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The Economic Impact of ICT: A Perspective from the Age of Steam Nick Crafts Financial support from...
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Transcript of The Economic Impact of ICT: A Perspective from the Age of Steam Nick Crafts Financial support from...
The Economic Impact of ICT:A Perspective from the Age
of Steam
Nick CraftsFinancial support from the Economic and Social
Research Council under grant R000239536 is gratefully acknowledged
Economic History Perspective
Can help to make better sense of today’s world and not to over-react to changes in the economic environment.
General Purpose Technologies (Lipsey et al, 1998)
• Over time are found to have many uses and complementarities … are pervasive
• Initially have much scope for improvement
• Eventually come to be widely used and lead to (large) rise in aggregate productivity growth
BUT• Initially may have no positive impact on growth
or even imply a slowdown phase
The Solow Productivity Paradox
You can see the computer age everywhere except in the productivity statistics
Robert Solow, 1987
Steam as a General Purpose Technology
• Steam Engines, Railways, Steamships
• James Watt’s Invention : 1769
• Liverpool & Manchester Railway : 1830
• Steamship crosses the Atlantic : 1838
Source: Kanefsky (1979a, p338); not including internal combustion engines
Sources of Power, 1760-1907 (Thousand Horsepower)
1760 1800 1830 1870 1907
Steam 5 35 165 2060 9659
Water 70 120 165 230 178
Wind 10 15 20 10 5
Total 85 170 350 2300 9842
Steam Engine Technology
• Took a long time to become cost effective in most sectors
• Coal consumption per hp per hour fell from 30 lb pre-Watt to 12.5 lb for Watt engine to 2 lb by 1900 when psi reached 200 compared with 6 in 1770
• The big breakthrough was not James Watt but the move to the high pressure steam engine after 1850
• TFP spillovers were unimportant prior to 1850 but may have been significant after 1870
Capital Cost and Annual Cost per Steam Horsepower per year (£ current)
Capital Cost Annual Cost
1760 42 33.5
1800 56 20.4
1830 60 20.4
1850 37 13.4
1870 25 8.0
1910 15 4.0
Note: the estimates are for a benchmark textile mill in a low coal cost region like Manchester
Source: Crafts (2003): includes railway, steamships, steam engines
Total Steam Contribution to Growth of Labour Productivity (% per year)
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
1760-1800 1800-30 1830-50 1850-70 1870-1910
Source: Oliner and Sichel (2003)
ICT Contribution to US Labour Productivity Growth (% points per year)
0 0.5 1 1.5 2
1974-90
1991-95
1996-2002
Source: Nordbaus (2001)
The Progress of ComputingReal Cost MIPS-E ($1998)
1850 1870 1890 1910 1930 1950 1970 1990 2000
1.E+10
1.E+06
1.E+04
1.E+02
1.E+00
1.E-02
1.E-04
1.E-06
1.E-08
1.E+08
Impacts of GPTs on Growth
• ICT much bigger impact on American growth in recent past than steam ever had on UK growth
• Costs of computing have fallen much faster than did costs of steam power
• Society seems to be getting better at exploiting GPTs more rapidly
Source: Gayer, Rostow & Schwartz (1953)
Railway Capital Authorised (£mn)
0
20
40
60
80
100
120
140
Railway Share Prices (June 1840=100)
0
20
40
60
80
100
120
140
160
1826
1828
1830
1832
1834
1836
1838
1840
1842
1844
1846
1848
1850
GWR and LNWR in the 1840s
50
75
100
125
150
175
200
225
250
Jan1844
Jan1845
Jan1846
Jan1847
Jan1848
Jan1849
Jan1850
Jan1851
Great Western Railway London & North Western
REVENUE GROWTH
05
1015202530354045
Passenger Receipts (£m) Freight Receipts (£mn)
Social Savings
• The basis of Fogel’s celebrated analysis of the impact of railroads on American economic growth
• Measures the benefits to users of a new technology from reductions in costs (area under the demand curve)
• Many of the users may be in other countries
RAILWAY BENEFITS
0102030405060708090
Net Earnings Social Savings
RATES OF RETURN
• Average private rate of return = 5%, 1830-70
• Average social rate of return = 15%, 1830-70
Lessons from Railways
• Railway mania ended in tears
• Profits from railways less than optimists had hoped
• Revenues exceeded expectations ... but so did costs!
• Competition reduced prices
• Users gained much more than investors
Sources: Coatsworth (1981); Summerhill (2003)
Freight Social Savings from Railways, c.1913 (% GDP)
0
5
10
15
20
25
30
35
Argentina Brazil Mexico
NASDAQ Composite Index
The New Economy and Stock Prices
• It was a bubble but fundamentals (trend growth) had improved
• Dot.coms experience would not have surprised someone who lived through the 1840s
• Economic gains from ICT not a mirage but few of them will be reaped by investors
Does Innovation Generate Supernormal Profits? (Nordhaus, 2004)
• Innovators capture about 2% of the total social gain from technological progress
• Appropriability is low (7%) and depreciation is high (20% per year)
• The US stock market valuation of ‘new economy’ firms grew between 1995 and 2000 at a rate that implied owners could capture 90% of the social gain
• Yet the appropriability of gains from ICT unlikely to match that of earlier technologies including railways
Source: Bayoumi & Haacker (2002)
Social Savings from ICT, 1992-99 (% GDP)
0
0.5
1
1.5
2
2.5
3
3.5
4
Finland Ireland Switzerland Australia
Globalization
• Enhanced integration of international markets
• Promoted by reductions in transport and communications costs ….. both steam and ICT do this
• But is the effect to centralize or disperse economic activity?
Transport/Communication Costs
• VERY HIGH: activity is dispersed
• VERY LOW: activity is dispersed
• INTERMEDIATE: agglomeration with feedback effects based on large markets and linkages
Steam Power and Industrial Location
• Reduced transport costs for goods rather than services both on land and at sea
• Industry moved closer to natural resources
• Manufacturing cities proliferated in Europe and North America
• Definitely not the 21st century
Railways and Effective City Size
• Labour productivity in cities rises with own city size and numbers of population ‘within reach’
• 80 minutes seems to be the cut-off point
• In 1906, population within 30 km raises productivity, in 1840 within 6 km
• Suggests railways had substantial productivity externalities perhaps around 10% GDP in 1906 (Crafts and Leunig, forthcoming)
Source: Harley (1988)
Real Cost of Ocean Shipping(1910 = 100)
0
50
100
150
200
250
300
350
1750 1830 1870 1910
Steam-Powered Globalization
• Helped manufacturing and the City
• Hurt arable agriculture, especially land rents
• Did not destroy Lancashire textiles
• Reduced Anglo-American wage gap by 28% points (O’Rourke, 1996)
Sources: Harley (1980); Mitchell (1988)
Wheat Prices
England and Wales (Sh/d per quarter)
Ratio of Liverpool/Chicago
1852/6 62/1 2.00
1868/72 54/8 1.49
1895/9 27/10 1.26
1910/3 32/5 1.06
Mass Production and Mass Distribution (Chandler, 1977)
• Developed in a subset of American industry in late 19th century
• Based on integration of the market following completion of main rail network
• Changed American industrial geography …. centralizing rather than dispersing
ICT and Industrial Location
• More outsourcing: reduced gains from vertical integration
• Facilitates trade in business services including mutually beneficial offshoring
• But cities continue to have the great advantage of lots of people close together
Bureau of Labor Statistics, McKinsey
Employer Wage Costs, 2003 ($/hour)
0
5
10
15
20
25
30
35
Germany UnitedStates
UK CzechRepublic
India China
Offshoring of Computer and Business Services
• Gains for both countries but losses for some individuals; reduces business costs and lowers prices to consumers in OECD.
• Imports of computer and business services = 0.4% US GDP in 2003
• Evidence suggests no net employment reduction from outsourcing in US (Amiti & Wei, 2004)
Source: Venables (2001)
Economic Interactions and Distance
0
20
40
60
80
100
120
1000km 2000km 4000km 8000km
Trade
FDI
Economic Geography and International Inequality (Redding and Venables, 2004)
• Most (60-70%) cross-country income variation accounted for simply by location relative to other countries
–market access (export demand)
–supplier access (import supply)
• Move 50% closer to trading partners would raise income by about 25%
Source: Redding & Venables (2004)
World Market Access
0
20
40
60
80
100
120
North America
Western Europe
EU Enlargement
South East Asia
Latin America
Sub-Saharan Africa
Death of Distance
• Would have truly dramatic effect on world distribution of economic activity and income
• But “greatly exaggerated”
• ICT enables some things to go to the periphery but enhances the strengths of the core at the same time (e.g. strengthens London as a financial centre)
• Like steam, ICT rearranges geography but doesn’t abolish it
Who Should do a Course in Economic History?
• Sadder but wiser investors who lost their savings in the dot.com boom and bust
• Growth economists baffled by the Solow Productivity Paradox
• Protectionist politicians who believe that offshoring will undermine our prosperity