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Thursday, January 12, 2006

Varian: Information Technology and Productivity Growth

Hal Varian explains the recent increase in productivity and the difference in productivity between the U.S. and Europe. The difference is explained by the efficient integration of computers into the production process to optimize the flow of information, an area where the U.S. has taken the lead:

American Companies Show an Edge in Putting Information to Work, by Hal R. Varian, Economic Scene, NY Times: Productivity just keeps humming along. ... From 1974 to 1995, productivity grew at around 1.4 percent a year. Productivity growth in the United States accelerated to about 2.5 percent a year from 1995 to 2000. Since then, productivity has grown at a bit over 3 percent a year, with the last few years looking particularly strong. Unlike the United States, European countries have not seen the same surge in productivity growth in the last 10 years. Why the difference?

The answer, according to Nick Bloom, Raffaella Sadun and John Van Reenen, researchers at the Center for Economic Performance at the London School of Economics, is that American companies make much more effective use of information technology than European companies. (A selection of their studies can be downloaded from http://cep.lse.ac.uk/research/innovation/ict.asp.)

Nowadays, most economists agree that information technology is a significant part of the explanation for the post-1995 productivity surge in the United States. ... The story is quite different in the European Union. In the late 1990's, ... productivity growth in Europe was static. But Europe has access to the same information technology that the United States does, at more or less the same prices. Why didn't those countries get the same increase in productivity?

To answer the question, we have to move away from macroeconomics and look at the experience of individual companies. Work by the economist Erik Brynjolfsson and his colleagues at M.I.T. suggests that organizational factors are quite important. Just dropping a bunch of new personal computers on workers' desks is unlikely to contribute to productivity. A company has to rethink how business processes are handled to get significant cost savings.

As the Stanford economic historian Paul A. David has pointed out, the productivity effects from the electric motor did not really show up until Henry Ford and other industrialists figured out how to use it effectively to create the assembly line. The same is true for computers: ... companies today must learn how to use information technology to optimize the flow of information in their organizations.

It appears that United States companies are much farther up the learning curve than European companies. ...[T]he authors suggest that information technology capital may be a big part of the productivity difference: American companies in Britain use a whopping 40 percent more information technology capital per worker than the average company. Not only did American companies use more information technology, they used it more effectively. ...

Why the difference in effective use of information technology? This is still something of a mystery, but part of the answer seems to be managerial practices. ... Personally, I have found that American managers are much more comfortable with computers than their European counterparts. Until a few years ago, a typical European manager could not even type. This is no longer true of the younger generation of European managers, and ... as they move up in their organizations, managerial comfort with information technology in European companies will broaden.

As a business school professor, I sometimes worry whether we are giving our students the right skills in finance, accounting, marketing and leadership. But the one thing I never worry about is their skills in PowerPoint and Excel... Perhaps the comfort of young American managers in using computers and other sorts of information technology contributes more than we realize to productivity growth.

    Posted by on Thursday, January 12, 2006 at 12:21 AM in Economics, Technology | Permalink  TrackBack (0)  Comments (12)

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