Saturday, February 26, 2011

Part 7 - Impact of technology


Agriculture and mining produce commodity raw materials. In 1880 agriculture accounted for over 40% of US employment. By 1970 this had dropped to 4%. Despite this, agricultural production vastly increased.

Before 1880 steam powered railroads enabled commodities to be moved from regions of the country which could produce them cheaply to consuming areas. This boosted productivity.

After 1880 the internal combustion engine (ICE) had an enormous impact on these sectors. Farms were mechanized from the 1920s to 1970 by tractors and combine harvesters. Mechanization of agriculture changed the face of America as people moved from towns to cities.

Bulldozers and dump trucks have reduced the cost of moving earth and have tended to replace labor intensive underground mining with open cast operations. Meanwhile, oil drilling rigs are powered by internal combustion engines.

Chemical fertilizers, pesticides and plant breeding also played a role in improved agricultural productivity.

After 1970 agricultural and mining productivity continued to improve, but these industries are now a small part of GDP.


Before 1880 steam powered production machinery revolutionized the production of many items, especially textiles. After 1880 electric motors eventually replaced steam engines for driving machinery, with most US industry electrified by 1930. Electric motors are far more convenient than steam engines for factory organization, and they helped to increase productivity in many ways.

Perhaps the biggest improvements in productivity came from mass production ideas, which were perfected in Ford Motor Company's assembly line for the Model T automobile. This is reported to have boosted productivity by a factor of 8. This eliminated skilled labor in direct production. Anyone could do the work, and this provided jobs for the people displaced by the mechanization of agriculture.

From 1970 to the present, the technologies which enable globalization have devastated US manufacturing. Globalization might have been beneficial if trade had been balanced, with easy manufacturing tasks sent overseas being replaced by the move of more difficult tasks to the US. Unfortunately, the US political establishment has allowed foreign countries to use the system to grab jobs from the US. US manufacturing's share of GDP been cut in half, and the gap filled with imports.


All of this industry's output is from offices. Before 1880 the telegraph would have had some impact on the operation of this sector. That invention enabled global financial markets.

From 1880 to 1970 electric lighting and photocopiers would have helped productivity a little. However, this industry was much less affected by technology than other economic sectors.

That changed after 1970, as semiconductor based technologies created a new generation of office machines. Computers and spreadsheets automated calculations that once would have taken hours. ATMs changed the face of US banking. Productivity should have improved massively, and yet this industry doubled as a percentage of GDP instead of shrinking. This is probably because computers and spreadsheets enabled new financial products. Has this improved the standard of living?


Before 1880 little progress was made. Life expectancy at birth in 1870 was 44, which wasn't much improved over earlier eras. Many children died young from infections.

By 1970 life expectancy at birth improved to 71. This is due to the near eradication of infectious disease among children. Vaccines played a large role in this, although improved sanitation may also have helped. The development of antibiotics like penicillin further reduced the toll from infectious disease. These improvements came at modest cost. Little progress was made in treating the diseases of aging, like cancer and heart disease.

Since 1970 cost has exploded. This might be due to Medicare, which allows the elderly to pay for expensive treatments which they previously could not have afforded. Life expectancy has improved from 71 to 78.

CAT scanners, ultrasound and NMR machines eliminated the need for exploratory surgery. Effective treatments for AIDs were developed. Biotechnology helped diagnoses. Computer technology could have cut administration costs, if it had been properly applied. However, powerful providers have little interest in cost savings.


Prior to 1880, the combination of railroads and telegraphs enabled mass mobilization, which ultimately proved destabilizing.

After 1880, the ICE eventually mechanized the battlefield. By 1970, nuclear bombs mounted on ballistic missiles vastly multiplied the potential for destruction. However, some think that they deterred war between great powers by making it too costly.

After 1970 the deployment of satellites, electronics and sensors have multiplied the lethality of conventional weapons. Targets that would have required hundreds of bombs in WW2 can now be destroyed with a single weapon.

However, no attempts have been made to take advantage of the potential cost savings. Defense expenditures are only very distantly related to defense needs.


The paradigm of a teacher standing in front of a class while the students take handwritten notes is a 'technology' that goes all the way back to the Dark Ages. Due to powerful providers, few attempts to apply technology to increase productivity have been made. Education wins the award for the industry least changed by technology. Computers and the Internet might eventually transform this industry.


After 1880 electric light enabled large, windowless stores. Automobiles meant that stores no longer had to be within walking distance of their customers, which allowed for larger stores and economies of scale.

After 1970 bar code scanners and computers with database software automated the management of products on the shelves and in warehouses. Better communications helped to manage deliveries. Walmart exploited these technologies to enable its growth.

After 1995 the Internet changed the face of retailing, and reduced the need for physical stores.


This industry employs very few in relation to it's size in GDP numbers. The output is mostly office based, so computers, cell phones and the Internet ought to have improved productivity. Suburbanization in the 1950s gave Americans much larger and more comfortable homes.


Before 1880 transport was revolutionized by steam powered railroads.

After 1880, the mass produced, oil fueled ICE took over as automobiles, trucks and airplanes developed.

In the 1950s, the globalization technologies were developed, which eventually enabled global supply chains for manufacturing.

After 1995 the Internet enabled airlines to better fill their planes, increasing the percentage of seats filled.


ICEs power cranes, bulldozers and hydraulic diggers which have partly mechanized construction. The assembly line ideas of Ford were also applied to home building from the end of WW2. These new suburbs were far more spread out than older cities, because they were designed around the automobile.
In cities, electric motors provided a convenient way to power elevators, which helped to enable skyscrapers.

Electrically powered hand tools eased construction tasks. Reinforced concrete structures also cut labor costs relative to brick.

After 1970 environmental and zoning restrictions made construction harder and helped to increase housing costs in many parts of the country. Large civil projects became impossible to build, while legacy infrastructure becomes increasingly overburdened.


Obviously newspapers and books were produced before 1880 on steam powered printing presses.

From 1880 to 1970 cinema, radio, television created new industries. After 1970 the demand for computer software further expanded this sector. CGI opened new possibilities for filmmakers.This industry employs few people in relation to its share in GDP.

The Internet has had a huge impact on this sector, allowing content to be distributed at very low cost.


This industry employs large numbers in relation to its GDP.

Part six - Evolution of the US economy

OK, so what did all of this technology mean for the US economy? When I started thinking about this I asked myself the question. What is the US economy? What are the major industries?

I quickly decided that the real US economy was far to complex to think about. So instead, I thought about a simplified model. Model America looks like real America, but it only has 13 major industries. The government provides data showing GDP by industry, and my 13 industries more or less match the major industries in the GDP data. One complication is that the size of those industries has changed considerably over time. The changing size of industries over time provides a clue as to how technology has driven the US economy.
Unfortunately, this detailed data only goes back to about 1950. For earlier eras the data is very sparse, but I will describe them as best I can. All my GDP numbers are in 2005 chained dollars at purchasing power parity.


The nation of Washington and Jefferson had a GDP per capita of $1370. That is similar to modern Kenya or Bangladesh. Life expectancy at birth was 39, while life expectancy in modern Bangladesh is 63. Life was hard.


By 1880, GDP per capita had hit $3800, similar to modern Indonesia. Life expectancy was stuck at around 41. However, if children reached their 20th birthday, they could then expect to live into their 60s.  Of the workforce, 41% worked in agriculture.

Today, only 1% of the US workforce works in agriculture. Technological progress in agriculture did lot to boost US living standards in the first half of the 20th century. While technological progress in agriculture is continuing, agriculture is now too small a part of the economy for it to have much overall effect on GDP.

Cowen and others have claimed that the US benefited from abundant land. If that was true, then the US should have been considerably wealthier than land poor countries like Holland or the UK. GDP data from the 1870s indicate that the US was poorer than Holland and the UK.  This evidence rules out the idea that abundant land had a major impact on the US economy.

By 1913 the US had surpassed the European economies. Something that happened after 1880 pushed the US into the lead.


By 1950 GDP per capita had hit $13000, similar to modern Mexico. The US and Switzerland were about 50% better off than the major European countries. Avoiding the devastation that two World Wars had inflicted on Europe delivered a big economic benefit. In the charts and tables below, I show the evolution of the US economy from 1950 to 2008. The key point to note is the shrinkage in agriculture and manufacturing and the expansion in finance and health care.

The numbers are based on GDP by industry accounts from the Bureau of Economic Analysis. It is important to note that physical agriculture production did not decline. Over production in agriculture lead to declining prices, so the fraction of end user dollars spent on agricultural products decreased. Another way to look at it is that agriculture used a smaller fraction of the economy's resources of labor and capital. This is also partly true for manufacturing.

The numbers for 'Healthcare' only capture a fraction of the nation's health care spending. I don't attempt to correct them because I'm frankly not sure where the rest of it is hiding.

Value added by industry as a Percentage of GDP
Finance and Insurance  2.848
Health care1.637
Retail and Wholesale trade151512
Real Estate91113
Accommodation and food services2.52.52.8
Everything else91019

The changing mix of industries is likely to be an important reason for the slowdown in productivity growth after 1970. Agriculture and manufacturing are productivity champions. As their contribution to GDP shrinks, so their contribution to productivity growth becomes smaller.

Thursday, February 24, 2011

Part 5 - The Electrical Power Grid

Electrification was named by the National Academy of Engineering as the most important technological development of the 20th century. Anybody who has ever been through a long power cut knows how the loss of electric light really changes the way you live. The introduction of the light bulb and the power grid provided night time lighting that was safer and more convenient than kerosene or gas lights.

The new power grids provided a plentiful supply of current for electric motors. The electric motor was important because it provided a convenient drive for small pieces of machinery. At home this enabled refrigerators, air conditioning units and domestic appliances. This reduced the amount of time women had to spend on house work and eventually enabled more women to work outside the home.

Outside, it drove streetcars which replaced horse drawn transportation. Streetcars enabled cities to spread out and give their residents more living space. Eventually, affordable domestic air conditioning would make living in the American South far more pleasant and encouraged the development of sunbelt cities.

In the chart below I look at the impact of electrification over time.

The dynamo was developed from Michael Faraday's scientific discovery of electromagnetic induction. It allowed mechanical power  to be converted to electrical power. This provided more plentiful and cheaper electricity than a battery. On feature worth noting here is the length of time that elapsed from the development of the dynamo to the commercial roll out of power grids. Major technologies often take a long time to develop.

Wednesday, February 23, 2011

Part 4 - Internal Combustion Engines

In this post I will look at one of the major threads of technological development in the past 150 years.


All three parts of that title are important. The importance of the internal combustion engine (ICE) is that it would provide a convenient drive for mobile machinery. It is a heat engine, as the steam engine is. This means that heat goes in and mechanical work comes out. The heat comes from burning fossil fuels in both cases, but because the internal combustion engine burns fuel inside its cylinders that fuel must be ash-free. That's a problem, because it can't use coal, and the 19th century ran on coal.

If it is going to be mobile, the ICE needs a fuel that is easy to store and ash free. That means a liquid organic compound like ethanol or vegetable oil or gasoline. The ICE would never have succeeded if the oil industry had not been able to provide it with vast amounts of fuel.

For the ICE to really change the world it needed to be cheap enough for everybody to own one. That's why mass production is important. Part of mass production is the use of interchangeable parts. We take that for granted today, but it presented challenges in the 19th century. Before interchangeable parts became common, everything was custom-built.

Another really important part of mass production is the assembly line. This was perfected by the Ford Motor Company in 1914 for the assembly of their Model T automobile. It provided an eightfold productivity boost. It also eliminated the use of skilled labor in direct production. One advantage noted by Henry Ford was that no special training was required for the workforce, and that anyone could do the work.

In the chart below I look at the impact of the ICE over time.

One of the most significant applications was the mechanization of farms. Farming's share of the American workforce fell by 37 percentage points. This may have accounted for about a quarter of the total progress 1880-1970. It is likely that many former agricultural workers found employment on assembly lines, which did not require skilled labor.

The development of mass production techniques and the development of the assembly line provided huge productivity boosts. The assembly line for the Ford Model T, started up in 1914, increased labor productivity by a factor of eight. The electrification of factories also delivered significant gains. Before electricity factory machinery was driven by a system of shafts and belts. Electricity allowed factories to be reorganized. Henry Ford reckoned that electric motors doubled productivity.

Mass produced automobiles enabled the development of spread out car dependent suburbs such as Levittown. The builders of these suburbs adopted mass production techniques as far as possible to drive down costs.The increased living space provided room for more consumer items.

Meanwhile, the development of airplanes increased long distance transportation speeds. Transatlantic crossing time fell from 4 days by ship to 29 hours by air when the first air service was launched. Jet powered passenger planes later reduced that to 7 hours. On the ground, the interstate highway system increased the speed and flexibility of land transportation.

Tuesday, February 22, 2011

Part 3 - Globalization

In this post I will look at another area of technology which Professor Cowen misses.


In the late 1950s several technologies developed which enabled globalization. In 1955 the first shipping containers were developed. These took a while to catch on, but they would eventually greatly reduce the costs of moving goods worldwide.

In 1956 the first transatlantic telephone cable was laid. It offered a grand total of 36 circuits. When the first fiber optic cable was laid in 1988 it would offer 40,000 circuits. In 1962 the first telecommunications satellite was launched. This made intercontinental TV transmissions possible for the first time, and helped to bring down the cost of intercontinental telephone traffic. These improvements in communications greatly eased the management of global supply chains.

Sometimes, only a face to face meeting will do. In 1958, the 707 jetliner entered service. This made transoceanic travel quicker and  more comfortable.

Although these technologies were first introduced at the end of the 50s, I believe that the impact of these inventions took decades to be fully felt. International trade has grown well into the 2000s.


If our politicians had insisted on balanced flows of trade, then it most likely would have been. Sending easy, low value manufacturing overseas and bringing the hard, high value work to America would have delivered a big productivity boost. Of course, this didn't happen. What did happen was massive trade deficits. The impact of those is a topic for another post.

Part 2 - Semiconductors

In this post I will look at the major area of technology which Professor Cowen misses.


The first and still most important product of the semiconductor industry is a device called a transistor. A transistor is a fast electronic switch which allows one electrical circuit to control another. Electronics, and even computers, did exist before transistors were introduced in 1954. They depended on another kind of electronic switch called a valve. Valves were light bulb like devices which were bulky, power hungry and produced substantial quantities of heat. Transistors were a huge improvement.

The real potential of transistors was harnessed when several were integrated together on a single piece of silicon. The number of transistors on a chip increased until by 1971 it was possible to put the entire brain of a computer on a single piece of silicon. The microprocessor was born.

In the chart below I look at the impact of semiconductors over time.

The microprocessor lead to pocket calculators, replacing slide rules and adding machines and making math calculations much easier.

The microprocessor also lead to affordable computer numerical control ( CNC) machine tools which automated parts of manufacturing in the 70s and 80s.

Most important of all, the microprocessor gave us the personal computer. Spreadsheet software was a very compelling application for the personal computer, because it could automate tedious financial calculations which once would have taken days. Spreadsheet software, faster mainframes and ATMs impacted the financial industry.

Database software helped businesses to keep records. When coupled to bar code scanners and cash registers, they automated the tedious business of keeping track of stock in stores and warehouses. Effective use of these technologies, together with satellite communications, helped Walmart to dominate retailing.

VCRs, cable TV, satellite TV and computer generated imagery (CGI) changed the information and media industries.

Finally the Internet has had many impacts, as even Professor Cowen admits. For example E-commerce has improved the market for airline tickets, and load factors on planes are about 10 percentage points higher than they used to be. Retailers like Borders and Blockbuster are being challenged by Amazon and Netflix.

Professor Cowen makes a fair point about how semiconductor technology has helped to make 'cheap fun' easier. Game consoles, DVDs and social networks have improved leisure time.

Part 1 - Why Tyler Cowen is (probably) wrong

Since 1973 the US economy has experienced a slow down in growth rates. In particular, median household income has stagnated. This is linked to a slowdown in measured productivity growth. The reasons for this are not understood.

This is the first in a series of posts which will examine the issues raised by Tyler Cowen's e-book 'The Great Stagnation'. In this book Professor Cowen argues that a slowdown in technological progress was the reason. This book has been generally well received in the media.

Initially, I found this idea persuasive. From 1880 to 1970 the US underwent profound change. In 1880 41% of the labor force worked in agriculture. By 1970 this had fallen to 4%. Life expectancy at birth rose from 39 to 71. Per capita GDP rose by more than a factor of 5, from $3380 to $18400.

I think that a lot of this was driven by 3 major areas of technology. One was the oil fueled, mass produced internal combustion engine. This enabled the automobile, the airplane and the mechanization of agriculture. Another was the electrical power grid. This provided electric lighting at night, and allowed factories to be reorganized for better efficiency. Eventually, electric motors would drive refrigeration and air conditioners. The third was the near elimination of deaths from infectious diseases among children, thanks to vaccinations and improved sanitation.

Thinking about this further, I realized that there are some very significant areas of technological progress which Professor Cowen overlooks. There is a group of technologies I will call the globalization cluster. These are the shipping container, the jet airplane, the telecommunications satellite and the fiber optic cable. These helped to enable the global supply chain.

A far more important area is semiconductor technology. This lead to vast improvements in electronics, which lead to a revolution in office machinery. This should have been very significant for GDP, since much of America's GDP is produced by offices. Semiconductor based technology, which includes the Internet, is still a very active area of development.

I'm going to divide technological history into the period before 1880, 1880-1970, and 1970 to the present. Why those dates? Because the first power grid in the world was switched on in Lower Manhattan in 1880. Then in 1886 Benz introduced the first automobile. Those two inventions would define the 20th century. I choose 1970 because that was around the time that the US economy started to slow down.

In my next few posts, I will look at a few major threads of technological development, including ones that Dr Cowen ignores. Then I will look at what industries make up the US economy, and how they have changed over time. I will develop a simple model of the economy that just focuses on the major industries. Finally I will go on to look at how technology has affected each of those major industries.