Why the internet was an economic disappointment

In my last newsletter I wrote about the possible economic implications of artificial intelligence, arguing that while they might be large, history suggests that they will take longer to materialise than many people expect.

Life being what it is, several people came back at me, citing a prediction I made in 1998 that the internet’s growth would soon slow and that “by 2005 or so, it will become clear that the internet’s impact on the economy has been no greater than the fax machine’s”. I did indeed say that, in a throwaway piece I wrote for the magazine The Red Herring — a piece I still don’t remember having written, but I guess I was trying to be provocative.

The internet may have made less of an economic impact than you ewould think. Credit: Louie Douvis

Obviously I was wrong about the internet petering out, and have admitted that. So it goes. Show me an economist who claims never to have made a bad prediction, and I’ll show you someone who’s either dishonest or unwilling to take intellectual risks.

But how wrong was I, really, about the internet’s economic impact? Or, since this shouldn’t be about me, have the past few decades generally vindicated visionaries who asserted that information technology would change everything? Or have they vindicated techno-sceptics like economist Robert Gordon, who argued in a 2016 book that the innovations of the late 20th and early 21st century were far less fundamental than those between 1870 and 1940?

Well, by the numbers, the sceptics have won the argument, hands down.

In that last newsletter, we looked at 10-year rates of growth in labour productivity, which suggested that information technology did indeed produce a bump in economic growth between the mid-1990s and the mid-2000s, but one that was relatively modest and short-lived. Today, let me take a slightly different approach.

The Bureau of Labor Statistics produces historical estimates, going back to 1948, of both labour productivity and “total factor productivity”, an estimate of the productivity of all inputs, including capital as well as labour, which is widely used by economists as a measure of technological progress. A truly fundamental technological innovation should cause sustained growth in both these measures, especially total factor productivity.

So I looked at those 25-year rates of change in these two measures. I choose 25 years partly because that’s roughly one generation, and partly because I made my bad prediction 25 years ago.

That comparison shows no great productivity boom following the rise of the internet.

True, there are a couple of excuses you can make for the gap between the numbers and the hype. One is to assert that the internet really did do great things for the economy, but that they were offset by negative factors — a deteriorating work ethic, or the mysterious decline in construction productivity, or something.

The other is that official numbers on economic growth fail to capture many invisible gains. I get a lot of pleasure out of the ability to stream live musical performances on YouTube; as far as I can tell, those benefits aren’t counted in gross domestic product. Indeed, official economic growth surely understates true progress in the human condition. But this has been true for a long time.

The Fed is ramping up its fight against inflation.Credit: Bloomberg

Before the internet, official economic data didn’t directly capture the benefits of, say, plunging infant mortality thanks to improved sanitation, or the huge improvement in air quality after 1970. Are those invisible gains bigger now than they were in the past? It’s doubtful.

Maybe the key point is that nobody is arguing that the internet has been useless; surely, it has contributed to economic growth. The argument instead is that its benefits weren’t exceptionally large compared with those of earlier, less glamorous technologies. For example, circa 1920, only about 1 in 5 US households had washing machines; by 1970, almost everyone had one, or access to one. Don’t you think that made a big difference? Are you sure that it made less difference than widespread access to broadband?

For the fact is that while moving information around is important, we’re still living in a material world: Most of what we consume is physical stuff or in-person services, which haven’t been drastically affected by the internet.

Now, it’s quite possible that AI — or at any rate, the things we’re calling AI, regardless of whether they warrant that designation — will really, truly, be a big thing. But one thing we should have learnt from the history of information technology is that things that seem exceptionally glamorous needn’t be especially useful, and vice versa.

This article originally appeared in The New York Times.

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