Knowing our history is best way to gauge benefits of technology

March 19, 2006

This year marks the 200th anniversary of the birth of one of the most innovative British engineers in history. Over the 200 years since Isambard Kingdom Brunel was born technological change has moved at a remarkably rapid pace. However, traditional ways of measuring the impact of new technologies on the economy could considerably underestimate their true benefit, according to a new study funded by the Economic and Social Research Council (ESRC). It urges us instead to draw lessons from the past.

A perspective from economic history can help us make better sense of technological developments, argues Professor Nicholas Crafts, who led the project at the London School of Economics and Political Science (LSE). In particular, it can teach us not to over-react.

Professor Crafts said: "Sadder but wiser investors who lost their savings in the dot.com boom, and protectionist politicians who still believe that off-shoring will undermine our prosperity, would all benefit from a good course in economic history."

The study compares the impact of information and communications technologies (ICTs) with that of steam power in the 19th century.

For many investors, the stock market crash at the end of the dot.com boom in 2000 is still a painful memory. But the boom and collapse of those 'new economy' stocks would not have surprised anyone familiar with the events of early Victorian times.

James Watt patented steam power in 1769, but it was not until after 1850, and high pressure engines, that its full potential was realised. By comparison, the microchip was invented in 1971, yet by the mid-1970s the impact of ICT was already much greater than that of steam. It became cheaper faster, and by the late 1990s was four times greater a force than steam at its peak. Professor Crafts says there are good reasons why it may take quite some time before major technological advances have a big impact on productivity.

Initially, manufacture and use of products involved will be only a small part of total economic activity. Also, it takes time to discover the full potential of any new development.

Financial returns from Britain's 19th century railways were much lower than expected, and the 'mania' of 1845 was followed by a prolonged shares slump. However, the 'social rate of return' was about 15 per cent, the lion's share going to users through cheaper, faster travel, and reductions in the cost of transporting goods.

Savings from railway freight transport were substantial in developing countries which imported the technology, in some cases far greater relative to GDP than in England and Wales.

ICT, like steam, has lowered transport and communication costs and might seem to threaten British jobs, but the lesson from the 1800s is that globalization leads to both losses and gains. Farming suffered and finance prospered, but employment overall increased.

Industries based on strong clusters of activity, such as Lancashire's textiles, had unique productivity advantages, and survived low wage foreign competition. London's financial sector is in a similar position today.

A typical off-shoring project to India may cut costs by 50 per cent - savings eventually passed to consumers. But the UK has a strong trade surplus in business services, and there is no evidence of net job losses from off-shoring. Professor Crafts said: "It seems clear that in the late 1990s, as in the mid-1840s, investors were far too optimistic that gains from new technology would go to its producers.

"The stock market crash of 2000 should not be taken as a signal that the contribution of ICT to economic growth will be much reduced or even trivial.

"In competitive markets, equipment prices will continue to be driven down and consumers will benefit, with gains spreading across the world."

He added: "The benefits of ICT are certainly no mirage, but will not be reaped as Wall Street imagined just a few years ago in its ignorance of economic history."
-end-
FOR FURTHER INFORMATION, CONTACT:
Professor Nicholas Crafts on 02476523468 (work); 01926 855507 (home) or e-mail: n.crafts@warwick.ac.uk

Or Alexandra Saxon or Annika Howard at ESRC, on 01793 413032/413119.

NOTES FOR EDITORS
1. The research project 'Understanding the effects of different generations of large-scale technological change' was funded by the Economic and Social Research Council (ESRC). Professor Crafts who lead the project at the Department of Economic History, London School of Economics and Political Science (LSE), LONDON WC2A 2AE.

2. Methodology: The research involved using modern economics and historical data to quantify the impact of technological change. Advances in economics allowed the researchers to go further in quantifying the impact of the railways than has previously been possible. Growth accounting methods used to estimate the contribution of steam to 19th century economic growth followed as closely as possible those used in recent work on ICT. Looking at the importance of faster travel on the railways, the approach was to quantify time savings in a way similar to that prescribed by the Department of Transport for cost-benefit analysis of current road projects.

3. The ESRC is the UK's largest funding agency for research and postgraduate training relating to social and economic issues. It provides independent, high quality, relevant research to business, the public sector and Government. The ESRC will invest more than £123million this year in social science and at any time is supporting some 2,000 researchers in academic institutions and research policy institutes. It also funds postgraduate training within the social sciences to nurture the researchers of tomorrow. More at http://www.esrcsocietytoday.ac.uk

4. ESRC Society Today offers free access to a broad range of social science research and presents it in a way that makes it easy to navigate and saves users valuable time. As well as bringing together all ESRC-funded research (formerly accessible via the Regard website) and key online resources such as the Social Science Information Gateway and the UK Data Archive, non-ESRC resources are included, for example the Office for National Statistics. The portal provides access to early findings and research summaries, as well as full texts and original datasets through integrated search facilities. More at http://www.esrcsocietytoday.ac.uk

5. The ESRC confirms the quality of its funded research by evaluating research projects through a process of peer review. This research has been graded as "Outstanding".

Economic & Social Research Council

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