Internet Age vs. Industrial Revolution

The cartoon is a pointed one. It shows several office workers seated before their computers. One is downloading a new version of the videogame Space Kombat. Another is e-mailing a boyfriend. The third is browsing fall fashions.

The headline says simply: "Economists wonder why computers haven't boosted productivity."

The cartoon, accompanying an article in the normally unadventurous Journal of Economic Perspectives, hints at a debate that lies at the heart of the New Economy.

The fundamental question: How broad are today's technology-driven productivity gains and are they permanent?

The answer will help determine whether Americans will enjoy rising living standards, as well as what direction the Federal Reserve should take in trying to prolong the nation's record economic expansion.

Throughout history, inventions have come along that have dramatically boosted worker output - from electricity that helped advance the Industrial Revolution to automobiles that helped change how goods are transported.

But few have had the potential for changing how Americans work as much as computers, the Internet, and the explosion in telecommunications.

Some economists, in fact, now think that the Swiss-watch precision with which these technologies allow companies to control inventories and the other benefits they bring are creating a permanent improvement in productivity.

That, in turn, puts downward pressure on prices, making inflation less of a threat than the Federal Reserve may realize. Proponents of this theory say it's helping reinvent the economy - allowing low-inflation to coexist with relatively high growth.

But others believe the productivity gains are only affecting a narrow band of industries and that they are ephemeral: Once the economy turns down again, so will the dramatic rise in worker output.

Even Fed policymakers appear to be debating the issue. Last week, Fed Chairman Alan Greenspan argued in a speech to the New York Association of Business Economists that productivity gains were now not theoretical, but "irreversible."

"The effect of these technologies could rival and arguably even surpass the impact the telegraph had prior to, and just after, the Civil War," he said.

Let's not get too giddy about Internet

Some other Fed officials sound less hopeful. Governor Laurence Meyer and other policymakers subscribe to the school that recent productivity gains are cyclical, and thus the economy has reached its speed limits and needs braking to a slower pace.

The issue will face Fed policymakers when they meet June 27-28 to decide on the need for another hike in interest rates. Because of fresh signs of a slowdown in the economy, most Fed watchers are expecting the Fed to either raise interest rates slightly - by 0.25 percentage points - or not at all.

Others caution against reading too much into the productivity "revolution" as well. In his paper in the Journal of Economic Perspectives, economist Robert Gordon of Northwestern University in Evanston, Ill., argues that productivity has enjoyed a "dynamic explosion" in the manufacture of durables, such as cars and refrigerators.

But it has bypassed 88 percent of the economy. Productivity growth there has decelerated - not risen, he argues.

"The New Economy has been remarkably unfruitful as a creator of productivity growth," he concludes. As if to kick sand in its face, he concludes that the computer and the Internet don't match the impact on the economy of many other inventions, such as the electric motor, the airplane, the telephone - or even the indoor toilet.

Moreover, though there has been an exponential growth in computer speed and memory, the new tools run into the limits of human time. The cartoon illustrates the nonwork uses of office computers. Internet surfing may be fun, Gordon notes, but it adds less to living standards than, say, the extension of day into night achieved by electric light.

Much Internet activity duplicates existing activity, like mail order catalogues. Or it takes market share from existing companies, not adding much in social returns as versus private profit.

Another skeptic, Irwin Kellner of Hofstra University in Hempstead, N.Y., notes that computer-related gadgets, such as pagers and cell phones, add to the hours of work. Employees get calls in the evening and on weekends. These on-duty hours are not much recorded in productivity statistics.

Yes, let's get excited about Internet

Contrariwise, Gordon Richards, chief economist of the National Association of Manufacturers, is busy writing a paper maintaining that the gains in productivity are broad. Research and development throughout the economy, not only in the New Economy, has raised productivity, he says. So have large investments in business capital, including computers. As a result, the private economy could grow at a husky 4 percent per year after inflation, for five to 10 years.

"We can sustain high rates of productivity," Mr. Richards says. "We don't have to tighten monetary policy."

Others concur that today's gee-whiz technologies are helping to reinvent the old economy and creating a dynamic dot.com progeny at the same time.

Indeed, Boyan Jovanovic of New York University, likens the New Economy to the boom times of the 1920s. By 1923, half the households in the US were plugged into electricity. The automobile age came into place.

Today, half of households are connected to the Internet. In a paper written with Peter Rousseau of Vanderbilt University in Nashville, Tenn., he compares the rapid creation of new public companies in the Jazz Age - many which survived the Great Depression - with the blossoming of computer and Internet companies today.

Many companies with their initial public offerings will not work out, he says. "But failure is the price you pay for Microsoft, Cisco, and Intel and other successful firms."

What should perhaps be the great arbiter in this overall debate - the stock market - can't seem to agree with either side. The daily volatility of stock prices - particularly New Economy equities on the Nasdaq - is breaking all-time records.

(c) Copyright 2000. The Christian Science Publishing Society