A theory of infotech and productivity

An explanation related to information technology

Greenwood and Yorukoglu (1997) turn the argument about diminishing returns on its head, arguing that the slowdown resulted not from an exhaustion of technical possibilities but from the opening up of new ones, specifically, the introduction of information technologies (IT). The authors argue that firms and workers will take a while to learn how to use the new technology. For example, they point to David's (1991) analysis of electrification in America. Before electricity, factories used a single source of energy—typically steam or water—to power all the machines at once, using a system of belts and drives. They continued to use this single-power-source structure even after the advent of electric power, using motors to drive groups of machines. Over time, however, firms figured out that machines could be powered individually, leading to more efficient production processes; for instance, the production plans for one machine no longer had to take account of when the other machines were running.

Critically, during this period, when both firms and workers are learning what to do with the new technology, worker productivity is likely to fall below what it was otherwise. Thus, Greenwood and Yorukoglu (GY) argue that while new technology ultimately leads to higher productivity, the immediate response to the new technology is likely to be a decrease in productivity. FRB

This theory is but one of several in the whole article, and they discuss the productivity slowdown in the 70s, for which we still don't get. More later.