Economic History and the "New Economy"

By Mokyr, Joel | Business Economics, April 2001 | Go to article overview

Economic History and the "New Economy"


Mokyr, Joel, Business Economics


A HISTORICAL PERSPECTIVE SUGGESTS A REVERSION BACK TO A WAY OF WORK AND LIFE THAT PRE-DATED THE INDUSTRIAL REVOLUTION

The perspective of an economic historian raises questions about whether many of the most important technological improvements to living standards ever show up in economic statistics. Moreover, the prospective demise of the Factory System implied by the "new" economy may have effects on the organization of work and living standards that transcend the technologies themselves.

I suppose I am in a somewhat unique position to speak about the "new" economy for two reasons. One is that I am an economic historian who has

written a bit about the Industrial Revolution and many economists are asking me whether we are in another Industrial Revolution. The other is that one of the leading new-economy skeptics, Robert J. Gordon, is my colleague, and everything I say about the topic will have to withstand his scrutiny.

Are we really in a "new economy?" I am always tempted to give the classic answer given by the Chinese Communist leader and revolutionary Zhou-en Lai who was once asked on a visit to Paris whether he thought the French Revolution had been a success. His response was "it's too soon to tell." Of course, economic and technological revolutions are not like political revolutions. There are no Bastilles to be stormed, no Petrograd Soviets to grab power. In economic history much of the change that matters is quiet, underneath the surface, and the effects often are not recognized until several generations later. The classic British Industrial Revolution, for instance, was barely noted for decades by contemporaries. Even those who noticed the innovations around them did not suspect that continuous innovation and productivity growth were there to stay and be transformed from rare events into a sustained and normal condition. Most of the macroeconomic effects do not show up in the aggregate statistics, such as they are, until many decades after the great inventions.

It has been customary among economists to judge technological changes by measures of productivity and growth. This is natural and normal, and I would be the last person to deny that if change is real, it will eventually show up in productivity changes, if properly measured. Therein, however, lies the rub. Productivity is a ratio of output to input, and the way we measure aggregate output was set in stone by national income accounting conventions agreed upon many decades ago to measure an economy that produced wheat and steel and services that were more or less unchanging in nature. The measurement rules that go into the numerator pay little attention to such issues as the boundaries between intermediate and final goods (always a tricky issue) and the consumption of leisure (widely acknowledged by economists to be an economic good in every respect, yet not counted in the GDP statistics). Worst of all, the accounting conventions have no way of dealing with new products.

Beyond that, technology affects economic welfare in ways that are not even designed to show up in the statistics. Thus, if someone invents a pain reliever that can alleviate suffering at a cost close to zero and with no side effects--even if there are no substitutes--this would not count for much under current accounting conventions. That is because GDP figures are designed to measure output at market prices, not consumer surplus. Hence, the invention of aspirin in 1898, arguably one of the most welfare-enhancing events in modern history, made little impact on national income statistics.

Living standards are affected by technology in many ways. The topic I would like to discuss is one that affected people as much as any increase in productivity over the past 250 years, despite some rather ambiguous effects on the income statistics, namely the rise and fall of the Factory System.

The Factory System

Karl Marx was the most notable but not the first observer to realize the enormity of the change that the Industrial Revolution implied for the labor force.

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