The Productivity Paradox

In 1987 Robert Solow, a Nobel prizewinning economist, famously remarked that “you can see the computer age everywhere but in the productivity statistics.”  The question he and others were asking was: Why is productivity growth low if information technology is advancing rapidly? In 2018, this “Productivity Paradox” has again become one of the hottest topics in economics. As you will see below, it turns out that you and I are the constraints.

How could this be? We own more and more electronic devices giving us access to incredible amounts of information. We use all types of software applications to plan and organize all aspects of our working lives. It is simple to explain this “paradox” when you examine it through the lens of a physical business process.

Before World War II, the majority of employees worked for businesses that manufactured tangible goods. The typical manufacturing process was to turn raw materials (e.g., steel, aluminum, rubber, glass) into a finished product (e.g., an automobile). Availability of raw materials and production capacity of a manufacturing plant determined the quantity of finished product manufactured. If you had enough raw materials, but limited capacity, your output would be lower than what it could be. Conversely, if you had plenty of capacity and limited raw materials, your production would also be lower than what it could be. Only when you had sufficient raw materials and plenty of capacity would you be able to boost your productivity and produce more output. The same is true in today’s knowledge economy.

The majority of employees today work for businesses that provide services. The typical production process turns information (e.g., web form, email, text message, phone call, in-person communication) into decisions (e.g., contact a potential customer, make an investment,  file a legal brief, or recommend a healthcare treatment regime). But here’s the problem. Human beings still read at the same speed as our parents and grandparents. And computers cannot help us because they cannot understand the majority of data we create.

So while information technologies have given us access to an abundance of information (e.g., raw material), they have not increased our capacity to turn that information into decisions (e.g., finished product). In effect, we are stockpiling raw materials without increasing the manufacturing plant’s capacity and expecting production to increase. Said another way, you and I are the bottleneck in the modern production process. And because of this, not only will this Artificial Intelligence hype-cycle be different, it has to be.

Jason Furman, chair of President Obama’s Council of Economic Advisers, wrote in 2016 that “measured productivity growth has slowed in 30 of the 31 advanced economies, slowing from a 2 percent average annual growth rate from 1994 to 2004 to a 1 percent average annual growth rate from 2004 to 2014.” To put this in perspective, “with productivity growth of 2 percent a year, the average standard of living will double roughly every 35 years,” according to Janet Yellen, former chair of the Federal Reserve. “But productivity growth of 1 percent a year means the average standard of living will double only every 70 years.” At the current 1 percent rate, children born within the past ten years cannot reasonably hope to be better off economically than we are today.

Ryan Welsh
Founder and CEO

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