Internet and the Economy

5 Great Inventions during IR Electricity Internal Combustion Engine Petroleum, natural gas, chemicals Communication

E.g. telegram (1884), photograph (1880s), Radio (1899), TV (1911)

Running water, indoor plumbing, Urban sanitation infrastructure

Industrial Revolution def.: any great acceleration of

output and productivity growth, pervasive and economywide

1st: 1760 in Britain 2nd: 1860-1900 in Europe and US

Living Conditions Before 2nd IR Housing

1882, 2% of NY’s houses had water connections animal wastes on streets

Power Horse

Working Conditions Long working hours: 60-hr week Dirty and dangerous working conditions

New Economy

Production growth – centered at the production of computer hardware, telecommunication equipment and durable manufacturing

Contemporary impact of computers and the internet

Declining cost of computer power

Introduction Development of Moore’s Law In 1975, he redrew his plot of

component densities doubled every 18 months keeping cost constant.

Moore’s Law : Every eighteen months, processing power doubles while cost holds constant.

Introduction History of IC industry Vacuum Tube Transistor planar Integrated Circuit ( IC )

1. Competitive force from the semiconductor industry.

2. Pressure from software company (complementary products)

3. Consumer expectations.

Keeping up with the race

“Either you and your 999 colleagues double the performance of our microprocessors in the next 18 months, to keep up with the competition, or you are fired” (Andrew Odlyzko on the Internet, 1995)

A forum for semiconductor companies to work collectively to achieve the exponential growth of the Moore’s Law.

Complementary Software

• “Word” first version program has 27,000 lines, the latest version had about two million.

• Marginal Cost of additional processing power ~> Zero

Economic Impact The Information Age:

Faster, Better, Cheaper You get more by less MOORE (1998):

"If the automobile industry advanced as rapidly as the semiconductor industry, a Rolls Royce would get half a million miles per gallon, and it would be cheaper to throw it away than to park it."

Transistor Density on Micro Processors and Memory Chips

Productivity:Processor performance in millions of instructions per second

(MIPS) for Intel processors, 1971-1995

0

1

10

100

1977 1982 1987 1992 1997

Computers Central Off ice Sw itching Equipment Prepackaged Softw are

All price indexes are divided by the output price index.

Relative Prices of Computers, Communications, and Software, 1977-2000

Cost

PC Sales, 1981 - 2005

0

10000

20000

30000

40000

50000

60000

Year

1991 Study

1996 Study

Total PC SalesTotal PC Sales

CPU/PC Average LifespanCPU/PC Average LifespanBy 2005 the average lifespan will level off at 2

years *

*based on 1998 National Safety Counsel Report - Electronic Product Recovery and Recycling Baseline Report

Limitations and Barriers

When will Moore's Law end? Is this the right question? What might slow it or stop it? -Physics limitations? -Design challenges? -Economics?

Physics limitations:

The gigabit chip generation may finally force technologists up against the limits of optical lithography.

Think of it as trying to paint a line that is smaller than the width of the paintbrush.

Economics: There are ways around the above

obstacles, but the cost may be prohibitive. In fact, economics may constrain Moore’s Law before physics does---an observation that others have called “Moore’s second law.”

The economic law of diminishing marginal returns

Another exponential trend in the cost The cost of a new fabrication plant : 1966 $14M 1995 $ 1.5B. Between 1984 and 1990, the cost of a fab

doubled, but chip makers were able to triple the performance of a chip.

In contrast, the next generation of fabs will see cost double again ,but this is likely to produce only a 50% improvement in performance.

Concluding Thought

“ The wonderful thing about [Moore’s Law] is that it is not a static law, it forces everyone to live in a dynamic, evolving world”

Perhaps the very fact that the future of Moore’s law seems unpredictable is what makes hi tech industries exciting and equally part of what drives them on.

Solow’s computer paradox(1987)

“ We can see the computer age everywhere except in the productivity statistics”

Positive and Negative side of Internet

Benefits: Email: shortens the communication

barrier E-commerce: provision of vast amounts of free

information *However, no evidence in boosting

the productivity growth of economy

Computer investment had a near-zero rate of return outside of durable manufacturing

76.6 percent of all computers are used in industries of wholesale, retail trade, finance, insurance, real estate, and other services.

Only 11.9 % of computers are used within manufacturing.

• Productivity growth has continue to rise even as investment in information technology has fallen from its late-1990 peak

• Confirm new technologies do not automatically lift productivity

US Business Productivity

annual average % increase

0

1

2

3

4

1960-65

1865-70

1970-75

1975-80

1980-85

1985-90

1990-95

1995-2000

2000-2003

Negative side:

Why Internet can’t improve the productivity growth?

Internet is only substitution of entertainmente.g. download music, play games

Just buying computers was not enough to make businesses smarter

>5% of investment was in computers – too small to accelerate the economy

Much investment in Internet web site and infrastructure only represent redistribution of sales rather than creating them

“Dilbert factor” Dilbert commented, “time lost for

loading web pages canceled out all the productivity gains of the Information Age”

Since early 1990s, more investment in IT than other kinds of equipment, but often to no effect

1998, half of IT projects abandoned

Just Beginning?

It takes time for information technologies to raise general productivities Infotech ---just at the beginning

Computer revolution – 40yrs old World Wide Web – just 5yrs old

E-commerce market spawned : Fast growing But too small to speed up a multitrillion-dollar

economy

Is dotcom shakeout a bad thing?

NO Because of Darwinian selection in action The likelihood of firm survival is lower in

industries in which the innovative opportunities available to small firms are large.

Internet technologies allows firms to operate on a small scale, and offer many innovation opportunities. This suggests a severe Shakeout.

Historical example : car industry The birth of the car industry in 1890. In 1908, more than 240 firms Entry was concentrated in the years

preceding the peak, with 490 entrants before 1909, and 233 entrants after 1909.

Only a few left after downturn Ford & General Motors

Shakeout There are evidence that the prices on the

internet are beginning to rise. In new industries, a build up in the number of

firms followed by a shakeout is a well-documented phenomenon.

Shakeout In the case of Internet technologies, parallel

to the cycle of Entry and Shakeout, there was also a cycle of Bubble and Burst in the stock market.

That was also the case of railroads in the late 19th, century and the case of electricity in the early 20th century. Are these 2 cycles related?

Eletric Dynamo The classical example of the electric dynamo It illustrates a parallel process of learning

how to use a new technology.

The deployment of electricity started by the 1890s, but its impact on productivity was negligible until the 1920s.

The reason was that initially firms replaced the power source, but left the way production was organized unchanged

Eletric Dynamo Initially, firms only replaced steam or

water powered motors by electric motors. This allowed fuel savings and improved machine speed control.

However, instead of a primary motor turning separate shafting sections and driving related groups of machines, individual electric motors could be used to run machines of all sizes.

Eletric Dynamo Furthermore, electric wires could replace

power transmission through shafts and belts.

The reduction of friction in transmission allowed further fuel savings.

Factories could also be redesigned, with lighter single-story structures replacing costly multistory structures.

Single-story, linear factory layouts, allowed a reconfiguration of materials handling, of machine placement, and handling equipment.

These changes in product and process design were the largest source of the productivity gains.

Real price of processing power down 99.999%, or 35% per year over the past 30 years.

Electricity prices fell 6% per year between 1890 – 1920.

Real costs of steam power costs dropped by only 50% between 1790 – 1850.

Freight rates only dropped 3% annually between 1870 - 1913 due to rail networks.

“The cost of computing has dropped exponentially, but the cost of thinking is what it always was”

– Zvi Griliches, Economist

Information Technology Includes computers, software as

well as related digital communication technology

IT vs Business Value Enables complementary

investment Business process Work practices Business Model Innovation

IT vs Business Value Resulted in

Reduced cost Improved

quality Convenience Timeliness Accuracy Speed

Responsive to Customers

New Products /Services

Introduction Historical Context Productivity Paradox Our Viewpoint Conclusion

By taking advantage of the new technology’s characteristics, production could be reorganized in more flexible and productive ways. It took several years and experiments to discover this.