In the United States since the mid-nineties output growth has accelerated and unemployment has declined while inflation has shown no tendency to rise. This appears as a reversal of the experience there in the mid-seventies when everything seemed to go wrong, epitomised by the expression `stagflation’ coined then to describe a combination of stagnant production and rising prices. Apparently forgetful that the dogma of the intervening period, that higher inflation must inevitably go along with lower output, is of less than a quarter century’s vintage Larry Summers, the Treasury Secretary of the United States, has claimed that we are witnessing a `paradigm shift’, a term used by philosophers of science to describe a fact that cannot be fit in our current understanding of a phenomenon. Others, more simply, have hailed a "New Economy", one where none of the old rules – notably the negative relation between inflation and unemployment - any longer apply. The key factor, as claimed by one and all, is a faster rate of growth of productivity, presumably here to stay.
So what is this New Economy and just how much does it amount to? A smattering of perceptions from among the afficionados may be taken for starters. Thus the June 1998 issue of the influential business magazine `Fortune’ declares that "The chip has transformed us at least as pervasively as the internal combustion engine or electric motor". Earlier the Semi-Conductor Association of the United States had published a study averring "The invention of the semi-conductor transistor set in motion a technological revolution that is arguably more impressive than that of the Great Industrial Revolution of the last century". Since computers have been around commercially for close to half a century none of these are likely to be referring to the machines per se. Indeed they are referring to the dramatic changes that have occurred on the interface of computers and communications, and the rapid technological progress in the production of computer hardware and peripherals during the nineties. The first of the above we recognise as the Internet becoming available for commercial use and the second may be interpreted as a significant reduction in the cost of computing power. Internationally there has also taken place a phenomenal reduction in the price of telephony, though we in India are yet to receive its fruits. Altogether this is the `IT Revolution’, and pronouncements of its potency, examples of which we have just seen, understandably excite many.
While there may be several perspectives from which to evaluate the revolutionary potential of an invention, there is little argument that from the economic point of view an invention is only as good as it is able to raise the rate of growth of productivity, defined as output per person. Incidentally, productivity growth is about as class neutral a phenomenon as one might encounter in economics, a rise in productivity being a pre-condition for both a rise in profits and a rise in economy-wide living standards. Once the importance of productivity growth is recognised, the stage is set for an evaluation of the potential of the New Economy. The question, quite simply, is whether its accoutrements measure up to the great inventions of the past. The economist Robert Gordon has done us great service by pursuing precisely this question (`Does the "New Economy" Measure Up to the Great Inventions of the Past?’, http://faculty-web.at.northwestern.edu/economics/gordon, May 2000) in the context of history of the U.S. economy. His chosen terrain is crucial, for the US is where all the action is as far as IT goes. His first task has been to investigate, the implication of hailing a New Economy, that there has been a rise in the rate of growth of average labour productivity in the U.S. since 1995 by comparison with the period 1913-1972, termed the Golden Age, when productivity growth was at its highest in recorded U.S. history. His conclusion is definitive. There is a faster growth of labour productivity in the production of computer hardware and, at a remove, in `durable manufacturing’ more generally. However, elsewhere in the economy, adding up to 88 percent of the national income, the annual average acceleration in labour productivity growth since 1995 has been a miserly 0.05 percent. When the effect of the contemporaneous capital input is accounted for, the so-called total factor productivity in this segment of the economy is negative, indicating no sign of a `spillover effect’ due to the IT Revolution which some apparently believe would have nudged the rate of growth of productivity across the economy to a level higher than that recorded during the said Golden Age. To any reasonable economist this need not come as a surprise. An economy, far from being a two-dimensional chart on a draughtsman’s board, is, very likely, a pulsating organism spewing forces leading to and led by `circular and cumulative’ causation in overlapping fields. In this turbulent cocktail the growth in the standard of living is not just some passive response to productivity growth independently determined. On the contrary, productivity growth is very likely also dependent upon living conditions, the flipside of the standard of living. And this is the point of the reference to the Golden Age, a period when living conditions improved radically and due to the tapping of the major inventions of the time. Expecting productivity growth to increase first so that rising living standards may be accounted for is nothing less than expecting a free lunch, a refrain recurrent in the now dominant, financial, view of economic development. It is of the very genre of error as the pre-Keynesian dictum that prior savings is a pre-condition for investment. To an appreciation of why the complex representing Information Technology may not by itself lead to a major productivity revolution as yet in the Indian economy I now turn.
If the New Economy is to deserve our admiration it must measure up to what the major inventions of the past have been able to bring about in the space of living standards in the economies of the United States and Western Europe where these inventions had first appeared. There is little, thus far at any rate, in the complex of computer hardware, telecommunications and the Internet that can compare with the changes wrought in living conditions by five clusters of invention as classified by Gordon. These are: first, electricity, which virtually turned night into day; secondly, the internal combustion engine, which made possible cheap and extensive transportation networks and their attendant by-products such as the suburb; third, the various processes which `rearrange molecules’ producing improved materials and products from plastic to nylon; fourth, the complex of information, communication and entertainment (ICE) in place before the Second World War which had by then already made the world a smaller place in a sense far more profound than anything achieved in the nineteen nineties apart from enabling the gradual diffusion of literacy and education; and, finally, perhaps the most palpable improvement in the quality of life ever brought about, the spread of running water, indoor plumbing and urban sanitation infrastructure. The point is that inventions, R&D and the spread of innovations did not contribute to rising productivity through some spiritual osmosis. It has been a flesh and blood affair contributing as much, arguably first, to an improvement in the quality of life of the working population. We are now able to see why much of what was attempted in India in over the past five decades has not fructified. Technological teleology may be construed as the belief that our lives will improve automatically with technological advance independent of the social conditions.
At Okinawa in July the leaders of the G-8, in a larger gesture they would have us believe, had pledged to "bridge the digital divide" across nations. This is not wholly unwelcome, and must bring cheer to many Third World politicians and businessmen alert to the main chance. However, it cannot escape one’s attention that the leaders have ignored the global divide more deep, that in living conditions. In recognising this we are able to see the exaggeration of the claim that the record of a five-year run in one sphere of the U.S. economy – that of its macroeconomic indicators – amounts to a `paradigm shift’ in our understanding of how economies function. Indeed, when we come to grips with the relative roles of technological progress, living conditions and productivity growth as they have buffetted each other over the long haul of American history we recover the paradigm in danger of being lost in the frenzy with which the `IT Revolution’ has sometimes been imagined in this country. The politicians meeting at public expense in Okinawa had apparently not listened a few months before to the Mexican maestro Carlos Santana who upon receiving the Grammy award for `Supernatural’, adjudged the rock album of the year, had, knowing where he came from, dedicated his prize to "all those living without running water". Had not Shelley claimed that poets are the legislators of mankind?