The Economy Of The Future?

By GEORGE J. CHURCH

Story has it that a Washington taxi driver once told an inquiring passenger that the motto on the National Archives Building, WHAT IS PAST IS PROLOGUE, really means "You ain't seen nothin' yet." In the case of the Internet and American business, the motto could be changed to WHAT IS PRESENT IS PROLOGUE--but it would translate the same way.

By many gauges, the Internet is already huge. As a business communications tool, it surpassed the telephone last year, when 3 billion e-mail messages were sent each day. Revenues of what might be called the Internet economy last year surpassed $300 billion, according to a University of Texas study, and experts say that number could double in 1999. The U.S. economy is so enormous that we are just beginning to see the effects of the Internet--lower inflation, more productivity, faster growth and a boom longer than anyone had expected, just a few months shy of being the longest in U.S. history. Profound as these effects are, they are only a foretaste of what could change the economy, and the way business is conducted, almost beyond recognition.

But please put heavy emphasis on the words could and almost. A gathering of TIME's Board of Economists, which met in San Francisco and was largely composed of specialists in the workings of nearby Silicon Valley, left a clear message: members were not at all prepared to forecast for the country an automatic or painless ascent into an Internet nirvana.

The Internet is weaving itself into the fabric of the economy at a breathtaking pace; on that point the economists were in full agreement. But they stopped short of calling it a revolutionary force, on the order, say, of the development of electricity as a power source for industry in the early 20th century. They did note that the Internet, like electricity, is insinuating itself in ways that make the future unthinkable without it. Says Barry Newman, director of technology, corporate and investment banking at Banc of America Securities: "You're going to see the Internet become a core portion of every business, of the way you think about entertainment, communication and information."

One difficulty is noted by Hal Varian, dean of the School of Information Management and Systems at the University of California, Berkeley: there are different definitions of just what the Internet is. "In a very narrow sense," he says, "it might be defined as a standardized protocol for wide-area computer networks." A broader definition, he explains, would be "the entire system of computers, plus the LANS [local area networks], plus the wide area network." That would come close to embracing most of what is generally considered information technology (IT).

That said, Paul Romer, professor of economics at the Stanford Graduate School of Business and an expert in economic-growth theory, specifically warns against a "technological determinism"--a belief that technological progress will continue along a fixed trajectory regardless of the choices people make. He predicts that "the Internet will reshape society, but also that society will reshape the Internet through its decisions about taxation, antitrust policy, support for new types of standards organization, protection of privacy and intellectual property, and the regulation of bandwidth connections to the home."

For the moment, the Internet is having only one mildly adverse effect: it is a wild card that makes old ratios obsolete and the performance of the economy increasingly difficult to forecast. Allen Sinai, chief global economist of Primark Decision Economics, a forecasting firm, nonetheless takes a stab. His prediction: "This great inflationless prosperity," of which the Internet is part, may be sustained "for yet another year or two or three."

Specifically, Sinai expects that national output will grow more than 3% in the year 2000, down from nearly 4% for all of 1999; productivity will increase more than 2% compared with about 2.5% this year; the Consumer Price Index will rise 2.5% vs. about 2% in '99, and unemployment will drop still further to a low of 4% before closing 2000 a bit higher. The figures are a quarter to a half percentage point better than the estimates Sinai would make without IT and the Internet. The biggest risk to these bright prospects, he says, is that the Federal Reserve will jack up interest rates higher than is anticipated to control the economic effervescence.

But without the Internet, he adds, by now "we probably would have an inflation problem we couldn't handle," which would have led the Fed to crack down earlier and harder than it has, and brought an end to the golden boom. The Net enables the consumer (or business purchasing agent) to easily find any particular item and buy it at the lowest price--one reason the Internet and IT can be a powerful anti-inflationary force. Another reason is the continuing decline in the prices of computers and related equipment, which have become important enough in business and household costs to weigh heavily in price indexes.

Despite these achievements, Varian believes, IT and the Internet are still in as embryonic a stage as electric power was 80-odd years ago. "Up until 1920," he says, "companies used large electric motors to drive central steam or waterwheel shafts. It was only after the '20s that industry learned to build small electric motors to power individual pieces of equipment, and that's when [electricity] changed work flow and significant productivity gains started to show up." It's a similar situation with IT and the Internet, he says. "Most industries really haven't learned how to use them. These technologies are just replacing processes that are already in operation. So my guess is that the major productivity gains are yet to come with the Internet and even with computerization in general."

And what will the economy look like when the Internet's full capabilities are realized? Since that depends heavily on what new uses may be invented, the question is unanswerable in any detail. But some general trends are foreseeable.

Obviously, the already marked speedup in the pace at which business operates will continue. Says Tapan Munroe, an economics professor at the University of San Francisco, who has his own consulting firm: "We're talking about product life cycles of two to three years or even less. We're talking about industry life cycles of less than a decade." Newman notes that this hectic pace poses "a massive challenge for people with existing successful businesses," whose "natural tendency is to focus on what has made the business successful." They are vulnerable to competition from "upstarts" who "have the advantage of starting today at the state of the art" and have nothing to lose.

Paradoxically, perhaps, at least some board members think the accelerated pace of business can lead to more leisure for workers--in about 15 years, says Varian. The reasoning: more work can be done in less time. Romer is unsure about leisure, but predicts another, generally beneficial aspect of the speedup. Faster economic growth will lead to higher wages, he says, and as a result, "the cost of people's time will be going up. That's a trend you can count on into the far future."

People will put a higher value on their time off as well as on the job, Romer continues, and this will promote and be aided by the accelerating growth of the Internet. Clearly, shopping online takes far less time than driving to five different stores.

For all that, TIME's board refuses to proclaim a "new economy" from which recessions have been banished. The Internet and IT may make downturns milder and less frequent, partly by tamping down the wild inventory swings that have intensified past slumps. Computers make it much easier to match orders and deliveries of goods to sales. On the other hand, Sinai senses an enhanced source of instability--the frenzied pace of stock and real estate trading, speeded up by the Internet and intensified by the enthusiasm of investors for Internet stocks, some of which may take many years to justify their current prices, if they ever do. The result may be a "bubble" of inflated prices for some Internet and IT companies, ending in a crash. Varian observes that the vastly greater speed of business information collecting and decision making ought to help executives avoid costly mistakes. But, he adds, there is a "dark side of the force. When you do make a mistake, it can be a lot bigger."

Berkeley's Varian mentions a more specific problem: "constructing a legal infrastructure for contracting and doing business in cyberspace which requires standards for things such as digital signatures, time stamping, antitrust, taxes, content regulation, intellectual property, privacy, jurisdiction, liability." The industry needs uniform standards covering all these issues, he says, and "it's very naive to think [federal and state] governments aren't going to play a significant role in setting such legal rules."

Federal, state and local governments already play a major role in education and thus may hold the key to solving one crucial question hanging over IT's future. Actually, there are two questions: Will schools produce as many trained people as will be needed, and will enough of those technically skilled graduates come from poor and minority groups to make IT the great equalizer between economic haves and have-nots foreseen by some would-be prophets? At best, there is a long way to go. Right now, says Varian, "educational institutions are moving in fits and starts" to integrate computers into classroom work. Romer asserts that education is "probably the worst laggard in coming up with better ways to do things," and it will have to change because the skills of the workforce can no longer be improved just by increasing "seat time," the number of years a person stays in school. "We can't ask people to train for the workforce until they're 25, 30, 35," he says, so it will be necessary "to increase the amount of skill we impart per year of education."

"We've got to improve education at every level," says Varian, "including elementary, high school, college and, most important, continuing and on-the-job education." Otherwise, a worsening skills shortage could dim the promise that the Internet will help narrow the gap between rich and poor. The gap could get even wider.

Board members also point out that the Internet can be a disruptive force, because it bypasses many business functions and can lead to their demise. Travel agencies could be in very, very difficult shape, for instance. Says Newman: "I think you will eventually see some change in the distribution of automobiles, because people detest the process" of getting all their information from dealers; they prefer to gather data on the Net. Varian believes that shopping malls will continue to draw people, but many consumers will come only to visit movie theaters, restaurants, cafes and other entertainment outlets. He thinks shopping at stores will be a smaller fraction of the economic transactions occurring at the mall.

All these, of course, are examples of what Joseph Schumpeter, one of the giants of economics, called "creative destruction"--the replacement of old ways of doing business by better ones. Still, these changes will wipe out some jobs and, Munroe fears, stir resistance to the Internet among many people who feel economically threatened.

Overall and long range, however, the growth of the Internet and IT promises much greater gains than losses: in economic growth, productivity, consumption, lower inflation and even, maybe, more leisure. In sum, a better, richer life for almost everyone. To realize the promise of IT, and minimize the risks, we must experiment with new policies and new institutional structures, make provisional decisions about where we should be headed and then experiment some more. The bright side, says Romer, is that it's doable: "We control this process." Both present and past may be prologue, and indeed we ain't seen nothin' yet, but the story line after the prologue will be determined not by the inexorable commands of a technological god, but by plain old humans.

--With reporting by Bernard Baumohl/San Francisco

With reporting by Bernard Baumohl/San Francisco