A saga of lost productivity

Researchers discuss whether the use of information technology has helped enhance productivity

Published: Monday 15 December 1997

it is a common belief that computers and telecoms have been playing a major role in accelerating economic growth. The mindboggling investment by companies in the us on computers and telecommunications further proves the necessity of information technology in recent times. Yet, if official figures are to be believed, the computer revolution has not made the economy more efficient. The decline in annual average rate of productivity growth in America's business sector from 2.6 per cent in 1960-73 to nearly one per cent in recent times, has become a matter of debate for economists.

According to Paul Strassmann, the author of a recently published book, "The Squandered Computer", the investment on information technology has been a waste. He says that many companies purchase computer systems without knowing how to use them properly. The author does not find a correlation between spending on information technology and profitability in any industry.

The argument is acceptable to a certain extent. Most of the firms have been found to make unwise investments in computers. Due to irrational decisions, most of the companies have not been able to achieve desirable benefits. This productivity paradox -- speedier computing and communications along with slower productivity growth -- can been explained even in more easy ways.

Looking at economic history, one may find that companies have taken a long time to properly adopt a certain technology after its invention. For instance, it took nearly 40 years for companies to properly recognise and take advantage of the electric dynamo, after it was invented in 1881. Similarly, most of the firms have still not learnt how to use microprocessor even when it was invented 26 years back.

Nevertheless, the use of computers at the individual company level has certainly shown a positive trend. Many companies have improved their productivity after taking resort to computers. According to American economists, Erik Brynjolfsson and Lorin Hitt, the annual return on investment in computers stands at nearly 50 per cent. It is much more than the average return on capital.

Now, the pertinent question is why the productivity growth has not been registered at the economy-wide level even after the use of information technology? Daniel Sichel, an economist at the Federal Reserve Board, usa, writes in his book, "The Computer revolution" that computers account for only two per cent of America's total capital stock. Even if the return on computers is higher than on other investments, their contribution to overall growth is modest.

However, Sichel's measure understates the full impact of information technology because it merely focuses on computers. If the total equipment used for gathering, processing and transmitting information is taken into account, it stands at 12 per cent of America's capital stock.

There is another most persuasive argument as to why productivity gains do not show up in the economy as a whole. Three quarters of computers are used in service sector such as finance and health, where it becomes extremely difficult to measure the output. Whereas many of the benefits are in the form of improved quality and convenience that do not reflect in cost savings or increased output. Such arguments strongly favour that information technology has boosted productivity, which for the time being is not visible.

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