1 Technological advancement
Everything that can be invented has been invented.
(The Commissioner of the United States Office of Patents, 1899, recommending that his office be abolished, quoted in The Economist, 2000, p. 5)
There is nothing now to be foreseen which can prevent the United States from enjoying an era of business prosperity which is entirely without equal in the pages of trade history.
(Sutliff, 1901)
The rise of information and communication technologies (ICT) – that is, computers, software, telecommunications and the internet – and the large impact that these new technologies are having on the way that society functions, have prompted many to claim that we have entered a new era, often referred to as the ‘Third Industrial Revolution’, the ‘information age’ or the ‘new economy’. Previous industrial revolutions were also linked to the rise of new technologies: the First Industrial Revolution, concentrated in Britain from around 1760 to 1850, introduced Cort's puddling and rolling process for making iron, Crompton's mule for spinning cotton and the Watt steam engine; the Second Industrial Revolution, from around 1890 to 1930, witnessed the development of electricity, the internal-combustion engine, the railway and the chemical industry. In each of these cases, the new technologies allowed new industries to develop and economic growth to increase.
The concept of the ‘new economy’ is thus a claim that the emergence of new information technology (IT) was responsible for the economic prosperity (e.g. rising incomes, rising employment) experienced by most Western countries in the 1990s. This was the decade in which personal computers (PCs) were diffused throughout the economy, and the decade which saw the commercial rise of the World Wide Web. The PC reached a 50 per cent household penetration rate in the USA only in 1999, while before 1990 the internet was used mainly by the US Defense Department, not for commercial purposes.
However, as the two introductory quotations indicate, proclamations that we have entered a ‘new’ era are not new. In fact, the advent of electricity, the internal-combustion engine and the radio telegraph witnessed similar proclamations about the future. They too emerged during periods of prosperity; for example, electricity and the automobile diffused through the economy during the prosperous and ‘Roaring’ 1920s. So how can we tell whether we are really entering a qualitatively new era or whether recent changes have simply been a quantitative extension of the past?
This course uses tools and frameworks from economics to study this question. It focuses on the historical and theoretical relationship between changes in technology, productivity and economic growth. The key driving force discussed will be technological change: that is, organisational and technical changes in the way that societies organise production and distribution. The question is: what exactly is so new about the ‘new economy’? Some economists focus was on the effect of new technologies and work practices on the way that people live and work, here the focus is on the organisation and evolution of firms and industries.
In each industrial revolution (including the current one), important non-technological factors have influenced industry dynamics and growth. Socio-political factors have been particularly prominent. For example, the rise of industrial trade unions in the Second Industrial Revolution greatly affected firm-level, industry-level and country-level growth. In this course, however, the analysis is limited to the role of technology.
We shall conduct our investigation by focusing on two related questions, neither of which has a clear-cut answer. The goal of the course is to help you to think about these questions using concepts and tools from economics.
First, after a brief overview of the concept of the industrial revolution, I shall ask whether the rise of IT has significantly affected economic growth, as new technologies did in previous eras. Focusing on the effect of technology on economy-wide growth implies that the perspective is a macroeconomic one. Macroeconomics looks at the functioning of the economy as a whole.
Second, I shall take a more microeconomic perspective. Microeconomics looks at the functioning of individual elements of the economy, whether they be consumers, firms, industries or markets. I shall ask whether the rise of new information technologies has fundamentally changed the way that individual firms and industries operate. To do this, I shall compare the patterns that characterised the early phase of a traditional industry with those that characterised the early phase of a relatively new industry. The traditional industry (one that is today considered to be relatively ‘mature’, not high growth) is the US automobile industry from 1900 to 1930, while the relatively new industry is the personal computer industry from 1975 to 2000. The similarities will lead us to ask whether we are really in a ‘new economy’ or simply in an economy driven, as in some past eras, by the development of new industries.