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OCR for page 93
Macrorealities of the
fonnation Economy
STEPHEN S. ROACH
The information economy and the associated surge in high tech-
nology spending my well offer promise of renewed productivity
growth in the Unzoned States, but at current exchange rates the re-
suking improvements in living standards could well turn out to be
built on a foundation offoreign-produced ar~foreign-owned capital.
Technology has taken on a new role as a conditioner of economic change
In He United States. Historically, economists have been preoccupied win
technological change in the narrow or macroeconomic sense—focusing mainly
on the process of innovation, its diffusion, and potential linkages to pros
ductivity. A shortcoming of this approach is Hat it fails to consider He role
of technology in the context of dramatic shifts that have occurred in He
macros~cture of the economy. Indeed, it can now be demonstrated Hat
high technology holds He key to the evolution of what can be called "~e
information economy" a core of activities Hat increasingly has become a
dominant source of economic progress in the United States.
This discussion of He macro~mensions of the inflation economy draws,
in large part, on work we have previously published at Morgan Stanley.
The findings of Hat work can be summarized in a relatively s~aigh~orward
way. First, He process of structural change in the U.S. economy began in
earnest in He 1960s and started with a shift of output and earnings away
tSee The industnalizabon of We infold non economy, Morgan Stanley Econonuc Perspectives,
June 15, 1984; and S. S. Roach, The tuformanon economy comes of age, Infonnation Management
Review, 1985 (1):9-18.
93
OCR for page 94
94
STEPHEN S. ROACH
from traditional manufacturing activities and toward industries engaged pre-
dominan~cly in He creation, manipulation, and distribution of information.
An important by-product of such trends was that job growth shifted dra-
matically away from employment on the factory assembly line and toward
the white-collar work force. Such workers had labored for years at a distinct
disadvantage because they had relatively limited productive capital at their
disposal. With the explosion in high technology spending in the late 1970s,
however, Hat all began to change, and by 1983 U.S. capital endowment per
worker had shifted dramatically away from the factory sector and into the
information economy. Therein lies the potential for a resumption of improved
longer-term performance of He U.S. economy: the industrialization of the
ntorrnat~on economy.
SHIFTS IN OUTPUT AND EARNINGS
Information has become a reality for most industries—whether they are
in the factory or the so-called service sector. The information intensity of a
firm's output is highest in such areas as communications, finance, and in-
surance, as well as in some of the more traditional service areas, such as
those provided by business consultants and professionals. ~ such informa-
tion-intensive industries, companies usually do not produce physical prod-
ucts, but instead combine the flow of information with their skilled labor
force and high technology capital to generate a knowledge-based "com-
modity." Even in manufacturing the growing use of robotics, computer-
aided design/computer-aided manufacturing (CAD/CAM), and management
information systems (MIS)-based control underscores the potential applica-
tions that information technologies can have on the traditional factory as-
sembly line.
Figure 1 lays out the broad boundaries of the information economy. Shown
in the upper panel of the figure is a decomposition of private nonfann output
into two broad groupings of industries. Defined in this context, the "infor-
mation sector" includes not only traditional services but also finance, in-
surance, real estate, Lade, transportation, communications, and public utilities.
The "goods sector" is what is left over: mar~ufactunug, mining, and con-
struction. The share of output going to the goods sector has declined steadily
since the mid-1960s from about 45 percent to about 37 percent in 1984. By
contrast, the output share of the infonnation sector has risen to over 60
percent, and our Morgan Stanley projections suggest that this group of in-
dustries will generate close to two out of every Tree dollars of national output
by the end of 1985.
As the lower panel of Figure 1 indicates, similar shifts can be observed
in the composition of corporate profits. In 1984 the information sector ac-
counted for essentially half the volume of total corporate profits in the United
OCR for page 95
MACROREALITIES OF THE INFORMATION ECONOMY
Output Shares
45
40
cr
LO
rat
95
55 _ _
50
60
65
60
Information Sector
(right scale)
. .—
Profit Shares
55
-
Goods Se~—_
(left scale)
50
55 _
/~\ Goods Sector
\_ (left scale)
50
45
40 I I
1 964 1 968 1972
Phi:
if\
Ad\
Information Sector \ ;
(right scale) \l
~ I 1 ~ 1
1976 1980 1984
FIGS 1 The emergence of the infonnabon economy.
NOTE: Dashed lines indicate Morgan Stanley economics projections.
source: Morgan Stanley Economic Perspectives, June 15, 1984.
60
55
50
45
40
States increasing its earnings share almost 25 percent over the past decade.
Moreover, on a per unit basis, the rise in profitability for information-inten-
sive industnes exceeded the growth in output over the past 10 years a clear
sign of an advantageous shift in earnings leverage that is another important
by-product of an emerging information economy.
INFORMATION WORKERS AND THE INVESTMENT RESPONSE
Table 1 illustrates one of the most important charactenst~cs of the infor-
mation sector—the employment of a relatively large share of what tradi-
tionally has been referred to as We economy's "white-collar" occupations.
These workers, hereafter referred to as the information work force, are
OCR for page 96
96
TABLE 1 Growing Information-Intensity of the Work Force
(share of private nonfarm work force)
STEPHEN 5. ROACH
Average: 1962 to 1972 1983
Infoll~,aiion Production Information Production
Workers Workers Workers Workers
Private nonfarm work force 49.~% 50.8% 56.2% 43.8
Information sector 62.3 37.7 65.7 34.3
Finance, insurance,
and real estate 92.9 7.1 92.4 7.6
Services - 61.9 38.1 66.6 33.4
Trade 62.5 37.5 61.6 38.4
Transportation
and public utilities 40.8 59.2 49.7 50.3
Goods sector 28.7 71.3 33.6 66.4
Manufacn~nug 30.4 69.6 36.8 63.2
Mining 28.8 71.2 44.4 55.6
Construction 21.9 78.1 21.4 78.6
-
SOURCE: B=eau of ~bor Smusucs ~cupation~-Indus~ Ma~.
defined to include executives, administrators, managers, professional spe-
cialists, technicians, salesworkers, and the support staffs of each of these
groups. As the table-indicates, the concentration of information workers is
clearly highest in the information sector of the economy. Indeed, in 1983
infonnanon-intensive industries employed, on average, two information workers
for every production worker; in contrast, the ratio is reversed in the goods
sector. Thus, we can tentatively conclude that the information sector includes
not only the fastest-growing and most profitable industries of We economy
but, as expected, ~ highly disproportionate share of the information work
force.
If shifts in the mix of output, earnings, and employment persist long
enough, it is only natural to expect a complementary response in the com-
posihon of the remaining factor of production—the capital stock. It took
more than 10 years for such a shift to occur, but when it did it came win
a vengeance! Figure 2 overlays compositional shifts in capital spending with
the mends in the mix of the work force just descnbed. The upper panel
highlights the essence of an emerging information economy: a rising share
of the inforrnanon work force together with an explosion of We high tech-
nology portion of business capital spending. From the mid-1960s through
1984, high-tech spending defined as computers, office machines, com-
- munications equipment, instruments, industrial control and measuring de-
vices, and miscellaneous electrical components and machinery almost tripled
as a portion of total business fixed investment, rising from about 12 percent
to over 35 percent. Similarly, during Me same period, the employment share
of infonnaiion workers climbed an estimated 10 percentage points to about
55 percent of the nonfarm work force.
OCR for page 97
MACROREALITIES OF THE INFORMATION ECONOMY
40
30
20
it
at:
30
25
20
1S
97
.......
.......
. ..~ I nvestment ~ ..
60
55
50
~ ,
Basic I ndustria I Sector .~ ......
,~Dg: ~ Production
, _ .......... 2.
, . .. ..
......
......
...2.2..
.... ..
_1 ~
........
.............
an 1 1 1 ~ . 1
~ ~ . .,. _
~ I ndustria I A.
..... ~leVfestmieelt .... ~ 1
1 2'.2' 1 1
,,.,,.,.,,, \ to
1968 1972
1 976 1 980 1 984
~0
45
40
FIGURE 2 Structural change and the information economy (investment and employ-
ment shares).
NOTE: Shaded areas indicate recessionary periods as designated by the National Bu-
reau of Economic Research. Dashed lines indicate Morgan Stanley economics pro-
. . .
Jectlons.
SOURCE: Morgan Stanley Economic Perspectives, June 15, 1984.
A COMMON TREAD
lithe shifts in the composition of employment and capital accumulation
turn out to be far more than a mere coincidence. Indeed, it is increasingly
important to view He extraordinary acceleration of spending on high tech-
nology as the complementary investment response to the rapid expansion of
the information work force. This conclusion is based on Be fact Hat high
technology capital turns out to be the mainstay of 'production" in He
information segment of our economy.
This assertion can be verified by examining He intenudustry flows of
shipments for a large number of high technology items. Figure 3 shows the
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98
STEPHEN S. ROACH
sectoral allocations of such flows for 1982- the latest year for which there
are reliable benchmark statistics. It is no surprise Mat industries Mat have
been identified as being among Me most infosmation-intensive In the economy
were also recipients of Me bunk of h~gh-tech equipment. Indeed, almost
85 percent of computers, other office machinery, and communications equip-
ment was shipped to the information sector in 1982. To be sure, Me share
was somewhat lower for instruments and photographic equipment, and clearly,
most measunug and control devices are purchased by manufacturing com-
panies. Nonetheless, about 70 percent of all purchases of high-tech equipment
were made by information-intensive industries.
Thus, high-tech investment and information-worker employment go hand
in hand—more Man a decade of parallel trends appears to be far more than
just happenstance. Figure 4 brings together these compositional shifts in
labor and capital. Shown in the figure are ratios (in real terms) of the stock
of basic industrial capital per production worker and high-tech capital per
~nfonnation worker Me most logical way to match Me functional categories
of productive capital win the workers who actually utilize such facilities in
the production process.
20:
15
10
5
o
~ Production Sector
$16.0
Information Sector
S8.5
$8.1
.
S7 0
Computers and Other Communications Instruments and Measuring and
Office Machinery Equipment Photographic Equipment Control Devices
S3.2
S0.6
FIGURE 3 WhO uses high-tech equipment? (Allocation of private domestic final shim
meets in 1982.)
SOURCE: Morgan Stanley economics estimates based on input-output industry dis~i-
bution tables provided by the Interindustry Service of Data Resources, Inc.
OCR for page 99
MACROREALITIES OF THE INFORMATION ECONOMY
1300
1 1 00
900
700
Oh 500
Cal
I_
6000
5000
4000
3000
2000
99
Investment per worker
/Basic I rx~ustrial ~~\,
/ per Production Worker
_,
1~
High-Tech per
Information Worker
~
~ \ _
~ ,
\'
Capital Stock per Worker
/Basic Industrial
per Production Worker
tic_
high-Tech per
Informnsion WnrkPr
-
I I ' 1 1 1 1 1
-
_ _
1 1
1964 1 968 1972 1976
1980 1984
FIGURE 4 Investment and capital stock per worker: high-tech versus basic industrial.
NOTE: Invesunent and capital stock are expressed in constant 1972 dollars. Dashed lines
indicate Morgan Stanley economics projections.
SOURCE: Morgan Stanley Economics Projections, June 15, 1984.
Figure 4 reveals a drmnatic convergence between these two components
of the economy's overall capital:labor ratio. Over a span of 20 years, the
stock of high-tech capital per infonnahon worker moved from about half the
size of its basic industrial counterpart to a position of relative parity in 1983.
This trend, perhaps more than anything else, brings the infonnation sector
to the forefront of econormc change in Me United States; its workers are now
OCR for page 100
100
STEPHEN S. ROACH
as richly endowed with capital as are typical production workers on the
factory assembly line. What has occurred is essentially a new process of
industrialization one that should dispel any doubts about the potential vi-
tality of the information economy.
PRODUCTIVITY IMPLICATIONS
During the long sweep of U.S. economic history, trends in capital:labor
ratios and productivity change have tended to move together. While many
point to the slower growth of the total stock of capital per worker as a
key element in this nation's productivity shortfall, what has been over-
looked is the dramatic shifts that have been taking place in the mix of
capital endowment across sectors. Potentially, these relative movements
may have even more to say about this nation's productivity potential than
do summary ratios that lump together and weigh the many diverse types
of capital against a variety of widely disparate occupational categories of
the work force.
A key question, of course, is whether the rapidly rising endowment of
high-tech capital embodies efficiencies that ultimately could generate im-
provements in infoImation-worker productivity. On that count, the verdict
is still out. Some believe that there has been unnecessary and indiscriminate
spending on new technologies. Others believe that the productivity payback
of the information economy cannot be accomplished without major improve-
ments in technology management.
Over time, however, productivity change in the information economy
should be less conditioned by managerial behavior and become more a func-
tion of the extraordinary revolution in microprocessing. Critical in this regard
are the steady miniaturization of the `'chip" and increasing economies in
the costs of its production. Moreover, the rapidly changing technology of
hardware is likely to be increasingly augmented by concomitant break-
~roughs in operating systems or software trends Mat ultimately hold the
potential for We introductioII of efficiencies in We workplace that are well
beyond the realm of present-day comprehension. Just as economies on the
assembly line once were the engine of productivity growth in '~smokestack
America," high technology also has the potential to spark even greater
efficiencies in the information economy
Of special note in this regard is the "leverage factor'' the fact that
information workers currently account for about 60 percent of all hours
worked in the economy. That implies, most critically, that improvements
in information-worker productivity should add about 50 percent more to
overall productivity change than would comparable increments for pro-
duction workers. Thus, like it or not, productivity change in the aggregate
OCR for page 101
MACROREAI]TIES OF THE INFORMATION ECONOMY
i
101
s now increasingly in the hands of improved efficiencies in the information
economy.
A DARK SIDE
Despite this constructive turn of events, the emergence of the information
economy has a dark side. Unfortunately, it turns out Rat a strong dollar and
an ever-widening foreign trade deficit have taken an unusually heavy toll on
U.S. high technology producers. ~deed, in a recent report we at Morgan
Stanley estimate that imports of high-tech equipment have risen to over twice
We level prevailing in late 1982—producing a 60 percent increase in the
market share of foreign-produced technology items (Table 21.2
In the context of the steadily growing technological requirements of an
expanding information economy, not only does such a development hint
at a potentially chronic dimension of the U.S. trade deficit, but it also
underscores We risk Rat American capital-goods producers could be squeezed
out of participating in the most dramatic structural transformation of the
U.S. economy since the Industrial Revolution. The information economy
may well offer a promise of renewed productivity growth, but at current
exchange rates, the resulting improvements in living standards could well
turn out to be built on-a foundation of foreign-produced and foreign-owned
capital.
Such a problem underscores the notion Rat no matter how powerful We
forces of ~nsforTnahon are, We dynamics of a technology-based infonnat~on
economy are vulnerable to the same problems Rat have plagued Washington
over the past two decades. Quite simply, an expansive fiscal policy in We
context of monetary discipline and flexible exchange rates will continue to
cause currency strains and heightened import penetration. And as recent
trends strongly hint, Me high technology sector in Me United States could
find itself as the new victim of this untenable imbalance in the mix of public
policy.
REALITIES OR VISIONS?
Despite the caution flag raised by import penetration, the U.S. economy
is clearly passing through a critical milestone in its postindustrial history.
Much has been written about Me productivity shortfall of Me past decade.
Little attention has been given, however, to the possibility that such an
occurrence might well be the by-product of an economy making a rawer
orderly transition from a basic industrial society to one Mat emphasizes
2See Trading away the capital spending recovery, Morgan Stanley Economic Perspectives, Febru-
ary 6, 1985.
OCR for page 102
102
TABLE 2 Functional Breakdown of Capital Goods Imports
(billions of current dollars)
STEPHEN S. ROACH
Cumulative
Change
1982 1983 1984 1984 1984 Over
Quarter4 Quarter 4 Quoter 1 Quarter 2 Quarter 3 7 Quarters
Total capital goods
imports
(excluding motor
vehicles) $34.2 $45.5 $57.5 $55.9 $68.7 $34.5
High technology
imports 19.7 29.9 36.8 35.8 42.9 23.2
Computers and
office machinery 6.3 10.4 13.8 12.7 15.1 9.4
Communication
equipment and
electronic
components 10.1 15.1 18.1 18.1 21.0 10.9
Instruments 3.3 4.4 4.9 4.9 6.1 2.8
Basic mdustnal
imports 9.8 10.9 14.5 14.9 18.5 8.7
Construction and
specialized
machinery 3.5 4.2 5.3 5.8 7.0 3.5
Other industrial
machinery 6.3 6.8 9.2 9.1 11.4 5.1
Over Imports 4.7 4.7 6.3 5.3 7.3 2.6
Memo items:
Import share of
High technology 26.6% 33.9% 40.7% 37.8% 43.0% n.a.
Basic industrial 16.4 16.9 21.2 20.5 24.6 n.a.
SOURCE: Census-based tabulation of U.S. international transactions.
information-intensive activities. The dramatic improvements Mat have re-
cently occurred in the high-tech capital endowment of the information world
force suggest that this transitional interlude may be coming to an end. Instead,
around the corner could very well lurk the long-awaited revival of productivity
grown in the United States We seeds of which were sown Trough the
industrialization of the information economy.
There is no assurance, of course, that technology is the answer to pro-
ductivity. One thing is certain, however. The structure of Me U.S. economy
in the mid-1980s bears little resemblance to that of the past. The eroding
market share of manufacturing output and the related loss of assembly-line
jobs have forced business managers headlong into the Information Age. For
a long time the steps were tentative, but in the last 7 years or so the steps
OCR for page 103
AlACROREALITIES OF THE INFORMATION ECONOMY
103
have become more purposeful: a conscious effort has been made to build an
infrastructure of productive capital in He information economy. Without that
development corporate America would have found itself caught in something
of a time warp outgrowing its industrial heritage but unwilling to look to
the future. That hesitation has passed, and economic performance over Be
next several decades now appears to depend critically on the new realities
of the information economy.
OCR for page 104
Representative terms from entire chapter:
morgan stanley
