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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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MAY 25, 2004
A "Free Lunch" for the Economy Part 1 of an excerpt from Michael Mandel's Rational Exuberance says during tech-fueled growth, gains can exceed any added investment Rational Exuberance: Silencing the Enemies of Growth and Why the Future Is Better Than You Think by Michael Mandel Chapter 3: How Innovation Matters The difference between exuberant and cautious growth is not simply that one is faster than the other. Exuberant growth transforms the entire economy. In terms of the critical economic variables -- wages, jobs, international competitiveness -- the evidence is compelling that innovation-driven economies come out way ahead. Technological change also brings an excitement and wonder to our daily lives. The ability to travel to distant places, to communicate instantly with people in other parts of the country, to have online access to a vast array of information -- all of these capabilities open up new possibilities that capture our attention. In the absence of change, economies are not just slow-growing, they are boring and ultimately failures. Pathways of Change There are three main pathways through which innovation drives growth: the "ramp-up," the "spin-off," and the "free lunch." Ramp-up: When the innovation first hits the market, and the demand grows very rapidly, there's typically a lot of investment in the new industry and new products. This can give a very big onetime pop to growth. That's what happened in the 1990s, when the advent of the Internet helped propel an enormous amount of investment in information technology and telecom companies and products. Spin-off: As the innovation takes hold, it transforms other parts of the economy. In some cases -- such as information technology and electricity -- the effect is to increase the productivity of other industries. But that's not necessarily the only big impact. The automobile, for example, opened up new possibilities for spatial arrangements of work and living, creating the modern suburbs, and transforming the housing market. Free lunch: Economists like to quote an old saying: "There's no such thing as a free lunch." The idea is that you usually only get what you pay for. In particular, future growth must be paid for by deferring current consumption, and putting it into savings and investment. But big technological breakthroughs violate the free lunch principle, giving a boost to growth and living standards that goes far beyond any added investment. Let's look at each of these in turn.
Almost every new innovation goes through three phases. When initially introduced into the market, the process of adoption is slow. The early models are expensive and hard to use, and perhaps even unsafe. The economic impact is relatively small. The second phase is the explosive one, where the innovation is rapidly adopted by a large number of people. It gets cheaper and easier to use and becomes something familiar. And then in the third stage, diffusion of the innovation slows down again, as it permeates out across the economy. (This process is also known as the S-curve.) During the explosive or ramp-up phase, whole new industries spring up to produce the new product or innovation, and to service it. For example, during the 1920s, there was a dramatic acceleration in auto production, from 1.9 million in 1920 to 4.5 million in 1929. This boom was accompanied by all sorts of other essential activities necessary for an auto-based nation: Roads had to be built for the cars to run on; refineries and oil wells, to provide the gasoline; auto dealerships, to sell the cars; and garages, to repair them. Historically, the same pattern is repeated again and again with innovations. The construction of the electrical system required an enormous early investment in generation and distribution capacity. The introduction of the radio was followed by a buying spree by Americans that quickly brought radios into almost half of all households by 1930, up from nearly none in 1924. During the 1990s, the arrival of the Internet ignited an even more impressive expansion in the info tech and telecom industries. Purchases of computers, routers, and cabling soared. Employment at software publishers and information technology consultants doubled, and then doubled again. A whole new category of retail computer stores exploded, flourished, and consolidated, leaving behind only a couple of survivors. The ramp-up effect is like a shot of adrenaline to an economy. It pushes growth much faster than it would otherwise go. By how much? During the tech boom of the 1990s, from 1995 to 2000, business spending on information technology rose at a 21 percent annual rate (adjusted for inflation and increases in computing power), while consumer spending on computers and peripherals rose at an almost 60 percent annual rate (also adjusted for inflation and increases in computing power). Over the same period, the rest of the economy grew at only a 3.1 percent rate. To put that in perspective, that's below the average growth rate for the whole economy in the 1980s. Without the ramp-up effect, the New Economy boom would have been merely a little firecracker. Looking forward, there are some incipient innovations that could potentially produce a very large ramp-up effect. For example, a widespread shift to the use of hydrogen as a fuel, especially in automobiles, would cost hundreds of billions to retool the energy distribution system. Hydrogen requires a very different infrastructure for storing and delivering than does gasoline. Buried gasoline tanks might be replaced by hydrogen "sponges" -- solid materials that store hydrogen. Depending on how fast the shift took place, it could give a nice little boost to growth. The ramp-up effect is usually ignored by economists, because it is only a one-time bump. Yet it is quite important, especially for the big innovations. The Western world has gone through several periods when innovation followed innovation in rapid succession. If each one gives the economy a little (or a big) jolt, that's enough to keep things moving forward.
BW MALL
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