Academic journal article Journal of International Affairs

Economic Growth in the Information Age: From Physical Capital to Weightless Economy

Academic journal article Journal of International Affairs

Economic Growth in the Information Age: From Physical Capital to Weightless Economy

Article excerpt

The defining feature of economic growth in the Information Age is the increasing weightlessness of output. Production and consumption are shifting away from objects toward information and services. Good examples of weightless goods are computer software, financial products, telecommunications, the Internet, entertainment and even management consulting. These goods accounted for about 23 percent of U.S. gross domestic product between 1987 and 1994. Their key characteristic is that they are often infinitely expansible; that is, they can be used by many people at the same time. Another way to think of this is that once the good has been produced, it can be replicated at very low cost.(1)

It is currently fashionable for some economic pundits to prophesy that the Information Age is dramatically changing the structure of the world economy, reducing the power of governments to raise taxes or to undertake independent economic policies. Furthermore, it is argued, new technologies will lead to an inexorable rise in unemployment in the West. This view is also often linked to a belief in the death of inflation. As stated, these views are nonsensical. There is little evidence that unemployment, at the aggregate level at least, is caused by technological change.(2)

This paper argues that while globalized and weightless activities have become increasingly important, they do not pose insuperable threats to the world economy. The overall message of this essay is an optimistic one: inequality and unemployment need not rise in the face of competition from the developing world or in response to technological change. However, government policy can play a major role in promoting adjustment to change, especially in terms of adjustment to the growing importance of weightless technologies.

In fact, three economic phenomena are at work. First, production has become increasingly globalized and foreign competition, especially from the newly industrializing economies (NIEs), has become more intense. Second, deregulation and liberalization of domestic and world markets have reduced the power of trade unions and increased levels of competition. Third, the pace of technological change has accelerated, and it has become increasingly biased towards skilled workers and weightless goods. To some extent these phenomena are not independent, since it is easy to see why they might cause each other in turn. In particular, this essay concentrates on the implications of globalization and weightlessness.

The paper is structured as follows. Section one describes the neoclassical view of economic growth, trade and inequality, and contrasts them with the theoretical developments of the past decade. These theoretical developments make an important contribution to our understanding of the economic effects of increasing globalization and weightlessness. Section two addresses two particular aspects of the Information Age: the collapse in demand for the unskilled and the rise of foreign direct investment (FDI). Section three looks at the East Asian growth miracle, a major recent economic development that has potential implications for how other emerging nations should manage their development. Section four examines the experience of the United Kingdom, an open economy which has experienced deindustrialization and has increasingly switched toward services and other weightless goods. The paper concludes by reviewing the implications of the Information Age for government policy in both developing and industrialized countries.

THE ECONOMICS OF THE INFORMATION AGE

A Neoclassical View

The measurement of economic growth raises a number of interesting and difficult problems. One obvious way to measure the material progress made by any economy is to measure labor productivity; that is, output per worker. However, to compare different industries or countries on such a basis is more contentious, since differences in the quantities of other inputs, such as capital or materials, will also affect output per worker. …

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