Is the New Economy History?

__"Does the ‘New Economy’ Measure up to the Great Inventions of the Past?" by Robert J. Gordon, in Journal of Economic Perspectives (Fall 2000), American Economic Assn., 2014 Broadway, Ste. 305, Nashville, Tenn. 37203–2418.__

The celebrated "New Economy" has run into difficulties lately, with dot.com woes now almost a regular feature of business news coverage. Are these just minor bumps in the road leading to an economy fundamentally transformed by the computer and the Internet? Gordon, a Northwestern University economist, doubts it. The computer’s greatest benefits may well lie "a decade or more in the past, not in the future."

While the late 1990s were very good years for the U.S. economy, awash in computer investment, the recent productivity revival, he says, "appears to have occurred primarily within the production of computer hardware, peripherals, and telecommunications equipment, with substantial spillover to the 12 percent of the economy involved in manufacturing durable goods." In more than 80 percent of the economy, however, computerization has had virtually no impact on productivity. "This is surprising," he says, since more than three-fourths of all computer investment has been in wholesale and retail trade, finance, insurance, real estate, and other service industries.

When, from the 1970s through the early 1990s, investment in computers failed to yield productivity gains, many economists predicted that they would arrive eventually. But unlike the electric light and the electric motor, which, once invented, "took time to diffuse [because] initially they were very expensive and didn’t work very well," computers "provided powerful benefits early on," Gordon writes. "Many of the industries that are the heaviest users of computer technology—[such as] airlines, banks, and insurance companies—began in the 1960s and 1970s with mainframe technology and still perform the most computation-intensive activities on mainframes, often using personal computers as smart terminals to access the mainframe database.... In this sense, computers have been around for almost 50 years. Instead of waiting for the productivity boost to arrive, it is more plausible that the main productivity gains of computers have already been achieved."

Another reason computers have yielded diminishing returns, he observes, is the continuing need for human beings to perform many jobs—to pilot aircraft, drive trucks, provide medical care, teach classes, and cut hair. "No matter how powerful the computer hardware and how user-friendly the software, most functions provided by personal computers . . . still require handson human contact to be productive," writes Gordon, and that limits potential productivity gains.

Nor has the rapid diffusion of the Internet since 1995 given productivity more than "moderate" boosts. Humans’ time is limited, Gordon points out, and much Internet use "represents a substitution [of] one type of entertainment or information-gathering for another.... Internet surfing may be fun and even informational," but its contribution to the American standard of living is no match for the improvements made by many past inventions, including the electric light, the electric motor, and the internal combustion engine.