The Weight of GDP – CONTINUED

The correlation between growing economic activity and growing weight of real GDP apparently peaked in the late 1970s. In recent years, the conceptual contribution to economic activity has reflected importantly the explosive growth in information gathering and processing techniques, which have greatly extended our capability to substitute ideas for physical volume.

In the years ahead, telecommunications and advanced computing will doubtless take on an even greater role. By expediting the transfer of ideas, information technology creates value by facilitating the substitution of intellectual for physical labor in the production process, much as the American railroads in an earlier time created value by transferring physical goods to geographic locations where relative shortages made those goods more valuable. At the turn of the last century, for example, we created economic value in the United States by moving iron ore from Minnesota’s Mesabi Range down to furnaces in Pittsburgh, where it was joined with West Virginia coal to produce steel. In today’s environment, economic value is increasingly created by fitting ever smaller silicon chips ever closer together with still larger data capacity than earlier, much bulkier units.

At least to date, Moore’s law still prevails. (Though as Gordon Moore himself recognized, miniaturization has physical limits that some see approaching in the near term. Moore’s law is the popular name for the prediction made by Intel cofounder Gordon Moore that the number of transistors per integrated circuit, or microchip, will roughly double every two years.) This process dramatically lowered the prices of information processing equipment in the 1990s which in turn contributed to a rise in multifactor productivity in the late 1990s and early 2000s (see chart).

Two clear benefits of the economy’s “weight loss” are the reduced depletion of the world’s finite natural resources in the context of growing populations and the expansion of international trade. Obviously, the smaller the bulk and the lower the weight, the easier it is to move goods across national boundaries. High-value computer products are a major and increasing factor in global trade. Since 2008, however, the share of global trade relative to global GDP has flattened.

Also implicit in the downsizing of products is the increased integration of many of the world’s production facilities. Inflationary bottlenecks tend to emerge when domestic productive facilities are pressed to capacity by burgeoning domestic demand. But if additional supplies from other world producers can be made readily and quickly available, such pressures can be significantly eased, effectively reducing the level of domestic capacity required for any given global demand for a commodity. The cost of moving gravel across continents makes it difficult to envisage foreign gravel pits as backup for excess domestic demand.

But the ease with which downsized electronic components can be moved essentially integrates much of the world’s electronic component capacity. Misplaced or displaced production facilities become a much smaller problem.

Thus, as we move beyond the current crisis and the general downsizing of economic output continues, worldwide production and inventory controls become far more feasible and price pressures associated with production dislocations less likely. One can only imagine the downsizing that will emerge with maturing nanotechnology and 3-D printing. Goods or their electronic versions may eventually be moved in a manner that brings to mind Star Trek’s instantaneous teleportation devices.