2.1.1.2Trends in Information Technology Capital Since 1977

The evolution of IT has been well-documented for the last thirty years. Since the 1960s, the density of transistor circuits has increased at a rate of 10% per year. In 1964, Gordon Moore, co-founder of Intel, observed that the density of transistors in semiconductor chips doubled every 18 months. This became known as “Moore’s law.”

According to a report on information technology from the OECD (1997), between 1987 and 1995 the size of the IT market more than doubled in the United States, increasing from $105 billion to $213 billion in real terms (1995 dollars). Spending on PCs and workstations alone increased from less than $50 billion to more than $130 billion per year between those years. Since the mid-1980s, the number of connections to a network has doubled every year. As a result, the total stock of IT capital in the U.S. economy has more than doubled between 1977 and 1987, and is six times greater in 1997 than in 1977, as shown in Figure 2.2. In comparison, the non-IT capital stock did not even double during the same period. Figure 2.2 also shows the evolution of the IT proportion of total capital (IT ratio), defined as the ratio of IT capital stock to total capital stock. The relative growth of the IT ratio followed the same trend as the absolute level of capital stock trend, confirming a much lower growth in non-IT capital stock.

Figure 2.2Trends in Information Technology Capital Stock, Absolute and Relative Levels 1977-1997

Looking at Figure 2.2 there seem to be three distinct sub-periods characterizing the evolution of the IT ratio between 1977 and 1997. The first period runs from 1977 to 1986, with an average annual growth rate of the IT ratio of 6.6%. There seems to be a plateau during the second period 1987-1993, with an average annual growth rate of only 3.3%. The growth in the first two periods seems to follow a linear trend, whereas the third period seems to be characterized by an exponential growth in the share of IT in total capital. The average annual growth rate for this period is 10.5%. A recent article from The Economist (2000) confirms this trend, reporting that spending in IT equipment and software now accounts for about half of all investment by American firms.

In this section, using the BEA’s definition of IT capital as information processing equipment, I reported the tremendous growth in this form of capital over the last thirty years. This significant growth is reported in absolute as well as in relative terms (IT ratio). The following section focuses on productivity.