Technology and Economic Growth

ROME: The story of Elihu Thompson, the inventor of the electric dynamo, and ultimately a founder of one of America's great companies, General Electric, recurs frequently in the speeches of Alan Greenspan. The chairman of America's Federal Reserve Board is understandably fascinated by the great inventions of the late 19th century which revolutionized industrial production in America and around the globe.

Some may be surprised that a central bank governor is interested in technological innovation, and even more that economists at the Fed are studying the impact of computers on economic growth (their research on this subject, indeed, may be found on the Fed's internet site: www.bog.frb.fed.us). Such research may also shed light on whether the current extraordinary expansion of the U.S. economy, which has lasted uninterrupted for the past nine years, is simply a prolonged streak of luck or represents the effect of a new technological revolution, similar to the one which occurred at the end of the 19th century and which is best symbolized by the spread of electric power. The answer to that question not only has important consequences for American monetary policy, but also suggests a few reflections on today's economic conditions in Europe as well as Europe's new single currency.

The reason why the Federal Reserve is studying the electric dynamo is, obviously, not the Fed's interest in history. The story of the diffusion and utilization of the dynamo offers strong analogies with the opportunities and problems posed by today's new information technologies for the organization of enterprises. The first industrial applications of the dynamo began in 1890, but one needed to wait some thirty years before seeing the effects of that then “new technology” on the productivity of enterprises. The most important reason for this delay was the resistance of managers towards adapting the organization of labor in their firms to the new mode of production. Once this transformation took place, however, rapid growth in productivity followed fast.

The story of the electrical dynamo is extremely timely, and so it is perhaps no accident that Alan Greenspan has been studying it so carefully. The research conducted so far by Fed economists shows that a long time has also been needed for the impact of computers to be felt in measurable improvements in productivity for the entire American economy. Indeed, so long was this lag that some economists and business leaders came to have doubts about whether information technology would have any effect on productivity. The reason for this delayed impact was the same as a hundred years earlier in the case of the electric dynamo: the difficulties that firms encountered in modifying the organization of their labor forces in such a way as to benefit from such technologies as e-mail and the internet.