IT and Productivity:
Solow’s Computer Paradox
and the Impact of New
Technologies Like AI
Jeffrey Funk
Technology Consultant
Retired Professor

Robert Solow, Nobel Laureate in Economics
 “You can see the computer age everywhere but in the
productivity statistics”
 How could this be true?
 Robert Gordon’s The Rise and Fall of American Growth
documents slowdown in productivity since 1970, thus lending
support to Solow’s statement
 Why haven’t computers led to massive improvements in
productivity?
 Manual systems weren’t as inefficient as ordinarily thought
 Thus computers didn’t contribute large improvements in
productivity outside of communications and entertainment
 Let’s look at sectors using data from Gordon’s book

Agriculture
 Productivity improvements since 1940 have been small
 No decline in inflation adjusted food prices
 Biggest change has been increase of food variety, partly
through global supply chains
 greater variety of fresh, packaged, and frozen food
 Helped by computers
 But computers don’t impact on crop yields or increase
productivity of machines, key factors in agriculture
 Implications for Future
 Internet of Things, Big Data, Artificial Intelligence will probably
not enable large productivity increases, except in some cases
 They must impact on crop yields to improve productivity

Logistics, e.g., Groceries
 Large-scale deployment of bar-code scanners in 1980s reduced
the cost of groceries consumers bought by an estimated 1.4%
 Why so small?
 Probably because manual system wasn’t that bad
 Paper wasn’t so bad at keeping track of products
 Computers didn’t help stock shelves, unload trucks
 Largest benefit of bar-code scanners may be increased variety
 Implications for Future
 Internet of Things, Big Data, Artificial Intelligence will probably
not enable large productivity increases, except in some cases
 But e-commerce may succeed because it provides convenience
http://www.mckinsey.com/~/media/McKinsey/Business%20Functions/McKinsey%20Digital/Our%20Insights/Where%20machines%20
could%20replace%20humans%20and%20where%20they%20cant/SVGZ-Sector-Automation-ex3.ashx

Clothing
 Clothing prices fell 1.5%/year between 1940 and 2012
 Variety also rose, with greater emphasis on aesthetics
and fashion
 But computers didn’t revolutionize factories
 Their biggest impact has been on globalization
 Computers facilitated production in low-wage countries
 Implications for future:
 Internet of Things, Big Data, Artificial Intelligence will
probably not enable large productivity increases, except in
some cases
 But e-commerce will continue to gain share because it
provides convenience

Construction
 Cost per square foot of homes has risen since 1940 due to
few improvements in construction productivity
 Stagnant productivity, higher wages, and rising labor costs
also caused housing prices to rise from 2.9 times of annual
salary in 1969 to 4.5 times in 2011
 Why didn’t computers enable increases in productivity?
 Most construction tasks are difficult to automate
 Manual scheduling system weren’t as inefficient as ordinarily
thought
 Implications for future
 Internet of Things, Big Data, Artificial Intelligence will probably
not enable large productivity increases, except in some cases

Power/Electricity
 Price of electricity has risen since 1970
 Why haven’t computers enabled increases in
productivity?
 Systems were largely automated long before computers
became available
 Manual scheduling, planning, and maintenance systems
weren’t as bad as ordinarily thought
 Implications for future
 Internet of Things, Big Data, Artificial Intelligence
will probably not enable large productivity
increases, except in some cases

Health Care
 Health care costs have grown dramatically
 Increases in life expectancy were twice as large in
first than second half of 20th century
 Why haven’t computers had positive effect?
 Small use of computers in health care
 Managing people, materials, and equipment occupies
small part of health care costs
 Government regulations complicate health care
 Keeping old people alive causes expenditures to rise
 Implications for future
 Little productivity increases from IoT, Big Data, AI
 They must enable better treatments, not just higher
efficiency. But IBM’s recent disclosure about Watson
suggests probably won’t happen
https://www.statnews.com/2017/09/05/watson-ibm-cancer/ http://big.assets.huffingtonpost.com
/2013_09_HealthCareCosts3.png

Education
 Cost of education has grown quickly
 Still haven’t replaced teachers or textbooks
 Computers have small impact, so far
 Might change in future
 But education is not very responsive to user
needs and very dependent on government
regulations and subsidies
 so it will probably resist change
 Implications for future
 Internet of Things, Big Data, AI will probably
not enable large productivity increases
 They must enable higher quality (more useful
content), not just higher efficiency
College Tuition vs.
Consumer Prices

Airlines
 Little drop in cost per passenger mile since 1970
 Cheap flights are result of airlines segmenting users into
business and consumer travelers
 Occurred as deregulation implemented in 1970s in the U.S.
 thus enabling consumers to benefit from higher prices for
business travel
 Why haven’t computers had a larger impact?
 Computer reservations began in 1970s and now reservations is
highly automated process
 But reservations and scheduling contribute much less to costs
than do airplanes and airports

Factories
 Computer-controlled machines have probably had large
impact on productivity, larger than other sectors
 But what about information systems?
 During 1980s there was lively debate between MRP (material
resource planning with computers) and JIT (just-in time
manufacturing)
 MRP is now widely used along with some JIT-hybrid systems
 But little impact on productivity of individual factories because
MRP doesn’t add large amounts of value
 Bigger impact was on globalization and creation of complex supply
chains
 Implications for Future
 Internet of Things, Big Data, Artificial Intelligence will probably not
enable large productivity increases, except in some cases
 Computers enable some new processes such as 3D printing

Vehicular Transportation
 Inflation-adjusted cost of vehicles has risen over
last 50 years
 City traffic has increased, thus reducing the value
of private automobiles
 Why haven’t computers had a larger impact?
 Automobile factories benefited little from computers,
as with other factories
 City traffic systems also haven’t benefited much from
computers – still lots of congestion
 Big changes in future with ride sharing and
driverless vehicles? See below

Implications for Future
 Assessing the impact of new technologies on productivity
requires an understanding of a sector’s cost structure
 What contributes to cost?
 What contributes to customer value?
 This is rarely done, because there is so much hype about
new technologies
 Most sectors will not benefit from more information
technology (Internet of Things, Big Data, Artificial
Intelligence) because
 existing system are already very efficient in terms of
organizing people, machines, and materials
 capability of new technology is over-hyped

Big Exception is Intra-City Transportation
 Most private vehicles are parked 95% of the time
 While being used, they also sit in traffic much of the
time and thus underutilized
 Big opportunity for IT (Internet of Things, Big Data,
Artificial Intelligence)
 Ride sharing services, driverless vehicles, and bike
sharing systems can reduce the need for private
vehicles
 Driverless vehicles can reduce congestion
 But outside of intra-city transportation, the impact of IT
will probably be small

 Funk Jeffrey 2017. Technology Change, Economic Feasibility and Creative Destruction: The
Case of New Electronic Products and Services, Industrial and Corporate Change, Forthcoming
 Funk Jeffrey 2017 What Does Innovation Today Tell Us About the US Economy Tomorrow? Above
all, that the nation needs to get a lot better at linking scientific advance to economically and
socially valuable technologies. Issues in Science and Technology September/October
 Funk Jeffrey 2017 Assessing Public Forecasts to Encourage Accountability: The Case of MIT's
Technology Review, PLOS ONE, August
 Funk Jeffrey and Magee Chris 2015. Rapid Improvements with No Commercial Production:
How do the improvements occur? Research Policy 44(3): 777-788
 Funk Jeffrey 2013. What Drives Exponential Improvements? California Management Review
55(3): 134-152, Spring 2013. Reported in Relax about robots but worry over climate change, Robin
Harding, Financial Times, July 27, 2016 and TodayOnline, August 4, 2016.
 Stop the Hype! Using Patterns of Technology Change to Rethink America’s System of R&D,
Book Manuscript, Book Manuscript, 2018
For More Information

Or If You Like Power Point Slides
 Mission-based research
 www.slideshare.net/Funk98/mission-based-rd-to-restore-productivity-growth
 PhDs don’t found successful startups
 https://www.slideshare.net/Funk98/phds-dont-found-successful-startups-why-they-
dont-and-why-it-matters
 Silicon Valley Startups
 www.slideshare.net/Funk98/silicon-valley-startups-for-which-sectors-and-why
 Corporate engineers and scientists don’t read academic papers
 https://www.slideshare.net/Funk98/do-corporate-engineers-and-scientists-read-
academic-journal-papers
 Finding Billion-Dollar “Opportunities”
 https://www.slideshare.net/Funk98/finding-billion-dollar-startup-club-opportunities-
67270449
 MIT’s Research
 https://www.slideshare.net/Funk98/mits-poor-predictions-about-technology