out ways of using the Net to cut out human beings and paper from the complex business of CASE ST ordering components, managing stocks, maintaining equipment, and so on. Humans make mistakes and paperwork costs money and time. You know the story GROUP: about an automated factory that was run by a man and a dog? Why a man and a dog? The man was there to feed the dog and the dog was there to bite the man if he tried to touch any of QUESTI the machinery. The Internet makes it possible to apply this principle to the entire production process. But it takes time to learn how to do it, and many factories are in the transition process, spending money on new kit and making it work, without yet obtaining the savings in labour and the improvement in quality and time that the technology promises. 1 . The first assessment of the impact of business-to-business investment from people like Goldman Sachs suggests that it will boost long-term productivity growth and reduce the sustainable rate of unemployment and thereby boost economic growth of developed countries by one percentage point a year for five years. There is an offset to this over the next five years from a decline in the growth of the labour force, but the very long-term effect will still be to boost economic activity by about the 5 percent figure. My own guess, for what it is worth, is that this estimate is both too high and too low. In the short-term it is too high. One percentage point a year across the entire economies of the developed countries requires an enormous shift in the way every business operates. It is a tall order, On the other hand, the effect of this new technology will not just last five or ten years. This will affect the way we live for a generation or more. It will take a full generation refining the technology and figuring out how to use it before we can be sure that we have exploited, its full potential. In the long term the 5 per cent figure is therefore too low. The markets, of course, have bought the hi-tech story, up-rating these stocks again and again. As my colleague Jeremy Warner has pointed out on several occasions, were it not for a couple of hi-tech sectors we would, in Britain at least, be in a bear market. Have the markets pushed too far, demanding with these ratings improvements in growth that cannot be achieved? Goldman here argues that it is "a tough call, but not necessarily fatal". Interestingly, it also believes that the trigger for a downgrading of equities will not be the aggressive valuations put on technology stocks. If there is a trigger, it will most probably be a reassessment of the cost of capital (higher interest rates) or a reassessment of the earnings outlook. They do not see either happening soon and remain reasonably confident of the hi- tech sector. We will see. The big point here surely is that we are seeing something akin to the railways, the steamship, the telegraph, the radio, the car, maybe even the moving production line of Henry Ford. New technologies fuel economic growth. They also inspire booms. Some of the protagonists get immensely rich. Others fail. The only thing we can be really sure of is that ultimately the certain beneficiaries are the consumers. 10 INNOVATION MCASE STUDY THREE YES, the Internet is helping to crunch down prices, but by how much - and what else is it doing to the whole production process? This week the UK debate about interest rates has been given a new twist by Sushil Wadhwani, a member of the Bank of England monetary committee. He has just written a paper that looks at the lessons from recent US experience and argues that after a lag, similar effects should become apparent here. Crucially, productivity growth may be faster than expected as a result of the Net. The reason that much of an increase in productivity has not been evident outside America may be eve Jobs partly because the costs of adjusting to the new technology have obscured the gains being made. In any case he believes that business-ta-business e-commerce will result in significant savings in costs. gy? This being Britain, the argument leads into a debate about interest rates. Put crudely, ovation, we do not need higher interest rates to hold down inflation, because the combination of greater competition and rising productivity will do it for us. That spin is understandable. People care about their mortgages, companies care about avigating their borrowing costs, and both care about the level of sterling - though private individuals rather like the strong pound because it makes foreign holidays so affordable, while companies dislike it because it makes exporting tougher. a threat? But seeing the impact of the Internet through the prism of British interest rate policy . is to focus on one tiny effect of a great global phenomenon. What it does to the structure of imply industry, to the nature of competitiveness, to the ability of developed economies to continue hare? delivering productivity gains - all this is vastly more important. And we are still guessing wildly. At most we have three or four years' experience of ink that the impact of the Internet, in practice more like 18 months. In normal economic terms this is nothing, for you cannot really assess the implications of any new technology, or indeed any new economic event, until you have tracked it through a full economic cycle. Once we have come through the next downswing and seen how the Internet has altered the response of the economy to a fall-off in demand then we can start to make some better guesses. But even then they will still be guesses. But we can, thanks to the couple of years of US experience, see some of the issues that matter, and it might be helpful here to identify two: the impact of business-to-business e-commerce and the fragility, or otherwise, of current ratings of technology stocks. The first matters because it will determine the outcome of the key micro-economic issue facing the world: whether the business community really can deliver a sharply improved economic performance. The second matters because it will determine the key macro-economic issue: might a crash of share values be the thing that plunges the world into the next downswing? The starting point with e-commerce is to realise that the bit we all write about, what businesses are doing to use the Net to sell services to the consumer, is much less important than the bit we do not write about, what businesses are doing to use the Net to streamline their production chain. Growth in business-to-consumer e-commerce is tiny compared with business-to-business and the gap is likely to widen. Quite suddenly, companies are figuring