The Economic Impact of ICT:
A Perspective from the Age
of Steam
Nick Crafts
Financial support from the Economic and Social
Research Council under grant R000239536 is gratefully
acknowledged
Economic History Perspective
Can help to make better sense
of today’s world and not to
over-react to changes in the
economic environment.
General Purpose Technologies
(Lipsey et al, 1998)
• Over time are found to have many uses and
complementarities … are pervasive
• Initially have much scope for improvement
• Eventually come to be widely used and lead to
(large) rise in aggregate productivity growth
BUT
• Initially may have no positive impact on growth
or even imply a slowdown phase
The Solow Productivity Paradox
You can see the computer
age everywhere except in
the productivity statistics
Robert Solow, 1987
Steam as a General Purpose
Technology
• Steam Engines, Railways, Steamships
• James Watt’s Invention : 1769
• Liverpool & Manchester Railway : 1830
• Steamship crosses the Atlantic : 1838
Sources of Power, 1760-1907
(Thousand Horsepower)
1760
1800
1830
1870
1907
Steam
5
35
165
2060
9659
Water
70
120
165
230
178
Wind
10
15
20
10
5
Total
85
170
350
2300
9842
Source: Kanefsky (1979a, p338); not including internal combustion
engines
Steam Engine Technology
• Took a long time to become cost effective in most
sectors
• Coal consumption per hp per hour fell from 30 lb preWatt to 12.5 lb for Watt engine to 2 lb by 1900 when psi
reached 200 compared with 6 in 1770
• The big breakthrough was not James Watt but the
move to the high pressure steam engine after 1850
• TFP spillovers were unimportant prior to 1850 but may
have been significant after 1870
Capital Cost and Annual Cost per
Steam Horsepower per year (£ current)
Capital Cost
Annual Cost
1760
42
33.5
1800
56
20.4
1830
60
20.4
1850
37
13.4
1870
25
8.0
1910
15
4.0
Note: the estimates are for a benchmark textile mill in a low coal cost
region like Manchester
Total Steam Contribution to Growth of
Labour Productivity (% per year)
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
1760-1800
1800-30
1830-50
Source: Crafts (2003): includes railway, steamships, steam engines
1850-70
1870-1910
ICT Contribution to US Labour
Productivity Growth (% points per year)
1996-2002
1991-95
1974-90
0
Source: Oliner and Sichel (2003)
0.5
1
1.5
2
The Progress of Computing
Real Cost MIPS-E ($1998)
1.E+10
1.E+08
1.E+06
1.E+04
1.E+02
1.E+00
1.E-02
1.E-04
1.E-06
1.E-08
1850
1870
Source: Nordbaus (2001)
1890
1910
1930
1950
1970
1990
2000
Impacts of GPTs on Growth
• ICT much bigger impact on American
growth in recent past than steam ever
had on UK growth
• Costs of computing have fallen much
faster than did costs of steam power
• Society seems to be getting better at
exploiting GPTs more rapidly
Source: Gayer, Rostow & Schwartz (1953)
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
50
49
48
47
46
45
44
43
42
41
40
39
38
37
36
35
34
33
32
31
30
29
28
27
26
Railway Capital Authorised (£mn)
140
120
100
80
60
40
20
0
Railway Share Prices (June 1840=100)
160
140
120
100
80
60
40
20
1850
1848
1846
1844
1842
1840
1838
1836
1834
1832
1830
1828
1826
0
GWR and LNWR in the 1840s
Great Western Railway
London & North Western
250
225
200
175
150
125
100
75
50
Jan Jan Jan Jan Jan Jan Jan Jan
1844 1845 1846 1847 1848 1849 1850 1851
REVENUE GROWTH
18
43
18
45
18
47
18
49
18
51
18
53
18
55
18
57
18
59
18
61
18
63
18
65
18
67
18
69
45
40
35
30
25
20
15
10
5
0
Passenger Receipts (£m)
Freight Receipts (£mn)
Social Savings
• The basis of Fogel’s celebrated analysis
of the impact of railroads on American
economic growth
• Measures the benefits to users of a new
technology from reductions in costs
(area under the demand curve)
• Many of the users may be in other
countries
Net Earnings
8
0
2
4
6
8
0
186
186
186
186
186
187
6
185
185
4
185
8
184
2
6
184
185
4
184
0
2
184
185
0
184
RAILWAY BENEFITS
90
80
70
60
50
40
30
20
10
0
Social Savings
RATES OF RETURN
• Average private rate of return =
5%, 1830-70
• Average social rate of return =
15%, 1830-70
Lessons from Railways
• Railway mania ended in tears
• Profits from railways less than optimists
had hoped
• Revenues exceeded expectations ... but so
did costs!
• Competition reduced prices
• Users gained much more than investors
Freight Social Savings from
Railways, c.1913 (% GDP)
35
30
25
20
15
10
5
0
Argentina
Sources: Coatsworth (1981); Summerhill (2003)
Brazil
Mexico
NASDAQ Composite Index
The New Economy and Stock
Prices
• It was a bubble but fundamentals (trend
growth) had improved
• Dot.coms experience would not have
surprised someone who lived through
the 1840s
• Economic gains from ICT not a mirage
but few of them will be reaped by
investors
Does Innovation Generate Supernormal
Profits? (Nordhaus, 2004)
• Innovators capture about 2% of the total social
gain from technological progress
• Appropriability is low (7%) and depreciation is
high (20% per year)
• The US stock market valuation of ‘new
economy’ firms grew between 1995 and 2000 at
a rate that implied owners could capture 90%
of the social gain
• Yet the appropriability of gains from ICT
unlikely to match that of earlier technologies
including railways
Social Savings from ICT, 1992-99
(% GDP)
4
3.5
3
2.5
2
1.5
1
0.5
0
Finland
Source: Bayoumi & Haacker (2002)
Ireland
Switzerland
Australia
Globalization
• Enhanced integration of international
markets
• Promoted by reductions in transport
and communications costs ….. both
steam and ICT do this
• But is the effect to centralize or disperse
economic activity?
Transport/Communication Costs
• VERY HIGH: activity is dispersed
• VERY LOW:
activity is dispersed
• INTERMEDIATE: agglomeration with
feedback effects based on large markets
and linkages
Steam Power and Industrial
Location
• Reduced transport costs for goods
rather than services both on land and at
sea
• Industry moved closer to natural
resources
• Manufacturing cities proliferated in
Europe and North America
• Definitely not the 21st century
Railways and Effective City Size
• Labour productivity in cities rises with own
city size and numbers of population ‘within
reach’
• 80 minutes seems to be the cut-off point
• In 1906, population within 30 km raises
productivity, in 1840 within 6 km
• Suggests railways had substantial
productivity externalities perhaps around 10%
GDP in 1906 (Crafts and Leunig, forthcoming)
Real Cost of Ocean Shipping
(1910 = 100)
350
300
250
200
150
100
50
0
1750
Source: Harley (1988)
1830
1870
1910
Steam-Powered Globalization
• Helped manufacturing and the City
• Hurt arable agriculture, especially land
rents
• Did not destroy Lancashire textiles
• Reduced Anglo-American wage gap by
28% points (O’Rourke, 1996)
Wheat Prices
(Sh/d per quarter)
Ratio of
Liverpool/Chicago
1852/6
62/1
2.00
1868/72
54/8
1.49
1895/9
27/10
1.26
1910/3
32/5
1.06
England and Wales
Sources: Harley (1980); Mitchell (1988)
Mass Production and Mass Distribution
(Chandler, 1977)
• Developed in a subset of American
industry in late 19th century
• Based on integration of the market
following completion of main rail
network
• Changed American industrial geography
…. centralizing rather than dispersing
ICT and Industrial Location
• More outsourcing: reduced gains from
vertical integration
• Facilitates trade in business services
including mutually beneficial offshoring
• But cities continue to have the great
advantage of lots of people close
together
Employer Wage Costs, 2003 ($/hour)
35
30
25
20
15
10
5
0
Germany
United
States
Bureau of Labor Statistics, McKinsey
UK
Czech
Republic
India
China
Offshoring of Computer and
Business Services
• Gains for both countries but losses for
some individuals; reduces business
costs and lowers prices to consumers in
OECD.
• Imports of computer and business
services = 0.4% US GDP in 2003
• Evidence suggests no net employment
reduction from outsourcing in US (Amiti &
Wei, 2004)
Economic Interactions and Distance
120
100
80
Trade
FDI
60
40
20
0
1000km
Source: Venables (2001)
2000km
4000km
8000km
Economic Geography and International
Inequality (Redding and Venables, 2004)
• Most (60-70%) cross-country income
variation accounted for simply by location
relative to other countries
–market access (export demand)
–supplier access (import supply)
• Move 50% closer to trading partners
would raise income by about 25%
World Market Access
120
100
80
60
40
20
0
Source: Redding & Venables (2004)
North America
Western Europe
EU Enlargement
South East Asia
Latin America
Sub-Saharan Africa
Death of Distance
• Would have truly dramatic effect on world
distribution of economic activity and income
• But “greatly exaggerated”
• ICT enables some things to go to the
periphery but enhances the strengths of the
core at the same time (e.g. strengthens
London as a financial centre)
• Like steam, ICT rearranges geography but
doesn’t abolish it
Who Should do a Course in
Economic History?
• Sadder but wiser investors who lost
their savings in the dot.com boom and
bust
• Growth economists baffled by the Solow
Productivity Paradox
• Protectionist politicians who believe
that offshoring will undermine our
prosperity