What creates economic growth? You might think this is one the economics profession had sown up decades ago but strangely not. Economists still struggle to explain precisely why we keep on producing things of greater value and they particularly struggle to explain why we have got so much better at doing this over the last 250 years.
Largely as a result of this problem there has been something of a mini-revival in recent years of an approach that places technological breakthroughs at the heart of our understanding of growth. It seems a better explanation of the rather messy and fitful way growth has alternately leapt forward and stalled over the last two and a half centuries than the more stately and calm progress one might expect from mainstream economic models.
One important aspect of this approach is a focus on so-called general purpose technologies (GPTs). These are the technological breakthroughs that can transform a whole economy because they can be applied in many different sectors. GPTs famously include things like steam power, electricity and ICT. These GPTs bring about revolutions in productivity that allow massive leaps forward in growth. Put simply we can produce lots more value at far less cost and, as a result, all (or most) of us get wealthier over time. In addition, new technologies allow the production of new commodities which create new markets stimulating demand and investment.
This huge growth potential has led to an intellectual hunt for the next or current GPT. This is hardly surprising at a time when many worry we may be trapped in a very long period of stagnation .
Although I did not set it out in these terms, I effectively argued in my pamphlet, published last week, that the interactive web is the new GPT. It seems self-evident to me that this is a technology radically transforming business processes in a wide variety of sectors.
However, I think the focus on the technology at the heart of such a transformation can be misleading. What really matters in all GPT revolutions is not the technology as much as the way the generation of value is transformed. What drove big shifts in production processes such as the mechanisation of the industrial revolution or the assembly line of mass production was ultimately the capacity of entrepreneurs to create much greater value - in the form of cheaper, higher quality and more bespoke goods - and for their customers to enjoy that value. GPTs have never been simply about a smart piece of new kit that drives up productivity, they are really just one piece of a much more complex shift in our understanding and use of value that encompasses business organisation, consumer behaviour, cultural expectations and even politics.
This is why in the pamphlet I suggested that the real shift being wrought by the interactive web is the rise of 'self-generated value' (SGV).
We can see this, for example, in the music industry. The cost of purchasing music has dropped but quality has also improved with MP3 technology delivered by the web providing a more reliable and better listening experience than previous formats. But the really important shift is the freedom consumers now have to directly shape products to meet their own very specific needs. That can be seen in the freedom available to consumers to download music when and where they want, to combine music into playlists, to determine touring locations and dates but perhaps most radically to make their own music and share it on-line with other consumers. In effect, the consumer has been empowered to shape aspects of the product on their own terms to add value to the commodity. It is this shift in behaviour, expectations and business practices that tells us what is meaningful about the current transformation rather than a focus purely on the IT side and the productivity gains it can provide.
If the interactive web and the associated SGV genuinely is the new general purpose technology then we need to start understanding it quickly. GPTs can be major motors of higher growth and living standards but economists have known for a long time that it can take many years for the full benefits to be felt. This is because GPTs are highly disruptive - companies which fail to employ them quickly or competently enough lose business, shed jobs and can go bust. It can also take some time for different sectors to fully understand how to apply new techniques associated with a GPT meaning that productivity can even drop in the early stages of adoption. So, working out how to ameliorate this short and medium term damage without weakening the longer term benefit will be, in my view, one of the big economic imperatives we face over the next few years.