Internet, Innovation and Macroeconomics

From Internet induced economic effects in micro-economic structures, i.e., on enterprise and industry levels, we now address network effects on a macro scale involving productivity, growth, and the business cycle. The network effect is strongly facilitated by computerization and information technologies (ITs). Ubiquitous computerization and digitalization increasingly pervade many sectors of the economy, and communication by network technologies through the Internet (the network is the computer) as a strong catalyst. Eventually, through this synergy, most sectors of the economy will be impacted by network effects. Thus, networking and computerization have far-reaching impacts on the pace and path of the economy but they could also make the economy more vulnerable to economic shocks and security breaches. We address three important issues: networks and productivity, endogeneous growth and increasing returns. The relationship between technology and productivity used for the United States on the economy or sector level, found little evidence of a relationship in the 1980s. Capital IT investment between 1977 and 1989 rose several hundred per cent but was barely reflected in a rise in output per worker. There was this famous saying by Nobel prizewinning economist Robert Solow (1987): “You can see the computer age everywhere except in productivity statistics”. In the 1990s, such a positive relationship on the firm level was established empirically. On a short-term basis: one-year difference in IT investments vs one-year difference in firm productivity should be benchmarked by benefits equal to costs. However, benefits are supposed to rise by a factor of 2–8 in forecasting future benefits through productivity growth.

Keywords: Catchup Race, DARPA, E-commerce, Economic transformation, Endogeneous Growth, General Purpose Technologies (GPT), Increasing Returns, Information Goods, Information markets, Minitel, Multi-Factor Productivity (MFP), Productivity Paradox, SABRE, Total Factor Productivity(TFP).