Contribution of the computer industry to the modern economy and the New Economy
"The New Meaning of New Economy," New York Times, October 8, 2001
Technological innovation is the engine of economic growth. Greatly impressed by the large array of spectacular technological innovations of the computer industry in recent years, economists coined a new phrase known as the "new economy." The new economy refers to the enormous power of computer technology, such as the Internet and web sites, to advance and transform the existing economy. Nowadays, most ordinary households use e-mail, shop on the Web and use ATM's (automated teller machine) as part of their daily routines.. For businesses, on-line inventory control and ordering of goods significantly facilitated and reduced the costs of business transactions in the global economy. All these technology-related accomplishments seemed to justify calling the modern economy the New Economy.
However, as the popularity and stocks of the dot.com industry precipitously declined in recent years, people have begun to reevaluate the economic contribution of the computer industry from a broader historical perspective. The conclusion seems to be that the computer industry's contribution to the economy was much less spectacular and significant than that of other earlier technological innovations in the history of the Western economy.
For example, between 1850 and 1903, there had been many significant technological innovations and inventions which completely reshaped the economy, such as the electric light bulb, telephone and telegraph, radio, automobile, airplane, and Bessemer steel-making process. Thanks to these technological wonders, real (in terms of a constant price) output per capita (or person) in Western Europe increased from .2% per year to 1.6% per year, almost an eight fold growth. Such a jump in growth has never been matched in the modern economy.
Historically, an introduction of new technology and related new goods typically generates initial psychological and commercial excitement, which last from about 5 to 10 years. After this period, they just become routine household and commercial items. The computer industry most likely will follow the same trend. After 10 years, nobody will pay much attention and stop calling this period the "new economy" or a phenomenon.
However, this observation by no means diminishes the important contribution of the computer industry to the modern economy. The industry contributed an increase in the U.S. economy's annual productivity growth of .25 to .5 percent.. In the very globally competitive and highly developed economy of today, this amount of net contribution is very significant. In terms of dollar amounts, the computer industry has been adding about $1,250 to $2,500 of wealth per person per year in the U.S., which is a much greater economic stimulant than any recent income tax cut.
However, this contribution of the computer industry is significantly dwarfed by much greater contributions of earlier periods, and it seems inappropriate to single out the computer industry alone and call it the new economy.