Can economists forecast technological progress?

As regular readers know, my co-blogger Erik Brynjolfsson has been in a continuing debate with Bob Gordon about what the next few decades are likely to bring technology-wise. There is no easy resolution of that debate as it ultimately depends on your view regarding whether technological progress will continue to have an impact on productivity growth. If I had to bet, I would side with Erik because (a) I’ve seen robots and they are cool and (b) I prefer to anticipate a world where technology is important. You’ll note that there is nothing particularly scientific about my assessment there.

I was thinking about this again while listening to this Freakonomics podcast on Bitcoin. As I have said before, Bitcoin optimists tend to be people who have actually looked closely at it. Pessimists tend to be those who have not. That podcast made the point that economists aren’t very good at forecasting technology. I would say that nobody is really that good at forecasting at the micro level. Occasionally, I have fun trying but it is always just fun. But the podcast quoted Paul Krugman making the following prediction in 1998:

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.

Now this wasn’t some forecast about wearables or what have you, but the whole Internet. I’m going to guess that Krugman would walk back from it now and the podcast was really just using this as an example of an objectively smart economist getting technology wrong. But I went and found the original article and decided that I shouldn’t let Krugman get off that easy for this 1998 mistake.

The article is entitled (and I am not making this up), “Why most economist’s predictions are wrong.” It starts with Herman Kahn who wrote a book in 1967 about what the future would look like in the year 2000. (Actually, Krugman doesn’t mention this but the book was co-authored (and again I can’t emphasise enough that I am not making this up) with one Anthony J. Weiner.)

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.

Of course, basically, Kahn, like Keynes 37 years earlier, saw technological progress, increasing living standards and more leisure. And, as we know, we got the living standards bit (although not necessarily as widespread as we would like) but not the more leisure. In fact, the opposite. Krugman claimed that what Kahn got wrong was to over-forecast technological progress.

In terms of the type of tech progress that Kahn predicted, Krugman concedes he was not that far off:

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.

But the weights in terms of likelihood was another matter:

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.

Hmm. OK. But methinks that Krugman is a little loose here. What was Herman Kahn’s number one — I repeat NUMBER ONE — prediction?

1. Multiple applications of lasers and masers for sensing, measuring, communication, cutting, heating, welding, power transmission, ilumination, destructive (defensive), and other purposes

Now this was an amazing prediction for 1967 and, as I don’t have a copy of the book, I can’t delve into it further. But even in 1980 when AT&T was broken up it was done so on the basis that satellites were the important way of delivering long distance telecommunications. Now when we look at this, it is laughable. Lasers not only brought about the telecommunications revolution in the form of optic fibre cables but with it surely the broadband revolution (at least insofar as exchange to network interactions are concerned). In other words, it is not much of a stretch to give Kahn some credit for predicting the Internet.

Having lambasted Kahn for being optimistic, Krugman then goes on to make his own pessimistic predictions including the one I referred to above. Here are the rest:

* 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.

OK predictions 1, 2 and 3 are economic predictions. They are wrong but economists get economic predictions wrong all the time. Prediction 6 is also economics and we did actually see that for a time and it is too early to tell. Predictions 4 and 5 were wrong and very wrong. Wrong and wrongerer than Kahn’s appear to have been. But I guess Krugman proved his point about economists being bad at predictions.

But the problem is that, despite the title of the article, Krugman never explains why economists are wrong at predicting technological progress. Krugman finally concludes:

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.

But that is it. So I write this post with a challenge. OK Paul, economists might well be bad at technological predictions, but why? And are they worse than other people?