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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
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Economic History Perspective
Can help to make better sense of today’s world and not to over-react to changes in the economic environment.
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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
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The Solow Productivity Paradox
You can see the computer age everywhere except in the productivity statistics
Robert Solow, 1987
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Steam as a General Purpose Technology
• Steam Engines, Railways, Steamships
• James Watt’s Invention : 1769
• Liverpool & Manchester Railway : 1830
• Steamship crosses the Atlantic : 1838
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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
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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
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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
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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
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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
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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
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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
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Source: Gayer, Rostow & Schwartz (1953)
Railway Capital Authorised (£mn)
0
20
40
60
80
100
120
140
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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
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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
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REVENUE GROWTH
05
1015202530354045
Passenger Receipts (£m) Freight Receipts (£mn)
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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
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RAILWAY BENEFITS
0102030405060708090
Net Earnings Social Savings
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RATES OF RETURN
• Average private rate of return = 5%, 1830-70
• Average social rate of return = 15%, 1830-70
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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
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Sources: Coatsworth (1981); Summerhill (2003)
Freight Social Savings from Railways, c.1913 (% GDP)
0
5
10
15
20
25
30
35
Argentina Brazil Mexico
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NASDAQ Composite Index
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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
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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
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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
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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?
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Transport/Communication Costs
• VERY HIGH: activity is dispersed
• VERY LOW: activity is dispersed
• INTERMEDIATE: agglomeration with feedback effects based on large markets and linkages
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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
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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)
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Source: Harley (1988)
Real Cost of Ocean Shipping(1910 = 100)
0
50
100
150
200
250
300
350
1750 1830 1870 1910
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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)
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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
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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
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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
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Bureau of Labor Statistics, McKinsey
Employer Wage Costs, 2003 ($/hour)
0
5
10
15
20
25
30
35
Germany UnitedStates
UK CzechRepublic
India China
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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)
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Source: Venables (2001)
Economic Interactions and Distance
0
20
40
60
80
100
120
1000km 2000km 4000km 8000km
Trade
FDI
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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%
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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
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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
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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