Productivity paradox
Encyclopedia
The productivity paradox was analyzed and popularized in a widely-cited article by Erik Brynjolfsson
, which noted the apparent contradiction between the remarkable advances in computer power and the relatively slow growth of productivity
at the level of the whole economy, individual firms and many specific applications. The concept is sometimes referred to as the Solow computer paradox in reference to Robert Solow
's 1987 quip, "You can see the computer age everywhere but in the productivity statistics." The paradox has been defined as the “discrepancy between measures of investment in information technology and measures of output at the national level.”
It was widely believed that office automation was boosting labor productivity
(or total factor productivity
). However, the growth accounts
didn't seem to confirm the idea. From the early 1970s to the early 1990s there was a massive slow-down in growth as the machines were becoming ubiquitous. (Other variables in country's economies were changing simultaneously; growth accounting
separates out the improvement in production output using the same capital and labour resources as input by calculating growth in total factor productivity, AKA the "Solow residual
".)
The productivity paradox can be seen as an example of diminishing marginal returns on technology and technological saturation in the broader sense of the entire universe of productivity improving technologies
.
He stressed the first explanation, noting weaknesses with then-existing studies and measurement methods, and pointing out that "a shortfall of evidence is not evidence of a shortfall."
Turban, et al. (2008), mention that understanding the paradox requires an understanding of the concept of productivity. Pinsonneault et al. (1998) state that for untangling the paradox an “understanding of how IT usage is related to the nature of managerial work and the context in which it is deployed” is required.
One hypothesis to explain the productivity paradox is that computers are productive, yet their productive gains are realized only after a lag period, during which complementary capital investments must be developed to allow for the use of computers to their full potential.
Diminishing marginal returns
from computers, the opposite of the time lag hypothesis, is that computers, in the form of mainframes, were used in the most productive areas, like high volume transactions of banking, accounting and airline reservations, over two decades before personal computers. Also, computers replaced a sophisticated system of data processing that used unit record equipment. Therefore the important productivity opportunities were exhausted before computers were everywhere. We were looking at the wrong time period.
Another hypothesis states that computers are simply not very productivity enhancing because they require time, a scarce complementary human input. This theory holds that although computers perform a variety of tasks, these tasks are not done in any particularly new or efficient manner, but rather they are only done faster. Current data does not confirm the validity of either hypothesis. It could very well be that increases in productivity due to computers is not captured in GDP measures, but rather in quality changes and new products.
Economists have done research in the productivity issue and concluded that there are three possible explanations for the paradox. The explanations can be divided in three categories:
Other economists have made a more controversial charge against the utility of computers: that they pale into insignificance as a source of productivity advantage when compared to the industrial revolution
, electrification, infrastructures (canals and waterways, railroads, highway system), Fordist mass production
and the replacement of human and animal power with machines.
High productivity growth occurred from last decades of the 19th century until the 1973, with a peak from 1929-1973, then declined to levels of the early 19th century.
There was a rebound in productivity after 2000. Much of the productivity from 1885-2000 came in the computer and related industries.
A number of explanations of this have been advanced, including:
A paper by Triplett (1999) reviews Solow’s paradox from seven other often given explanations. They are:
When computers for general business applications appeared in the 1950s, a sophisticated industry for data processing existed in the form of unit record equipment
. These systems processed data on punched cards by running the cards through tabulating machines
, the holes in the cards allowing electrical contact to activate relays and solenoids to keep a count. The flow of punched cards could be arranged in various program-like sequences to allow sophisticated data processing. Some unit record equipment was programmable by wiring a plug board, with the plug boards being removable allowing for quick replacement with another pre-wired program.
In 1949 vacuum tube calculators were added to unit record equipment. In 1955 the first completely transistorized calculator with magnetic cores for dynamic memory, the IBM 608, was introduced.
The first computers were an improvement over unit record equipment
, but not by a great amount. This was partly due to low level software used, low performance capability and failure of vacuum tubes and other components. Also, the data input to early computers also used punched cards. Most of these hardware and software shortcomings were solved by the late 1960s, but punched cards did not become fully displaced until the 1980s.
Computers did not revolutionize manufacturing because automation
, in the form of control systems, had already been in existence for decades, although computers did allow more sophisticated control, which led to improved product quality and process optimization. Pre-computer control was known as analog control and computerized control is called digital.
Credit card transactions now represent a large percentage of low value transactions on which credit card companies charge merchants. Most of such credit card transactions are more of a habit than an actual need for credit and to the extent that such purchases represent convenience or lack of planning to carry cash on the part of consumers, these transactions add a layer of unnecessary expense. However, debit or check card transactions are cheaper than processing paper checks.
Despite high expectations for on line retail sales, individual item and small quantity handling and transportation costs more than offset the savings of not having to maintain "bricks and mortar" stores. On line retail sales main success was in specialty items, collectibles and higher priced goods. Some airline and hotel discounters have been very successful.
On line commerce was extremely successful in banking, airline, hotel, and rental car reservations, to name a few.
The personal computer restructured the office by reducing the secretarial and clerical staffs. Prior to computers, secretaries transcribed Dictaphone
recordings or live speech into shorthand
, and typed the information, typically a memo or letter. All filing was done with paper copies.
A new position in the office staff was the information technologist, or department.
With networking came information overload in the form of e-mail, with some office workers receiving several hundred each day, most of which are not necessary information for the recipient.
It is well known by software developers that projects typically run over budget and finish behind schedule.
Software development is typically for new applications that are unique. The project's analyst is responsible for interviewing the stakeholders, individually and in group meetings, to gather the requirements and incorporate them into a logical format for review by the stakeholders and developers. This sequence is repeated in successive iterations, with partially completed screens available for review in the latter stages.
Unfortunately, stakeholders often have a vague idea of what the functionality should be, and tend to add a lot of unnecessary features, resulting in schedule delays and cost overruns.
and his colleagues found a significant positive relationship between IT investments and productivity, at least when these investments were made to complement organizational changes. A large share of the productivity gains outside the IT-equipment industry itself have been in retail, wholesale and finance.
Computers revolutionized accounting, billing, record keeping and many other office functions; however, early computers used punched cards for data and programming input. Until the 1980s it was common to receive monthly utility bills printed on a punched card that was returned with the customer’s payment.
In 1973 IBM introduced point of sale
(POS) terminals in which electronic cash registers were networked to the store mainframe computer. By the 1980s bar code readers were added. These technologies automated inventory management. Wal-Mart Stores was an early adopter of POS.
Computers also greatly increased productivity of the communications sector, especially in areas like the elimination of telephone operators. In engineering, computers replaced manual drafting with CAD and software was developed for calculations used in electronic circuits, stress analysis, heat and material balances, etc.
Automated teller machine
s (ATMs) became popular in recent decades and self checkout
at retailers appeared in the 1990s.
The Airline Reservations System
and banking are areas where computers are practically essential. Modern military systems also rely on computers.
Erik Brynjolfsson
Erik Brynjolfsson is the Schussel Family Professor of Management at the MIT Sloan School of Management, the Director of the MIT Center for Digital Business and a Research Associate at the National Bureau of Economic Research...
, which noted the apparent contradiction between the remarkable advances in computer power and the relatively slow growth of productivity
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
at the level of the whole economy, individual firms and many specific applications. The concept is sometimes referred to as the Solow computer paradox in reference to Robert Solow
Robert Solow
Robert Merton Solow is an American economist particularly known for his work on the theory of economic growth that culminated in the exogenous growth model named after him...
's 1987 quip, "You can see the computer age everywhere but in the productivity statistics." The paradox has been defined as the “discrepancy between measures of investment in information technology and measures of output at the national level.”
It was widely believed that office automation was boosting labor productivity
Labor productivity
Workforce productivity is the amount of goods and services that a worker produces in a given amount of time. It is one of several types of productivity that economists measure. Workforce productivity can be measured for a firm, a process, an industry, or a country...
(or total factor productivity
Total factor productivity
In economics, total-factor productivity is a variable which accounts for effects in total output not caused by inputs. If all inputs are accounted for, then total factor productivity can be taken as a measure of an economy’s long-term technological change or technological dynamism.If all inputs...
). However, the growth accounts
Growth accounting
Growth accounting is a procedure used in economics to measure the contribution of different factors to economic growth and to indirectly compute the rate of technological progress, measured as a residual, in an economy...
didn't seem to confirm the idea. From the early 1970s to the early 1990s there was a massive slow-down in growth as the machines were becoming ubiquitous. (Other variables in country's economies were changing simultaneously; growth accounting
Growth accounting
Growth accounting is a procedure used in economics to measure the contribution of different factors to economic growth and to indirectly compute the rate of technological progress, measured as a residual, in an economy...
separates out the improvement in production output using the same capital and labour resources as input by calculating growth in total factor productivity, AKA the "Solow residual
Solow residual
The Solow residual is a number describing empirical productivity growth in an economy from year to year and decade to decade. Robert Solow defined rising productivity as rising output with constant capital and labor input...
".)
The productivity paradox can be seen as an example of diminishing marginal returns on technology and technological saturation in the broader sense of the entire universe of productivity improving technologies
Productivity improving technologies (historical)
Productivity improving technologies date back to antiquity, with rather slow progress until the late Middle Ages. Technological progress was aided by literacy and the diffusion of knowledge that accelerated after the spinning wheel spread to Western Europe in the 13th century...
.
Explanations
Different authors have explained the paradox in different ways. In his original article, Brynjolfsson (1993) identified four possible explanations:- Mismeasurement: the gains are real, but our current measures miss them;
- Redistribution: there are private gains, but they come at the expense of other firms and individuals, leaving little net gain;
- Time lags: the gains take a long time to show up; and
- Mismanagement: there are no gains because of the unusual difficulties in managing IT or information itself.
He stressed the first explanation, noting weaknesses with then-existing studies and measurement methods, and pointing out that "a shortfall of evidence is not evidence of a shortfall."
Turban, et al. (2008), mention that understanding the paradox requires an understanding of the concept of productivity. Pinsonneault et al. (1998) state that for untangling the paradox an “understanding of how IT usage is related to the nature of managerial work and the context in which it is deployed” is required.
One hypothesis to explain the productivity paradox is that computers are productive, yet their productive gains are realized only after a lag period, during which complementary capital investments must be developed to allow for the use of computers to their full potential.
Diminishing marginal returns
Diminishing returns
In economics, diminishing returns is the decrease in the marginal output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant.The law of diminishing returns In economics, diminishing returns (also...
from computers, the opposite of the time lag hypothesis, is that computers, in the form of mainframes, were used in the most productive areas, like high volume transactions of banking, accounting and airline reservations, over two decades before personal computers. Also, computers replaced a sophisticated system of data processing that used unit record equipment. Therefore the important productivity opportunities were exhausted before computers were everywhere. We were looking at the wrong time period.
Another hypothesis states that computers are simply not very productivity enhancing because they require time, a scarce complementary human input. This theory holds that although computers perform a variety of tasks, these tasks are not done in any particularly new or efficient manner, but rather they are only done faster. Current data does not confirm the validity of either hypothesis. It could very well be that increases in productivity due to computers is not captured in GDP measures, but rather in quality changes and new products.
Economists have done research in the productivity issue and concluded that there are three possible explanations for the paradox. The explanations can be divided in three categories:
- Data and analytical problems hide "productivity-revenues". The ratios for input and output are sometimes difficult to measure, especially in the service sector.
- Revenues gained by a company through productivity will be hard to notice because there might be losses in other divisions/departments of the company. So it is again hard to measure the profits made only through investments in productivity.
- There is complexity in designing, administering and maintaining IT systems. IT projects, especially software development, are notorious for cost overruns and schedule delays. Adding to cost are rapid obsolescence of equipment and software, incompatible software and network platforms and issues with security such as data theft and viruses. This causes constant spending for replacement. One time changes also occur, such as the Year 2000 problemYear 2000 problemThe Year 2000 problem was a problem for both digital and non-digital documentation and data storage situations which resulted from the practice of abbreviating a four-digit year to two digits.In computer programs, the practice of representing the year with two...
and the changeover from Novell NetWareNovell NetWareNetWare is a network operating system developed by Novell, Inc. It initially used cooperative multitasking to run various services on a personal computer, with network protocols based on the archetypal Xerox Network Systems stack....
by many companies.
Other economists have made a more controversial charge against the utility of computers: that they pale into insignificance as a source of productivity advantage when compared to the industrial revolution
Industrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
, electrification, infrastructures (canals and waterways, railroads, highway system), Fordist mass production
Mass production
Mass production is the production of large amounts of standardized products, including and especially on assembly lines...
and the replacement of human and animal power with machines.
High productivity growth occurred from last decades of the 19th century until the 1973, with a peak from 1929-1973, then declined to levels of the early 19th century.
There was a rebound in productivity after 2000. Much of the productivity from 1885-2000 came in the computer and related industries.
A number of explanations of this have been advanced, including:
- The tendency – at least initially – of computer technology to be used for applications that have little impact on overall productivity, e.g. word processing.
- Inefficiencies arising from running manual paper-based and computer-based processes in parallel, requiring two separate sets of activities and human effort to mediate between them – usually considered a technology alignmentTechnology alignmentBusiness and technology alignment, or just technology alignment, corrects terminology and assumptions used in business to better match those of technology and standards anticipated in the technology strategy and so-called technology roadmaps....
problem - Poor user interfaceUser interfaceThe user interface, in the industrial design field of human–machine interaction, is the space where interaction between humans and machines occurs. The goal of interaction between a human and a machine at the user interface is effective operation and control of the machine, and feedback from the...
s that confuse users, prevent or slow access to time-saving facilities, are internally inconsistent both with each other and with terms used in work processes – a concern addressed in part by enterprise taxonomy - Extremely poor hardware and related boot image controlBoot image controlA boot image control strategy is a common way to reduce total cost of ownership in organizations with large numbers of similar computers being used by users with common needs, e.g. a large corporation or government agency...
standards that forced users into endless "fixes" as operating systems and applications clashed – addressed in part by single board computers and simpler more automated re-install procedures, and the rise of software specifically to solve this problem, e.g. Norton Ghost - Technology-driven change driven by companies such as MicrosoftMicrosoftMicrosoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...
which profit directly from more rapid "upgrades" - An emphasis on presentation technologyPresentation technologyPresentation technology are tools used to assist in conveying information during a presentation.When a speaker is verbally addressing an audience it is often necessary to use supplementary equipment and media to clarify the point...
and even persuasion technologyPersuasion technologyPersuasive technology is broadly defined as technology that is designed to change attitudes or behaviors of the users through persuasion and social influence, but not through coercion...
such as PowerPointMicrosoft PowerPointMicrosoft PowerPoint, usually just called PowerPoint, is a non-free commercial presentation program developed by Microsoft. It is part of the Microsoft Office suite, and runs on Microsoft Windows and Apple's Mac OS X operating system...
, at the direct expense of core business processes and learning – addressed in some companies including IBMIBMInternational Business Machines Corporation or IBM is an American multinational technology and consulting corporation headquartered in Armonk, New York, United States. IBM manufactures and sells computer hardware and software, and it offers infrastructure, hosting and consulting services in areas...
and Sun MicrosystemsSun MicrosystemsSun Microsystems, Inc. was a company that sold :computers, computer components, :computer software, and :information technology services. Sun was founded on February 24, 1982...
by creating a PowerPoint-Free Zone - The blind assumption that introducing new technology must be good
- The fact that computers handle office functions that, in most cases, are not related to the actual production of goods and services.
- Factories were automated decades before computers. Adding computer control to existing factories resulted in only slight productivity gains in most cases.
A paper by Triplett (1999) reviews Solow’s paradox from seven other often given explanations. They are:
- You don’t see computers “everywhere,” in a meaningful economic sense
- You only think you see computers everywhere
- You may not see computers everywhere, but in the industrial sectors where you most see them, output is poorly measured
- Whether or not you see computer everywhere, some of what they do is not counted in economic statistics
- You don’t see computers in the productivity yet, but wait a bit and you will
- You see computers everywhere but in the productivity statistics because computers are not as productive as you think
- There is no paradox: some economists are counting innovations and new products on an arithmetic scale when they should count on a logarithmic scale
Before computers: Data processing with unit record equipment
When computers for general business applications appeared in the 1950s, a sophisticated industry for data processing existed in the form of unit record equipment
Unit record equipment
Before the advent of electronic computers, data processing was performed using electromechanical devices called unit record equipment, electric accounting machines or tabulating machines. Unit record machines were as ubiquitous in industry and government in the first half of the twentieth century...
. These systems processed data on punched cards by running the cards through tabulating machines
Tabulating machine
The tabulating machine was an electrical device designed to assist in summarizing information and, later, accounting. Invented by Herman Hollerith, the machine was developed to help process data for the 1890 U.S. Census...
, the holes in the cards allowing electrical contact to activate relays and solenoids to keep a count. The flow of punched cards could be arranged in various program-like sequences to allow sophisticated data processing. Some unit record equipment was programmable by wiring a plug board, with the plug boards being removable allowing for quick replacement with another pre-wired program.
In 1949 vacuum tube calculators were added to unit record equipment. In 1955 the first completely transistorized calculator with magnetic cores for dynamic memory, the IBM 608, was introduced.
The first computers were an improvement over unit record equipment
Unit record equipment
Before the advent of electronic computers, data processing was performed using electromechanical devices called unit record equipment, electric accounting machines or tabulating machines. Unit record machines were as ubiquitous in industry and government in the first half of the twentieth century...
, but not by a great amount. This was partly due to low level software used, low performance capability and failure of vacuum tubes and other components. Also, the data input to early computers also used punched cards. Most of these hardware and software shortcomings were solved by the late 1960s, but punched cards did not become fully displaced until the 1980s.
Analog process control
Computers did not revolutionize manufacturing because automation
Automation
Automation is the use of control systems and information technologies to reduce the need for human work in the production of goods and services. In the scope of industrialization, automation is a step beyond mechanization...
, in the form of control systems, had already been in existence for decades, although computers did allow more sophisticated control, which led to improved product quality and process optimization. Pre-computer control was known as analog control and computerized control is called digital.
Parasitic losses of cashless transactions
Credit card transactions now represent a large percentage of low value transactions on which credit card companies charge merchants. Most of such credit card transactions are more of a habit than an actual need for credit and to the extent that such purchases represent convenience or lack of planning to carry cash on the part of consumers, these transactions add a layer of unnecessary expense. However, debit or check card transactions are cheaper than processing paper checks.
On line commerce
Despite high expectations for on line retail sales, individual item and small quantity handling and transportation costs more than offset the savings of not having to maintain "bricks and mortar" stores. On line retail sales main success was in specialty items, collectibles and higher priced goods. Some airline and hotel discounters have been very successful.
On line commerce was extremely successful in banking, airline, hotel, and rental car reservations, to name a few.
Restructured office
The personal computer restructured the office by reducing the secretarial and clerical staffs. Prior to computers, secretaries transcribed Dictaphone
Dictaphone
Dictaphone was an American company, a producer of dictation machines—sound recording devices most commonly used to record speech for later playback or to be typed into print. The name "Dictaphone" is a trademark, but in some places it has also become a common way to refer to all such devices, and...
recordings or live speech into shorthand
Shorthand
Shorthand is an abbreviated symbolic writing method that increases speed or brevity of writing as compared to a normal method of writing a language. The process of writing in shorthand is called stenography, from the Greek stenos and graphē or graphie...
, and typed the information, typically a memo or letter. All filing was done with paper copies.
A new position in the office staff was the information technologist, or department.
With networking came information overload in the form of e-mail, with some office workers receiving several hundred each day, most of which are not necessary information for the recipient.
Cost overruns of software projects
It is well known by software developers that projects typically run over budget and finish behind schedule.
Software development is typically for new applications that are unique. The project's analyst is responsible for interviewing the stakeholders, individually and in group meetings, to gather the requirements and incorporate them into a logical format for review by the stakeholders and developers. This sequence is repeated in successive iterations, with partially completed screens available for review in the latter stages.
Unfortunately, stakeholders often have a vague idea of what the functionality should be, and tend to add a lot of unnecessary features, resulting in schedule delays and cost overruns.
Qualifications
By the late 1990s there were some signs that productivity in the workplace been improved by the introduction of IT, especially in the United States. In fact, Erik BrynjolfssonErik Brynjolfsson
Erik Brynjolfsson is the Schussel Family Professor of Management at the MIT Sloan School of Management, the Director of the MIT Center for Digital Business and a Research Associate at the National Bureau of Economic Research...
and his colleagues found a significant positive relationship between IT investments and productivity, at least when these investments were made to complement organizational changes. A large share of the productivity gains outside the IT-equipment industry itself have been in retail, wholesale and finance.
Computers revolutionized accounting, billing, record keeping and many other office functions; however, early computers used punched cards for data and programming input. Until the 1980s it was common to receive monthly utility bills printed on a punched card that was returned with the customer’s payment.
In 1973 IBM introduced point of sale
Point of sale
Point of sale or checkout is the location where a transaction occurs...
(POS) terminals in which electronic cash registers were networked to the store mainframe computer. By the 1980s bar code readers were added. These technologies automated inventory management. Wal-Mart Stores was an early adopter of POS.
Computers also greatly increased productivity of the communications sector, especially in areas like the elimination of telephone operators. In engineering, computers replaced manual drafting with CAD and software was developed for calculations used in electronic circuits, stress analysis, heat and material balances, etc.
Automated teller machine
Automated teller machine
An automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
s (ATMs) became popular in recent decades and self checkout
Self checkout
Self checkout machines provide a mechanism for customers to pay for purchases from a retailer without direct input to the process by the retailer's staff. They are an alternative to the traditional cashier-staffed checkout...
at retailers appeared in the 1990s.
The Airline Reservations System
Airline Reservations System
An airline reservation system is part of the so-called passenger service systems , which are applications supporting the direct contact with the passenger....
and banking are areas where computers are practically essential. Modern military systems also rely on computers.