Communication Capital, Metcalfe's Law, and U.S. Productivity Growth

Abstract

This paper analyzes the contribution of network externalities to the pickup in U.S. productivity in the early 2000s. The Internet and wireless communication are treated as the central mechanisms of ICT-driven productivity growth. The approach contrasts with the dominant view in the macro-productivity literature, which places microprocessor speed and computational capacity at center stage (e.g., Jorgenson 2001). The usual sources-of-growth model is adapted for network effects and network utilization, and new metrics for communication capital and its productivity are introduced. The adapted model and metrics significantly aid understanding how the spread of high-speed networking and wireless communications (via Metcalfe’s Law and ICT as a GPT, or “network effects” for short) have profoundly shaped the modern productivity performance of the United States. Under exceedingly modest assumptions, the model and metrics developed in this paper suggest network effects contributed nearly 0.5 percentage points to productivity growth annually from 2000 to 2007, or 32 percent of the overall change in MFP.