- Robert E. Lucas, Jr.

“The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.”

The Importance of Growth & Productivity

The Power of Productivity

Helpman article, Figure 3.5

Major Avenues of Impact of Internet on Productivity Enhancing globalization Increasing business productivity Increasing consumption productivity (class favorite)

Shortening adjustment time for GPTs.

How Flat is the World? Globalization 1.0: 1492: Size large to size medium. Globalization 2.0: 1880s: Size medium to size small.

Globalization 3.0: 2000: Size small to size tiny.

Friedman’s 10 Flatteners Fall of the Berlin Wall Netscape IPO Work flow software Open-sourcing Outsourcing Off shoring Supply chaining In-sourcing In-forming

Some of your examples:•Skype 2.0•Craigslist•Babelfish•Download.com

Growth and Productivity The Solow Model of Growth

F( , , )GDP K L TFP

Gross domestic product Capital Labor Total factor productivity

1*GDP TFP L K

(Cobb-Douglas production function)

Sources of Growth: Accumulation Capital accumulation

Labor growthPittsburgh 1890s

Great Lakes, 1970s

New Zealand, 2005

1*GDP TFP L K

The Eventual Driver: ProductivityTotal Factor Productivity Relative to Somalia, 1960-1985

Helpman article, Figure 3.3

Something Big Recently Changed

1966-1975 1976-1985 1986-1995 1996-2004

United States 1.2 0.9 1.0 2.0

Euro area 1.7 1.4 1.2 0.6

Japan 0.4 0.6 0.7 0.3

1*GDP TFP L K

Average annual percentage changes in TFP per hour workedSource: Skoczylas and Tissot, Oct. 2005

The U.S. Productivity Boom (it wasn’t all hype)

Somewhat different breakdown with more detail and shorter horizon, but still same pattern.

New Growth Theory The Romer Model of Growth

F( , , , )GDP K L I TFP

Gross domestic product Capital Labor Ideas

TFP

Private investment in R&D spills over to society.Ideas are an externality, leading to possibility of much higher sustained growth.The Romer model makes technological change endogenous.

Productivity Surge & the Net

Personal computers

Networked computers

Class examples• Blast• In-flight WiFi• CRM Online• GasBuddy• LexisNexis• YouSendIt• Konfabulator• CafePress

Ecommerce Not (Yet) a Big Driver in the Statistics Back of the envelope

Brynjolfsson & Hitt: Prices roughly 10 percent lower.Annual Ecommerce 2000: Approximately $150 Billion

$15 billion << 0.1 percentage point of growth.

BUT, by 2003: B2B ecommerce = $843 billionB2C ecommerce = 75 billion

If savings still 10%, then savings almost $100 billion.(probably too high)

Consumer productivity changes Better shopping, payment, service

consumption

Your examplesPriceGrabber, Expedia, Priceline, Progressive, Carfax, Campusi,…

Teemaster, OpenTable, Fandango, CitySearch,…

BankofAmerica, PayPal, E-Trade,…

Time to Sow, Time to Reap

Years Since GPT Discovery

Out

put

Rel

ativ

e to

yea

r 0

Year 0

1

Investment phase Returns phase

(Checkfree, GasBuddy, Wikipedia, Safeway, …)

(CNet, Finance Yahoo, Stanford Library, IMDB, Orbitz, Dictionary, …)

Slump and Boom

iTi iT

1iT (Sufficient innovation & training to use effectively)

Phase 1: Slump Phase 2: Boom

Where are we with:

CRM online?

MapQuest?

Summary The Three GPTs have all affected productivity,

but are in different phases Digital/computing in returns phase Networking emerging from investment phase Individualization early in investment phase

The Internet is enhancing globalization, increasing B2B productivity, emerging in consumption productivity, accelerating GPTs.