Remarks by Chairman Alan Greenspan
Technology and the economy
Before the Economic Club of New York, New York, New York
January 13, 2000
We are within weeks of establishing a record for the longest economic
expansion in this nation's history. The 106-month expansion of the
1960s, which was elongated by the Vietnam War, will be surpassed in
February. Nonetheless, there remain few evident signs of geriatric
strain that typically presage an imminent economic downturn.
Four or five years into this expansion, in the middle of the 1990s, it
was unclear whether, going forward, this cycle would differ
significantly from the many others that have characterized post-World
War II America. More recently, however, it has become increasingly
difficult to deny that something profoundly different from the typical
postwar business cycle has emerged. Not only is the expansion reaching
record length, but it is doing so with far stronger-than-expected
economic growth. Most remarkably, inflation has remained subdued in the
face of labor markets tighter than any we have experienced in a
generation. Analysts are struggling to create a credible conceptual
framework to fit a pattern of interrelationships that has defied
conventional wisdom based on our economy's history of the past half
When we look back at the 1990s, from the perspective of say 2010, the
nature of the forces currently in train will have presumably become
clearer. We may conceivably conclude from that vantage point that, at
the turn of the millennium, the American economy was experiencing a
once-in-a-century acceleration of innovation, which propelled forward
productivity, output, corporate profits, and stock prices at a pace not
seen in generations, if ever.
Alternatively, that 2010 retrospective might well conclude that a good
deal of what we are currently experiencing was just one of the many
euphoric speculative bubbles that have dotted human history. And, of
course, we cannot rule out that we may look back and conclude that
elements from both scenarios have been in play in recent years.
On the one hand, the evidence of dramatic innovations--veritable shifts
in the tectonic plates of technology--has moved far beyond mere
conjecture. On the other, these extraordinary achievements continue to
be bedeviled by concerns that the so-called New Economy is spurring
imbalances that at some point will abruptly adjust, bringing the
economic expansion, its euphoria, and wealth creation to a debilitating
halt. This evening I should like to address some of the evidence and
issues that pertain to these seemingly alternative scenarios.
What should be indisputable is that a number of new technologies that
evolved largely from the cumulative innovations of the past half century
have now begun to bring about awesome changes in the way goods and
services are produced and, especially, in the way they are distributed
to final users. Those innovations, particularly the Internet's rapid
emergence from infancy, have spawned a ubiquity of startup firms, many
of which claim to offer the chance to revolutionize and dominate large
shares of the nation's production and distribution system. Capital
markets, not comfortable dealing with discontinuous shifts in economic
structure, are groping for sensible evaluations of these firms. The
exceptional stock price volatility of most of the newer firms and, in
the view of some, their outsized valuations, are indicative of the
difficulties of divining from the many, the particular few of the newer
technologies and operational models that will prevail in the decades
How did we arrive at such a fascinating and, to some, unsettling point
in history? The process of innovation, of course, is never-ending. Yet
the development of the transistor after World War II appears in
retrospect to have initiated an especial wave of innovative synergies.
It brought us the microprocessor, the computer, satellites, and the
joining of laser and fiber-optic technologies. These, in turn, fostered
by the 1990s an enormous new capacity to disseminate information. To be
sure, innovation is not confined to information technologies. Impressive
technical advances can be found in many corners of the economy.
But it is information technology that defines this special period. The
reason is that information innovation lies at the root of productivity
and economic growth. Its major contribution is to reduce the number of
worker hours required to produce the nation's output. Yet, in the
vibrant economic conditions that have accompanied this period of
technical innovation, many more job opportunities have been created than
have been lost. Indeed, our unemployment rate has fallen notably as
technology has blossomed.
One result of the more-rapid pace of IT innovation has been a visible
acceleration of the process of "creative destruction," a shifting of
capital from failing technologies into those technologies at the cutting
edge. The process of capital reallocation across the economy has been
assisted by a significant unbundling of risks in capital markets made
possible by the development of innovative financial products, many of
which themselves owe their viability to advances in IT.
Before this revolution in information availability, most
twentieth-century business decisionmaking had been hampered by wide
uncertainty. Owing to the paucity of timely knowledge of customers'
needs and of the location of inventories and materials flowing
throughout complex production systems, businesses, as many of you well
remember, required substantial programmed redundancies to function
Doubling up on materials and people was essential as backup to the
inevitable misjudgments of the real-time state of play in a company.
Decisions were made from information that was hours, days, or even weeks
old. Accordingly, production planning required costly inventory safety
stocks and backup teams of people to respond to the unanticipated and
Large remnants of information void, of course, still persist, and
forecasts of future events on which all business decisions ultimately
depend are still unavoidably uncertain. But the remarkable surge in the
availability of more timely information in recent years has enabled
business management to remove large swaths of inventory safety stocks
and worker redundancies.
Information access in real time--resulting, for example, from such
processes as electronic data interface between the retail checkout
counter and the factory floor or the satellite location of trucks--has
fostered marked reductions in delivery lead times and the related
workhours required for the production and delivery of all sorts of
goods, from books to capital equipment.
The dramatic decline in the lead times for the delivery of capital
equipment has made a particularly significant contribution to the
favorable economic environment of the past decade. When lead times for
equipment are long, the equipment must have multiple capabilities to
deal with the plausible range of business needs likely to occur after
these capital goods are delivered and installed.
With lead times foreshortened, many of the redundancies built into
capital equipment to ensure that it could meet all plausible
alternatives of a defined distant future could be sharply reduced. That
means fewer goods and worker hours are caught up in activities that,
while perceived as necessary insurance to sustain valued output, in the
end produce nothing of value.
Those intermediate production and distribution activities, so essential
when information and quality control were poor, are being reduced in
scale and, in some cases, eliminated. These trends may well gather speed
and force as the Internet alters relationships of businesses to their
suppliers and their customers.
The process of innovation goes beyond the factory floor or distribution
channels. Design times and costs have fallen dramatically as computer
modeling has eliminated the need, for example, of the large staff of
architectural specification-drafters previously required for building
projects. Medical diagnoses are more thorough, accurate, and far faster,
with access to heretofore unavailable information. Treatment is
accordingly hastened, and hours of procedures eliminated.
Indeed, these developments emphasize the essence of information
technology--the expansion of knowledge and its obverse, the reduction in
uncertainty. As a consequence, risk premiums that were associated with
all forms of business activities have declined.
Because the future is never entirely predictable, risk in any business
action committed to the future--that is, virtually all business
actions--can be reduced but never eliminated. Information technologies,
by improving our real-time understanding of production processes and of
the vagaries of consumer demand, are reducing the degree of uncertainty
and, hence, risk. In short, information technology raises output per
hour in the total economy principally by reducing hours worked on
activities needed to guard productive processes against the unknown and
the unanticipated. Narrowing the uncertainties reduces the number of
hours required to maintain any given level of production readiness.
In economic terms, we are reducing risk premiums and variances
throughout the economic decision tree that drives the production of our
goods and services. This has meant that employment of scarce resources
to deal with heightened risk premiums has been reduced.
The relationship between businesses and consumers already is being
changed by the expanding opportunities for e-commerce. The forces
unleashed by the Internet are almost surely to be even more potent
within and among businesses, where uncertainties are being reduced by
improving the quantity, the reliability, and the timeliness of
information. This is the case in many recent initiatives, especially
among our more seasoned companies, to consolidate and rationalize their
supply chains using the Internet.
Not all technologies, information or otherwise, however, increase
productivity--that is, output per hour--by reducing the inputs necessary
to produce existing products. Some new technologies bring about new
goods and services with above average value added per workhour. The
dramatic advances in biotechnology, for example, are significantly
increasing a broad range of productivity-expanding efforts in areas from
agriculture to medicine.