Note by instructor: this essay, on a topic not assigned in W01, earned a mark of A+, with style and content both rated "excellent". We particularly liked the level of research and the ways in which the source material was used in the analysis. This essay sets a high standard.
Although its existence remains undecided, the trends that made economists fear a "productivity paradox" in the early 1990s appear to have continued through to the end of the decade. In the class readings, Martin Neil Baily describes how the rate of productivity increases, which had been growing since the end of World War II, suddenly tailed off around 1973. ((0)) A report by the Bank of Montreal argues that productivity growth rates have remained constant at about 1.0% when measured using labour-based productivity and about 0.5% when measured using multifactor productivity from 1973 through to 1997. ((1)) These findings are widely reported throughout the literature I saw, although the Bank of Montreal provided the most recent data for Canadian productivity I could find. However, the Bank of Montreal survey notes that different sources have come up with different values for Canada's productivity. The Organization for Economic Co-operation and Development (OECD) apparently produced results that Canada's productivity has been declining since 1979, but the Bank of Montreal survey claims many economists have dismissed those findings because they are unreproducible.
One change that the productivity-measurement community seems to have embraced is the idea that "labour-based" measurements of productivity do not report some important information. In a labour-based approach, productivity is measured by taking the "output" of an economy (that is, what it produces) and dividing it by the labour needed to produce it. This ignores factors such as long-term capital investment and resource depletion. Economists have embraced another form of measuring productivity, called "multifactor" productivity, which takes a difference between outputs and a weighted sum of the different aspects that are thought to produce those outputs, such as capital investment, labour and the use of natural resources. ((2)) Although economists think that multifactor productivity produces a more realistic picture of progress, it is harder to measure and more prone to error. Labour-based productivity is still used to measure productivity, especially when conducting research in countries other than the U.S. or Canada.
In the U.S. and Canada, multifactor analysis consistently reports smaller productivity values than labour-based measurements. However, the Bank of Montreal report shows that the ratio of multifactor productivity to labour-based productivity has been relatively constant for the years after World War II. For the purposes of the productivity paradox debate the measurement used matters only when looking at absolute productivity, as opposed to the relative increases in productivity after a given year. ((3))
Multifactor productivity analysis supposedly takes into consideration more computerization impacts on productivity by taking into account investment in new technologies (which it measures as capital). However, many economists feel that even multifactor analysis does not provide a complete picture, that the impacts of computers on productivity are still too poorly measured for computerization benefits to show up in productivity statistics. However, in an article published for the Centre for the Study of Living Standards (CSLS) (a Canadian "think-tank" that is supposedly very involved in productivity analysis), Jack Triplett notes that proper measurements of IT are not guaranteed to bias productivity measurements upwards, making computerization look better in productivity figures. ((4)) However, until better ways of measuring computerized productivity are developed, arguing that the unrecorded impacts of computerization will bias productivity measurements one way or the other is fruitless.
Some parties continue to take a very optimistic view of computer productivity. Not surprisingly, technology providers discount the productivity paradox, arguing that computerization has helped boost productivity since it was introduced, but that the gains are not measured well by existing indices, which were designed to measure productivity in terms of physical goods, not information. IBM is currently working with the University of California-Irvine, MIT, and the Economist Intelligence Unit (a research division of The Economist magazine) to complete an international study of productivity figures and their correlation with technological investment.((5)) IBM claims that preliminary results from its studies indicate a strong correlation between productivity growth and technological investment. According to the studies, on average 50% of the existing labour-based productivity growth is thanks to technology. The studies admit that productivity has been slow, but as usual they predict greater productivity gains as computerization becomes more widespread. ((6))
The IBM-sponsored research is both exciting and suspicious. One part of the study is aiming to collect multinational productivity measurements to see whether the productivity paradox is justified on a worldwide scale. Indeed, a paper published in 1998 already reports some multinational results. ((7)) The paper echos IBM's claims that technological investment was responsible for one-third to one-half of the total productivity growth in many countries. The paper says that its findings are significant because IT capital investment made up only 5% of total GDP for the countries surveyed. ((8)) The IBM project has the potential to collect data worldwide and comment on global trends, which is exciting because most productivity paradox research has focussed on the United States up to this point. Of course, IBM has a definite interest in making techological investment look good: it is trying to grab a large share of the e-commerce service provider market. Although its partnerships with respected academic institutions and world-renowned economists give the research project credibility, I am not certain whether IBM would be so happy to release the results of productivity research if the studies concluded that technological investment had no effect (or worse -- a negative effect) on productivity statistics.
However, companies are not the only ones optimistic about the positive effects of computerizaton on the economy. The Progressive Policy Institute (PPI) is a U.S. think-tank that believes the American economy has been changing for the last 15 years, and that the U.S. is in a transitional state between a manufacturing-based economy and an information-based "New Economy." The PPI blames the "productivity paradox" on this transitional state, but agrees with IBM's view that sectors that invest heavily in technologies have enjoyed bigger productivity increases than their counterparts who did not invest in technology. ((9)) Unfortunately, the report damages its own credibility by making claims that many others -- including Paul Attewell in our readings -- have shown to be false; it claims that the cost of a transaction on an ATM is a penny, while the cost of performing the same transaction using a teller is $1.07. Of course, these are the costs to the consumer, but they do not reflect actual costs of carrying out transactions on ATMs versus using tellers. Although it appears that PPI might have its own agendas in portraying the benefits of the "New Economy," its viewpoint is probably worth considering.
Paul David's example of the "productivity paradox" with respect to steam engines reflects PPI's view. To many (including John Leslie King from III-L of our readings), the argument seemed convincing: the productivity gains from computerization would eventually show up in productivity statistics, after businesses and societies adjusted themselves to use the new technology. However, not everybody is convinced by David's arguments. In a talk presented to the 1997 Conference on Service Sector Productivity and the Productivity Paradox (held by CSLS), Dale Jorgenson argues that the introduction of electric power was not comperable to that of computerization because prices of computers dropped much more rapidly than they did for electric power. ((10)) To this, Triplett adds that initially electric power was used to for new purposes, and did not replace steam-power applications, while from the beginning computers were touted as replacements for existing applications. ((11)) Jorgenson argues that computers accelerated so quickly that the productivity figures should be reflecting the gains of technology. Triplett argues that the electric-power analogy is simply misleading. In either case, David's analogy is under attack.
It is possible that the Productivity Paradox has been figured out. If productivity growth owes a lot to technological change, as reflected by IBM's and the PPI's reportings, then it's possible (although not certain) that productivity would have been even worse after 1973 if computerization had not stepped in. That point of view would also conclude that computerization gains will be fully realized when the transition to the New Economy is complete. Unfortunately, there are a number of problems with this view. First of all, it doesn't take into account "productivity sinks" such as game-playing and idle web-surfing that detract from productivity. Secondly, it does not address the concerns outlined in the Baily reading -- that computers are not creating more work than they save, and that corporations will not fight for existing market share rather than opening new markets. This viewpoint also does not address Triplett's fear that computerization results in a decrease of productivity because computers must be replaced frequently, with little real benefit to each upgrade. ((12)) These objections make me suspect that the paradox has not been resolved yet. While methods for integrating technological investment into productivity figures have improved, and while there are some indications that maybe computers have been beneficial at improving productivity, there are still too many unresolved issues -- including whether expecting huge gains in productivity are realistic -- to decide the matter yet. Economists will be able to waste their time arguing about computerization's impact on productivity growth for a while yet.
((0)) Martin Neil Baily. "Great Expectations: PCs and Productivity." Published in Computerization and Controversy, 2nd Edition, edited by Rob Kling. San Diego: Academic Press, 1996. Section III-J, p. 220.
((1)) Robert Hogue. Canadian Productivity -- The Sky Is Not Falling. June 1999, published by the Bank of Montreal. Available at http://www.bmo.com/economic/regular/canprod.htm
((2)) Statistics Canada. The Daily: Tuesday March 23, 1999. Available at http://www.statcan.ca/Daily/English/990323/d990323.htm.
((3)) For the purposes of this essay, I will conveniently avoid the issue of whether any measure of progress that depends on the GDP is likely to be any good, because many think that the GDP itself is a messed-up indicator of progress. An article in the Atlantic Monthly, If the GDP is Up, Why is America Down? offers a good (although biased) introduction to the problems of the GDP, and the supposed benefits of a replacement called the "Genuine Progress Indicator," or GPI.
((4)) Jack Triplett. The Solow productivity paradox: what do computers do to productivity?. Published for the Canadian Journal of Economics, Volume 32, No. 2, April 1999. p. 319. Available at http://www.csls.ca/jrn/v32n2_04.pdf.
((5))Beyond the productivity paradox: New views on the value of information technology. August 1999. p. 4. Available at http://www.ibm.com/services/whitepapers/productivity.html.
((6)) Ibid., p. 5.
((7)) It is quite possible that the research I mention was not associated with the IBM project, even though one author is from the University of California-Irvine. However, I think it is reasonable to suspect that IBM's research project is of a similar nature, because in its white paper IBM reports that it is studying many of the same things that the Dewan and Kraemer paper talks about.
((8)) Sanjeev Dewan and Kenneth L. Kraemer. International Dimensions of the Productivity Paradox. Published for Communications of the ACM, Volume 41, No. 8, August 1998. p. 62. Available at http://www.acm.org/pubs/citations/journals/cacm/1998-41-8/p56-dewan/.
((9)) The Progressive Policy Institute. "Explaining the Productivity Paradox," from The New Economy Index, November, 1998. Available at http://www.neweconomyindex.org/productivity.html.
((10)) Dale Jorgenson. "Computers and Productivity." Transcript from an April 12, 1997 talk for the Conference on Service Sector Productivity and the Productivity Paradox. Available at http://www.csls.ca/conf-pap/jorgenson.pdf.
((11)) Triplett, p. 323.
((12)) Triplett, p. 325.