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.

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.

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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.