The Internet and Productivity
By Arnold Kling
Yesterday, having been lured downtown by an opportunity to gaze into Virginia Postrel’s eyes, I stumbled on Nobel Laureate Michael Spence giving a talk on the Internet and productivity. Some major points were:
1. Before the Internet, computing was a stand-alone affair. This severely limited the economic benefits of computers.
2. With the advent of the Internet, computers now can create new markets. Consider eBay, for example.
3. Also with the Internet, it has become easier for companies to outsource and to optimize along the supply chain.
4. These capabilities are quite new. The first wave of e-commerce enthusiasts over-estimated and somewhat mis-guessed the short-run prospects, but the medium-term opportunity is real.
5. Remember that technology diffuses slowly. There is a classic study by Zvi Griliches on hybrid corn. Or, consider Paul David’s analysis of the computer and the dynamo, as updated by Paul Krugman, for example.
Put all this together, and it suggests that the Internet’s effect on productivity is only just beginning. We could see dramatic gains in economic growth in the next decades.
Spence was not trying to be wildly original. Based on my informal reading, quite a number of economists agree with his formulation. However, the optimistic medium-term outlook for productivity may itself be an example of slow diffusion. I have not seen it discussed much in the press.
For the role that Postrel and others played yesterday, click on the link to “more” below, and then scroll down.On her weblog, Virginia Postrel provided an extended synopsis of her recent eye surgery, in the middle of which she dropped this teaser:
I’m off to Washington for a Hoover Institution/Policy Review conference on “The Politics of Prosperity.” I’m on the opening panel with David Brooks, HOlman Jenkins, and Sebastian Mallaby. (It’s at the St. Regis tomorrow.
I had never met her, and I was free that morning, so I got on the subway to go to the St. Regis (having first called the hotel to verify that they indeed had such an event taking place.) My intention was to stay for her panel–or part of it–and then go back to the suburbs to teach my afternoon high school economics class.
However, when I arrived, I found that Postrel had somewhat understated the program. The rest of the day’s events were to include two Nobel laureates as well as a free lunch. So I wound up ditching my class.
The journalists on the morning panel were reasonably sophisticated…for journalists. I thought Postrel was more insightful and in tune with the anti-establishment thinking of Internet geeks. Unless you count me, she was the only propeller-head in a roomful of Suits.
David Brooks’ best moment was when he offered the insight that the current political strength of Republicans comes not from the fact that they are viewed as favoring the market but from the fact that they are viewed as favoring restoring authority and maintaining order. I admit that he is probably right, but it bothered me that he looked so darned happy about it.
Brooks’ worst moment came when he said that he saw the growth in government as a share of GDP as a trend that would continue indefinitely. Moderator Tod Lindberg felt obliged to step in and invoke (Herbert) Stein’s Law, which is that things that can’t go on forever, stop.
After the panel came the keynote address. I thought Spence’s best moment was when he put up the classic New Yorker cartoon, “On the Internet, no one knows you’re a dog,” and pointed out that it illustrates asymmetric information. I thought his worst moment was when he tried to justify dwelling on the topic of Supply Chain Management by making a reference to Wassily Leontief. We were all like, yeah, right, Mike, whatever. Of course, it wouldn’t have anything to do with the fact that you spent all those years hanging around business schools or anything, would it?
Postrel might have been a good follow-on to Spence. What led me to start an Internet business was the the low barriers to entry, rather than extending markets or rationalizing supply chain management. I think that Postrel shares my appreciation of the Schumpeterian aspects of the Net. (By the way, this month Econlib is featuring a biography of Schumpeter.)
The afternoon panel consisted of Glenn Hubbard, Edward Lazear, Robert Hall, and Gary Becker. All of them turned out to be cheerleaders for President Bush’s economic program. The only way you could tell that Hubbard was the one who is a member of the administration is that he began every sentence with “The President believes that…”
(To find out what Hubbard himself believes, I recommend this EconLib interview.)
Hall, whose style of delivery has a way of making everything he says sound like he’s kidding (and then he gets really hurt when people don’t take him seriously), said that getting rid of dividend taxes at the personal level was a step in the direction of the Utopian tax system of a progressive consumption tax. He had an argument for why getting rid of dividend taxes at the corporate level instead would have made it less easy to reach Utopia. He spoke quickly and glibly, as if this argument were simple and widely understood, which made it all the more humbling for me when I could not follow it or even take adequate notes.
Nobel Laureate Becker noted that the positions of Democrats and Republicans on deficits have reversed. (Jeff Frankel also has made this observation.) Becker argued that cutting taxes improves welfare twice: first, by reducing the deadweight loss from taxes; later, by constraining government spending–he implied that spending also imposes deadweight loss.
I thought that Becker’s worst moment was when he supported adding a prescription drug benefit to Medicare. His point was that it would reduce the distortionary incentive to substitute more expensive alternatives, but it seemed a little dissonant, given his earlier sonata.
Overall, attendance at the event was sparse, considering the caliber of the panelists. Next time, the Suits at Hoover might want to ask for more help from the propeller heads in stirring up interest.