Does the "New Economy" Measure Up to the Great Inventions of the Past?

Does the "New Economy" Measure Up to the Great Inventions of the Past? Robert Gordon; Working Paper No. 7833; National Bureau of Economic Research, Cambridge, MA; Dec. 2000.

This Northwestern University economist and NBER research associate is skeptical that inventions like the computer

and the Internet have brought the United States to the beginning of another industrial revolution. Without doubting that U.S. productivity has improved in recent years, he argues that the long-term improvements in productivity and living standards are incremental compared to the great inventions of the late 19th and early 20th century. He finds that the New Economy productivity gains are largely confined to the durable manufacturing sector, including the making of computers and semiconductors. Yet that industrial sector only comprises 12 percent of the economy. The New Economy productivity increases haven't spread to the remaining 88 percent of the economy. Dissecting the 1.35 percentage point acceleration in productivity growth achieved in 1995-99 as compared to 1972-95, Gordon calculates that 0.54 of that acceleration is unsustainable, reflecting a temporary upsurge in the growth of output that cannot continue. The remaining, sustainable part of the acceleration has occurred only within the durable manufacturing sector (including the production of computers), leading to the surprising conclusion that the trend in multi-factor productivity (MFP) has actually slowed since 1995 outside of durable manufacturing.

Gordon asserts that the computer, telecom and Internet technologies pale next to the five "great inventions" of 1860 to 1900. Electricity, the internal combustion engine, the chemical and pharmaceutical industries, the entertainment, information and communication industries, and the rise of an urban sanitation infrastructure not only led to a dramatic upsurge in productivity from 1913 to 1972 but, he observes, also changed everyday life. In contrast, much of the economic activity involving the Internet is little more than a substitution of one form of entertainment or communication for another, he says.