The Red Herring - Economics - June 1998

ECONOMICS
Why most economists' predictions are wrong.

By Paul Krugman

Everyone knows we are living in a time of spectacular technological progress--progress at a rate that nobody could have foreseen. But is what everyone knows really true?

Recently I went to the library and checked out a once-famous book, Herman Kahn's The Year 2000, published in 1967. The book is a favorite because it is a perfect example of overly optimistic economic forecasting. Kahn, presumably drawing on the opinions of pretty reasonable people, predicted that over the last third of the century living standards would double, despite a sharp reduction in work time. He thought that by 2000 a 30-hour workweek, with 13 weeks of vacation per year, would be the norm. He then went on to worry about the social implications of excessive leisure time. His prophecy didn't come true, but most Americans were too busy trying to make ends meet to notice.

Why was Kahn--along with almost everyone else--so optimistic? Mainly because he expected spectacular technological progress, which for the most part has not materialized.

No bots
Kahn provided a convenient set of tables listing 100 innovations that he considered "very likely" by the year 2000, plus 25 "somewhat unlikely" possibilities. And he actually fares pretty well. Among the very likely developments were many major technological changes that have taken place. He predicted, for example, that most people would have computers at home and that they would be able to use them both to search databases and to communicate. He also predicted pocket phones, VCRs, and home satellite dishes. Indeed, I can't think of a single important technological development since 1967 that was not on his list.

All of his errors were in the opposite direction. Many of the technological developments he predicted, like radical new power sources, dramatically cheaper construction techniques, and undersea cities, did not materialize. In fact, only about a third of his very likely innovations have occurred, by my count, mainly in areas involving information processing; two-thirds have not. (An example: though Kahn was skeptical that housecleaning robots would be available by 1984, he regarded them as more or less a sure thing by 2000.) And not one of the innovations he listed as somewhat likely has taken place--or seems likely to happen any time soon. In short, looking back at the future makes it pretty clear that technology has made less, not more, progress than expected.

How can this be, when information technology is making such strides? One answer is that input isn't the same as output. The raw power of computers has advanced at a stunning speed, but has this advance translated into a comparable improvement in their usefulness? Word processing, to take the most obvious example, hasn't fundamentally improved since the late '80s. And in the view of many people I know, WordPerfect 5.1 for DOS was actually better for their purposes than any of the bloatware that has followed.

Peaks in valleys
Another explanation is that when all is said and done, the technological progress we keep hearing about is occurring in only a small part of the economy. Silicon Valley employs something like one-third of 1 percent of U.S. workers, and information technology as a whole no more than 3 or 4 percent, unless you use a definition so broad as to be meaningless.

So never mind the hype. The truth is that we live in an age not of extraordinary progress but of technological disappointment. And that's why the future is not what it used to be.

Paul Krugman is a professor of economics at MIT.

FUTURE THOUGHT Paul Krugman prognosticates. * Productivity will drop sharply this year. Nineteen ninety-seven, which was a very good year for worker productivity, has led many pundits to conclude that the great technology-led boom has begun. They are wrong. Last year will prove to have been a blip, just like 1992. * Inflation will be back. Wages are rising at almost 5 percent annually, and the underlying growth of productivity is probably only 1.5 percent or less. Sooner or later, companies will have to start raising prices. In 1999 inflation will probably be more than 3 percent; with only moderate bad luck--say, a drop in the dollar--it could easily top 4 percent. Sell bonds! * Within two or three years, the current mood of American triumphalism--our belief that we have pulled economically and technologically ahead of the rest of the world--will evaporate. All it will take is a few technological setbacks or a mild recession here while Europe or Japan recovers a bit. * The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law"--which states that the number of potential connections in a network is proportional to the square of the number of participants--becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's. * As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly. * Sometime in the next 20 years, maybe sooner, there will be another '70s-style raw-material crunch: a disruption of oil supplies, a sharp run-up in agricultural prices, or both. And suddenly people will remember that we are still living in the material world and that natural resources matter. Table of Contents