Critical Review of a Technology and Economics Article
Length: 1276 words (3.6 double-spaced pages)
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The article Digital Technology and Institutional Change from the Gilded Age to Modern Times: The Impact of the Telegraph and the Internet describes the difficulties that exist when trying to create an accurate economic model showing responses to new, economy changing, technologies. The author Ronnie Phillips mainly focuses on institutional economics and, by showing the history of other technological advances, the need for institutional analysis. He explains how the challenge is to explain societal change, recognize what and how it happens, and create policies that will "foster" increased living standards throughout the world.
The way that the author forms his article is by first giving a rather exhaustive history of the telegraph, and reviews the impact that it had when it became a major form of fast communication. He then goes over some factors that are essential to understanding the evolution of society. One, that technology is of the nature of a "joint stock of knowledge for humankind"; two, the role institutions and organizations (like the government) play in the development of the technology; three, a so-called ceremonial encapsulation and path dependency; and four, the unpredictability of technological change and it’s impact on society.
The last half of the article addresses institutional economics, while not very clearly, he writes about the institutional changes that the internet has had on the economy, while going into a short history of the growth of the internet. The conclusion of the article involves an argument/discussion about whether or not the arguments presented in the article substantiate a "new institutional" or "old institutional" methodology versus whether or not they fall within neoclassical theory. Many questions remain unanswered through the end, and even more are raised right in the last paragraph.
Although the author does raise some very interesting and provoking questions in the beginning of the article, unfortunately, some of them are very difficult to answer, or just can’t be answered. While the article doesn’t solve any problems, it does raise awareness and creates some interesting connections with the present and the past. The overall question the author wishes to answer is "how can economists understand and explain the nature of societal change?"
The information is explained mostly through a narrative history with a short quantitative analysis of the growth of the telegraph and the Internet.
The numbers are interesting, but don’t show how the economy has changed because of the growth of the Internet. Also absent is an explanation of "institutional" economics. Maybe it’s assumed that the reader already knows what institutional economics is, but I am unclear, and the rest of the article is developed around the idea that with the analysis of the internet, it lies outside "mainstream" economics and lies somewhere in "institutional" economics, but no explanation of "institutional."
The problem and the weak part of the article is that he spends much of the time explaining the telegraph, how it came about, how it grew in use, how it changed the way people behaved, etc. While this information is pretty interesting, such an in depth history of it is unnecessary. He then compares this technology of the past with the technology of today, the Internet. He lobbies for a change, or at least renewed vigor for deciding if a "new economy" exists or not.
One of the most important questions the author raises, well, rather hints at, is expressed through a quote of Paul Romer, a leading new growth theorist. Mr. Romer said:
Once we admit that there is room for newness-that there are vastly more conceivable possibilities than realized outcomes-we must confront the fact that there is no special logic behind the world we inhabit, no particular justification for why things are the way they are. Any number of arbitrarily small perturbations along the way could have made the world as we know it turn out very differently… We are forced to admit that the world as we know it is the result of a long string of chance outcomes [cited in Lewis 2000, 252].
The author says that this explanation is why economists have difficulty explaining the economy, and deciding how it is going to behave, and whether or not there is a "new economy". So he begins with an almost apologetic approach, but then goes on to explain how we may be able to take what we know about the past and apply this knowledge to both the present and the future. He goes on to agree with an article put out in 1965 by Time magazine that claimed economists at that time "confess[ed] rather cheerily that they have just about reached outer limits of economic knowledge." This statement was made because there was continued expansion, low unemployment for an extended period of time. Economic models and theories could not explain this phenomenon in 1965, although there have been improvements since then. The author argues that we are once more at a point that significant changes in economic theory must take place to explain the changes in the economy due to technology.
This type of discussion is important because economics is a study of peoples behavior. If faster communication and new technology changes peoples behavior, thus changing the economy, an accurate economic model should be found, or at least sought for. While there are many current economic models, none of them accurately, at least in the authors view, can explain or predict peoples behavior when it comes to a new technology. This discussion is interesting to me personally because I see the way that technology, especially the Internet, is affecting peoples behavior and peoples productivity. The ease of how all these Internet startups are creating overnight millions is astounding. The economy for a long time has been expanding consistently and quickly. (Apparently a little too quick for the fed, as changing interest rates show). I think that the Internet has leveled the playing field for a lot of people.
What the author doesn’t talk about that I think that is important to this discussion is the ability of someone to create a service or product and market it over the internet with little or no capital. There isn’t a lot of analysis on how this new type of industry affects the economy. This type of market has never existed before, and relying on past models to predict how the economy is going to act does not work. While there are some similarities of traditional types of commerce and this new so-called e-commerce, there are also many glaring differences.
According to some industry experts, having a lot of capital on hand can be less of an asset and more of a liability because of the fast depreciation of products that are technologically advanced. There are also many intangibles besides the main aspects of which the author speaks about. Where speed and availability of information does affect productivity, there are other variables, some which are defined, some which may never be defined. The questions the author leaves us with are the same that he started the article with, which, as I explained earlier, never seem to get answered. While I understand that the answer to the questions are not available and the whole point of the article was to point out the shortcomings of current economic theory when it comes to information technology, at least a conclusion or even a speculation would have been nice.
The questions left that are the most intriguing to me is how has this new information technology affected productivity among other economic quantifications, as well as what is going to happen to the economy because of the rapid expansion of this technology?