The Anti-Economist — From the January 2014 issue

The Digital Revolution That Wasn’t

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The newly dominant information companies are not job producers. In 1955, General Motors employed nearly 600,000 people. Today, in a much larger economy, Google employs fewer than 50,000; eBay employs about 20,000 people in the United States; Facebook, fewer than 6,000. The numbers for Apple, Microsoft, and Amazon — which each employ between 80,000 and 100,000 worldwide — are better, but still small potatoes compared with General Electric or Ford. By one calculation, the development of the iPod created fewer than 14,000 U.S. jobs. Meanwhile, Americans work harder, equipped with devices that allow them to check in while at home, commuting, or on vacation. (We may actually be undercounting hours worked, which would mean productivity is even lower than currently estimated.)

Given the long-standing precedents, it is tempting to explain away the failure of the information age to provide more prosperity. Some argue that our sluggish recovery from the current economic crisis is to blame, but as I’ve already mentioned, the slowdown in productivity growth preceded the recession. Others say that the true output of the new technologies just doesn’t show up in GDP, since the daily utility of a cell phone or the pleasure of playing a video game is not easily counted — but neither were many of the pleasures derived from cars, transistor radios, or televisions, and measured productivity kept rising after the introduction of these devices.

Still others point to one area of the economy where innovation did bring greater productivity of a sort: the financial sector. As a proportion of the economy, finance has roughly doubled in size since 1980, and its productivity is high; and indeed, the amount of GDP contributed by finance served to exaggerate productivity figures in the early 2000s. Financial products were overpriced and oversold, contributing little to the nation’s welfare and a lot to bankers’ pocketbooks. Given how much damage they’ve caused, a large portion of Wall Street sales might be best characterized as negative GDP. The risky derivatives products bankers sold were really time bombs. The credit-default swaps designed as insurance against a downturn were never paid off. Now, finance may be coming back down to earth. Cheap, often fraudulent mortgages drove the economy of the 2000s more than true innovation in financial products.

If we set these excuses aside, how do we explain the apparent historical anomaly of technological progress without production gains? An increasing number of economists, Northwestern University’s Robert Gordon among them, argue that this most recent wave of technological innovation is simply not comparable in terms of productivity potential to those that preceded it. “The rapid progress made over the past 250 years,” Gordon writes, “could well turn out to be a unique episode in human history.” He concludes that the so-called third industrial revolution is unlikely to muster the gains in productivity brought about by steam power and railroads and then by electricity and the internal combustion engine.

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