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