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INTRODUCTION



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Measuring and Sustaining the New Economy: Report of a Workshop II INTRODUCTION

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Measuring and Sustaining the New Economy: Report of a Workshop This page in the original is blank.

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Measuring and Sustaining the New Economy: Report of a Workshop Introduction The term “New Economy” has been used extensively in recent years. It describes the dynamic of the U.S. economy as it capitalizes on new technologies, new opportunities, and in particular on national investments in computing, information, and communication technologies—or collectively, information technology. Use of the term New Economy also reflects the growing conviction that substantial change has occurred in the structure of the U.S. economy and that this change may be permanent.1 This change, it is thought, hinges on dynamic increases in productivity and the correlating impact of investments in the information technology sector.2 1   See Organisation for Economic Co-operation and Development. 2000. “Is There a New Economy? A First Report on the OECD Growth Project,” June, p. 17. See also, M. N. Baily and R. Z. Lawrence. “Do We Have an e-conomy?” NBER Working Paper 8243, April 23, 2001, at http://www.nber.org/papers/w8243. 2   This is especially so for the computer hardware sector and perhaps for the Internet sector as well, although there is insufficient empirical evidence on the degree to which the Internet may be responsible. For a discussion of the impact of the Internet on economic growth see “A Thinker’s Guide,” The Economist, March 30, 2000. For a broad study of investment in technology capital and its use in various sectors, see McKinsey Global Institute. 2001. U.S. Productivity Growth 1995-2000, Understanding the Contribution of Information Technology Relative to Other Factors. Washington, D.C.: McKinsey & Co. October.

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Measuring and Sustaining the New Economy: Report of a Workshop THE ECONOMIC IMPACT OF THE SEPTEMBER ATTACKS The tragic events of September 11, 2001 delineate a new period of economic uncertainty in the United States.3 As noted at the time of the conference (see below), the recent downturn in the economy comes on the heels of earlier warning signals—including the burst of the dot-com bubble—indicating that the economic boom of the 1990s was slowing. Prospects for the global economy also appear to have deteriorated, with fading growth prospects for America’s main economic partners.4 The economic costs inflicted by the attacks are known to be substantial, but their full scope and the appropriate policy response are still unclear. These developments have led some to question whether the optimism of the “New Economy” was not merely a fad. The premise of this report is that the New Economy is not a fad but, rather, a long-term productivity shift of major significance. In the context of this analysis, the New Economy does not refer to the boom economy of the mid to late 1990s. The introduction of advanced productivity-enhancing technologies, the key feature of the New Economy, obviously does not eliminate the business cycle. Instead, as this report emphasizes, the New Economy refers to particular technological and structural changes that positively impact productivity and growth. These positive developments need to be understood better if they are to be nurtured by appropriate policies. To do so, issues of measurement must be addressed on a systematic basis by the responsible agencies. Measuring and sustaining the investments that underpin the recent growth characteristic of the New Economy thus take on an added imperative in the normal downturns of the business cycle. The aggravation of the cyclical downturn caused by the shock of the September attacks makes this effort all the more timely and pressing. At the time of this workshop in October 2000, the strength and durability of U.S. economic performance continued to surprise forecasters, although the clouds on the horizon were apparent even then. Indeed, the value of many of the “dotcom” companies, which to some characterized the New Economy, had fallen steeply by then. This sharp drop in value and resurgence of more traditional business models created uncertainties about a new era of growth. Economic developments since the workshop have, of course, accentuated these concerns, emphasizing the policy relevance of the issues identified in this report. 3   See “The Business-Cycle Peak of March 2001,” National Bureau of Economic Research, November 26, 2001, at http://www.nber.org/cycles/november2001/. While dating the beginning of the recession as March 2001, the NBER Business Cycle Dating Committee noted that “the [September] attacks clearly deepened the contraction and may have been an important factor in turning the episode into a recession.” The Committee also found “continuing fast growth in productivity” after March 2001, noting that this and the “sharp declines in the prices of imports especially oil raised purchasing power while employment was falling.” 4   See “GDP Forecasts,” The Economist, November 22, 2001. This article reports on recent estimates by the OECD that the industrial world is experiencing the first economic contraction for 20 years.

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Measuring and Sustaining the New Economy: Report of a Workshop Box A: Key Questions About the New Economy As they look for ways to describe this New Economy, economists have raised, among others, the following questions5 Has the economy growth rate trend been raised, and could it go even higher? Has the lowest unemployment rate consistent with stable inflation (or NAIRU—the Non-Accelerating Inflation Rate of Unemployment) been reduced? If so, How much further might it fall? How long can the economy expand without the emergence of inflation? How long can productivity increases and global competition keep wage pressures in check? Have the primary sources of growth changed with the emergence of information technology? Will “Moore’s Law”6 continue to contribute to productivity growth? Will the synergies between Moore’s Law and Metcalfe’s Law7 generate spillovers that fuel growth in other sectors? 5   See for example, K. Stiroh. 1999. “Is There a New Economy?” Challenge, July/Aug, Vol. 42, No. 4, 1999, pp. 82-101. 6   See Gordon E. Moore. 1965. “Cramming More Components onto Integrated Circuits,” Electronics 38(8) April 19. Here, Dr. Moore notes that “[t]he complexity for minimum component costs has increased at a rate of roughly a factor of two per year. Certainly over the short term, this rate can be expected to continue, if not to increase. Over the longer term, the rate of increase is a bit more uncertain, although there is no reason to believe it will not remain nearly constant for at least 10 years. That means by 1975, the number of components per integrated circuit for minimum cost will be 65,000.” See also, Gordon E. Moore, “The Continuing Silicon Technology Evolution Inside the PC Platform,” Intel Developer Update, Issue 2, October 15, 1997, where he notes that he “first observed the ‘doubling of transistor density on a manufactured die every year’ in 1965, just four years after the first planar integrated circuit was discovered. The press called this ‘Moore’s Law’ and the name has stuck. To be honest, I did not expect this law to still be true some 30 years later, but I am now confident that it will be true for another 20 years.” 7   Metcalfe’s Law poses that the value of communication networks and Internet applications rises as more people are connected.

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Measuring and Sustaining the New Economy: Report of a Workshop A CALL FOR MORE INFORMATION The recent decline in economic activity and the perceived over-investment in some sectors (e.g., telecommunication networks) only underscore the need expressed by the workshop participants for more and better information. The participants affirmed that policy makers need better ways to measure the contribution of software and telecommunications and more information about the contributions of the Internet to the economy. We also need a better understanding of how long the information technology sector can maintain its exceptional pace of growth, based substantially on the progress foreseen by Moore’s Law. Many economists have been reluctant to proclaim a technologically driven New Economy if only because they have been unable to discern a measurable economy-wide benefit of the substantial investments by U.S. business in new technologies. Throughout the 1970s and 1980s Americans and American businesses regularly invested in ever more powerful and cheaper computers. They assumed that advances in information technology—by making more information available faster and cheaper—would yield higher productivity and lead to better business decisions. The expected benefits did not materialize—at least in ways that were readily measured. Even in the first half of the 1990s productivity remained at historically low rates, as it had since 1973. This phenomenon is often called “the computer paradox,” after Robert Solow’s casual but often repeated remark in 1987: “We see the computer age everywhere except in the productivity statistics.”8 A Point of Inflection By the mid-1990s, however, it became clear that something was changing at a fundamental level. While growth rates did not return to those of the “golden age” of the U.S. economy in the 1960s, new data began to reveal an acceleration of growth accompanying a transformation of economic activity. This shift in the rate of growth had coincided with a sudden, substantial, and rapid decline in the prices of semiconductors and computers; the price decline abruptly accelerated from 15 to 28 percent annually after 1995.9 In response, investment in computers exploded. Computers’ contribution to growth rose more than five-fold, to 0.46 percent per year in the late 1990s. Software and communications equipment contributed an additional 0.30 percent per year for 1995-1998. Preliminary estimates through 1999 reveal further increases for all three categories.10 8   R. Solow. 1987. “We’d Better Watch Out.” New York Times Book Review, July 12. The implications of the Solow Productivity Paradox have since been actively discussed. For example, see J. E. Triplett. 1999. “The Solow Productivity Paradox: What Do Computers Do to Productivity?” Canadian Journal of Economics 32 (2) April, pp. 309-34. 9   Jorgenson and Stiroh, op. cit., p. 2. 10   Ibid.

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Measuring and Sustaining the New Economy: Report of a Workshop With these data in hand, the paper proposed by Jorgenson and Stiroh documents the case for “raising the speed limit”—that is, for revising upward the intermediate-term projections of growth for the U.S. economy. After a 20-year slowdown dating from the early 1970s the average labor productivity had grown by 2.4 percent per year during the period 1995-1998. This exceeded the rate for 1990-1995 by a full percentage point.11 Economic Impact of the Internet Along with the rise in productivity grew the expectation that new information technologies would improve business practices, generate spillovers to other industries, and raise productivity throughout the economy. Some economists anticipated that Internet use, in particular, would contribute to the following: Reduce the cost of transactions necessary to the production and distribution of goods and services; Enhance the efficiency of management, especially by enabling firms to manage their supply chains more effectively and communicate more easily both within the firm and with customers and partners; Increase competition, making prices more transparent, and broadening markets for both buyers and sellers; Increase consumer choice, convenience, and satisfaction in a variety of ways.12 The prospect of savings made possible by applying information technology has resulted in some tantalizing estimates. One such calculation suggests that perhaps $20 billion a year could be saved by digitizing medical insurance claims, with speed and convenience improved in the bargain. Annual economy-wide cost savings, once fully realized, were estimated to grow to $200 billion annually, with consumers rather than businesses the primary beneficiaries.13 11   Jorgenson and Stiroh, op. cit. Also see: Oliner, S. and Sichel, K. 2000. “The Resurgence of Growth in the Late 1990s: Is Information Technology the Story?” Journal of Economic Perspectives 14(4) Fall. 12   Robert E. Litan and Alice M. Rivlin summarized these results at a recent conference held in Washington, D.C. See “The Economy and the Internet: What Lies Ahead?” Internet Policy Institute, November 2000, found at <http://www.internetpolicy.org>. The conference was sponsored jointly by the Internet Policy Institute, the Brookings Institution, the Berkeley Roundtable for the International Economy, the Department of Commerce, and the Organization for Economic Cooperation and Development. 13   Litan and Rivlin, op. cit. (pages unnumbered).

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Measuring and Sustaining the New Economy: Report of a Workshop Box B: Total Factor Productivity Total Factor Productivity (TFP) measures the efficiency with which both the labor and capital factor resources are used to produce output. In other words, higher TFP reflects a smarter and better use of the labor and capital resources available for a given level of output. It is defined as: TFP = Output /(Capital + Labor) This definition, by itself, is simple and uncontroversial, and national accountants have a high-resolution picture of productivity in such traditional sectors in the economy as manufacturing. Here, measures of output and factor inputs are largely well-established. The question of how to measure the relevant outputs and inputs in the new and fast changing sectors that underpin the New Economy is, however, much less clear and is one of the central themes of this report. The sections below—relating to the challenge of quantification and problems of measurement—highlight the observations of participants in the workshop and underscore the need for the resources necessary to improve government statistical capabilities. Gains in Total Factor Productivity To date, the recorded gains in total factor productivity (Box B) have been attributed in substantial measure to the information-technology-producing industries—that is, those that produce computers, semiconductors, and associated products. The evidence is equally clear, however, that these gains have not spilled over to computer-using industries and services, such as finance, insurance, and real estate.14 Robert Gordon, a critic of many New Economy assumptions, finds that there is “no productivity growth in the 99 percent of the economy located outside the sector which manufactures computer hardware.”15 14   Jorgenson and Stiroh, op. cit., p. 3. 15   Robert Gordon. 1999. “Has the ‘New Economy’ Rendered the Productivity Slowdown Obsolete?” Manuscript. Northwestern University. June 12. Also, by the same author, “Does the New Economy Measure up to the Great Inventions of the Past? op cit.

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Measuring and Sustaining the New Economy: Report of a Workshop Box C: Productivity Growth and the Internet “We have a tantalizing fact—that productivity accelerated at just about the time the Internet burst on the scene. Whether or not the Internet was the cause of the speedup in productivity growth will be a matter for economic historians to sort out some years from now.” Alan S. Blinder, “The Internet and the New Economy” The Challenge of Quantification As participants in this workshop agreed, we still cannot quantify the economic impact of the Internet, which came into wide public use in the same year (1995) as Jorgenson and Stiroh’s point of inflection. As Alan Blinder writes, this is partly because many Internet-related activities do not appear in official statistics.16 For example, Internet retailing may offer benefits to consumers, such as easier comparison-shopping, removal of travel costs, and 24-hour availability, but such gains are not counted in the Gross Domestic Product. While the Internet may offer the greatest productivity benefits in the sphere of business-to-business commerce—where vast virtual marketplaces may reduce the costs of supply— the corporate systems and partnerships that may realize these benefits are only now being put in place (Box C). If Blinder and others are correct, high-speed computers may have been waiting on the connectivity of the Internet to use their power to boost productivity on a national scale.17 If this is true, we must wait some years more before the productivity statistics capture this change. Meanwhile, the rapid pace of change in this “new” or “emerging” economy provides a smorgasbord of emerging synergies, new economic opportunities, and new statistics to consider and new needs for better measures, as we attempt to determine the emerging outline and prospects of the New Economy. The Problem of Measurement Participants in the workshop noted that the contribution of information technologies to the economy is difficult to capture accurately. These problems are 16   Alan S. Blinder. 2000. “The Internet and the New Economy,” Internet Policy Institute, first published January; <http://www.internetpolicy.org>. 17   For a fuller development of this theme, see Stephen S. Cohen, J. Bradford DeLong, and John Zysman. 2000. “Tools for Thought: What Is New and Important About the ‘E-conomy’?” BRIE Working Paper 138 (Berkeley: Berkeley Roundtable on the International Economy).

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Measuring and Sustaining the New Economy: Report of a Workshop made more acute given the fast-changing nature of information technology and the complex and often invisible roles it plays in economic processes. Asymmetries in Data It was noted that current statistical methods are suited better to pick up some forms of information over others. Illustrating the challenges facing the federal statistical system, Dr. Bresnehan of Stanford University noted the discrepancy between measures of output in the information technology sector (which he noted are adequate) and measures of output where information technology is used as an input in other sectors (which are not).18 Dr. Greenstein of Northwestern University added that conventional measures of GDP provide good data on established channels by which goods and services are distributed, but fail to capture such information about goods and services when there are concurrent changes in the distribution methods.19 Illustrating the implications of asymmetries in data availability, Dr. Price of the Department of Commerce observed that data on the value of packaged software (which is more easily measured both in terms of nominal value and price) may not be as important to productivity as other forms of software whose value is more difficult to capture—resulting in under-valuation.20 He stressed the need to further refine statistical methods to better quantify the value of information technology. Difficulties in Measuring Value Several workshop participants emphasized the problems in valuing information technologies. Dr. Flamm of the University of Texas observed that it is difficult to calculate the percentage of improvement in computers that come from semiconductors since the answer depends on the worth of semiconductors in the value of computers.21 Dr. Brynjolfsson of the Massachusetts Institute of Technology further noted some hazards in equating price with value for computers, particularly given that consumers are often not price-sensitive, valuing instead service, brand loyalty, and perceived quality.22 Further to the issue of value, Dr. Mowery of the University of California at Berkley noted that it is difficult, from the point of view of statistics, to see the contributions of the semiconductor industry since it is hard to measure the output of “user” industries. He added that the economy outside the computer industry has become “a bit of a black planet” in terms of understanding quality improvements in their products.23 18   See remarks by Dr. Bresnahan in the Proceedings section of this report. 19   See remarks by Dr. Greenstein in the Proceedings section of this report. 20   See remarks by Dr. Price in the Proceedings section of this report. 21   See remarks by Dr. Flamm in the Proceedings section of this report. 22   See remarks by Dr. Brynjolfsson in the Proceedings section of this report. 23   See remarks by Dr. Mowery in the Proceedings section of this report.

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Measuring and Sustaining the New Economy: Report of a Workshop Box D: Challenges for Accurate Measurement of the New Economy The workshop, which drew together economists with an appreciation of technology and technologists with an appreciation of economics, identified key challenges regarding the measurement of the New Economy. Among the core themes that run through the report are the need for better measurement of the output of the service sectors, the impact of technology on user sectors, the contribution of the semiconductor industry, the emergence of the communications industry, changes in distribution methods, organizational capital and other intangibles, assessing the value of business information systems, and difficulties when investments are reported as expenses in source data. As Dr. Lee Price of the Department of Commerce observed, “From the vantage point of an economist, one of the largest challenges is accurately measuring what is happening in the New Economy.” The Technology Adoption Curve The impact of new technologies on the sustainability of the New Economy rests crucially on how information technologies are integrated and adopted throughout the economy. Workshop participants, both implicitly and explicitly, referred to an S-shaped technology adoption curve for new technologies. Some argued that we are near the bottom of the curve and about to take off; others suggested that we are in the middle and thus enjoying rapid productivity gains from the widespread adoption of information technologies; still others indicated that marginal productivity gains from information technologies might be waning, signifying that we are already near the top of the technology adoption curve. Workshop participants noted that a major constraint in sustaining the New Economy might not be the rate of innovation itself, but rather the rate of technology absorption. Sid Abrams of AT Kearney noted that business organizations often face challenges in reengineering themselves to take better advantage of the technologies available. While the cutting edge of technology may advance, their potential to advance business productivity may depend on the extent that executives are aware of the possibilities and/or uncertain of the effects of adopting new

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Measuring and Sustaining the New Economy: Report of a Workshop technologies in their organizations. Indeed, as Ralph Gomery of the Alfred P. Sloan Foundation concluded, the ability to absorb rapid advances in technology and the cost of re-doing the business organization to take advantage of these advances are, in many cases, more significant for sustaining productivity-led growth than the rate or propulsion of technological advance. In essence, the question is not merely one of more technology, but rather one of how businesses can integrate productivity-enhancing changes induced by technology they already have or find available. SUMMARY OF THE WORKSHOP This section summarizes the presentations and comments of the participants. The Proceedings section reports these in more detail. In opening remarks, Bill Spencer observed that the workshop was being convened out of a sense of both uncertainty and opportunity. The STEP Board had agreed to instigate this study, in part, from feeling that many issues related to recent economic growth, the impact of information technologies, and the Internet were distinguished by many questions on one hand and a surprising lack of data on the other. This gap is particularly evident in productivity growth derived from new technologies and their collective impact on the economy. The Internet exemplifies both the potential and the uncertainty of major features of this new economy. A Revolution to Rival the Industrial Revolution? Dr. Vint Cerf opened his remarks with the bold opinion that the “consequences of this information revolution will be as great or greater than the effects of the industrial revolution.” He then qualified this assertion by noting that the Internet is in its early years and no one can yet predict which ideas for the Internet will prove most useful as we move through the current period of experimentation. He emphasized that the growth of Internet use, while extremely fast, is distributed unevenly. Its continued growth faces a variety of challenges involving technological challenges (e.g., carrying new modalities, smoothing two-way service, finding enough addresses for everyone), as well as economic and political challenges (e.g., such as who should own, regulate, and tax digitized information). He predicted additional ubiquitous devices, more daily uses, and more convenience as we learn to apply the emerging capabilities of the Internet. In response to a question from Dr. Wessner, Dr. Cerf suggested that the most likely showstoppers in Internet growth will not be technical but political, as traditional sources of tax revenue and authority are eroded by technical progress.

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Measuring and Sustaining the New Economy: Report of a Workshop Panel I: Defining and Measuring the New Economy Robert Shapiro of the U.S. Department of Commerce noted that the U.S. economy seems to have entered a high-performance period in the 1990s that looks different from others.24 He acknowledged that his department faces many difficulties in “measuring” the New Economy. The U.S. economy, he observed, has matured, yet productivity gains have accelerated, real GDP growth has quickened, real hourly wages have risen, business investment has continued to rise (most of it for information technology) while inflation has remained moderate. Beneath the higher productivity and growth figures, he identified three conditions: Capital deepening—the acceleration in the growth of capital stock. Disinflation, which has held back price pressures for more than a decade. Innovation, particularly in technology that drives productivity. Other contributing features, he noted, were network effects (where the value of an innovation increases the more it is used), cascading innovation (new information technology brings deeper changes in the way a firm operates), and networks that match manufacturers with their suppliers. The discussion following his talk made clear the continuing need for and challenge in providing statistical techniques that capture these new features of the economy. The Point of Inflection Dr. Jorgenson addressed the economic acceleration in the 1990s with a more specific focus on the period around 1995. At that point, the ongoing decline in computer prices reached a point of inflection and suddenly doubled. In searching for the causes of this point of inflection, Dr. Jorgenson noted that he found that total factor productivity was rising in some industries, including information technology but not in all. The sustainability of this increased rate of growth, he concluded, depends on the persistence of high rates of technological progress and is subject to considerable uncertainty because of incomplete information about prices of software, telecommunications equipment, and other important sectors.25 Dr. Cerf commented that software costs have risen in the telecommunications industry and wondered whether this could limit future productivity. Dr. Brynjolfsson said that although software productivity had not been measured 24   At the time of this workshop, Robert Shapiro was serving as Under Secretary of Commerce for Economic Affairs. 25   See the paper by Dale W. Jorgenson and Kevin J. Stiroh, “Raising the Speed Limit: U.S. Economic Growth in the Information Age” in this volume. See also Dale W. Jorgenson, “Information Technology and the U.S. Economy,” Presidential Address to the American Economic Association, New Orleans, Louisiana, January 6, 2001.

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Measuring and Sustaining the New Economy: Report of a Workshop as accurately as hardware productivity, it was still growing impressively—on the order of 10 to 15 percent. He felt that this improvement was not yet reflected in official statistics. Dr. Raduchel commented that software production was a hardware-intensive process, so that economies in hardware tend to reduce software costs and raise productivity. Dr. Raduchel also summarized his experiences in re-engineering companies, emphasizing that the portion spent on information technology is only 5 to 10 percent; the rest is spent on training, testing, data collection, and other human activities that by current accounting standards, are recorded as General and Administrative expenses (G&A) rather than as investments in productivity.26 Dr. Jorgenson concluded the discussion by reiterating the need for a better understanding of software productivity and suggesting that the recent inclusion of software in Department of Commerce statistics was a sign of progress. Panel II: Drivers of the New Economy Dr. Gomory opened the panel by emphasizing the difficulty of predictions, and urged some humility in the present exercise—a sentiment that was echoed by other participants. While hardware predictions are difficult, software predictions are more so, and most elusive of all are predictions about the social consequences of technological transformations. Dr. Gomory then introduced Dr. Spencer, who began his presentation with the “modest proposal” that the nation’s recent surge of economic growth may be entirely due to semiconductors. While inviting critiques of that serious hypothesis, he said he would also address the impact of semiconductors on other information technology components and raise some questions about what might happen if the growth in that technology slows. He noted that the rapid growth of the industry was driven partly by lower costs (especially for microprocessors, magnetic memory, and DRAMs) and the higher productivity described by Dr. Jorgenson. This higher productivity, he said, comes at a time when most engineers see the approach of physical limits on further improvements in minimum feature size, transistor density, oxide layering, and other critical features of semiconductors. Dr. Jorgenson asked whether advances in non-semiconductor technologies might stave off the time when the semiconductor industry hits a physical “wall” of limits. Citing such examples as fiber optics and ways of writing software more efficiently, Dr. Spencer agreed that the future of IT would depend not only on semiconductor productivity, but also in jumps in other complementary technolo- 26   For a discussion of “Organizational Informatics,” see Rob Kling and Roberta Lamb, “IT and Organizational Change in Digital Economies: A Sociotechnical Approach,” in Brynjolfsson and Kahin, eds., Understanding the Digital Economy, p. 296. They write: “Thirty years of systematic, empirically grounded research on IT and organizational change suggests that many organizations have trouble changing their practices and structures to take advantage of IT.”

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Measuring and Sustaining the New Economy: Report of a Workshop gies. Dr. Raduchel added that the most interesting challenges would likely involve finding more effective uses for already developed technologies. “Innovations have no value,” he said, “unless consumers see that value and use it.” Unchanged Productivity in R&D David Mowery of the University of California, Berkeley, turned to the “economics of the New Economy,” trying to see how advances in information technology have propelled new process and design techniques. He found that instead of using computer simulations and other new techniques, the process side of information technology was relatively old-fashioned, relying on incremental change. Into this gap has leapt a range of specialized firms that design, develop, and market process technologies, as well as supply and equipment technologies. These firms increasingly specialize in individual pieces of “real estate” on wafers and chips, trading techniques among themselves on the Internet. More generally, he said, there is still no evidence that information technology has raised the “productivity” of R&D or of knowledge production. To gain a better grasp of the importance of semiconductors to the larger economy, we need better measures of quality improvement in automobiles, consumer electronics, and communications, major end-users of semiconductors. During the discussion period, Dr. Mowery commented again on the vertically specialized firms that are entering the semiconductor industry to focus on development at the leading edge of commercial technology. He questioned whether such highly focused “upstream” research could be maintained unless it is supported by more basic research—a concern seconded by Dr. Gomory. Five Trends of Microprocessors and Computers In his presentation Alan Ganek of IBM posited five major trends, drawn from recent innovations in information technologies. The first is a continuing ability to overcome apparent physical limits in information technology. Improvements in processors from innovations in materials and designs are not the whole story, noted Mr. Ganek. He pointed also to circuit design, logic design, and packaging techniques as well as to improvements in memory storage and fiber optic technology as key factors propelling progress in information technology. The second trend brought to light was the growing pervasiveness of computing devices that will interconnect computing everywhere and change the way people interact with other people and objects in the digital world. While the personal computer will remain important, he noted that pervasive devices, such as data-capable cell phones and personal digital assistants, will become the dominant means of information access. The third trend is a utility-like model for value delivery to businesses based on an intelligent infrastructure. Here the network becomes a repository of intelli-

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Measuring and Sustaining the New Economy: Report of a Workshop gence across a broad spectrum of applications, such as caching, security, multicasting, and network management, so that the application does not know what the device looks like. The fourth trend relates to the formation of e-marketplaces and virtual enterprises. Of all the software being written, noted Mr. Ganek, the most important relates to such enterprise processes as business-to-consumer and business-to-business activities. He observed that the building blocks of electronic commerce are already emerging to support these processes. Mr. Ganek’s fifth prediction was that electronic businesses of the future will be dynamic, adaptive, and continually optimized. They will facilitate powerful business analytics and knowledge management. Computers will no longer be seen as tools of automation but will be an integrated part of strategic decision making. He closed by emphasizing that the pharmaceutical industry is about to enter a dramatically new phase through the introduction of “deep computing” for rational drug design, genomic data usage, personalized medicine, protein engineering, and molecular assemblies. During the discussion period Dr. Myers of Xerox asked about the possibility of thinking machines—a goal of NASA, for example, in developing semiautonomous, self-learning spacecraft. Mr. Ganek replied that many people are working toward this goal, but so far their systems are not holistic in the sense of being able to do actual learning and they have not been able to simulate the ability of neural networks. Something Very Significant Kenneth Flamm of the University of Texas at Austin continued the discussion of computers and microprocessors by looking at trends from an economist’s viewpoint. He began by addressing what Dr. Jorgenson described as a point of inflection; when the steady trend in computer price declines seem to have accelerated abruptly around 1995. Dr. Flamm said that after years of seeing only a steady decline, he too had come to the view that an acceleration—of a magnitude even greater than described in official figures—had occurred. He had calculated a quality-adjusted price performance of 60 to 68 percent per year for microprocessors, which he called extraordinary. He concluded saying that something “very significant for the economy” had happened and that it was likely to have a lasting, positive effect. Panel III: Communications and Software: A Globally Distributed System Robert Borchers of the National Science Foundation, the moderator of this session, said that several studies had made positive linkages between basic research in information technology and the economy. As a result, the National

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Measuring and Sustaining the New Economy: Report of a Workshop Science Foundation now funds basic information technology research in universities on many of the questions being raised in this workshop. The first speaker, Alfred Aho of Lucent Technologies, talked about the impact of basic research, and particularly communications research, on the information-based economy. He sketched a world of communications systems that will not simply be automated versions of existing systems. These, he said, will be replaced by radically new styles of services that effectively turn the world into a global distributive system that will include data, computation, and communication. These services will depend heavily on improved software productivity and reliability, where considerable effort is now focused. Daniel Ling of Microsoft observed that while progress has been made in software productivity, there remain worrisome needs that merit much more research. He described various advances in communications, including the advent of “post-Internet” software adapted primarily for wireless devices; the potential for data accessibility “anytime, anywhere”; the digital convergence of sound, video, and other media; and the evolution of software from a purchased commodity to an online service tailored to specific needs. Panel IV: Applications and Policy Issues As moderator, Dr. Raduchel of AOL Time Warner opened the session. Acknowledging the difficulty of defining the new economy, he suggested that one of its central features was likely to be the wide availability of information, made possible first by the copier and now by e-mail. He illustrated the power of democratized information with several anecdotes and urged the workshop participants to continue to focus on this task of definition. Shane Greenstein of Northwestern University continued the discussion of communications by examining ways to sustain innovation in communications markets and identifying policy issues that deserve attention. He highlighted several issues facing communications markets. These include: the difficulties of adapting the essentially free environment of the Internet to a commercial environment; the regulatory complexities of bringing the Internet the last mile into users’ homes and offices; the best ways to narrow the digital divide between Internet users and non-users; and the difficulties in deciding whether commercial and security “gateways” that restrict Internet access are acceptable. Turning from policy to applications, Eric Brynjolfsson of the Massachusetts Institute of Technology reiterated previous comments about the risk of making

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Measuring and Sustaining the New Economy: Report of a Workshop predictions and suggested that e-business is not exempt from this risk. In marketing, for example, he observed that one early prediction was that the Internet would bring fierce price competition and eliminate brand loyalty. In a study of online booksellers, however, Dr. Brynjolfsson and colleagues found that there were three other variables in addition to price, the most important being whether the buyer had visited that Web site before. More generally, consumers appear to perceive more differences between products than that which economists might impute to them. These distinctions are made in gauging customer service, product selection, and the convenience and timeliness of the product or service offered. In addition, he amplified Dr. Raduchel’s point that e-business is only fractionally concerned with actual technology, and most of its activity concerned implementation, organization, and co-inventions that bring valuable new abilities. He suggested that businesses need significant changes in accounting to reflect the true value of corporate assets. Elliot Maxwell of the U.S. Department of Commerce turned from economic issues of e-business to consider a series of policy questions: How will the issue of taxing e-commerce be resolved? Who will control and apportion the electromagnetic spectrum? Will the infrastructure, on which e-commerce rides, be robust enough? Who will control the domain name system and open it to competition? Can the privacy of Internet users be assured? How can national laws be applied to an international Internet? Can intellectual property be preserved on an open Internet? “I think what we are striving to do in the government,” said Mr. Maxwell, “is to find ways to work together with the private sector, non-governmental organizations, consumers, and businesses.” If we work together, he concluded, we might find solutions that allow and encourage the growth of e-commerce instead of stifling it. Tim Bresnahan of Stanford University returned to the theme discussed by Dr. Brynjolfsson: value creation from the use of information technology. We do not yet have the tools, he said, to measure the value of business information systems, which are “among the most valuable human artifacts.” This problem is amplified by the difficulty of changing business systems and the high organizational costs of such changes. In noting recent changes that had enhanced value, he conjectured that the advent of the Web browser might have had more impact than commonly supposed—and could even explain at least part of the point of inflection noted by Dr. Jorgenson. This single innovation had solved a “best of both worlds” problem in permitting applications that are as easy to use as personal computers but have the power of large systems. Continuing to address the theme of value, Sid Abrams of AT Kearney said that he works with senior executives and major companies to help them navigate

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Measuring and Sustaining the New Economy: Report of a Workshop and take advantage of dramatic changes in the business world. Many of his clients are daunted by the challenge of new technologies and unsure about their eventual benefit. To assuage their anxieties and justify the substantial investments, e-business techniques would have to bring companies closer to their customers and more tightly integrate them with other businesses in ways that improved effectiveness and profits. Panel V: Roundtable Discussion Dr. Jorgenson moderated the discussion and opened by requesting suggestions on how to structure further discussion of the complex and central topic of the New Economy. Dr. Raduchel responded that two central issues deserved further discussion: measurement and sustainability. There is much uncertainty about how to measure the parameters of the New Economy, he said. Much of the available data is not reported in useful forms and is not helpful in understanding trends. Dr. Price agreed, saying that one of his largest challenges in the Department of Commerce is to measure accurately what is happening in the New Economy. Many economists believe that some features of growth have changed, he said, but without better measurements he cannot verify these changes, isolate their causes, or predict whether they will continue. Dr. Brynjolfsson underscored the need to measure the “dark matter” other speakers had referred to. He said that some of it might be difficult or even impossible to measure but not all of it. The good news, he said, is that the Internet itself is producing new, large data sources, such as those he demonstrated in his talk. Dr. Raduchel also suggested that the United States needs to move toward a more tightly coupled Internet (that is, one like telephony in which one or a few agents were able to rationalize regulatory conditions). Absorption and Cost Dr. Gomory agreed with earlier speakers that the rate of technology advances was “not the name of the game” today but rather the ability to absorb it and the cost of re-doing the business organization to take advantage of it. The question is not one of how businesses can acquire more technology but one of how they can integrate changes induced by technology they already have. As an additional point, he said that changes are relatively easy to make in the business world, where the desire to be successful and profitable is a powerful driver. He suggested that one of the great-unrealized possibilities for the New Economy is to find useful drivers for areas such as education and government where business motivations do not apply.

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Measuring and Sustaining the New Economy: Report of a Workshop Key Role of Technical Standards Dr. Jorgenson asked for a technologist’s view of these questions, and Mr. Ganek suggested that the issue of technical standards, especially for wireless devices, was crucial in sustaining the economy. Without standards and better access technologies, the United States could find itself at a competitive disadvantage. Dr. Aho agreed that if wireless becomes the dominant mode of accessing the information infrastructure, the intellectual leadership driving the Internet may move offshore. Dr. Flamm said that one explanation for the United States’ slow progress in wireless is national economic forces. That is, unlike Europe and Japan, the United States has a fixed-rate access model for local landlines, meaning that telephone service—and Internet connections—are essentially free. Dr. Aho raised two other points. One was the need to ensure the reliability of the Internet infrastructure, which, like the highway system needs to be refurbished periodically and will never be completed. The second point was that the Internet came out of a government research program. Yet there has been little discussion about what roles the government should—and should not—play in facilitating the transition to new ways of doing business and arbitrating issues such as taxation that set the parameters for that business. Dr. Mowery agreed that measurement should have a high priority and suggested that a panel of the National Academies could be an appropriate body to articulate the characteristics and effects of needed investments in e-commerce applications. He said that many studies have demonstrated that 80 percent of the investments are non-technological investments but that this conclusion cannot be repeated frequently enough. Jeffrey Macher of Georgetown University echoed Dr. Mowery’s comments on measurement and suggested a study of learning curves. He referred to the day’s discussion of semiconductors and its learning curve for density, optics, transmission capacity, magnetic storage, and other features. He suggested an attempt to determine whether shifts of the learning curve are caused by new science, new technology, or some government policy and whether features of each industry, such as market structure, industry standards, and government policy, are influenced by changes in productivity. Dr. Ling of Microsoft advocated more work on the issue of sustaining the economy and whether adverse conditions of intellectual property, privacy, and taxation could become major obstacles to economic growth by starting to fragment the market. Margaret Polski of AT Kearney brought up the need for additional research on Internet technologies and the lag time between original research and implementation. Dr. Spencer agreed and emphasized that we are living off the results of research done 25 and 30 years ago. In closing remarks, Dr. Wessner noted a disjunction between the predictions of continued technological progress and the difficulties faced by CEOs in capital-

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Measuring and Sustaining the New Economy: Report of a Workshop izing on new technologies. If CEOs do not find new applications useful and manageable, he asked, would they continue to invest in information technology at the same level? He also underlined the importance of Mr. Maxwell’s series of questions about taxation and other potential policy roadblocks to the development of economies, noting that to achieve the enormous promise of these technologies, public policy will have to evolve in many significant ways. Dr. Spencer closed the symposium by thanking the participants for their contributions in both technology and economics and reiterated the importance of better understanding the concept of the New Economy and of devising better ways to measure its activities. Dale W. Jorgenson Charles W. Wessner

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