Thinking about a "New Economy
Taylor, Timothy, The Public Interest
THE Industrial Revolution that began about 200 years ago lives in the collective memory as a cavalcade of inventors and machines: James Watt and the steam engine, Eli Whitney and the cotton gin, Cyrus McCormick and the reaper, Charles Goodyear and vulcanized rubber, and many more. But the Industrial Revolution brought a remarkable change in the human condition that went beyond any particular invention. It instilled a belief that the standard of living did not have to be forever stagnant.
Looking back from today's privileged vantage point, after two centuries of economic growth, it may be impossible to feel in our bones what it meant to live in a world without economic progress. Consider, for example, the note of genuine wonder in the voice of Karl Marx, writing of the new realities in the Communist Manifesto in 1848:
The bourgeoisie during its rule of scarce one hundred years has created more massive and more colossal productive forces than have all preceding generations together. Subjection of nature's forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalization of rivers, whole populations conjured out of the ground-what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?
Modern economists, with their highly developed talent for reducing the drama of human production and consumption to dry statistics, describe the Industrial Revolution more simply: It was the era when economic growth in countries like the United States rose from essentially nothing to 2 percent per year. This 2 percent growth rate should not be understood as a physical constant like the boiling point of water but rather as a rough guideline to the average experience of the most highly developed economies over the last two centuries.
A 2 percent growth rate may sound small to those who have not doodled with a calculator and the magic of compound growth rates. But, at a humble 2 percent per capita annual rate of growth, the average standard of living doubles in 36 years; quadruples in 72 years; and will rise roughly 50-fold over two centuries. The change from almost no increase in the average standard of living over several millennia, until 1800, to a 50-fold increase in the next two centuries is what the Industrial Revolution has meant to those who live in developed countries.
In recent years, there has been considerable discussion of whether the development and application of information and communications technology have changed the U.S. economy in a fundamental way, promising a golden future of rapid growth, low unemployment and inflation, perpetual economic expansion, and a booming stock market. The change is sometimes called the "Information Revolution"; more commonly, it is called the "New Economy." While there is sound evidence that the U.S. economy has experienced a revival in productivity growth since the mid 1990s, the argument that it has undergone either a fundamental shift in its patterns or a change on the scale of the Industrial Revolution appears overblown.
What's in a name?
There are three distinct senses in which the development and dispersion of information and communications technology could qualify as a "revolution." One would be that just as the Industrial Revolution increased the annual per capita rate of growth by two percentage points a year, from zero to 2 percent, the Information Revolution should raise the per capita growth rate by an additional two percentage points, from 2 percent to 4 percent. Such a change would represent a phenomenal shift in the human condition. Again doodling with a calculator, an annual per capita growth rate of 4 percent per year, sustained over two centuries, would mean a staggering 2,500-fold increase in the standard of living.
A less exacting standard for the Information Revolution would be that a new set of inventions will carry the economy forward at its 2 percent annual growth rate. …