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Why Tech Is Still The Future

By W. Brian Arthur
November 24, 2003

The strength of the American economy over the next 20 years depends largely on our ability to keep our productivity growing. And productivity grows when a large set of novel technologies changes business practices and creates new industries. Interest rates, deficits, Federal Reserve policies--those will all make a difference, of course, but they won't be the driving force. That force will be technology and its ability to transform the economy. It's too early for biotech and nanotech to transform anything-- their time has not yet arrived. So the main hope for future economic golden eras remains that tarnished cluster of technologies we call information technology.

Does information technology still have the oomph to power the economy? Its critics tell us no--that the computer's days of greatness are over. "The IT buildout is much closer to its end than its beginning," says Nicholas G. Carr in a recent article in Harvard Business Review. "The opportunities for gaining IT-based advantage are already dwindling." And Oracle's Larry Ellison declares that the IT industry "is as large as it's going to be."

If you see the digital revolution as the adoption of digital devices or the buildout of its Internet infrastructure, you would have to agree. You'd have to ask just how many more teraflops and servers and fiber-optic cables business really needs. But that is a limited way to look at information technology. It is better to see the digital revolution as merely the latest in a series of historical technology revolutions. In the past each of them has gone through a predictable sequence of initial technological turbulence, media glamour, and investment boom. Then a crash. After the crash the revolution seems to be finished, but in each case there follows a massive buildout in which the new technology deeply transforms the economy and produces decades of prosperity. Britain's railway revolution underwent its investment frenzy in the mid-1840s; then a crash in 1847. There followed a pattern we would recognize today: disgraced executives hauled before government inquiry boards, stocks worth 15% of their peak value, a collapse in investment. Yet in the decades after the crash, track miles in Britain increased by a factor of ten. In 1859 the U.S. went through an echo of Britain's experience. "Our railroad system has cost more than $1 million and has brought ruin upon nearly everyone connected with it, the nation included," Henry Carey Baird, an economic commentator, said at the time. But railroads in the U.S. in the next four decades increased their track mileage by a factor of eight.

More than that, railroads became an engine of growth: They brought a whole new era of economic expansion. They opened the Western states to commerce with the rest of America, they helped bring a massive steel industry into being, and they cheapened the economy's inputs--the iron ore, timber, leather, and other raw materials that industry needed. Such structural changes happened gradually, and at the time were almost invisible. But they were powerful. In 1860, before the railroad buildout, by international standards the United States was a backwater economy. Some 40 years later it was the largest economy in the world.

The information revolution, like the railroad revolution before it, is causing deep structural transformations in the economy-- three transformations in particular.

First, with the arrival of networks of all kinds--wired and wireless--everything is getting connected: devices, systems, machines, business processes, even networks themselves. Information technology's task these days is to get these items to "converse" seamlessly and remotely with one another. As a result processes that were carried out by humans 15 years ago now become interactions among devices that talk with one another, figure appropriate action, and execute.

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