The productivity paradox was analyzed and popularized in a widely-cited article[1] 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."[2] The paradox has been defined as the “discrepancy between measures of investment in information technology and measures of output at the national level.”[3]
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.
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Different authors have explained the paradox in different ways. In his original article, Brynjolfsson (1993) identified four possible explanations:
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.[4]
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. [5] 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. [6][7] There was a rebound in productivity after 2000. Much of the productivity from 1885-2000 came in the computer and related industries.[7]
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.[8]
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.[8]
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.
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 Brynjolfsson and his colleagues found a significant positive relationship between IT investments and productivity, at least when these investments were made to complement organizational changes.[9][10][11] A large share of the productivity gains outside the IT-equipment industry itself have been in retail, wholesale and finance.[12]
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 machines (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.