Many signs of industrial revolution

The Economy

February 20, 2000|By WILLIAM PATALON III

It's been dubbed the "New Economy."

The current U.S. expansion -- in its ninth year-- set a record for duration this month.

The expansion's strength has been just as stunning as its length, shrugging off four interest rate increases by the Federal Reserve with less effort than it took Pittsburgh Steelers lineman Mean Joe Greene to shove aside enemy blockers. And a key catalyst of thc current boom, the Internet, is proving to be far more than just a gee-whiz innovation: It's spawning new businesses and markets in the entertainment, retailing and investing industries, even as it dramatically boosts the productivity of Corporate America.

Despite all this apparent economic "newness," University of Rochester economist Jeremy Greenwood says it's a misnomer to call it the "New Economy." The reason: We haven't altered the basic rules of supply and demand, just the technology we use. What we've done is enter the "Third Industrial Revolution,'' in which information technology such as personal computers, data networks and the Internet have fueled the boom-- much like steam power and then electricity and the internal-combustion engine did in the two industrial shifts that preceded this one.

By peering into history and basing studies on the two preceding industrial revolutions, Greenwood has drawn conclusions about when and how the current boom got under way, how long it might last, and how it might change the U.S, economy.

Take stock prices. While many doomsayers worry that stocks are vastly overvalued (even the professor allows that prices may have reached risky territory), it s a so possible that "today's high stock prices are merely reflective of the rosy earnings estimates" experts are making for these new industries, Greenwood says. "lf you look back at previous periods as an example, new entrants and new technologies add value."

In the first Industrial Revolution, which started in Great Britain about 1760 and lasted until roughly 1850, the catalyst was steam. Steam power quickened the pace of travel and shipping--over water and via rail-- and put real muscle into the manufacturing process.

What Greenwood classifies as the second Industrial Revolution was spawned about 1890, lasted until the start of the Great Depression, and was powered by the proliferation of electricity, the gasoline engine and the rise of the chemical complex-- the types of true "smokestack" industries that transformed the United States from an agrarian to an industrial economy and ultimately made it a superpower.

The current Industrial Revolution, which arose with the proliferation of information technology, was born about 1974, a year Greenwood settled upon after reading a trifeeta of economic tea leaves. The first of the three clues was the big drop in productivity that occurred about that time --which happens when technological leaps outstrip the general know-how of workers, who play catch-up through training, experience and schooling. That takes time. But as those workers gain the needed knowledge and skills, they become more valuable and pull down bigger wages.

That leads to clue No. 2: a gulf between the wages or skilled and unskilled workers that started to widen about that time.

Clue No. 3 had to do with producer equipment, which traditionally falls in price even as it becomes more powerful-- a trend that also accelerated about 1974 and persists to this day. In the Industrial Revolution of today and the first one in Great Britain during the 1700s, the recipe for producer equipment was the same: Higher power at a declining cost. It's just that we apply that formula to computer chips today, while the British industrialists applied it to the steam engines that ran their factories.

The formula worked in both cases. In Britain, the mating of steam and the "spinning mule" so mechanized the textile industry that the "real," or inflation-adjusted, price of spun cotton fell by an impressive two-thirds during the first 81 years of the British Industrial Revolution, Greenwood found. And we know what's happened to computers, a key piece of producer equipment: A computer that cost $2.2 million in 1955 had, by 1987, fallen to $5,000.

The similarities between the two periods-- coupled with the fact, that, as Greenwood says, the basic laws of economics have not been repealed -- means the economist an use the two previous industrial evolutions to do some crystal-ball gazing about the one we're living through now.

For one thing, during a period of revolution, paradigm-shifting change can persist for 50 to 80 years before it's fully played out. The one that began in Britain lasted for 90 years, and the second revolution spanned 40 years before. It faded into the Great Depression. Yet it most certainly set the table for the postwar boom.

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