January 2003, Vol. 126, No.1
Internet's economic promise
Book reviews from past issues
Internet's economic promise
Beyond the Dot.coms. By Robert E. Litan and Alice M. Rivlin. Washington, DC, Brookings Institution Press, 2001, 130 pp., $19.95/cloth.
In the 1990s, there was much investment into the dot.coms. Many thought there was coming a golden age of entrepreneurship—that the world of business would be transformed. But then the bubble of dot.com burst. It had been an exciting new frontier. There was an explosion of new companies. But profit on paper did not match actual revenue—and the result was myriad bankruptcies.
In Beyond the Dot.coms, two of the Nation’s most respected economists look past the dot.coms to search out the Internet’s real impact on the economy in the near future. They examine the potential effect of the Internet on productivity growth across a wide range of existing "old economy" sectors.
Robert Litan and Alice Rivlin summarize the conclusions of a Brookings research team set up for the purpose of this study. Their judgment is that the impact of the Internet will be positive, significant, and sustained, and that it would be a mistake to equate the benefits of the Internet with the profitability of the dot.coms or, for that matter, the broader "new economy" technology sector.
In short, the authors surmise that the Internet will produce significant cost savings in many sectors of the economy. Some of the cost savings will mean faster productivity growth; others will be reflected in narrower profit margins and lower prices for consumers. Overall, the Internet will improve the standard of living for the average American. Other benefits are not easily quantified, but they are nonetheless real; for example, increased and efficient accessibility to products never before available to the man on the street.
The Brookings Task Force, which was composed of experts in the major economic sectors, was asked to estimate how the Internet might alter productivity over the next 5 years. It examined such businesses as automobile manufacturing and sales, general manufacturing, education, financial services, government, healthcare, retailing, and trucking. The Brookings’ project indicates that the effect of the Internet will not be so much in e-commerce as in enhancements that lower transaction costs and improve business efficiency.
The Internet has the potential to increase productivity growth in a variety of distinct, but mutually reinforcing, ways—by significantly reducing the costs of many transactions necessary to the production and distribution of goods and services, and by promoting cost-effective management of such things as supply chains and communications within firms and with customers. Other benefits include an increase in competition, more price transparency, and broader markets for both buyers and sellers.
Andrew McAfee of the Harvard Business School projected overall cost reductions in the manufacturing sector. Routine transactions will be handled more consistently and expeditiously. Firms can reduce their cost of production, not by doing anything new or different, but by simply using the Internet to do the same things cheaper. Within the manufacturing firms themselves, intranets are allowing management to share information more accurately and less expensively.
In their discussion of the healthcare sector, Patricia Danzon and Michael Furukawa from the Wharton School at the University of Pennsylvania said that "perhaps as much as $27 billion a year could be saved …."
Lower processing costs to financial services were forecast by Eric Clemons and Loren Hitt, also from the Wharton School.
Jane Fountain of Harvard’s Kennedy School of Government projects that the Government could also realize significant savings in transaction costs in terms of response to questions and information gathering. However, it was noted that e-government is in its early stages and that realization of savings will be impeded by the need to maintain alternate systems for those unable or unwilling to use the Internet.
Even though distance-learning at the postsecondary level is on the rise, Austin Goolsbee of the University of Chicago predicts that the impact of the Internet on education productivity in the next few years will be slight, owing to the fact that the cost of developing learning tools is steep and the advantages are protracted.
Charles Fine of MIT and Daniel Raff of the University of Pennsylvania, on the other hand, predict that the automobile sector of the future will involve far fewer dealers and sales personnel because of productivity improvements in product development, procurement and supply, and in various aspects of the automobile manufacturing process itself.
Even though only 1 percent of retail sales are transacted over the Internet currently, and in 5 years are likely to account for no more than 10 percent, Joseph Bailey of the University of Maryland believes there is considerable potential for retailers to be able to use the Internet to increase their overall efficiency and, thus, indirectly advance productivity.
Litan and Rivlin observe that the Internet also provides opportunities for convenience, pleasure, and comfort that cannot be measured in dollars (that don’t show up in the Gross Domestic Product). They also mention that there are serious hurdles to overcome if the Internet is to maximize its potential, issues like relationship-dependent services, confidentiality of records, and unwillingness of the public to make the changeover from paper to electronic transactions. The authors also mention the Internet’s potential to affect politics, making it feasible to know virtually everyone’s opinion on a given subject on a daily basis, with the warning that such a society could easily degenerate from a system that relies on elected leaders making responsible judgments into a "knee-jerk" democracy.
In sum, the studies indicate that the potential of Internet-related cost savings is as much as 2.5 percent of the gross domestic product and that the savings are likely to accrue over time. But improvement in the process does not guarantee improvement in the outcome. There is an unpredictable human element that can sabotage the best technology. People who thought the Internet would shorten, or even eliminate, economic cycles were probably wrong in that economic growth can turn downward for a host of reasons other than the technology. The Internet can help companies save money, but it does not protect them from managerial mistakes.
The biggest bottleneck in reaping the rewards of the Internet is retraining personnel to do things differently. Ironically, the people who thought they’d get rich quickly on dot.coms are now helping firms adapt to the Internet era.
The authors summarize the Brookings study team’s conclusions to say that use of the Internet will produce major savings in many sectors of the economy and that some of these cost savings will mean faster productivity growth for years to come. "In product markets the new and old will blend seamlessly. And the economy will have moved beyond the dot.coms."
Consumer Price Computer Systems,
Bureau of Labor Statistics
Within Monthly Labor Review Online:
Welcome | Current Issue | Index | Subscribe | Archives
Exit Monthly Labor Review Online:
BLS Home | Publications & Research Papers