Web 2.0 Is Everywhere, Except in the Productivity Statistics

Web 2.0 moves us closer to frictionless (free, instantaneous) communication, but we were already pretty close.

We have a productivity paradox. Web 2.0 (including social media) is radically transforming society and entire industries — Facebook has about 800 million users, Twitter has about 500 million usersMcKinsey & Company predicts as much as ~$1 trillion/year in productivity gains from the Web 2.0 “revolution,” with anticipated productivity gains of up to 35 percent for some activities. Clay Shirky believes Web 2.0 radically lowers transaction costs, making fundamentally new methods of production feasible (for example, the volunteer community that builds/edits Wikipedia).

So far, and paradoxically (considering how much Web 2.0 has touched our lives), no productivity revolution is visible. During 1948-2011, U.S. non-farm business labor productivity (i.e., output per work hour) grew by an average of only 2.2 percent/year, and during 2007-2011, by just 1.8 percent/year. Looking to the future, don’t hold your breath awaiting a Web 2.0 productivity revolution. In historical context, Web 2.0 is an incremental communications improvement — not a revolutionary one.

For most of human history, productivity growth was negligible, causing per capita income to remain the same from one generation to the next. Significant productivity growth only began about 250 years ago with the Industrial Revolution. A major contributor to this productivity growth came from rapid improvement in communications.

Until the telegraph’s appearance about 200 years ago, communications moved only at the speed of physical travel, and that speed had been constant for millennia. Prior to the transatlantic telegraph cable in 1866, at least nine days were needed to transmit information between London and NYC. Imagine the inefficiency in running a business when communications between branches took weeks.

Prior to the telegraph: Replenishment of supplies was slow; Prices were highly uncertain for orders from a supplier any distance away; Markets were local (since nothing could be coordinated over a region, let alone a country); Economies of scale didn’t exist, because everything was so localized. In the early 19th century — NYC, Boston and every city in the world was a separate market — with separate prices for grain, food, and so on. The telegraph began to overturn these market limitations by converging prices between different cities, thereby causing productivity growth (which resulted in increasing per capita income).

However, telegraph cables only linked up telegraph offices. Information (conveyed at the speed of light across the Atlantic) traveled only at the speed of the messenger’s pace, horse or vehicle — for that “last mile” to the customer. Speeding up this “last mile” has been a long process. As late as the 1960s, some 10 million telegrams/year were still delivered by hand in the UK.

In 1885, AT&T completed its first commercial telephone line. In 1927, the first commercial transatlantic phone call was made. The mobile phone first became widely available during the 1980s-1990s.

ARPANET (forerunner of the Internet) commenced in the 1960s, and email accounts in the 1970s. The World Wide Web arrived circa 1993.

These communications improvements weren’t just about increasing speed, expanding service and improving quality — they were also about reducing cost. When transatlantic telephone service began in 1927, a three-minute call cost $75 ($750 in current dollars). By the 1990s, companies could make calls between London and NYC for just pennies per minute.

At $750 for a three-minute call, only the highest value information will be conveyed. As transmission costs approach zero, less valuable information can be shared with more people.

Decreased communication costs (almost zero) make it feasible for Kim Kardashian to communicate with her 16 million Twitter followers very frequently, but the economic value of these communications is low (perhaps no more than a penny per follower). This isn’t a value judgment; it’s an observation. Even before social media, celebrities communicated with their followers (through snail mail and fan clubs), at a cost of pennies per follower. It was the Web 2.0 cost reduction, to almost zero marginal communication cost per follower, that created Ms. Kardashian’s massive communication opportunities.

Web 2.0 brings us one step closer to frictionless communication, and will impact everything. Many newspapers, independent booksellers and encyclopedia makers have gone out of business (or will soon do so) because of Web 2.0′s impact. But the aggregate economic gain from these transformations (e.g., buying books online, celebrities communicating with millions of fans, Wikipedia, and so on) won’t have a revolutionary effect on productivity — because the existing alternatives were pretty good/relatively inexpensive. We’d already gone the lion’s share of the journey to frictionless communication, even before Web 2.0.

This isn’t just a story about communications and productivity. In the last 200 years, as economist Robert Gordon noted, we’ve benefited from many one-shot productivity gains — in public health, infrastructure, etc. The quick wins and easy gains are behind us. Just maintaining 2 percent/year productivity growth will require hard work and difficult choices. Web 2.0 will provide no miracle solutions.

Steven Strauss was founding managing director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is a 2012 Advanced Leadership Fellow at Harvard University. He has a Ph.D. in Management from Yale University and over 20 years’ private sector work experience. You can follow him on Twitter @Steven_Strauss, or on Facebook.

This piece is cross-posted from the Huffington Post with permission.

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Richard Wood Richard Wood

Richard has published papers on wages policy, the taxation of financial arrangements and macroeconomic issues in Pacific island countries. Views expressed in these articles are his own and may not be shared by his employing agency. He is the author of How to Solve the European Economic Crisis: Challenging orthodoxy and creating new policy paradigms