Internet and the Economy

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Internet and the Economy
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5 Great Inventions during IR

• Electricity
• Internal Combustion Engine
• Petroleum, natural gas, chemicals
• Communication
• E.g. telegram (1884), photograph (1880s), Radio
  (1899), TV (1911)
• Running water, indoor plumbing, Urban sanitation
  infrastructure

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Industrial Revolution

• def. any great acceleration of output and
  productivity growth, pervasive and economywide
• 1st 1760 in Britain
• 2nd 1860-1900 in Europe and US

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Living Conditions Before 2nd IR

• Housing
• 1882, 2 of NYs houses had water connections
• animal wastes on streets
• Power
• Horse
• Working Conditions
• Long working hours 60-hr week
• Dirty and dangerous working conditions

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New Economy

• Production growth centered at the production of
  computer hardware, telecommunication equipment
  and durable manufacturing

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Contemporary impact of computers and the internet

• Declining cost of computer power

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Introduction

• Development of Moores Law
• In 1975, he redrew his plot of component
  densities doubled every 18 months keeping cost
  constant.
• Moores Law Every eighteen months,
  processing power doubles while cost holds
  constant.

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Introduction

• History of IC industry
• Vacuum Tube
• Transistor
• planar Integrated Circuit ( IC )

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1. Competitive force from the semiconductor
   industry.
2. Pressure from software company (complementary
   products)
3. Consumer expectations.

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Keeping up with the race
Either you and your 999 colleagues double the
performance of our microprocessors in the next 18
months, to keep up with the competition, or you
are fired (Andrew Odlyzko on the Internet, 1995)
A forum for semiconductor companies to work
collectively to achieve the exponential growth of
the Moores Law.
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Complementary Software

• Word first version program has 27,000 lines,
  the latest version had about two million.

• Marginal Cost of additional processing power gt
  Zero

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Economic Impact

• The Information Age
• Faster, Better, Cheaper
• You get more by less
• MOORE (1998)
• "If the automobile industry advanced as rapidly
  as the semiconductor industry, a Rolls Royce
  would get half a million miles per gallon, and it
  would be cheaper to throw it away than to park
  it."

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Transistor Density on Micro Processors and Memory
Chips
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Productivity Processor performance in millions
of instructions per second (MIPS) for Intel
processors, 1971-1995
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Cost
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Total PC Sales
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CPU/PC Average Lifespan

• By 2005 the average lifespan will level off at 2
  years

based on 1998 National Safety Counsel Report -
Electronic Product Recovery and Recycling
Baseline Report
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Limitations and Barriers

• When will Moore's Law end?
• Is this the right question?
• What might slow it or stop it?
• -Physics limitations?
• -Design challenges?
• -Economics?

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Physics limitations

• The gigabit chip generation may finally force
  technologists up against the limits of optical
  lithography.
• Think of it as trying to paint a line that is
  smaller than the width of the paintbrush.

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Economics

• There are ways around the above obstacles, but
  the cost may be prohibitive. In fact, economics
  may constrain Moores Law before physics
  does---an observation that others have called
  Moores second law.
• The economic law of diminishing marginal returns

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Another exponential trend in the cost

• The cost of a new fabrication plant
• 1966 14M
• 1995 1.5B.
• Between 1984 and 1990, the cost of a fab
  doubled, but chip makers were able to triple the
  performance of a chip.
• In contrast, the next generation of fabs
  will see cost double again ,but this is likely to
  produce only a 50 improvement in performance.

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Concluding Thought

• The wonderful thing about Moores Law is that
  it is not a static law, it forces everyone to
  live in a dynamic, evolving world
• Perhaps the very fact that the future of Moores
  law seems unpredictable is what makes hi tech
  industries exciting and equally part of what
  drives them on.

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Solows computer paradox(1987)

• We can see the computer age everywhere except
  in the productivity statistics

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Positive and Negative side of Internet

• Benefits
• Email shortens the communication barrier
• E-commerce
• provision of vast amounts of free information
• However, no evidence in boosting the
  productivity growth of economy

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• Computer investment had a near-zero rate of
  return outside of durable manufacturing
• 76.6 percent of all computers are used in
  industries of wholesale, retail trade, finance,
  insurance, real estate, and other services.
• Only 11.9 of computers are used within
  manufacturing.

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• Productivity growth has continue to rise even as
  investment in information technology has fallen
  from its late-1990 peak
• Confirm new technologies do not automatically
  lift productivity

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Negative side

• Why Internet cant improve the productivity
  growth?
• Internet is only substitution of entertainment
• e.g. download music, play games
• Just buying computers was not enough to make
  businesses smarter
• gt5 of investment was in computers too small to
  accelerate the economy

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• Much investment in Internet web site and
  infrastructure only represent redistribution of
  sales rather than creating them
• Dilbert factor
• Dilbert commented, time lost for loading web
  pages canceled out all the productivity gains of
  the Information Age

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• Since early 1990s, more investment in IT than
  other kinds of equipment, but often to no effect
• 1998, half of IT projects abandoned

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Just Beginning?

• It takes time for information technologies to
  raise general productivities
• Infotech ---just at the beginning
• Computer revolution 40yrs old
• World Wide Web just 5yrs old
• E-commerce market spawned
• Fast growing
• But too small to speed up a multitrillion-dollar
  economy

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Is dotcom shakeout a bad thing?

• NO
• Because of Darwinian selection in action
• The likelihood of firm survival is lower in
  industries in which the innovative opportunities
  available to small firms are large.
• Internet technologies allows firms to operate on
  a small scale, and offer many innovation
  opportunities. This suggests a severe Shakeout.

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• Historical example car industry
• The birth of the car industry in 1890.
• In 1908, more than 240 firms
• Entry was concentrated in the years preceding the
  peak, with 490 entrants before 1909, and 233
  entrants after 1909.
• Only a few left after downturn
• Ford General Motors

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Shakeout

• There are evidence that the prices on the
  internet are beginning to rise.
• In new industries, a build up in the number of
  firms followed by a shakeout is a well-documented
  phenomenon.

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Shakeout

• In the case of Internet technologies, parallel to
  the cycle of Entry and Shakeout, there was also a
  cycle of Bubble and Burst in the stock market.
• That was also the case of railroads in the late
  19th, century and the case of electricity in the
  early 20th century. Are these 2 cycles related?

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Eletric Dynamo

• The classical example of the electric dynamo
• It illustrates a parallel process of learning how
  to use a new technology.

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• The deployment of electricity started by the
  1890s, but its impact on productivity was
  negligible until the 1920s.
• The reason was that initially firms replaced the
  power source, but left the way production was
  organized unchanged

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Eletric Dynamo

• Initially, firms only replaced steam or water
  powered motors by electric motors. This allowed
  fuel savings and improved machine speed control.
• However, instead of a primary motor turning
  separate shafting sections and driving related
  groups of machines, individual electric motors
  could be used to run machines of all sizes.

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Eletric Dynamo

• Furthermore, electric wires could replace power
  transmission through shafts and belts.
• The reduction of friction in transmission allowed
  further fuel savings.
• Factories could also be redesigned, with lighter
  single-story structures replacing costly
  multistory structures.

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• Single-story, linear factory layouts, allowed a
  reconfiguration of materials handling, of machine
  placement, and handling equipment.
• These changes in product and process design were
  the largest source of the productivity gains.

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• Real price of processing power down 99.999, or
  35 per year over the past 30 years.
• Electricity prices fell 6 per year between 1890
  1920.
• Real costs of steam power costs dropped by only
  50 between 1790 1850.
• Freight rates only dropped 3 annually between
  1870 - 1913 due to rail networks.

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• The cost of computing has dropped
  exponentially, but the cost of thinking is
  what it always was
• Zvi Griliches, Economist

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Information Technology

• Includes computers, software as well as related
  digital communication technology

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IT vs Business Value

• Enables complementary investment
• Business process
• Work practices
• Business Model
• Innovation

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IT vs Business Value

• Resulted in
• Reduced cost
• Improved quality
• Convenience
• Timeliness
• Accuracy
• Speed

• Responsive to Customers
• New Products /Services

Introduction
Historical Context
Productivity Paradox
Our Viewpoint
Conclusion
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• By taking advantage of the new technologys
  characteristics, production could be reorganized
  in more flexible and productive ways. It took
  several years and experiments to discover this.