Arnold Kling  

Solow Paradox Revisited

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Raffaella Sadun and John Van Reenen write,

The rebound of US productivity growth has been a major economic development over the last decade. This “miracle” is linked to IT as the productivity acceleration was particularly strong in those sectors that used IT intensively - such as retail and wholesale. Europe did not experience this acceleration in the same sectors. We have shown that the bulk of the evidence from firm level, micro-economic studies is that IT does have an economically and statistically significant impact on productivity but this varies dramatically between firms: having the right organisation helps greatly in making the most of ICT [information and communications technology]. We have suggested that these organisational differences also lie behind the different productivity performance between the US and Europe – US firms are better placed to take advantage of ICT. It is likely that European firms will have to adopt more US style business processes to obtain the same level of productivity advances.

Many people like to quote Robert Solow that "We see computers everywhere but in the productivity statistics." Few of them seem to realize that he said that in 1987, and in the past five years most economists who have studied U.S. productivity growth have seen plenty of evidence of computers in the productivity statistics.

This paper says, in effect, that we can see computers everywhere but in the productivity of non-U.S. firms.

Thanks to Michael Stastny for the pointer.

Comments and Sharing

COMMENTS (4 to date)
Pontus writes:

I thought it said rather the opposite:

"We see productivity everywhere but in the computers of europe."


FDKbrussels writes:

I think we should be more careful in putting the productivity gap between EU an US on the sole IT introduction gap. EU was a slower adapter in de late nineties but the EU-US difference in the installed base of PC’s, mainframes and networks seems vaporized at the moment. But there is still a gap in the organisational integration : it is far more easier to create a coast to coast business to customer IT service in US that create the same product, integrating the British, French and Spanish market e.d.. This transnational service needs integrated structures over different countries who work whit the same IT business applications. Production companies (automobile, chemicals, some engineering companies etc) have integrated transnational company applications. But a transnational service or meeting, (e.d. in Italy with French, Germans, Swedish and Portuguese) where different company cultures (even in the same company) and languages have to be addressed, takes more time and money to organise and to back by IT. And all this slows down the advantages of an IT integration.

AJ writes:

If computer systems or software reduce costs in a competitive industry, then a widget may go from a full cost of 100 down to 20. The price goes from 100 down to 20. GNP goes down, all other things equal. Full employment may shift resources to other sectors or products and so GNP.GDP may stay flat. There is no productivity increase measured for the economy, because it's consumers, not producers, who just scarfed up this gain. Large benefits from efficiency improvements are not well estimated by GNP/GDP.

I always thought that was an explanation for the Solow comment. Thoughts?

spencer writes:

AJ -- you are confusing nominal and real prices.
In your example if prices fall from 100 to 20 the real price does not fall. The consumer that was paying 100 and now pays 20 still gets 100 in value.

You really see this in the capital spending data in the gdp accounts. Because of the fall in IT prices if you look at nominal values the capital spending boom of the 1990s did not happen. But we all realize that in real terms capital spending rose to record ammounts and lead to the productivity rebound we are now seeing.

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