Is IT productivity a myth?

You can see the computer age everywhere except in productivity statistics.” — Robert M Solow, Nobel Prize winner in Economics

If you ask computer and IT devotees, they will tell you that as far as enhancing productivity goes, there has never been anything like it. Most likely, you will agree with at least a nod. Lots of people believe that the IT revolution is comparable to the Industrial revolution.

But there is a small minority — of economists, who else — that challenges this notion. A decade ago, just alongside the dotcom bubble, an economist called Robert Gordon said that far too much was attributed to computers and that their effect on productivity was hugely exaggerated.

In a seminal paper written in 2000, called “The New Economy in Historical Perspective” (http://www.nber.org/papers/w7833) Gordon showed how the productivity increases caused by the steam engine, electricity, telephones, radio and so on in the 19th century were far greater than those caused by computers in the 20th.

Those things improved the quality of life — what economists call a sort of consumers' surplus — hugely in comparison.

Gordon conducted a detailed econometric study of the US economy and concluded, after examining a great deal of evidence, that there was simply no comparison. “There is no revival of productivity growth in the 88 per cent of the private economy lying outside of durables; in fact when the contribution of massive investment in computers in the nondurable economy is subtracted, multi-factor productivity growth outside of durables has actually decelerated.”

Not more for less

The problem, he said, is that while all those IT things do seem to work wonders, in purely economic terms, the Internet's “use involves substitution of existing activities from one medium to another.” In other words, it is not as if the world is producing more for less, which is what productivity growth implies.

He also said that the inverse relationship between computing power and the price of computer had meant “the marginal utility of computer characteristics like speed and memory” has fallen too rapidly. From this he made the most valuable prediction: “the greatest contributions of computers lie in the past, not in the future.”

The Internet, according to him, didn't measure up to the inventions of the 19th century for another important reason: its social returns were much less than its private returns. This, too, was a very fundamental insight, ignored because of the very fact that private returns are so much higher than social returns.

His last objection was that things like Net-based daytime e-trading seemed to make a big difference but in purely economic terms they actually lowered productivity because people would be doing things other than their jobs while at work.

True, but…

What Gordon is saying is probably true. But he failed to ask two questions: does what happens in the US hold true for all societies and countries, and especially those where productivity and its growth are negative, as in India; and what about the impact of the Internet and computers on international trade in services, especially labour embodied ones and their effect on labour exporters?

In particular, Gordon's argument about the gap between private and social returns may not hold good in the case of low income, low human capital, low productivity countries because, in the US and the West generally, by the time computers and the Internet arrived, human capital was already fairly deep.

In the former, however, it is not. The impact of computers and the Net on productivity there has been dramatic.

The pity of it is that in spite of all the talk about IT, no Indian economist has thought it fit to study its impact here.

What to do? They are like that only.