Innovation and productivity

Source: US Bureau of Labor Statistics

I was struck by an article by Nobel Prize-winning economist Paul Krugman, which appeared in the New York Times on 25 May 2021. In Remembrance of futures past, Krugman asks whether new technologies have increased productivity (output per person-hour).

The figures he cites are extremely striking, as productivity has grown only half as much since 2007 (the year the iPhone was introduced) as in the period since World War II.

The official statistics on which the analyst relies are as follows:

The statistics in the table allow us to make a more detailed analysis of the phenomenon of declining productivity growth, or at least suggest important questions.

We observe a significant increase in productivity in the period from the post-World War II reconstruction until the first oil shock (1973), in which OPEC's sharp increase in the price of crude oil was one of the most important causes of a global economic recession accompanied by hyperinflation. And if technology played an important role in post-war productivity growth, it was in any case a different technology from the one we associate with the digital revolution.

The period that follows, 1973-1979, is directly related to the oil crisis. But it is the later period, 1979-1990, with productivity growth little greater than that of the preceding crisis, and equal to the more recent 2007-2020, that should give us pause for thought.

1979-1990 was the period when microcomputers (PCs) became ubiquitous, rapidly replacing the functions performed by mainframes, and the refrigerator-sized minicomputers produced by companies such as IBM and Digital Equipment.

Microcomputers produced by IBM (and the emerging WINTEL standard, i.e. CPUs produced by Intel and Windows operating systems from Microsoft) and Apple conquered every desktop in the world, but productivity did not grow appreciably!

The periods 1990-2000 and 2000-2007 when there was a major increase in productivity can be associated with the development of the internet and the exponential increase in internet users, which has continued to this day. Currently, internet users are estimated at 4.7 billion (websitehostingrating.com).

From 2007 to the present day the digital revolution has continued, but this has not translated into significant increases in productivity. For example, e-commerce has expanded rapidly and is expected to reach $5 trillion in sales soon, but to what extent is this not simply a phenomenon of "cannibalisation", accelerated by the covid 19 pandemic, and which in practice has increased unemployment, while at the same time representing an opportunity for survival for many small businesses, and a formula for success for Amazon?

As we can see, the issue we are studying, the relationship between the diffusion of technology, especially computer technologies (from 1980 onwards) and productivity growth, is not a simple one. A first step in advancing our understanding of this complex phenomenon is to set aside simplistic statements such as "the digital revolution is necessarily a source of productivity growth".

A second consideration, which we leave to the seasoned reader and for future articles, is a deeper analysis of the issue. It is possible that by focusing on specific technologies, narrowly-defined industries, and even considering geographical differences, some light might be shed on this complex issue.

Sources:

https://www.bls.gov/lpc/prodybar.htm?campaign_id=116&emc=edit_pk_20210525&instance_id=31519&nl=paul-krugman&regi_id=91135989&segment_id=58970&te=1&user_id=fb6c923f06e43fae4fde42e904a32527

https://www.websitehostingrating.com/es/internet-statistics-facts/

Accessed 6 July 2021

Harry Costin