Andrew McAfee continues to push for a better understanding of information technology and its impact on broader economic measures. His latest missive reexamines the data on IT spending and its ability to drive productivity growth. Last December, Andrew argued in defense of IT productivity gains in spite of some evidence to the contrary:
There's also an intriguing possibility that IT's benefits are now showing up elsewhere in the productivity statistics. As discussed above, the TFP growth measured by JHS and others is a bit of a catchall category; it includes the impact of faster computers -- the 'IT-related contribution' -- and all productivity improvements that couldn't be assigned to any other source -- the 'other contributions.'
From 1973-1995, these other contributions added only .09 to the yearly average labor productivity growth of 1.39% (all other sources combined contributed the remaining 1.30). From 1995 to 2004, however, 'other contributions' leapt up to .59. During this period, in other words, unattributed sources added over half a percentage point to yearly productivity growth, whereas they were previosly adding less than one tenth of a percentage point.
Any guesses about what I think is going on here? It seems quite plausible to me that this measured-but-unattributed catchall category is where IT's productivity benefits are now showing up. Gordon told us that be believes the spike in this category is temporary and related to cost-cutting. He also said that some other economists believe it's permanent, but don't know what's causing it.
I also believe it's permanent, and I think IT is at least partially underlying it. Information technology is changing work and boosting efficiency in the US in many different ways, and is in aggregate having a large and positive impat on productivity now and into the future.
At the time, Andrew noted that if aggregate productivity gains continued to decline, he might have to reexamine his thesis. This week, he updates his theory and admits that, for we IT bulls, the productivity data looks disheartening:
It Looks like IT Isn't Helping Productivity Anymore...Yeah, But..
...Well, the most recent data have not been kind to us optimists. Annual nonfarm productivity growth (seasonally adjusted) in the first quarter of 2007, was only 1.0%, according to recently revised estimates, which is less than half the corresponding figure from Q4 2006. This is quite far below the annual average growth rate of 3.87% the US economy experienced from Q3 2001 to Q2 2004.
So even though many expect productivity growth to pick up somewhat in the second half of the year, the trend is clearly down from its peak.
Does this indicate that the era in which information technology was having a deep impact on the US economy has passed? Evidence in support of this view comes not only from the productivity statistics, but also from the slowdown in IT investment growth rates themselves. Taken together, they tell a straightforward and intuitively appealing story: companies are making rational decisions to stop spending willy-nilly on IT because they realize that IT is doing less for them now than was the case in the past.
A logical conclusion of this story is that absent any radical tech innovations, this gradual cooling will continue. We'll continue to spend less and less on IT if IT does less and less for us...
So is that it? Do we throw in the towel now that IT's biggest academic supporter is doubting the veracity of our bullish stance? NOT SO FAST, Andrew goes on to suggest that while productivity data certainly remains an important measuring stick, it's not the only way to evaluate the importance of IT spend.
Rather than continuing to scrutinize the productivity figures, I'd like to shift topics. Everyone agrees that productivity growth is a critical measure, but it's not the only one managers care about, and it's not the only one that could be influenced by IT. Productivity growth measures whether the economic pie is getting bigger, but it's also important to understand how that pie is being divided up.
Productivity growth, in other words, doesn't tell us anything about competitive balances or competitive dynamics. And it's perfectly possible for IT to have no impact on aggregate productivity at the same time that it's having a substantial impact on competition. To see how, consider a stripped-down industry with only two firms, both of which have 50% market share. One of them invests successfully in IT and uses its new technology-based capabilities to take customers from the other company. After a couple years one firm has 75% market share, the other 25%, but the industry remains the same size during this period because total customer demand doesn't increase. At the industry level, IT has had no impact on productivity in this example (since total output doesn't increase) but it's had a major impact on relative competitive position.
Obviously some are going to accuse Andrew of pulling a bait and switch just when the data starts looking like it works against his thesis. I, on the other hand, think he's starting to zero in on the real-world fact that information technology is such a ubiquitous part of the economic model now that you HAVE to measure its impact through multiple, coincident variables.
I'm looking forward to hashing this out with Andrew over drinks next week at Enterprise 2.0. In the meantime, I would love to hear where you stand on this discussion.
andrew mcafee productivity IT competition enterprise irregulars woodrow
You might take a look at The Productivity Exchange, http://productivityexchange.typepad.com/my_weblog/
This work is somewhat of a result of the Information Worker Productivity Council that was put together a few years ago (2003-ish). Susan Conway was one of Microsoft's most active participants in the IWPC effort and her work continues to focus on productivity and measurement. Prof. Erik Brynjolfsson was involved in that community as I recall.
Posted by: Mike Gotta | June 17, 2007 at 02:59 PM