Technological Change and Technological Change and Economic Growth: the Economic Growth: the Interwar Years and the Interwar Years and the

1990s1990sAlexander J. FieldAlexander J. Fieldafield@scu.eduafield@scu.edu

All Ohio Eocnomic History SeminarAll Ohio Eocnomic History SeminarOhio State UniversiytyOhio State Universiyty

April 30, 2004April 30, 2004

The Most Technologically The Most Technologically Progressive Decade of the Progressive Decade of the

CenturyCentury

Field, Field, American Economic ReviewAmerican Economic Review (2003) (2003) Hint #1: It’s not what you think …Hint #1: It’s not what you think … Hint #2: It wasn’t the 1990s...Hint #2: It wasn’t the 1990s... Hint #3: It wasn’t the 1920s…Hint #3: It wasn’t the 1920s…

The Main ArgumentThe Main Argument

The years 1929-1941 were, in the aggregate, the most technologically progressive of any comparable period in U.S. economic history.

Y = real outputN= labor hoursK=capital input

Y/N = Labor Productivity y – n = Labor Productivity growth (lower case letters = compound annual average rates of growth)

Y = A KβN1-β = Production function (Cobb Douglas, crts)

A = Y/(KβN1-β) = Multifactor Productivity a = y – βk – (1-β)n = Growth Rate of MFP

y - n = a + β (k - n) = Growth rate of labor productivity

Labor and Multifactor Productivity Labor and Multifactor Productivity Growth FormulasGrowth Formulas

Disclaimers - 1Disclaimers - 1 What we measure in the residual contains not only What we measure in the residual contains not only

serendipitous or accidental discovery of useful serendipitous or accidental discovery of useful knowledge, but a variety of related influences, knowledge, but a variety of related influences, including, but not limited to:including, but not limited to:

• The outcomes of focused research and development The outcomes of focused research and development activitiesactivities

• The influence of scientific and educational infrastructuresThe influence of scientific and educational infrastructures• Economies of scale and network effectsEconomies of scale and network effects• Learning by doingLearning by doing• Reallocation of economic activity from sectors with low to Reallocation of economic activity from sectors with low to

higher value added per worker higher value added per worker • New organizational blueprints or managerial practicesNew organizational blueprints or managerial practices

Disclaimers - 2Disclaimers - 2 Under certain conditions, the residual will Under certain conditions, the residual will

underestimate the impact of technological underestimate the impact of technological change because of linkages between such change change because of linkages between such change and the rate of saving and capital accumulationand the rate of saving and capital accumulation• Biased technical change that increases the return to Biased technical change that increases the return to

capital or to highly educated labor may shift income to capital or to highly educated labor may shift income to households with higher saving propensities, increasing households with higher saving propensities, increasing the aggregate saving ratethe aggregate saving rate

• Technical change that increases the real after tax return Technical change that increases the real after tax return to capital to capital maymay elicit larger flows of saving elicit larger flows of saving

• Innovations that reduce the relative price of capital Innovations that reduce the relative price of capital goods will, for a given saving rate measured at base goods will, for a given saving rate measured at base period prices, be associated with a larger real volume of period prices, be associated with a larger real volume of investmentinvestment

Abramovitz – David (1999)Abramovitz – David (1999)

CAAGR of MFPCAAGR of MFP

1890-19051890-19051905-291905-291929-481929-481948-661948-661966-891966-89

1.281.281.381.381.541.541.311.31.04.04

Gordon (2000b)Gordon (2000b)CAAGR of MFPCAAGR of MFP

1870-18911870-18911891-19131891-19131913-19281913-19281928-19501928-19501950-19641950-19641964-19721964-19721972-19791972-19791979-19881979-19881988-19961988-1996

.39.391.141.141.421.421.901.901.471.47.89.89.16.16.59.59.79.79

Conventional WisdomConventional Wisdom

The measured peak in MFP growth The measured peak in MFP growth rates between 1929 and 1948 is rates between 1929 and 1948 is principally the consequence of the principally the consequence of the production experience of World War production experience of World War II: a persisting benefit of the II: a persisting benefit of the enormous cumulated output as well enormous cumulated output as well perhaps of spinoffs from war related perhaps of spinoffs from war related R and D. R and D.

New ArgumentNew Argument Peak MFP growth between 1929 and 1948 is Peak MFP growth between 1929 and 1948 is

primarily attributable to an exceptional primarily attributable to an exceptional concatenation of technical and organizational concatenation of technical and organizational advances across a broad frontier of the American advances across a broad frontier of the American economy prior to full scale war mobilizationeconomy prior to full scale war mobilization

Governmental and university funded research, as Governmental and university funded research, as well as the maturing of a privately funded R and well as the maturing of a privately funded R and D system that began with Edison at Menlo Park D system that began with Edison at Menlo Park played a roleplayed a role

So too in some sectors, such as railroads, did the So too in some sectors, such as railroads, did the “kick in the pants” of cut off of easy credit “kick in the pants” of cut off of easy credit availability and declines in demand availability and declines in demand

Why do we credit World War 2 with Why do we credit World War 2 with establishing the foundations for establishing the foundations for

postwar prosperity?postwar prosperity?

Sheer volume of output between 1942 and 1945 is exceptionalSheer volume of output between 1942 and 1945 is exceptional Remarkable successes in such sectors as airframes and Remarkable successes in such sectors as airframes and

shipbuildingshipbuilding

• Between 1942:1 and 1944:4 airframe production increased by a factor of six, and labor productivity grew by 160

percent. This is a compound annual average growth rate of output per hour of 34.7 percent

In shipbuilding: in one ten-month period alone, the

number of hours required to build a Victory ship fell by half (U.S. Bureau of Labor Statistics, 1946, pp. 897–98). On an annualized basis, this is a growth in output

per hour of 83 percent a year

Why we should be skepticalWhy we should be skeptical Overall increase in labor productivity in munitions sector Overall increase in labor productivity in munitions sector

between 1939 and 1945 was 25 percent – far below between 1939 and 1945 was 25 percent – far below standout sectors (Brackman and Gainsbrugh, 1949). This is standout sectors (Brackman and Gainsbrugh, 1949). This is a growth in output per hour of 3.71 percent per year, a growth in output per hour of 3.71 percent per year, respectable, but hardly surprising given the more than $10 respectable, but hardly surprising given the more than $10 billion of public sector capital invested in the defense sectorbillion of public sector capital invested in the defense sector

Short period of full scale war production: roughly three and Short period of full scale war production: roughly three and a half yearsa half years

Spillovers – which direction?Spillovers – which direction? War drained skilled labor, managers, and capital from War drained skilled labor, managers, and capital from

civilian sector. Output per hour stagnated in 1942-44 in the civilian sector. Output per hour stagnated in 1942-44 in the civilian sectorcivilian sector

Swollen productivity numbers are partly the result of a Swollen productivity numbers are partly the result of a temporary shift of output to sectors with traditionally high temporary shift of output to sectors with traditionally high ratios of value added per worker – could not persistratios of value added per worker – could not persist

Why 1941?Why 1941? 1937 – unemployment 14.3 percent1937 – unemployment 14.3 percent 1940 - unemployment even higher – 14.6 1940 - unemployment even higher – 14.6

percentpercent 1941 unemployment is 9.9 percent (6 1941 unemployment is 9.9 percent (6

percent according to Darby)percent according to Darby) Only 2.5 percent of cumulated war Only 2.5 percent of cumulated war

spending 1941-1945 had been undertaken spending 1941-1945 had been undertaken by the end of 1941by the end of 1941

1941 is the closest we come to recovery 1941 is the closest we come to recovery before full scale war mobilizationbefore full scale war mobilization

United States, Private Non-Farm EconomyUnited States, Private Non-Farm Economy CAAGR of MFP, 1919-1948CAAGR of MFP, 1919-1948

1919-19291919-19291929-19411929-19411941-19481941-1948

SolowSolow

.78%.78% 2.36% 2.36% .89% .89%

Kendrick Kendrick

2.02%2.02%2.31%2.31%1.29%1.29%

Solow (1957)Solow (1957) “there does seem to be a break at

about 1930. There is some evidence that the average rate of progress in the years 1909–29 was smaller than that from 1930–49” (Solow, 1957, p. 316)

Kuznets and War PlanningKuznets and War Planning Simon Kuznets needed to estimate the potential Simon Kuznets needed to estimate the potential

output of the U.S. economy to determine war output of the U.S. economy to determine war production plans consistent with planned force production plans consistent with planned force levels and civilian consumption.levels and civilian consumption.

His estimates came in considerably higher than His estimates came in considerably higher than most had expected, leading the military to most had expected, leading the military to multiply their production targets and forcing multiply their production targets and forcing Kuznets and others to fight a rear guard action to Kuznets and others to fight a rear guard action to bring them down to a realistic levelbring them down to a realistic level

The outward shift of the production possibility The outward shift of the production possibility frontier during the Depression years -- largely frontier during the Depression years -- largely unrecognized until then -- was the principal unrecognized until then -- was the principal reason potential output in 1942 was so much reason potential output in 1942 was so much higher than had been anticipated.higher than had been anticipated.

Sectoral EvidenceSectoral Evidence R and D employment in manufacturingR and D employment in manufacturing Time path of key innovationsTime path of key innovations

• KleinknechtKleinknecht• SchmooklerSchmookler• MenschMensch

MFP growth in telephone, railroads, MFP growth in telephone, railroads, electric utilitieselectric utilities

Build out of surface road system: network Build out of surface road system: network effects – impact on productivity growth in effects – impact on productivity growth in trucking and warehousingtrucking and warehousing

R and D employment in US R and D employment in US ManufacturingManufacturing

1927: 6,274 1927: 6,274 1933: 10,9181933: 10,918 1940: 27,7771940: 27,777

Source: National Research Council data; Source: National Research Council data; Mowery and Rosenberg, 2000Mowery and Rosenberg, 2000

Kleinknecht (1987)Kleinknecht (1987)

05

1015202530

1850

-59

1860

-69

1870

-79

1880

-89

1890

-99

1900

-09

1910

-19

1920

-29

1930

-39

1940

-49

1950

-59

1960

-69

ProductProcessInstrumentOtherTotal

Basic Innovations, 1900-1959

010203040506070

1900-1904

1905-1909

1910-1914

1915-1919

1920-1924

1925-1929

1930-1934

1935-1939

1940-1944

1945-1949

1950-1954

1955-1959SchmooklerMensch

The Irony of Secular StagnationThe Irony of Secular Stagnation At precisely the moment when Alvin Hansen and At precisely the moment when Alvin Hansen and

others were developing theories of secular others were developing theories of secular stagnation, the U.S. economy was experiencing stagnation, the U.S. economy was experiencing its greatest technological efflorescence, a period its greatest technological efflorescence, a period of creativity which, in the aggregate, remains of creativity which, in the aggregate, remains unmatched to this day. unmatched to this day.

His Harvard colleague, Joseph Schumpeter had a His Harvard colleague, Joseph Schumpeter had a better fix on what was going on, although he better fix on what was going on, although he misjudged the terrain on the road to socialism. misjudged the terrain on the road to socialism.

Schumpeter’s homage to “creative destruction” Schumpeter’s homage to “creative destruction” was developed against the backdrop of what in was developed against the backdrop of what in fact has turned out to be the most technologically fact has turned out to be the most technologically dynamic epoch of the twentieth century.dynamic epoch of the twentieth century.

CAAGR of MFP, 1919-1948CAAGR of MFP, 1919-1948

TelephoneTelephone Electric Electric UtilitiesUtilities

RailroadsRailroads

1919-19291919-19291929-19411929-19411941-19481941-1948

1.60%1.60%2.01%2.01%0.53%0.53%

2.51%2.51%5.55%5.55%5.87%5.87%

1.63%1.63%2.91%2.91%2.56%2.56%

Table 4: Compound Annual Average Growth Rates of Net Stock of Street and Highway Capital, United States, 1925-2000

1925-1929 6.00% 1929-1941 4.32% 1941-1948 0.08% 1948-1973 4.15% 1973-2000 1.63%

Street/Highway Capital as % of Street/Highway Capital as % of Private Fixed CapitalPrivate Fixed Capital

Street/Hway K Private Fixed K 1929 $16,415 $253,987 6.46% 1941 $30,861 $289,487 10.66% 1948 $47,892 $582,248 8.22% 1973 $290,389 $2,698,194 10.76% 2000 $1,423,833 $21,464,786 6.63%

Two Waves of Government Two Waves of Government Investment: the 1930 and the Investment: the 1930 and the

1940s 1940s Both decades experienced substantial Both decades experienced substantial

government investment in physical capitalgovernment investment in physical capital 1930s: Infrastructure1930s: Infrastructure 1940s: Over $10 billion of GOPO capital in 1940s: Over $10 billion of GOPO capital in

manufacturing, much of it equipment, especially manufacturing, much of it equipment, especially machine toolsmachine tools

The 1930s investment generated spillovers that The 1930s investment generated spillovers that augmented PNE MFP growth, particularly in augmented PNE MFP growth, particularly in trucking and warehousing, and, through trucking and warehousing, and, through complementarities, in railroads.complementarities, in railroads.

The 1940s investment was associated with The 1940s investment was associated with decliningdeclining MFP growth in manufacturing and for MFP growth in manufacturing and for the economy as a whole.the economy as a whole.

What does this imply for the generality of the What does this imply for the generality of the equipment hypothesis?equipment hypothesis?

Summary – Field (2003)Summary – Field (2003)

The 1930s were characterized by productivity advance across a broad frontier of the U.S. economy. The expansion of potential output between 1919 and 1941 laid the foundation for postwar prosperity, at the same time that it enabled successful prosecution of the war.

In the light of this finding we need to rethink our In the light of this finding we need to rethink our understanding of the defining contours and understanding of the defining contours and determinants of U.S. economic growth in the determinants of U.S. economic growth in the twentieth century.twentieth century.

Field (2004)Field (2004)

Compares 1929-41 with 1919-29 on the Compares 1929-41 with 1919-29 on the one hand, and 1995-2000 on the otherone hand, and 1995-2000 on the other

Disaggregates, by broad sector, Disaggregates, by broad sector, contributions to MFP growth in these contributions to MFP growth in these different periodsdifferent periods

Reassesses IT’s impact on economic Reassesses IT’s impact on economic growth in the 1990s, as well as the growth in the 1990s, as well as the broader utility of the GPT concept with broader utility of the GPT concept with which it is closely associated.which it is closely associated.

Main ArgumentsMain Arguments MFP Growth in the 1920s was almost entirely a MFP Growth in the 1920s was almost entirely a

story about manufacturingstory about manufacturing In the 1930s, manufacturing’s contribution In the 1930s, manufacturing’s contribution

declined, although remaining high in absolute declined, although remaining high in absolute terms. Transport and Public Utilities played a terms. Transport and Public Utilities played a much more important role. The same was true to much more important role. The same was true to a lesser extent of distribution.a lesser extent of distribution.

Although MFP growth between 1995 and 2000 Although MFP growth between 1995 and 2000 was triple what it had been during 1973-95, it was triple what it had been during 1973-95, it was less than half what it was between 1929 and was less than half what it was between 1929 and 1941.1941.

The IT revolution was responsible for about two The IT revolution was responsible for about two thirds of MFP growth, and about a third of labor thirds of MFP growth, and about a third of labor productivity growth between 1995 and 2000productivity growth between 1995 and 2000

CAAGR of MFP, PNE,CAAGR of MFP, PNE,United States, 1919-2000United States, 1919-2000

1919-19291919-1929 2.022.021929-19411929-1941 2.312.311941-19481941-1948 1.291.291948-19731948-1973 1.901.901973-19891973-1989 .34 .341989-20001989-2000 .78 .78

1973-19951973-1995 .38 .381995-20001995-2000 1.141.14Sources: 1919-48: Field (2003); Kendrick (1961)Sources: 1919-48: Field (2003); Kendrick (1961) 1948-2000: Bureau of Labor Statistics: www.bls.gov1948-2000: Bureau of Labor Statistics: www.bls.gov

CAAGR of Labor Productivity, CAAGR of Labor Productivity, United States, 1919-2000United States, 1919-20001919-19291919-1929 2.272.271929-19411929-1941 2.352.351941-19481941-1948 1.711.711948-19731948-1973 2.882.881973-19891973-1989 1.331.331989-20001989-2000 1.971.97

1973-19951973-1995 1.401.401995-20001995-2000 2.432.43Sources: 1919-48: Kendrick (1961), Table A-23.Sources: 1919-48: Kendrick (1961), Table A-23. 1948-2000: Bureau of Labor Statistics: www.bls.gov1948-2000: Bureau of Labor Statistics: www.bls.gov

Labor Productivity GrowthLabor Productivity Growth Roughly comparable over 1919-29, 1929-Roughly comparable over 1919-29, 1929-

41, and 1995-2000.41, and 1995-2000. The 1930s were exceptional because The 1930s were exceptional because

advance took place in the virtual absence advance took place in the virtual absence of capital deepeningof capital deepening

The 1948-73 period remains the golden The 1948-73 period remains the golden age of living standard improvement, age of living standard improvement, because of the combined effects of because of the combined effects of respectable MFP growth and robust rates respectable MFP growth and robust rates of capital deepening.of capital deepening.

Labor Quality - 1Labor Quality - 1 How much of the growth in output per hour between 1929-How much of the growth in output per hour between 1929-

41 is attributable to labor quality improvement?41 is attributable to labor quality improvement? Margo (1991, 1993) has emphasized selective retention of Margo (1991, 1993) has emphasized selective retention of

higher quality workers as employment drops in a recessionhigher quality workers as employment drops in a recession Not relevant for peak to peak comparisons; these Not relevant for peak to peak comparisons; these

composition effects would have been unwound as economy composition effects would have been unwound as economy returned to full employmentreturned to full employment

1941 is much closer to full employment than 1940 or 1937, 1941 is much closer to full employment than 1940 or 1937, but still had 9.9 percent unemployment, vs. less than 4 but still had 9.9 percent unemployment, vs. less than 4 percent in 1929percent in 1929

In retrospect it would have been helpful for my research In retrospect it would have been helpful for my research had Japan delayed attack on Pearl Harbor for another 8 to had Japan delayed attack on Pearl Harbor for another 8 to 12 months, so the U.S. economy could have continued its 12 months, so the U.S. economy could have continued its then rapid movement toward full employment before full then rapid movement toward full employment before full scale war mobilization took placescale war mobilization took place

Labor Quality 2Labor Quality 2 Goldin (1998) has emphasized rapid rise in high Goldin (1998) has emphasized rapid rise in high

school graduation rates in the 1930s.school graduation rates in the 1930s. R and D employment data for manufacturing and R and D employment data for manufacturing and

Margo’s analyses reflect strong demand for Margo’s analyses reflect strong demand for managerial, scientific, and technical personnel managerial, scientific, and technical personnel during this periodduring this period

Opportunity cost of high school attendance Opportunity cost of high school attendance dropped as probability of a non high school grad dropped as probability of a non high school grad being unemployed rosebeing unemployed rose

Build out of surface road network facilitated high Build out of surface road network facilitated high school attendanceschool attendance

Influx of human capital fleeing Hitler’s EuropeInflux of human capital fleeing Hitler’s Europe

Labor Quality 3Labor Quality 3 Labor Quality did rise between 1929 and 1941, but changes Labor Quality did rise between 1929 and 1941, but changes

in labor supply were probably not a major or dominant in labor supply were probably not a major or dominant influence on growth in output per hourinfluence on growth in output per hour

If we calculate rate of growth of output per hour between If we calculate rate of growth of output per hour between 1929-41 using adjusted hours, where adjusted hours take 1929-41 using adjusted hours, where adjusted hours take into account labor quality improvement, increase in output into account labor quality improvement, increase in output per hour is 6 percent lessper hour is 6 percent less

If selective retention were the dominant influence on If selective retention were the dominant influence on growth as we came out of recession, we should have had a growth as we came out of recession, we should have had a larger increment to output per hour moving from 19.1 to larger increment to output per hour moving from 19.1 to 14.6 percent unemployment between 1938 and 1940 than 14.6 percent unemployment between 1938 and 1940 than we did moving from 14.6 to 9.9 percent unemployment we did moving from 14.6 to 9.9 percent unemployment 1940 to 1941. But the reverse was true.1940 to 1941. But the reverse was true.

1929-41 Manufacturing MFP 1929-41 Manufacturing MFP CalculationCalculation

Output: 3.81 percent/yearOutput: 3.81 percent/year Hours: 1.35 percent/yearHours: 1.35 percent/year Capital: .85 percent/yearCapital: .85 percent/year MFP: 2.60 percent/yearMFP: 2.60 percent/year Hours and output data from Kendrick; capital input data Hours and output data from Kendrick; capital input data

from BEA Fixed Asset Table 4.2from BEA Fixed Asset Table 4.2

1941-48 Manufacturing MFP 1941-48 Manufacturing MFP CalculationCalculation

Output: 2.20 percent/yearOutput: 2.20 percent/year Hours: 2.17 percent/yearHours: 2.17 percent/year Capital: 4.02 percent/yearCapital: 4.02 percent/year MFP: -.52 percent/yearMFP: -.52 percent/year Hours and output data from Kendrick; capital input data Hours and output data from Kendrick; capital input data

from BEA Fixed Asset Table 4.2from BEA Fixed Asset Table 4.2

CAAGR of MFP, Manufacturing, CAAGR of MFP, Manufacturing, United States, 1919-2000United States, 1919-2000

1919-19291919-1929 5.125.121929-19411929-1941 2.602.601941-19481941-1948 - .87- .871948-19731948-1973 1.521.521973-19951973-1995 .66 .661995-20001995-2000 2.092.09Sources: Field (2004), Kendrick, (1961); Bureau of Economic Analysis Fixed Sources: Field (2004), Kendrick, (1961); Bureau of Economic Analysis Fixed

Asset Table 4.2; Bureau of Labor Statistics, Series MPU300003 (B).Asset Table 4.2; Bureau of Labor Statistics, Series MPU300003 (B).

Manufacturing, 1919-1929Manufacturing, 1919-1929 Share of PNE (1929): .333Share of PNE (1929): .333 CAAGR, MFP(1919-29): 5.12%CAAGR, MFP(1919-29): 5.12% Cont to PNE MFP Growth: 1.71% Cont to PNE MFP Growth: 1.71% PNE MFP Growth (1919-29): 2.01%PNE MFP Growth (1919-29): 2.01% Manufacturing’s Share: Manufacturing’s Share: 85%85%

1919-1929

1929-1948

1949-1973

1973-2000

1973-1995

1995-2000

Manufacturing 5.12 1.71 1.52 0.93 0.66 2.09

Durable goods.................................. 5.06 1.43 1.48 1.57 1.19 3.27

Lumber and wood products..................... 2.49 1.42 1.67 0.65 0.98 -0.78

Furniture and fixtures....................... 4.14 2.00 0.60 0.74 0.69 0.96

Stone, clay, and glass products.............. 5.57 2.09 1.09 0.51 0.49 0.57

Primary metal industries..................... 5.36 1.30 0.39 -0.12 -0.36 0.95

Fabricated metal products.................... 4.51 1.36 0.54 0.20 0.19 0.26

Industrial, Commercial Machinery 2.82 1.62 0.71 2.93 2.31 5.65

Electric and electronic equipment............ 3.45 2.55 2.07 3.85 3.09 7.18

Transport Equipment 8.07 0.39 1.47 0.18 0.05 0.72

Instruments and related products............. 4.47* 2.36* 1.75 0.97 1.07 0.54

Miscellaneous manufacturing ....... 1.55 0.47 0.33 1.10

MFP Growth, Durable Manufacturing

Nondurable goods............................... 4.89 2.22 1.32 0.14 0.06 0.47

Food and kindred products.................... 5.18 1.47 0.67 0.26 0.39 -0.31

Tobacco products............................. 4.28 4.19 -0.62 -3.71 -2.92 -7.19

Textile mill products........................ 2.90 3.28 2.29 2.23 2.32 1.87

Apparel and other textile products........... 3.90 0.63 0.72 1.00 0.91 1.41

Paper and allied products.................... 4.54 2.33 1.58 -0.11 -0.31 0.74

Printing and publishing...................... 3.67 1.43 0.48 -0.73 -0.94 0.22

Chemicals and allied products................ 7.15 3.36 2.51 -0.25 -0.42 0.51

Petroleum and coal products.................. 8.23 1.70 0.82 0.03 -0.14 0.77

Rubber and miscellaneous plastics products... 7.40 2.07 0.96 0.64 0.42 1.60

Leather and leather products................. 2.88 1.71 0.02 0.58 0.21 2.23

MFP Growth, NonDurable Manufacturing

1919-29 1929-48 1949-73 1973-2000 1973-95 1995-2000

Manufacturing, 1929-1941Manufacturing, 1929-1941 Share of PNE (1941): .426Share of PNE (1941): .426 CAAGR, MFP (1929-41): 2.60%CAAGR, MFP (1929-41): 2.60% Cont to PNE MFP Growth: 1.11%Cont to PNE MFP Growth: 1.11% PNE MFP Growth (1929-41): 2.31%PNE MFP Growth (1929-41): 2.31% Manufacturing’s Share: Manufacturing’s Share: 48%48%

Manufacturing, 1995-2000Manufacturing, 1995-2000 Share of PNE (2000): .214Share of PNE (2000): .214 CAAGR, MFP(1995-00): 2.08%CAAGR, MFP(1995-00): 2.08% Cont to PNE MFP Growth: .45%Cont to PNE MFP Growth: .45% PNE MFP Growth (1995-00): 1.14%PNE MFP Growth (1995-00): 1.14% Manufacturing’s Share: Manufacturing’s Share: 39%39%

Transport and Public Utilities 1919-Transport and Public Utilities 1919-19291929

Share of PNE (1929): .14Share of PNE (1929): .14 CAAGR, MFP(1919-29): 1.86%CAAGR, MFP(1919-29): 1.86% Cont to PNE MFP Growth: .27%Cont to PNE MFP Growth: .27% PNE MFP Growth (1919-29): 2.01%PNE MFP Growth (1919-29): 2.01% Sector’s Share: Sector’s Share: 13%13%

Transport and Public Utilities 1929-Transport and Public Utilities 1929-19411941

Share of PNE (1941): .123Share of PNE (1941): .123 CAAGR, MFP(1929-41): 4.67%CAAGR, MFP(1929-41): 4.67% Cont to PNE MFP Growth: .58%Cont to PNE MFP Growth: .58% PNE MFP Growth (1929-41): 2.31%PNE MFP Growth (1929-41): 2.31% Sector’s Share: Sector’s Share: 25%25%

Transport and Public Utilities 1929-Transport and Public Utilities 1929-19411941

26 percent of sector MFP growth 26 percent of sector MFP growth comes from railroadscomes from railroads

40 percent of sector MFP growth 40 percent of sector MFP growth comes from trucking & warehousingcomes from trucking & warehousing

10 percent of total private non farm 10 percent of total private non farm MFP growth comes from trucking & MFP growth comes from trucking & warehousingwarehousing

Table 7MFP Growth, Transportation and Public Utilities, 1929-1941

Share of Share Share of Subsector Subsector NI*100 of Covered MFP Contribution1941(1948) T & PU Subsectors Growth MFP Growth

1929-41Railroad transportation...................... 3.27 0.372 0.420 2.91 1.22Local and interurban passenger transit.. 0.66 0.075 0.084 3.02 0.25Trucking and warehousing..................... 1.03 0.117 0.132 13.57 1.80Water transportation......................... 0.42 0.048 0.054 1.47 0.08Transportation by air........................ 0.18 0.021 0.023 14.69 0.34Pipelines, except natural gas................ 0.10 0.012 0.013 4.48 0.06Transportation services...................... 0.13 0.014Telephone and telegraph..................... 1.30 0.148 0.167 2.02 0.34Radio and television......................... 0.10 0.011Electric, gas, and sanitary services... 1.61 0.183 0.104 5.55 0.57 8.81TOTAL 4.67

Wholesale and Retail Trade Wholesale and Retail Trade 1919-19291919-1929

Share of PNE (1929): .201Share of PNE (1929): .201 CAAGR, MFP(1919-29): .80%CAAGR, MFP(1919-29): .80% Cont to PNE MFP Growth: .17%Cont to PNE MFP Growth: .17% PNE MFP Growth (1919-29): 2.01%PNE MFP Growth (1919-29): 2.01% Trade’s Share MFP Growth: Trade’s Share MFP Growth: 8% 8%

Wholesale and Retail TradeWholesale and Retail Trade 1929-1941 1929-1941

Share of PNE (1941): .223Share of PNE (1941): .223 CAAGR, MFP(1929-41): 1.81%CAAGR, MFP(1929-41): 1.81% Cont to PNE MFP Growth: .40%Cont to PNE MFP Growth: .40% PNE MFP Growth (1929-41): 2.31%PNE MFP Growth (1929-41): 2.31% Trade’s Share MFP Growth: Trade’s Share MFP Growth: 18%18%

Wholesale and Retail TradeWholesale and Retail Trade 1995-2000 1995-2000

Share of PNE (2000): .223Share of PNE (2000): .223 CAAGR, MFP(1995-00): .70 %CAAGR, MFP(1995-00): .70 % Cont to PNE MFP Growth: .16%Cont to PNE MFP Growth: .16% PNE MFP Growth (1995-00): 1.14%PNE MFP Growth (1995-00): 1.14% Trade’s Share MFP Growth: Trade’s Share MFP Growth: 14 %14 %

Let’s Remove Religion from the Let’s Remove Religion from the Analysis of Productivity TrendsAnalysis of Productivity Trends

Late 1990s: New economy skeptics and true believersLate 1990s: New economy skeptics and true believers The move from skeptic to believer as a matter of “Getting The move from skeptic to believer as a matter of “Getting

Religion”; akin to a process of spiritual conversionReligion”; akin to a process of spiritual conversion Use of vignettes and anecdotesUse of vignettes and anecdotes Is this really the way to discipline our conclusions with Is this really the way to discipline our conclusions with

data?data? Focus on what the data actually reveal, rather than what Focus on what the data actually reveal, rather than what

they might reveal in the future, or we hope they will reveal they might reveal in the future, or we hope they will reveal in the futurein the future

With the marked acceleration in both MFP and labor With the marked acceleration in both MFP and labor productivity growth 1995-2000, one can no longer claim the productivity growth 1995-2000, one can no longer claim the statistical apparatus is incapable of picking up effects of IT.statistical apparatus is incapable of picking up effects of IT.

Reckoning The Impact of IT on Reckoning The Impact of IT on Labor Productivity GrowthLabor Productivity Growth

Conventional Framework: 3 partsConventional Framework: 3 parts

1.1. MFP growth within IT producing sectorMFP growth within IT producing sector2.2. MFP growth within IT using sectors MFP growth within IT using sectors

(spillovers)(spillovers)3.3. That portion of the impact of capital That portion of the impact of capital

deepening on labor productivity deepening on labor productivity growth associated with the growth associated with the accumulation of IT capital goodsaccumulation of IT capital goods

Why Include the Third Component? Why Include the Third Component? In the absence of IT, saving flows would have been In the absence of IT, saving flows would have been

congealed in a slightly inferior range of capital goods.congealed in a slightly inferior range of capital goods. Social Savings Analogy. Debate between Rostow on the Social Savings Analogy. Debate between Rostow on the

one hand and Fishlow and Fogel on the other. Fogel and one hand and Fishlow and Fogel on the other. Fogel and Fishlow imagined worlds in all respects similar save the Fishlow imagined worlds in all respects similar save the availability of railway technology.availability of railway technology.

Fogel: Because of the railroad, GDP was higher in 1890. Fogel: Because of the railroad, GDP was higher in 1890. But not that much higherBut not that much higher: the availability of the technology : the availability of the technology made a difference of 4 percentmade a difference of 4 percent

Over a 25 year period, what kind of an annual increment to Over a 25 year period, what kind of an annual increment to MFP growth does one need to produce a 4 percent increase MFP growth does one need to produce a 4 percent increase in GDP? in GDP?

.15 percentage points.15 percentage points In MFP terms, that’s the railroad’s contributionIn MFP terms, that’s the railroad’s contribution

Rostow ReduxRostow Redux Would it be reasonable for supporters of Would it be reasonable for supporters of

the “indispensability” thesis to object that the “indispensability” thesis to object that Fogel’s estimate vastly underestimated Fogel’s estimate vastly underestimated the contribution of the railroad to labor the contribution of the railroad to labor productivity growth and US standards of productivity growth and US standards of living because it failed to take into account living because it failed to take into account that portion of labor productivity growth that portion of labor productivity growth attributable to the (substantial) fraction of attributable to the (substantial) fraction of capital deepening associated with the capital deepening associated with the accumulation of railway permanent way, accumulation of railway permanent way, bridges, tunnels, roundtables, stations, bridges, tunnels, roundtables, stations, locomotives, and rolling stock?locomotives, and rolling stock?

Solow AgainSolow Again It remains worthwhile distinguishing It remains worthwhile distinguishing

between the effects on labor between the effects on labor productivity of thrift and innovation productivity of thrift and innovation

There is little evidence that saving There is little evidence that saving rates accelerated in the presence of rates accelerated in the presence of the IT revolutionthe IT revolution

Sources and Uses of SavingSources and Uses of Saving

S = I + (G-T) + (X-M)S = I + (G-T) + (X-M)Private Domestic Saving funds Private Domestic Capital Accumulation, the Private Domestic Saving funds Private Domestic Capital Accumulation, the Government Deficit, and capital accumulation outside of the CountryGovernment Deficit, and capital accumulation outside of the Country

I = S + (T-G) + (M-X)I = S + (T-G) + (M-X)Private Domestic Capital Accumulation must be funded by the sum of Private Domestic Capital Accumulation must be funded by the sum of private domestic saving, government saving, and the capital account private domestic saving, government saving, and the capital account

surplus (inflows of foreign saving).surplus (inflows of foreign saving).

End of Century Tangible Capital End of Century Tangible Capital AccumulationAccumulation

Whatever one can say about the rising importance of Whatever one can say about the rising importance of human capital formation in the twentieth century, a human capital formation in the twentieth century, a distinguishing feature of the 1995-2000 was a rise in distinguishing feature of the 1995-2000 was a rise in tangible capital accumulation, with a heavy emphasis on tangible capital accumulation, with a heavy emphasis on short lived equipment.short lived equipment.

Capital services growth accelerated from 3.94 percent per Capital services growth accelerated from 3.94 percent per year (1973-95) to 5.38 percent per year (1995-2000).year (1973-95) to 5.38 percent per year (1995-2000).

The capital deepening that made this possible required The capital deepening that made this possible required capital accumulation that had to be financed.capital accumulation that had to be financed.

As growth of IT capital services accelerated from .41 to As growth of IT capital services accelerated from .41 to 1.03 percent per year, growth of non IT capital services 1.03 percent per year, growth of non IT capital services essentially halted, dropping from .30 to .06 percent per essentially halted, dropping from .30 to .06 percent per year.year.

Inflow of foreign saving represented a slowing of capital Inflow of foreign saving represented a slowing of capital services growth outside of the country.services growth outside of the country.

1995 2000 Change Changein uses in sources

Gross Private Domestic Investment1,143.8 1,755.4 611.6

Gross Government Investment238.2 319.8 81.6

Personal Saving302.4 201.5 -100.9

     

Retained Business Earnings203.6 152.6  

Depreciation Allowances743.6 1,017.9  

Gross Business Saving* 963.6 1,170.5

206.9

 

Gross Government Saving-8.5 435.8 444.3

Capital Account Surplus98.0 395.8 297.8

Statistical Discrepancy26.5 -128.5 -155.0

TOTALS 693.2 693.1

Sources and Uses of Saving, US, 1995-2000

Table 13MFP Contribution to Labor Productivity Growth and Acceleration,

1995-2000

Labor Productivity Growth, 1995-2000a 2.46 MFP a 1.14 Capital deepening a 1.05 Labor Composition a .26

Labor Productivity Growth Acceleration, 1995-2000 vs. 1973-95b 1.09 MFP b .76 Capital Deepening b .32 Labor Composition b -.01

a percent per yearb percentage points Note: Components do not sum exactly to aggregates due to rounding errors.

Table 16Sectoral Contributions to MFP growth, 1995-2000

Share of PNE Sectoral MFP Growth

Contribution to PNE MFP Growth

Share of PNE MFP Growth

Manufacturing .214 2.08 .45 .39Trade .223 .70 .16 .14Other .563 .94 .53 .47TOTAL 1.00 1.14

Sources: Sectoral Shares: see Table 3 Note: Private Nonfarm economy excludes nonfarm housing, health, agriculture, and government, which leaves 72.4 percent of value added. MFP growth Manufacturing: see Table 5 MFP growth Trade: see text

IT’s Contribution IT’s Contribution Credit IT with all MFP growth in Credit IT with all MFP growth in

Manufacturing Manufacturing Credit IT with one third of MFP growth in Credit IT with one third of MFP growth in

the rest of the economythe rest of the economy .68 of 1.14 percent per year (about 60 .68 of 1.14 percent per year (about 60

percent) of MFP growth between 1995 and percent) of MFP growth between 1995 and 2000 attributable to IT2000 attributable to IT

28 percent of labor productivity growth 28 percent of labor productivity growth 1995-2000 is attributable to the IT 1995-2000 is attributable to the IT revolution (.68/2.46 percent per year)revolution (.68/2.46 percent per year)

The Equipment HypothesisThe Equipment Hypothesis De Long and Summers (1991) De Long and Summers (1991)

• Cross country regressions using 1960-85 data show a Cross country regressions using 1960-85 data show a relationship between share of equipment investment in relationship between share of equipment investment in GDP and the growth of output per workerGDP and the growth of output per worker

Auerbach, Hasset, and Oliner (1994) Auerbach, Hasset, and Oliner (1994) • Criticize econometrics, question whether conclusion is Criticize econometrics, question whether conclusion is

applicable to USapplicable to US Field (2004)Field (2004)

• The drop in relative prices of equipment, and increase in The drop in relative prices of equipment, and increase in equipment’s share of capital formation in the US equipment’s share of capital formation in the US coincides with a long term decline in the rate of MFP coincides with a long term decline in the rate of MFP advance from its high rates in the interwar period to its advance from its high rates in the interwar period to its virtual disappearance in the last quarter of the centuryvirtual disappearance in the last quarter of the century

• Is 1995-2000 an aberration, or a fundamental turning Is 1995-2000 an aberration, or a fundamental turning point in US. productivity history?point in US. productivity history?

Multifactor Productivity Growth Rate, Private Non-Farm Economy, United States, 1919-2000

0

0.5

1

1.5

2

2.5

1919-1929 1929-1941 1941-1948 1948-1973 1973-1989 1989-2000

Series1

GPT’sGPT’s Distinguish between the proposition that it sometimes Distinguish between the proposition that it sometimes

takes a long time for the productivity benefits of new takes a long time for the productivity benefits of new technological complexes to be reaped, and the usefulness technological complexes to be reaped, and the usefulness of the concept of a GPTof the concept of a GPT

Potential multiplicity of candidates: Steam, electricity, IT Potential multiplicity of candidates: Steam, electricity, IT are most frequently identified, but chemical engineering, are most frequently identified, but chemical engineering, the internal combustion engine, radio transmission and the the internal combustion engine, radio transmission and the assembly line have also been mentioned. assembly line have also been mentioned.

Identification of one or several GPT’s often offers an Identification of one or several GPT’s often offers an appealing narrative hook, but the criteria for designating appealing narrative hook, but the criteria for designating them are not universally agreed upon, in spite of continuing them are not universally agreed upon, in spite of continuing efforts to nail them down. efforts to nail them down.

Why isn’t the railroad also a GPT? Why isn’t the railroad also a GPT? Gordon (2004) suggests that use by both households and Gordon (2004) suggests that use by both households and

industry is a criterion. This works for electricity and the industry is a criterion. This works for electricity and the internal combustion engine. But steam?internal combustion engine. But steam?

GPTsGPTs Bessemer and Siemens Martin processes were Bessemer and Siemens Martin processes were

industry specific, and would clearly not pass industry specific, and would clearly not pass muster as GPTs. They offered, to use David’s muster as GPTs. They offered, to use David’s words, “complete, self-contained and words, “complete, self-contained and immediately applicable solutions.” This was not immediately applicable solutions.” This was not the case for the product whose production they the case for the product whose production they enabled. Does that make steel a GPT? It took enabled. Does that make steel a GPT? It took Carnegie and others time to persuade users they Carnegie and others time to persuade users they should make skyscrapers, plate ships, and should make skyscrapers, plate ships, and replace rails with it. Cheap steel in turn replace rails with it. Cheap steel in turn encouraged complementary innovations such as, encouraged complementary innovations such as, in the case of taller buildings, elevators. in the case of taller buildings, elevators.

GPTsGPTs If one follows the impact of product and process If one follows the impact of product and process

innovations far enough through the input-output table, one innovations far enough through the input-output table, one will eventually find products or technological complexes will eventually find products or technological complexes used as inputs in many other sectors, with the potential to used as inputs in many other sectors, with the potential to generate spillover effects in using sectors. These generate spillover effects in using sectors. These processes, products, or complexes are the consequence of processes, products, or complexes are the consequence of many separate breakthroughs as well as learning by doing, many separate breakthroughs as well as learning by doing, much of which has been sector specific. IT for example, much of which has been sector specific. IT for example, has required advances in sector specific semiconductor has required advances in sector specific semiconductor manufacturing, and the thin film technology and manufacturing, and the thin film technology and mechanical engineering that underlies most mass storage, mechanical engineering that underlies most mass storage, let alone software.let alone software.

Because of the potential for multiplying GPT candidacies Because of the potential for multiplying GPT candidacies and the lack of an authoritative tribunal applying uniform and the lack of an authoritative tribunal applying uniform rules passing judgment about which ones qualify, economic rules passing judgment about which ones qualify, economic and technological history may be better off without the and technological history may be better off without the concept. concept.

ConclusionsConclusions IT was responsible for about 60 IT was responsible for about 60

percent of MFP growth and about 28 percent of MFP growth and about 28 percent of labor productivity growth percent of labor productivity growth between 1995 and 2000between 1995 and 2000

ConclusionsConclusions MFP Growth in the 1920s was 15 percent lower than the MFP Growth in the 1920s was 15 percent lower than the

benchmark 1929-41 period. During the 1920s it was almost benchmark 1929-41 period. During the 1920s it was almost entirely a story about progress in manufacturing, although entirely a story about progress in manufacturing, although advance was broadly experienced throughout the sector, in advance was broadly experienced throughout the sector, in contrast with the 1990scontrast with the 1990s

In the 1930s, manufacturing’s contribution declined, In the 1930s, manufacturing’s contribution declined, although remaining high in absolute terms. Transport and although remaining high in absolute terms. Transport and Public Utilities played a much more important role. The Public Utilities played a much more important role. The same was true to a lesser extent of distribution. These same was true to a lesser extent of distribution. These latter effects reflect a roughly three decade long delay latter effects reflect a roughly three decade long delay between the invention of the internal combustion engine between the invention of the internal combustion engine and the full reaping of its productivity benefits in using and the full reaping of its productivity benefits in using sectors.sectors.

MFP growth in 1995-2000 was three times what it had been MFP growth in 1995-2000 was three times what it had been during the anemic years 1973-1995, but less than half the during the anemic years 1973-1995, but less than half the rate clocked between 1929 and 1941.rate clocked between 1929 and 1941.

ConclusionsConclusions In accounting for the expansion of potential In accounting for the expansion of potential

output, there is no single process, product, or output, there is no single process, product, or technological complex for the 1930s around technological complex for the 1930s around which one can build a compelling narrative.which one can build a compelling narrative.

What was exceptional about 1929-41, What was exceptional about 1929-41, distinguishing the period from the other two distinguishing the period from the other two examined in this paper, was the broad frontier examined in this paper, was the broad frontier across which technological progress was across which technological progress was advancing.advancing.

In contrast, MFP advance 1995-2000 was In contrast, MFP advance 1995-2000 was narrowly concentrated within a declining narrowly concentrated within a declining manufacturing sector in SIC 35 and 36, and within manufacturing sector in SIC 35 and 36, and within the using sectors in wholesale and retail trade the using sectors in wholesale and retail trade and securities trading.and securities trading.

A Century of Technological A Century of Technological ExpositionsExpositions

1893 –Chicago1893 –Chicago• Columbian Exposition – The White CityColumbian Exposition – The White City• AC current for illumination, but still powered by coal and AC current for illumination, but still powered by coal and

steamsteam 1939-40 – New York1939-40 – New York

• GM’s Futurama – Norman Bel Geddes’ wildly popular and GM’s Futurama – Norman Bel Geddes’ wildly popular and largely accurate vision of the US in 1960largely accurate vision of the US in 1960

• DemocracityDemocracity 1964-65 – New York1964-65 – New York

• Failure of the new Futurama – either to inspire or to Failure of the new Futurama – either to inspire or to accurately forecastaccurately forecast

1996 – Anaheim1996 – Anaheim• A Retro Tomorrowland A Retro Tomorrowland

Is Comdex a Substitute?Is Comdex a Substitute? The last “successful” North American world’s fair was Expo The last “successful” North American world’s fair was Expo

’67 at Montreal, and the first (and last Asian fair Expo ’70 ’67 at Montreal, and the first (and last Asian fair Expo ’70 was also a successwas also a success

Subsequent fairs (Spokane - 1974, Knoxville - 1982, New Subsequent fairs (Spokane - 1974, Knoxville - 1982, New Orleans - 1984, Vancouver - 1986, and Seville -1992) have Orleans - 1984, Vancouver - 1986, and Seville -1992) have been more narrowly themed. Who now remembers them? been more narrowly themed. Who now remembers them? The fading impact of these international expositions The fading impact of these international expositions coincides roughly with the collapse of the residual coincides roughly with the collapse of the residual beginning in the 1970s.beginning in the 1970s.

World’s fairs emerged out of commercial fairs, and in the World’s fairs emerged out of commercial fairs, and in the 1990s trade shows such as Comdex generated some of the 1990s trade shows such as Comdex generated some of the same kind of excitement as had earlier international same kind of excitement as had earlier international expositions, but they were much more narrowly focused, expositions, but they were much more narrowly focused, reflecting the relatively narrow based of technical advance reflecting the relatively narrow based of technical advance in recent years, and have not been targeted at the general in recent years, and have not been targeted at the general public.public.

Table 9

Sectoral Contributions to Multifactor Productivity Growth Within the Private Nonfarm Economy

United States, 1929-1941

Sectoral Sector's

1941 Share of 1941 Share of Private MFP Growth Contribution to Aggregate

National Income Nonfarm Economy 1929-1941 (PNE) MFP Growth

Manufacturing 31.86 42.57 2.91 1.239

Transport and Public Utilities 9.21 12.30 4.48 0.551

Wholesale and Retail Trade 16.70 22.31 1.81 0.404

Other Sectors (net) 17.08 22.82 0.51 0.116

Mining 2.30

Construction 4.03

Finance, Insurance, Real Estate (see note a) 4.78

Other Services (see note b) 5.97

TOTAL 74.85 100.00 2.310