Technology Acceleration, Then Productivity Growth

The eighteenth century philosopher Jean-Jacques Rousseau famously said that “man is born free and everywhere he is in chains.” Similarly, these days technology is accelerating and everywhere productivity is slipping.

We can debate the former without ever reaching agreement, but evidence for the latter can be seen in impressive new technologies introduced over the last few years – from driverless cars, to mind-controlled prosthetics, to powerful machine intelligence.

Yet the strong productivity growth in the late 1990s has slowed in recent years. It appears that much of the pace was driven by the industries actually making computers, communications equipment, software, and the Internet.

In a new NBER working paper, John Fernald, of the Federal Reserve Bank of San Francisco, argues that productivity growth did indeed slow down from around 2005, returning to a trend rate near the level from 1973 to 1995.

“The slowdown clearly predates the global recession and seems to have persisted right through it and into recovery,” Fernald tells The Economist. “Slower productivity growth does not appear to be related to any unusual activity in the housing or financial sectors; rather, it came in the same sectors that drove the boom from 1996 to 2004: those producing IT or using it intensively.”

Fernald hypothesizes that the productivity slowdown was the “flip side of the mid-1990s”. Simply, the early IT revolution impacted those industries producing IT equipment, related to things like advances in semiconductor technologies.

But IT is a general purpose technology that can be applied widely and used to boost productivity across many sectors. Achieving those gains, however, requires investment in equipment and also in intangible capital.

The ‘low-hanging fruit’ had been picked by the IT industry, but the broader economy and businesses had to first figure out what to do with the new technologies and how to integrate it into their organizations. This is no easy task and it takes years to happen.

The sizable bulge in productivity growth in the early 2000s has since slowed. But Fernald and Susanto Basu of Boston College suggest that the lag between technology acceleration and productivity growth between investments in information-and-communication technologies and improvements in productivity is between five and 15 years.

We live at a time when everything seems to occur at the speed of light and new inventions are rolled out every week. But history shows that it usually takes many years and even decades before the full effects of new technologies are realized by an economy.

As The Economist points out, it's only been within the last few years that smartphones with 3G connections achieved greater than 50% market penetration in rich countries, and the really impressive new technologies, like autonomous vehicles and powerful machine intelligence, are scarcely beyond the realm of experimental prototype.

We’ve got to keep this in perspective because as The Economist explains, “the more potentially transformative the technology, the longer it may take for business – and society, for that matter – to learn to maximize its economic benefits.”

Third Stream Tweets