Asking if the Internet is good or bad for the economy seems like a simple question, but the answer depends on your perspective. Investors in pets.com, the poster child, or site, for the first dot com bubble, probably think it has been harmful. Those who bought stock in Apple before iTunes changed music will have a different answer. But any new technology makes winners of some investors and losers of others, so that’s not really the best measure of this topic.
Don’t Sugar Coat It
A recent and rather blunt article by William Davidow in the Harvard Business Review reports the Internet is “colossal economic disappointment,” which sounds counterintuitive. Davidow acknowledges, while it’s easy to name companies that used the Internet to make huge fortunes, like Amazon and Google, they don’t generate as many jobs as you’d expect. Overall job creation is the metric Davidow uses to rate the Internet’s overall economic usefulness and he says the Internet is better at making money than jobs.
Defining the Problem
Davidow points to data published by MIT Professor Erik Brynjolfsson that shows close correlation between productivity and overall employment in the U.S. from the end of World War II until 2000. At that point, however, productivity continues to rise while employment becomes stagnant. Both believe the Internet is to blame, and admittedly, it’s hard to think of another valid cause for this change.
In other words, our fears have come true; nearly 150 years after the legend of John Henry defeating the steam engine but dying in the process, machines are finally taking away our jobs.
The Internet is Different
Disruptive technologies eliminate some jobs, but historically, they’ve also provided new ones. Radio killed the telegraph, but offered much more job potential. Computers replaced typewriters to similar effect, and airlines have nearly diminished passenger train travel. In each case, though, look at the support industries that grew to support these new technologies. Radio created jobs in advertising, computers spawned video games and accessories, and air travel created massive amounts of infrastructure.
But Davidow says that Internet businesses like Amazon distribute their products so efficiently, thanks to automated, computerized warehousing, that they don’t replace the total number of retail jobs they eliminate. As the need for retail space lessens, so does the need for construction workers to build that space. There’s a ripple effect, and jobs creating Amazon’s warehouse automation haven’t made up the difference.
Davidow calls the Internet “the most powerful efficiency engine the world has ever known.” Even on the surface, that sounds believable, but what does it mean? Using some quick math, he shows that, because Internet companies are so good at doing so much with so few employees, they have to generate five to ten times more sales than traditional companies in order to hire a new employee. He shows that Google generated more than $1 million in sales per employee in 2013.
Okay, but what do we do about it?
Naturally, not everyone agrees. Last year, the Copenhagen Consensus Centre estimated that broadband access could add $22 trillion to the world economy. There are no simple answers in economics, and maybe no sure ones, either. But if you accept Davidow’s argument, then the problem needs a solution. Davidow’s proposed solution is a bit ironic: invest in Internet infrastructure.
He proposes creating bandwidth as an example of infrastructure spending, and municipal fiber networks are a good example of such a project. He asks, though, whether there are enough online infrastructure demands to solve the problem. And you can’t try to increase worker wages, because the more expensive we become, the more attractive our robotic replacements become to employers.
Use it to Your Advantage
Use some of the Internet’s efficiency for your own good: find a faster connection that increases your efficiency, so your boss decides you’re a better to have as an employee than a robot. Use it to find a good recipe for cookies, too. Robots never bring cookies to share at work.
Photo Credit: Tax Credits/Flikr