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Technological Breakthroughs and Productivity Growth

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Technological Breakthroughs and Productivity Growth A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Edquist, Harald; Henrekson, Magnus Working Paper Technological breakthroughs and productivity growth SSE/EFI Working Paper Series in Economics and Finance, No. 562 Provided in Cooperation with: EFI - The Economic Research Institute, Stockholm School of Economics Suggested Citation: Edquist, Harald; Henrekson, Magnus (2004) : Technological breakthroughs and productivity growth, SSE/EFI Working Paper Series in Economics and Finance, No. 562, Stockholm School of Economics, The Economic Research Institute (EFI), Stockholm This Version is available at: http://hdl.handle.net/10419/56150 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu SSE/EFI Working Paper Series in Economics and Finance No. 562 January 2006 Technological Breakthroughs and Productivity Growth* by 1 2 Harald Edquist and Magnus Henrekson Forthcoming in: Research in Economic History Abstract:This study consists of an examination of productivity growth following three major technological breakthroughs: the steam power revolution, electrification and the ICT revolution. The distinction between sectors producing and sectors using the new technology is emphasized. A major finding for all breakthroughs is that there is a long lag from the time of the original invention until a substantial increase in the rate of productivity growth can be observed. There is also strong evidence of rapid price decreases for steam engines, electricity, electric motors and ICT products. However, there is no persuasive direct evidence that the steam engine producing industry and electric machinery had particularly high productivity growth rates. For the ICT revolution the highest productivity growth rates are found in the ICT-producing industries. We suggest that one explanation could be that hedonic price indexes are not used for the steam engine and the electric motor. Still, it is likely that the rate of technological development has been much more rapid during the ICT revolution compared to any of the previous breakthroughs. Keywords: Electrification; General purpose technologies; ICT revolution; Productivity growth; Steam power. JEL Classification: N10; O10; O14; O40. 1Institute for Research in Economic History 2Institute for Research in Economic History Stockholm School of Economics Stockholm School of Economics P.O. Box 6501 P.O. Box 6501 S-113 83 Stockholm S-113 83 Stockholm SWEDEN SWEDEN Phone: +46-8-736 92 59 Phone: +46-8-736 92 02 Fax: +46-8-31 32 07 Fax: +46-8-31 32 07 e-mail: [email protected] e-mail: [email protected] *We are grateful for useful comments and suggestions from two anonymous referees, Alexander Field, Håkan Lindgren, Peter Meyer, Karl Gunnar Persson, Daniel Waldenström and participants at seminars at the Stockholm School of Economics, Groningen Growth and Development Centre and Lund University. Moreover, we are grateful for valuable input by participants at the annual conference of the Economic History Society in Leicester, April 2005. Financial support from the Jan Wallander and Tom Hedelius Foundation is also gratefully acknowledged. Table of contents 1. INTRODUCTION................................................................................................................................................1 2. METHODOLOGICAL DISCUSSION ..............................................................................................................3 2.1 Sources .......................................................................................................................................................4 2.2 Data quality and measurement issues.........................................................................................................5 3. THE STEAM ENGINE .......................................................................................................................................6 3.1 The early development of the steam engine ................................................................................................6 3.2 The diffusion of the steam engine ...............................................................................................................6 3.3 The steam engine and productivity growth.................................................................................................8 3.3.1 Steam power development in the UK ...................................................................................................................8 3.3.2 Steam power development in other countries .....................................................................................................11 3.4 Concluding remarks on the development of steam power ........................................................................12 4. ELECTRIFICATION........................................................................................................................................12 4.1 Diffusion of electricity ..............................................................................................................................13 4.2 Electricity and productivity growth ..........................................................................................................16 4.2.1 Productivity development in the US ...................................................................................................................16 4.2.2 Evidence for other countries ...............................................................................................................................18 4.3 Price development of electric motors .......................................................................................................20 4.4 Concluding remarks on electrification .....................................................................................................21 5. THE ICT REVOLUTION.................................................................................................................................22 5.1 Background...............................................................................................................................................22 5.2 What is ICT?.............................................................................................................................................22 5.3 The ICT Revolution and productivity growth ...........................................................................................23 5.4 Productivity growth: Industry evidence....................................................................................................25 5.5 Spillovers to the rest of the economy ........................................................................................................26 5.6 Concluding remarks on the ICT revolution ..............................................................................................28 6. SUMMARY AND CONCLUSIONS.................................................................................................................29 6.1 Patterns of productivity growth after major technological breakthroughs ..............................................29 6.2 Measurement errors..................................................................................................................................31 6.3 Concluding remarks..................................................................................................................................33 REFERENCES.......................................................................................................................................................36 TABLES AND FIGURES......................................................................................................................................40 1. Introduction According to many observers (e.g., Castells 1996, 1997; Greenwood 1997; Litan and Rivlin 2001) we have just experienced a technological revolution based on a breakthrough in information and communication technology (ICT). This revolution has already profoundly impacted the way we lead our lives and produce goods and services. Moreover, significantly higher rates of productivity growth were observed in the latter half of the 1990s compared to the 1970s and 1980s, in particular in the United States. This tendency was discernible in several other countries too, but on closer inspection it appears that it may only be true for the sectors producing the
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