Saturday, June 11, 2016


Productivity Paradox

Not the Digital Future We Were Promised

By Jens Münchrath
Digitization promised better economic productivity and a brighter future. But that promise has not been kept. And as rates of growth in productivity actually decrease, researchers and economists are asking why.
The much-vaunted digital revolution is moving at a snail's pace. (Source: Handelsblatt Print)
The much-vaunted digital revolution is moving at a snail’s pace. Source: Handelsblatt Print

A first attempt at making contact with the digital future was not particularly successful.
IBM’s supercomputer, Watson, is widely seen as the future of artificial intelligence. The U.S. computing giant boasts that its technology platform “processes information more like a human than a computer.” Yet when Handelsblatt called the company to request an interview with Watson – “about the prospects of digitization and the economic and societal changes that have accompanied it” – IBM seemed reluctant. An employee said Watson would have to be fed information on the topic before it could talk, a process that could take months.
As with Watson’s interview, the promises of the digital age – to bring about quantum leaps in productivity and prosperity – seem to have remained on a distant horizon, promises which include everything from robot slaves catering to the myriad whims of their masters, to self-driving, even flying, cars that will ease traffic jams.
The founder of the World Economic Forum, Klaus Schwab, has argued that digitization, along with bio- and nano-technology, is the foundation of a revolution that will be more comprehensive than anything the world has ever seen.
Not everyone is so enthusiastic about the digital future though. Critics see computerization as a mechanism that robs laborers of their work and big data as a tool of oppression.
Yet skeptics and supporters alike acknowledge that it is only a matter of time before the digital revolution upends the economy as we know it. Much like the steam engine and electricity before it, so the thinking goes, digitization will advance productivity in the same ways that industrialization did.
When it comes to the emerging digital world’s new business models, the usual systems of measurement fail.
Bert Rürup
Head of Handelsblatt Research Institute
But so far this has not really happened, even in the countries that have embraced new information technologies. In fact, for more than two decades now, growth in rates of productivity has been decreasing.
In Germany, annual increases in productivity averaged four percent during the 1970s. That figure dropped by half during the 1980s and 1990s, and has sat at around one percent during the past decade. In the U.S., where the digital revolution began, growth in productivity has declined dramatically – and if the trend for the first quarter of 2016 continues for the rest of the year, there will be negative growth.
One might assume from this that the more digitalization there is, the less growth there will be in rates of productivity. But that would be a false causality; doubtless there are other variables influencing this dynamic. However there is one way in which digitalization is dangerous – its impact on prosperity is concerning. As the Nobel Prize-winning U.S. economist Paul Krugman put it: “Productivity isn’t everything, but in the long run it is almost everything.”
This raises a lot of serious questions: If digitalization cannot help human beings improve their efficiency and productivity, then what can? And how can it be that a force so pervasive in our lives, one that affects almost everything we do now, delivers no discernible increase in prosperity?
Another Nobel Prize-winning U.S. economist, Robert Solow, addressed this in the 1980s with a theory known as the productivity paradox. “You can see the computer age everywhere but in the productivity statistics,” Solow argued.
Robert Gordon, a professor and macroeconomist at Northwestern University in the U.S., who specializes in labor productivity, has also cast doubt on the promises of digitization. “The decline of productivity growth within the past 10 years is no illusion,” he wrote in a guest op-ed for Handelsblatt. “Millions of office workers sit at their computer screens and laptops and do the same tasks they did 10 years ago, that they will do tomorrow too.”
Mr. Gordon said the introduction of electricity, running water and the internal combustion engine have been far bigger drivers of productivity than innovations like Google and the iPhone. And the statistics support his conclusion.
Yet critics argue that those numbers also miss the mark. They say that we’re actually measuring productivity the wrong way. Since it costs nothing to use Wikipedia or Google, there is no corresponding effect on gross domestic product, or GDP, despite the fact that technological innovations like this have given more people access to knowledge and education than ever before.

10 p47 Productivity Growth Has Slowed Down-01

Researchers at the Massachusetts Institute of Technology, or MIT, estimate that the use of these Internet services accounts for 0.3 percent of GDP in the U.S. These innovations accelerate production processes, but their effects are indirect. Those official statistics are relics of the “old economy”, the researchers say, and they give a misguided picture of the world’s “new economy”.
“National accounting provides a very precise picture of the old analog economy,” says Bert Rürup, head of Handelsblatt’s Research Institute. “But when it comes to the emerging digital world’s new business models, which cost users nothing, this system of measurement fails.”
Those who dispute the characterization of new technology as a driver of productivity may well point to the inefficiencies associated with e-mail. Whereas the time required to send a fax or write a letter encourages workers to correspond only when necessary, the ease of email often results in a flurry of messages with little substance, but plenty of time-wasting potential.
Sociologist Hartmut Rosa has described it as the biggest mystery of the modern age: Despite an abundance of efficiency-boosting technologies, none of us seem to have any time. Of course, this phenomenon could partially be due to human beings’ ever-increasing use of e-mail and social media during working hours.
German neuroscientist Manfred Spitzer, who authored the book, Digital Dementia, has argued that information technology can be as damaging to the brain as alcohol.
“It damages brain development, learning and the health of young people, and generates addiction,” Mr. Spitzer argues.
Other researchers suggest that it is only a matter of time before we see the growth in productivity that should be associated with increasing digitalization. We just need to be patient. That’s an assertion supported by MIT’s Erik Brynjolfsson and Andrew McAfee, authors of the best-selling book, “The Second Machine Age.”
Their position is confirmed by studies from a Stanford University professor of economic history, Paul David. He asserts that it took more than 30 years before inventions such as electricity and the steam engine had major impacts on productivity. This is because they required a radical reorganization of production methods.
So it would make sense that the current phase of slower growth in productivity is just part of the birthing pains associated with a new economic era. Whether the golden age of high tech productivity is about to begin is something that only the economists of the future will be able to judge. That’s if IBM’s Watson hasn’t done it for them already.

Jens Münchrath is based in Düsseldorf, leads Handelsblatt’s weekend section and spearheads coverage of economics and monetary policy. To contact the author: