The Internet Just Isn’t That Big a Deal Yet: A Hard Look at Solow’s Paradox

The Internet age has given us blisteringly fast connectivity to the World Wide Web, cloud computing, nearly instant collaboration and high definition face-to-face video communication with our peers around the world. Yet in terms of our rate of economic productivity, we have not only stalled in the past several years but also taken hugely dramatic dips. The promise of the Internet making everyone’s job easier and boosting economic advancement has not been met. Why?

The answer lies in a closer look at Solow’s Paradox. The concept was first described in 1987 by economist and author Robert Solow, who stated, "You can see the computer age everywhere but in the productivity statistics." As it grew in popularity, Solow’s Paradox became defined as the “discrepancy between measures of investment in information technology and measures of output at the national level.” In particular, it asks why the rate of productivity increase appears to be slowing dramatically in the Internet age.

And that is undeniably true. According to an early November report from the Bureau of Labor Statistics, 2014’s third quarter business sector labor productivity increased at a 2.0 percent annual rate. Output increased 4.4 percent and hours worked increased 2.3 percent. From the third quarter of 2013 to the third quarter of 2014, productivity rose 0.9 percent as output and hours worked increased 3.0 percent and 2.1 percent, respectively.

Looking at the year-over-year performance by quarter, that seems like good news. But taking a closer look, productivity actually declined steadily from a high of 8.3% in Q2 2009, including sizeable dips of -2.7 percent in Q1 2011 and – 4.5% in Q1 of 2014.

An average productivity growth of 2.0% is something people actually might notice in their lifetimes. With the trends since 2009 showing steady decline over the past several years, however, what’s really noticeable is that there seems to be no correlation between productivity and technological advancement.

For me, it boils down to the fact that, compared to the technological innovations of the last industrial revolution (electricity, automobiles, wireless broadcasting) the Internet age just isn’t that impressive. Technological advancements of the last century had a truly transformative effect over the previous industrial age. Ice farming was replaced by refrigeration, the horse and buggy by the automobile, burning of fossil fuels for energy by centralized electrical power production. These advancements were notable not just in what they achieved in themselves but how they affected society.

What’s more, consider that the average American worker’s productivity soared at an average rate of 2.7% from 1939 to 2000. Among other reasons, the productivity surge occurred because the military industrial complex went from building more weapons to building more expensive, more sophisticated ones. This was a 20th Century idea, and came into its own with the advent of the Cold War. The USA knew it could never beat the Soviet Union or China by weight of numbers, but it could beat them with more efficient systems. This caused both the arms race escalation and the space race.

In defence of today’s technology, despite its ubiquity, some industry observers believe society has really only been in the Internet age for no more than 15 years. As a result, today’s incredible advances in technology innovation have simply not had the time to effect society yet. With the every-quickening rate of change offered by the Internet, it is sensible to assume that 15 years from now we may see some more profound changes, on the order of those enjoyed across society in past periods of innovation.

That is, of course, it we take advantage of the new technological changes available to us. Right now, we are not. People are afraid of rapid change, and when technological change happens faster than the investment cycle for a technology, major problems can happen. People will dig in their heels as a reaction to the newness of innovation. They will stick to old familiar processes, even when the new ones are faster, easier and more efficient. That’s the equivalent of driving a horse-drawn carriage on the freeway.

To avoid falling victim to Solow’s Paradox over the long term, society as a whole – and business in particular – needs to think bigger. No longer can business think in terms of 10% improvement. Today’s business leaders need to radically change their business process, and look for 10 times better process. Take advantage of the opportunities offered by the cloud and gigabit Ethernet, put the applications of the Internet age to work daily, across every aspect of your operations.

That will spur a real revolution in how to do business. And only then might we be able to disprove and put to rest Solow’s Paradox.

This piece first appeared in Wired Magazine November 2014