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New Ideas Why Productivity Growth Is Low

by Andrew White  |  January 18, 2018  |  Comments Off on New Ideas Why Productivity Growth Is Low

This week’s US edition of the Economist reported (see Producing Ideas- Automation and Productivity) in the annual meeting of the American Economic Association that took place in Philadelphia January 7th. The article highlighted well known and popular beliefs in broad circles (the techno pessimists) about the causes of our recent cycle of slow productivity growth. The article, and the meeting, also highlighted the minority’s view (the techno optimists) held by Erik Brynjolfsson of MIT and others (including several of us here at Gartner), that argue for different reasons why our economies are getting ready for a big boost in productivity growth: See 2018 Won’t See a Massive Productivity Boost From AI – 2019 Might Show It.

But the article called out a newer item of interest, one that plays into another part of my reasoning and thinking for why and how productivity-inducing growth changes: the nature of innovation. Daron Acemoglu of MIT and Pascua Restrepo of Boston University presented a new theoretical model that looks at different kinds of technological innovation: those that replace workers en masse (e.g. via automation) and those that create new, higher level skilled or thinking work. Their model suggests periods of market balance where the two kinds of innovation continue apace. But certain conditions, for example long periods of near-zero or very low interest rates, might change the way capital is invested, thus knocking this balance out. If capital is cheap relative to wages, maybe firms will increasingly seek more achievable automation-based innovation, over higher risk new-work generating innovation. It’s an interesting idea and sounds plausible.

I lean toward accepting the idea. My analysis suggests that firms have shifted investment strategy. My recent blog on a book review (see review of Capitalism without Capital) shows that investment in intangibles and specifically software is now far more larger and more important than spend on tangibles such as hardware. Up through late 1990s we had compute and storage to thank for our productivity boots from IT. Looking forward we need to focus on software, and less in hardware.

But is capital investment in software switching to automation-focused opportunities rather than new-work innovation? Intuitively this is the case. Software-as-a-Service (SaaS), if the SaaS vendor is to be successful long term, needs to be multi-tenant.  As such all customers using that app use the same app – which is a receipt for standardization and so automation. SaaS spending is up and growing (according to our data); as is spend on AI to simplify analytics and decision making. So this, short-term at least, bodes well for increased productivity growth.

The only downside to the argument made by Acemoglu and Restrepo is that capital spending is down overall- at least through most of the post- financial crisis recovery, or Great Recession. The Fed’s low interest rate policy did not trigger major new swathes of capital investment by firms. CEOs were more interest in stock buy-backs and M&A to knock up their EPS-based bonuses. But even so, the reduced capital spending may still have been nudged toward automation. There may yet be a silver lining from the Great Recession.


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Category: innovation  productivity  

Andrew White
Research VP
8 years at Gartner
22 years IT industry

Andrew White is a Distinguished Analyst and VP. His roles include Chief of Research and Content Lead for Data and Analytics. His main research focus is data and analytics strategy, platforms, and governance. Read Full Bio

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