For the last three decades the U.S. corporate sector has invested in computers at an astonishing rate. According to a recent document by Bureau of Economic Analyses (BEA, 1998), the real investments in computers grew by 33.7% per year for the last three decades, 1967- 1997. The nominal investment also showed an annual 13.4% increase for the same period. An obvious reason for this rapid investment growth is the substitution towards computers, the price of which has fallen dramatically at an annual rate of 16%. Jorgenson and Stiroh (1995, 1998) argue that the computers contribution to economic growth mainly comes from the massive substitution due to their price decline.
While the effects of substitution are undoubtedly large, some economists believe that other forces hold sway. Helpman (1998) suggest that the computer engineering is one of the general purpose technologies, which are characterized as a "drastic innovation" and has "a potential for pervasive use in a wide range of sectors." The pervasive use of a general purpose of technology in other sectors can stimulate "innovational complementarities" (Bresnahan and Trajtenberg, 1995).
Dictated by the Moore's law on the supply side and enabled by the ever-increasing applications on the demand side, the price decline of computers has been prolonged for the last half a century and is projected to continue at least another decade. This rapid and lasting price decline is substantially greater than that experienced by any other general purpose technologies (Lipsey, Kekar and Carlaw, 1998). These combined economic forces of substitution and complementary innovation appear to have been associated with higher output and productivity growth by adopting firms (Brynjolfsson and Hitt, 1993, 1995; Lichtenberg, 1995), and may have been foreseen by the stock market as early as 1973. (Greenwood and Jovanovic, 1999).
Although the theories and anecdotes about the "information technology revolution" abound, some observers are still skeptical about the promise of computers. The skeptics point out that the portion of computer hardware in total capital stock still remains quite small. According to the above BEA document, computers' nominal share in fixed private capital is a mere 0.86% in 1997. When Solow initiated the discussion on the "computer productivity paradox" in 1987, the computer share was even lower. Oliner and Sichel (1994) concluded that any computer revolution was still too early to detect given the small share of computer hardware, although they projected a greater real impact of computers in the future.
Download
The Intangible Costs and Benefits of Computer Investments: Evidence from the Financial Markets
