Weightless economy produces a new breed of superstar

When Alan Greenspan, chairman of the Federal Reserve, speaks, anybody with any sense listens carefully - not simply because his remarks will shift the markets, but because he is one of the most perceptive economic commentators around. In one of his less heavily reported speeches last summer, Mr Greenspan noted that the economy weighs about the same now as it did a century ago, even though GDP has grown 20-fold.

On the face of it this is a very odd remark to make about economic growth, but weightlessness, rather than any of the fashionable notions such as globalisation or trade, is the key to understanding the profound changes sweeping over the industrial countries. People think of things of economic value as having physical presence, mass and weight. This is less and less true. The economy is dematerialising.

A quarter of a century ago, the industries that used to create the most value added were - a telling description - the "heavy industries" and the rest of manufacturing: steel, ships, machine tools, cars and washing machines. New electronics, miniaturisation and new materials steadily allowed the same amount of value to be embedded in less weight. For example, cars are smaller, use less steel and are becoming increasingly sophisticated with power steering, stereos andon-board navigational computers. The value added has climbed, the weight has fallen.

There are many examples of physical goods becoming lighter. But more important is the switch in the industrial economies away from manufacturing and towards services. Although we all still want to own cars, and shop for food and clothes, and always will, the share of our income spent on services has risen sharply.

The category "services" lumps together two kinds of activity. There are the "community and personal" services, such as haircuts, cleaning, babysitting, teaching, nursing, and indeed almost all of the public sector. Then there are what could be described as hi-tech services, including software development and gene research, but also financial derivatives and currency trading, making programmes for satellite TV or pop videos. They depend on modern information technology and telecommunications, and have much higher value added than the traditional services.

These industries are growing like Topsy thanks to a regularity known as Moore's Law, after Gordon Moore, Intel chairman. It is that the computing power of a microchip doubles approximately every 18 months. This rate of technical advance has brought prices down incredibly rapidly. Recent figures published in the Computer Industry Almanac, the annual Bible of the industry, showed that the US has two computers for every five people, up from one for every 10,000 people 30 years ago, and predicted that it would be one computer for every two people by the end of the century. The trend has advanced furthest across the Atlantic: world-wide computer density is only about a tenth of the US level. However, there is no definitive empirical evidence on the extent to which any individual economies have become weightless, although this is something that both the Federal Reserve and Bank of England are keen to gather more data on.

That caveat aside, the interesting question is what kind of implications weightlessness has for the economy. Danny Quah, a professor at the London School of Economics and a pioneer of weightless economics, identifies several. Two are particularly interesting. One is the trend that many people tend to describe as globalisation, the diminishing importance of national boundaries. Professor Quah says: "With dematerialisation, the natural marketplace is unbounded." There are no obvious geographical restrictions on where trade in such products can take place. In fact, it can be hard to figure out where the economic activity is happening at all.

The financial markets are a prime example of this. Consider the survey of foreign exchange trading conducted every few years by the Bank for International Settlements. The latest, published during the summer, showed that in 1995 more than $1,000bn worth of currencies was traded daily. London was the main centre, with New York and Tokyo a distant second and third.

The first thing to note is that the BIS, the world's foremost banking authority, can only get this information by sending a questionnaire to the banks concerned, asking for their estimates of the size of their business. Second, the banks filling out the forms assign the trades to one place rather than another according to where their traders have a desk and book their profits or losses. But the dealing is transacted between computers located around the world, and the assignation of trades to London rather than New York is notional. It is not really London that is the biggest centre for foreign exchange trades, but cyberspace.

A second key implication, according to Professor Quah, is that dematerialisation will bring greater inequality. It reinforces the "winner-takes-all" trends in modern economies. A classic paper by US economist Sherwin Rosen, published in 1981, identified the "superstar" phenomenon. Some individuals in fields such as movies can attract incomes far in excess of the average whenever their extra output has almost no extra cost (a Hollywood actor only has to act once and requires no more effort to be seen by another viewer) and wherever reputation will increase demand for that individual rather than another. Trivial differences in talent are magnified into big inequalities in earnings.

The phenomenon is spreading across the weightless industries - not just the field of entertainment but also areas such as medicine, where technology allows stars to spread their expertise over a wider market through operations via video links, for instance.

Professor Quah does not think this kind of inequality is undesirable because it is becoming easier for people to become stars - all it really takes is an idea.

There is no need for huge capital investment to break into dematerialised industries. He thinks that, just as people do not condemn lottery winners because everybody has a chance at winning millions for only pounds 1, the opportunities for mobility will compensate for the increase in inequality.

This might be over-optimistic, for the increase in inequality in the UK and US during the past decade has been controversial. Whether governments can do anything about it is a different matter. What politicians will be able to do in the weightless economy is going to be very different from the policy levers they can pull now, if a growing share of economic activity takes place not only beyond regional or national boundaries but also beyond measurement.

Computers in use per 1,000 people

US World

1975 0.9 0.07

1980 14 1.2

1985 90 7.8

1989 192 18.5

1991 245 25.3

1992 267 29.1

1993 297 33.7

1994 329 38.8

1995 365 44.9

1997 433 57.0

2000 580 90.3

Source: Computer Industry Almanac, 1996