A decade ago people all over the place were saying confidently that the economic effect of the internet would outstrip the effects seen by the invention of railways and telecommunications, and that new synergies from fast and universal communication would generate a society of massive capability…
Yet economic growth since the internet came has been, well – ahem! – very modest…
I am reminded of a quote from William Gibson: “The future is here, it is just unevenly distributed.” I think that the economy has not yet adapted to the Internet, just as in 1930 it had not yet adapted to the automobile.
I think that ultimately the Internet will yield high productivity, but for now it is creating a mix of winners and losers. I am a winner. My cost of living is way down as a result of the Internet. Our household gets along very well, and if it were not for college tuition for our daughters, the past few years I would not even have needed the income of a median worker .
Many people who use the Internet for work have been winners. At the same time, the Internet has introduced new forms of competition, including offshoring of services, and this has created losers.
I suspect that the age of mass production is gradually passing. That is, the proportion of the world’s population that can be economically put to work producing mass goods, such as automobiles, is on the decline. That may reduce the standard of living for low-skilled workers.
You might look at the technology of warfare as a leading indicator. In 1939, the world’s armies still had a lot of horses. But motorized vehicles soon made horses obsolete.
The idea of sending massed formations of relatively untrained soldiers into war, as countries did in the middle of the 20th century, seems absurd today. Instead, we think in terms of highly professional military personnel using advanced equipment. What if the economy in general is moving in that sort of direction? With highly-skilled professionals using advanced equipment substituting for masses of low-skilled workers?
We are undergoing a major demographic shift, with the ratio of older dependents to younger workers rising. That may slow the increase in the standard of living, at least for the younger workers.
We may end up throwing away much of the productivity increase on ineffective medical services. But I think that we will have a lot to throw away.
READER COMMENTS
Floccina
Jul 27 2010 at 10:25am
Isn’t this due to the fact that GDP cannot include consumer surplus?
Thomas DeMeo
Jul 27 2010 at 10:55am
Most of the growth that will result from the internet requires a revolution in discipline and cooperation. For example, healthcare can be revolutionized by using the internet, but organizations must change their habits profoundly in order to take advantage.
Apple is winning at the moment because it can enforce such discipline vertically while virtually no one else is positioned to do so.
8
Jul 27 2010 at 10:59am
I’m willing to bet that the personal contact list of the average top tier college graduate is more international than a 1950s Fortune 500 CEO.
It’s one thing to have companies open factories all over the globe, it’s something much different when the whole world has the capability to organize globally.
Anyone who mainly uses computers for work can do their job from anywhere that has reliable Internet access. The new healthcare law and fear of taxes make this a more palatable option for U.S. employers now. Cloud computing is also a step in this direction.
Once you have an employee in country X, how long before someone thinks about expanding into country X?
There’s still a lot of entrenched thinking and behavior tied to an office, physical presence and physical assets. Many employers think of employees in terms of time rather than output.
Finally, energy remains relatively cheap.
Doug
Jul 27 2010 at 11:54am
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Chris T
Jul 27 2010 at 12:18pm
We’re only at the beginning of exploiting the potential of the internet. We’ve entered a world of post scarcity for information, but have yet to fully adapt or integrate it.
As you mention, the simultaneous computational revolution is going to make any benefits very uneven. The low-skilled will have very few economic opportunities going forward. High skilled will see their prospects rise significantly.
You seem to be one of the few economists who actually recognize any of this.
Bruce G Charlton
Jul 27 2010 at 12:27pm
AK says: “I think that the economy has not yet adapted to the Internet, just as in 1930 it had not yet adapted to the automobile.”
But this analogy is flawed – according to Wikipedia 3/4 US population had home access to the internet by 2004. You could not say the same about automobiles in 1930 – I found a source which put USA auto ownership at 40 percent in this period.
I think a fairer comparison between the internet and automobile adaptation would probably be with the 1950s or 60s.
But either way, according to mass punditry of a decade ago, we were supposed to have seen big economic benefits from the internet by now.
AK said: “I suspect that the age of mass production is gradually passing. That is, the proportion of the world’s population that can be economically put to work producing mass goods, such as automobiles, is on the decline. That may reduce the standard of living for low-skilled workers.”
I don’t see things this way. There are massive demographic changes going on in the world. e.g. the population in most of Africa is at least doubling every generation, and now outstrips Europe.
The world economy will on average fall toward African (and Middle Eastern) levels of productivity (unless you believe that – bucking the trend of the past 60 years – Africa will somehow undergo an economic renaissance).
The prospect is not so much mass production, but a return to subsistence agrarian economies on the medieval model.
AK said: “We are undergoing a major demographic shift, with the ratio of older dependents to younger workers rising. That may slow the increase in the standard of living, at least for the younger workers.”
Well, it will *at least* slow it, but perhaps abolish it and turn it negative. History has never before seen societies with a median age of late forties and rising (e.g. Germany and Japan) – nobody knows if they will work. I personally don’t think they will work in the long term.
Contrast this with the other novelty – societies in sub-Saharan Africa and the Middle East (eg Gaza) with a median population age of mid-teens.
Average age mid-teens versus average age late-forties (and rising).
The standard of living for low skilled/ chronically-unemployed people in the West is vastly cross-subsidized at present – and the lowest skilled workers are rapidly expanding as a proportion of the population in all Western countries.
The low skilled cannot generate anything near to the level of resources which they currently consume. Indeed the combination of available job types in modern economies, and high minimum wages and conditions, means that it costs much more to employ and support the low skilled than they generate by their work.
Low skill is mainly a euphemism for low intelligence and a conscientious personality (human capital is a similar euphemism) – which implies that learning skills will be slow at best and impossible in the case of complex skills. Beyond a modest point, the problem of ‘low skill’ is not solvable by ‘education’ or anything much else (except by better health and nutrition – which are themselves mostly a product of ‘high skills’).
And it is worth bearing in mind that the evidence is overwhelming (although frequently denied by the un-informed and dishonest) that both personality and intelligence differences are both stable and substantially heritable – so on average these phenomena tend to persist over time and across generations.
It is a reasonable approximation that demography is destiny (within fairly tight confidence intervals), and demography has a good track record of prediction – unlike economics!
DD
Jul 27 2010 at 12:29pm
“Our household gets along very well, and if it were not for college tuition for our daughters, the past few years I would not even have needed the income of a median worker”
— Great line…you sound like a politician justifying some unseemly act. If it weren’t for that cancer, I’d be healthier than the average person.
“Instead, we think in terms of highly professional military personnel using advanced equipment. What if the economy in general is moving in that sort of direction?”
— Perfect analogy on why all the predictions on economic gains due to technology fall flat. While we ‘may think in terms of highly professional, high-tech military’, the fact of the matter is that our high-cost, high tech soldiers are daily killed by low-tech, unprofessional opponents.
The internet has yielded high-productivity, but as you correctly note, it’s given rise to winners and losers (as any technology will). Big banks can engage in ultrafast trading and poach gains from the system. Multinationals can offshore to stay ahead of regulation and product liability. Parasitic politicians can extend their reach ever further.
“What if the economy in general is moving in that sort of direction? With highly-skilled professionals using advanced equipment substituting for masses of low-skilled workers?”
— It already has and continues to do so. Unfortunately, unless you kill them off, those masses of low-skilled workers will now be unemployed. Now they extort you for continued unemployment benefits, consuming a large part of any benefit you may have extracted from substituting high-tech equipment for them, or you run the risk of social upheaval. It’s great in theory to think that they can be retrained and become contributing members of society…but that theory breaks down quickly in reality, where uprooting people and teaching them new skills and plugging them into new jobs is easier said than done.
Think entropy, just like in any other physical system.
Chris T
Jul 27 2010 at 1:54pm
The productivity trend for the last 20 years is well above historical:
http://www.theatlantic.com/business/archive/2010/03/what-labor-productivity-and-costs-mean-for-employment/37021/
kebko
Jul 27 2010 at 2:16pm
It sounds like Bruce Charlton has a very good essay, and I hope he will type it up, mimeograph a few thousand copies, and mail it to each of us so we can properly address it & respond in due time. That should create $1,000’s in GDP.
Ignacio Concha
Jul 27 2010 at 2:22pm
“Yet economic growth since the internet came has been, well – ahem! – very modest…”
This is inaccurate as it refers to the US economy. The rest of the world has been doing very well, thankyouverymuch. Just check on the growth rates for China, India, Brazil and other countries in Asia and Latin America.
Gaspard
Jul 27 2010 at 2:37pm
How has your cost of living been reduced by the internet?
Yancey Ward
Jul 27 2010 at 3:03pm
Going forward, the physical materials which go into the things you consume will decline significantly. To consume your time, which has not increased, what would you have had to purchase 40 years ago? 30 years ago, if you wanted to see your sister across the country, you had to go there, or she had to come to where you were- your communications were limited to phone lines and letters, otherwise. Today, you can talk to her face to face if you want, and it is perfectly conceivable that 40 years from now, information processing will allow you an experience in communication that is indistinguishable from physically being in the same room with her.
Colin K
Jul 27 2010 at 3:29pm
Floccina: “Isn’t this due to the fact that GDP cannot include consumer surplus?”
+1
5 years ago I dropped my $70/mo cable subscription and got Netflix for $18/mo.
If (as many believe), pornography is a leading indicator of where the rest of the Internet will be in 5-10 years, we have only just begun to disintermediate. Consumption of adult content keeps going up, but the market seems to be dominated by relatively small producers, as the incumbents (e.g. Playboy) teeter on the edge of bankruptcy.
Is the real issue employment, absolute standard of living, or relative status? People worry about employment so that they can consume, but given the choice, many people seem quite happy to consume somewhat less and enjoy a lot more leisure.
Steve Sailer
Jul 27 2010 at 7:14pm
“The idea of sending massed formations of relatively untrained soldiers into war, as countries did in the middle of the 20th century, seems absurd today. Instead, we think in terms of highly professional military personnel using advanced equipment. What if the economy in general is moving in that sort of direction? With highly-skilled professionals using advanced equipment substituting for masses of low-skilled workers?”
Excellent point.
So, why has the U.S. been letting in for decades low skill economic cannon fodder by the millions?
Noah Yetter
Jul 27 2010 at 8:22pm
The value created by and on the internet does not show up in GDP because it is not traded for money. On the internet goods are virtual, and thus can be reproduced infinitely for zero cost. Internet production therefore takes the form of production-for-gift rather than production-for-sale. See Eric Raymond’s “The Cathedral and the Bazaar”. There will be a temptation to say that because no money changes hands and trades are not explicit that this is not economic activity. Call it whatever you want, as Floccina said in the first comment it is still consumer surplus which is the ultimate purpose of all human action.
Chris T
Jul 27 2010 at 8:42pm
On the internet goods are virtual, and thus can be reproduced infinitely for zero cost.
Hence my contention that we are in a post scarcity world regarding information.
This is nothing less than a revolution of human affairs and one we are ill equipped to predict or understand.
MernaMoose
Jul 27 2010 at 11:46pm
The idea of sending massed formations of relatively untrained soldiers into war, as countries did in the middle of the 20th century, seems absurd today. Instead, we think in terms of highly professional military personnel using advanced equipment.
Um. We think that way. China doesn’t think that way, for one.
But let’s see if I got it straight here. You’re suggesting that a minority of “Super Capitalists” is about to take over the world?
It is somehow incredibly absurd to hear this whole proposition coming from a supposedly free market economist. And nearly as absurd again to see so many free market followers jump on the wagon.
Are you sure this post came from a free market economist, and that it’s not an advertisement from some kind of collectivist? Because if your theory is right, then I could see it readily lending ammunition of collectivist arguments.
Why shouldn’t The Few be made to work for the many? Indeed, why should we even permit the existence of conditions, that allow The Few to ever realize who and what they are?
Is it better to enslave These Few, or the many others?
Somehow we’ve utterly forgotten our roots here, people. Get a grip.
jb
Jul 28 2010 at 8:43am
We are experiencing significant upheaval due to the Internet – lots and lots of low-skill jobs have been automated away.
My theory is that the people who do those jobs can’t find better ones, and it creates drag on the economy. In other words, the growth is there, and accelerating (we continue to replace more and more low-skill jobs with automation) but since it’s putting people out of work, it’s a very mixed bag overall.
Brian Clendinen
Jul 28 2010 at 9:30am
I see the internet as an additional choice. Depending on the product and industry the internet is a big disrupter to a tool that can help productivity modestly. It increases productivity in that it drastically reduces the logistics of distributing and collecting information. I really due not see much rapid productivity increases from an internal business standpoint that would not of happened with-out the internet. When it comes to Business to Business transactions the only major improvement I could see is the admin cost of a firm now being able to outsource more effectively internal services. To date I think the colossal failures many business have made with this has lead to a modest productivity gains. However, on the BtoC side I think we are just starting to see critical mass which is about to drasticly change many industries.
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