One of the most often-repeated episodes in the history of technology is when Steve Jobs was recruiting John Sculley from his lofty position as CEO at Pepsi to come to Apple in 1983. “Do you want to sell sugar water for the rest of your life,” Jobs asked, “or do you want to come with me and change the world?”
It’s a strange conceit of digital denizens that their businesses are something nobler than other industries. While it is true that technology can do some wonderful things, if the aim of Silicon Valley entrepreneurs were truly to change the world, why wouldn’t they apply their formidable talents to something like curing cancer or feeding the hungry?
The reality, as economist explains in The Rise and Fall of American Growth, is that the measurable impact has been relatively meager. According to the International Monetary Fund, except for a relatively short burst in growth between 1996 and 2004, productivity has been depressed since the 1970s. We need to rethink how technology impacts our world.
The old productivity paradox
In the 1970s and ’80s, business investment in computer technology was increasing by more than 20% per year. Strangely, though, productivity growth had decreased during the same period. Economists found this turn of events so strange that they called it the productivity paradox to underline their confusion.
Productivity measures were largely developed for an industrial economy, not an information economy.
The productivity paradox dumbfounded economists because it violated a basic principle of how a free market economy is supposed to work. If profit-seeking businesses continue to make substantial investments, you expect to see a return. Yet with IT investment in the ’70s and ’80s, firms continued to increase their investment with negligible measurable benefit.
A paper by researchers at the University of Sheffield in England sheds some light on what happened. First, productivity measures were largely developed for an industrial economy, not an information economy. Second, the value of those investments, while substantial, was a small portion of total capital investment. Third, businesses weren’t necessarily investing to improve productivity, but to survive in a more demanding marketplace.
Yet by the late 1990s, increased computing power combined with the internet to create a new productivity boom. Many economists hailed the digital age as a “new economy” of increasing returns, in which the old rules no longer applied and a small initial advantage would lead to market dominance. The mystery of the productivity paradox, it seemed, had been solved. We just needed to wait for the technology to hit critical mass.
The new productivity paradox
By 2004, the law of increasing returns was there for everyone to see. Google already dominated search, Amazon ruled e-commerce, Apple would go on to dominate mobile computing, and Facebook, founded that year, would eventually rule social media. Yet as the dominance of the tech giants grew, productivity would once again fall to depressed levels.
Today, more than a decade later, we’re in the midst of a second productivity paradox, just as mysterious as the first one. New technologies like mobile computing and artificial intelligence are there for everyone to see, but they have done little, if anything, to boost productivity.
At the same time, the power of digital technology is diminishing. Moore’s Law, the decades-old paradigm of continuous doubling in the power of computer processing, is slowing down and soon will end completely. Without advancement in the underlying technology, it is hard to see how digital technology will ever power another productivity boom.
Considering the optimistic predictions of digital entrepreneurs like Steve Jobs, this is incredibly disappointing. Compare the meager eight years of elevated productivity that digital technology produced with the 50-year boom in productivity created in the wake of electricity and internal combustion, and it’s clear that digital technology simply doesn’t measure up.
New technologies like mobile computing and artificial intelligence are there for everyone to see, but they have done little, if anything, to boost productivity.
The Baumol effect, the clothesline paradox, and other headwinds
Much like the first productivity paradox, it’s hard to determine exactly why the technological advancement over the last 15 years has amounted to so little. Most likely, it is not one factor in particular, but the confluence of a number of them. Increasing productivity growth in an advanced economy is no simple thing.
One possibility for the lack of progress is the Baumol effect, the principle that some sectors of the economy are resistant to productivity growth. For example, despite the incredible efficiency that Jeff Bezos has produced at Amazon, his barber still only cuts one head of hair at a time. In a similar way, sectors like health care and education, which require a large amount of labor inputs that resist automation, will act as a drag on productivity growth.
Another factor is the clothesline paradox, which gets its name from the fact that when you dry your clothes in a machine, it figures into GDP data, but when you hang them on a clothesline, you produce no measurable output. In much the same way, when you use a smartphone to take pictures or to give you directions, there is considerable benefit that doesn’t result in any financial transactions. In fact, because you use less gas and don’t develop film, GDP decreases somewhat.
Additionally, the economist Robert Gordon, mentioned above, notes six headwinds to economic growth, including aging populations, limits to increasing education, income inequality, outsourcing, environmental costs due to climate change, and rising household and government debt. It’s hard to see how digital technology will make a dent in any of these problems.
Technology is never enough to change the world
Perhaps the biggest reason the digital revolution has been such a big disappointment is that we expected the technology to largely do the work for us. While there is no doubt that computers are powerful tools, we still need to put them to good use, and we have clearly missed opportunities in that regard.
Think about what life was like in 1900, when the typical American family didn’t have access to running water, electricity, or gas-powered machines such as tractors or automobiles. Even something as simple as cooking a meal took hours of backbreaking labor. Yet investments in infrastructure and education combined with technology to produce prosperity.
Today, however, there is no comparable effort to invest in education and health care for those who cannot afford it, to limit the effects of climate change, to reduce debt, or to do anything of significance to mitigate the headwinds we face. We are awash in nifty gadgets, but in many ways we are no better off than we were 30 years ago.
None of this was inevitable, but somewhat the results of choices we have made. We can, if we really want to, make different choices in the days and years ahead. What I hope we have learned from our digital disappointments is that technology itself is never enough. We are truly the masters of our fate, for better or worse.
All Rights Reserved for Robert Gordon