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Internet and the Economy
5 Great Inventions during IR
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Electricity
Internal Combustion Engine
Petroleum, natural gas, chemicals
Communication
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E.g. telegram (1884), photograph (1880s),
Radio (1899), TV (1911)
Running water, indoor plumbing, Urban
sanitation infrastructure
Industrial Revolution
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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
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1882, 2% of NY’s houses had water connections
animal wastes on streets
Power
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Horse
Working Conditions
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Long working hours: 60-hr week
Dirty and dangerous working conditions
New Economy
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Production growth – centered at the
production of computer hardware,
telecommunication equipment and
durable manufacturing
Contemporary impact of
computers and the internet
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Declining cost of computer power
Introduction
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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
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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
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The Information Age:
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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
Cost
Total PC Sales
CPU/PC Average Lifespan
By 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
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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:
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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:
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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)
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“ We can see the computer age
everywhere except in the productivity
statistics”
Positive and Negative side of
Internet
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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
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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.
US Business Productivity
• 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
annual average % increase
4
3
2
1
0
196065
186570
197075
197580
1980- 198585
90
199095
19952000
20002003
Negative side:
Why Internet can’t improve the
productivity growth?
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Internet is only substitution of entertainment
e.g. download music, play games
Just buying computers was not enough to
make businesses smarter
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>5% of investment was in computers – too small to
accelerate the economy
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Much investment in Internet web site
and infrastructure only represent
redistribution of sales rather than
creating them
“Dilbert factor”
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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
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1998, half of IT projects
abandoned
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Just Beginning?
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It takes time for information
technologies to raise general
productivities
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Infotech ---just at the beginning
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Computer revolution – 40yrs old
World Wide Web – just 5yrs old
E-commerce market spawned :
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Fast growing
But too small to speed up a multitrillion-dollar
economy
Is dotcom shakeout a bad
thing?
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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.
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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
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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
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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
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The classical example of the electric dynamo
It illustrates a parallel process of learning how to
use a new technology.
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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
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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
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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.
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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.
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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.
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“The cost of computing has dropped
exponentially, but the cost
of
thinking is what it always was”
– Zvi Griliches, Economist
Information Technology
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Includes computers, software as well as
related digital communication
technology
IT vs Business Value
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Enables complementary investment
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Business process
Work practices
Business Model
Innovation
IT vs Business Value
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Introduction
Resulted in
 Reduced cost
 Improved quality
 Convenience
 Timeliness
 Accuracy
 Speed
Historical Context
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Responsive to
Customers
New Products
/Services
Productivity Paradox
Our Viewpoint
Conclusion
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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.