Europe lags behind the US in terms of productivity, but such levels were not achieved in the United States until high-tech equipment achieved critical mass

The second half of the 1990s saw an astonishingly large productivity boom in the US. Moreover, the boom did not end when the recession began: the unemployment rate has risen by two percentage points over the past six quarters, yet production has risen by 2.4 per cent.

But why was the boom in productivity so tightly confined to the US? There is, after all, nothing in the air or water that makes high- tech equipment work better in San Francisco or New York than in Frankfurt, Lyons or Edinburgh.

In the past four years, analysts have puzzled over slow relative growth outside the US - particularly in Europe.

Some analysts from the Bundesbank suggested it was the result of different ways of calculating production in Europe but this would fail to fully explain the component of the US productivity acceleration, found not in computer-making but in computer-using industries.

The US Federal Reserve moved towards a consensus that the real problem was too much European red tape: that businesses invest heavily in high-tech equipment only when they can smell immediate productivity gains from reorganisation and restructuring; and that western Europe's steps towards economic reform and liberalisation have, so far, been too small for businesses to be confident that they will be allowed to re-organise and restructure.

Keynesians offered an opposing diagnosis: that businesses invest heavily in high-tech equipment only when they need to satisfy increased demand and European central bankers, unwilling (as Alan Greenspan, chairman of the Fed, was in the 1990s) to take risks on the inflation side in order to expand employment, have slowed the transformation.

Still others said the boom was oversold - that because of the Nasdaq bubble the US had pushed employment too high and invested too much in telecommunications infrastructure and computer equipment that would never be very useful. According to this theory, the US boom was only a boom in production, not an increase in economic welfare.

It would be unlikely if any of these stories were completely false: some socially unproductive investments were made during the Nasdaq bubble; some European companies have held back on investment plans because of slack demand; others have held back on investment plans because of various obstacles to economic flexibility; and there are important differences between US and many European statistical systems in their ability to track economic growth.

Yet I cannot help but be reminded of the US just a decade ago, when commentators and analysts speculated that all the investment in high-tech equipment was wasteful and dissipative.

People in Washington, DC, observed the ferment of innovation in Silicon Valley but dismissed the possibility that it would have a big macroeconomic impact. After all, steadily and rapidly increasing computer power had already been at work for three decades without having any effect on aggregate productivity.

What the conventional wisdom of a decade ago in the US missed was that you do not expect growing sectors - even rapidly growing ones - to have an impact on aggregate statistics until they achieve critical mass.

This is an old lesson, first taught by the observation that historians of technology think Britain's industrial revolution took place between 1780 and 1830, when its key inventions were made, while social historians think the revolution took place between 1830 and 1870, when the new industries of steam, iron and mass production achieved critical mass and turned Britain from a nation of shopkeepers into one of factory workers and industrialists.

Indeed, a decade ago Daniel Sichel of the Federal Reserve pointed out that it should have been no surprise that, back then, the aggregate impact of the computer revolution was small - it was, after all, proportional to how fast computer prices were declining, multiplied by the share of national income spent on high technology, multiplied by the share of total production attributable to the use of high technology.

None of these numbers was very big (although they were growing rapidly) and the product of three not very big numbers will be a small number.

However, as computers and communications equipment continued to spread throughout the economy, expenditure on high-tech equipment and the share of income attributable to it continued to grow and did achieve critical mass. The result was the productivity boom that is still continuing.

Much of western Europe is in the same situation as the US in the early 1990s, simply waiting for the next turn of the business cycle and the continued diffusion of technology to achieve the necessary critical mass.

The computer and communications revolution is already transforming the economies of the Republic, Finland, Sweden and Australia. My money is on western Europe's revolution being relatively close behind. - (Financial Times Services)

The writer is professor of economics at the University of California at Berkeley.