The Solow Paradox - and how it's been solved

Robert Solow made the observation "You can see the computer age everywhere but in the productivity statistics". This quote became known as the Solow Paradox and spawned much research and analysis. The words of a distinguished professor were gospel or at least merited further investigation. Time and research however has shown this passing comment is not true. Why then is IT still regarded as an enemy of productivity?

Numerous studies in the 90's refuted the productivity paradox. The notion that IT adds to the fuss and bother of life instead helping with it. When looking at the statics over time and on a company by company basis, or at a firm level, the adoption of IT has been shown to have a return on investment. Brynjolfsson and Hitt [1] took 527 large firms between 1987 and 1994 and found direct evidence of a positive impact on productivity and output. This now disproven perception that IT reduces productivity has a number of causes.

How do you define productivity?

This is all difficult to measure in that there is no way of quantifying the actual return on investment against the backdrop of other changes. Solow's paradox needs to be taken in its context. He was reviewing a book by Cohen and Zysman, "Manufacturing Matters: The myth of the post industrial economy" [2] . This was a critique of the emerging service economy against a backdrop of declining industrial output during the 1980's, a different time. Historically with technology innovation there have been seen an increase in productivity and output which was not evident here. The suggestion could be that IT has not had the same size of impact of other aspects of the industrial revolution. Only after Solow's review was the impact of adopting IT teased away from other factors and looked at a firm level.

Time to return on investment

Also the timescale for changes to take effect are difficult to define and may take longer than hoped for. When Brynjolfsson and Hitt looked at the data they concluded that not only are benefits found over the short term but even larger benefits are evident when taken over a long term.

Those little savings in time and energy take a while to register in productivity and output figures. Little things like being able to find something by typing into a search box rather than rummaging through draws, emailing document rather than putting them in the post or wrangling with a fax machine (remember them!) all save us precious moments.

Some IT projects go wrong

Negative experience of individual projects that proved more costly than anticipated, and/or overran and then subsequently were judged as failures. But again, how do you measure this

The shambles of some IT projects can be shown to be the result of the approaches and attitudes taken to then. The metrics involved in judging success may not be appropriate or well defined. Shortages of skilled staff are also blamed for difficulties in bringing about these transformations. Agile methodologies can give flexibility and resilience to projects set against changing circumstance and requirements.

Management Practices

Management practices and organisational culture do not always make best use of this technology. IT can be mechanism for additional information overload and add to burden of existing tasks.

Organisation culture and management practices can encourage additional processes and procrastination and not simplification. This brings about an Information overload exacerbated by IT and give raise to this particular aspect of the productivity paradox. Changing how things are done should go hand in hand with changing technology. Skills and knowledge are part of this picture so Human capital also needs investing in as much as gadgets. Brynjolfsson and Hitt found that the extent of the benefits where more likely when part of other innovations, investments and other complementary organisational changes.

Research carried out by the London School of economics agree with these finding within a European context. On this side of the Atlantic investment and organisational change lags behind the US, giving greater potential productivity gains when we get round to it. [3]

A New Paradox

Experience over time and of many different organisations, individual failures aside, have clearly shown a positive impact. However this is without an easy formula for putting dollars or pounds signs against success.

Given the body of research a new paradox has emerged. Dedrick and Kraemer [4] pose the conundrum of why isn't more being invested given what we know of the potential returns, and question whether managers and investors are behaving rationally. Fear of project failures being behind much of this resistance. Dedrick and Kraemer set out the implications for management, again organisational culture is the key. Recommended is a de-centralised structure, aligning IT with business strategy and changing process and practices to take full advantage of changing technology. Employee engagement and education is a factor in bringing about and getting the best out of these changes.

Any Luddite notions have since been dispelled by the evidence. Yet there appears to remain fear, uncertainty and doubt which results in underinvestment and underutilisation. Solow's productivity paradox where it is found is the result of bad and avoidable practice, but more often than not it is just not true

  1. Brynjolfsson & Hitt (2003). Computing Productivity: Firm Level Evidence. MIT Sloan School of Management.

  2. Solow, R. M. (1987, July 12). Manufactory Matters. New York Times Book Review, p. 36.

  3. Reenen, P. J. (January 2010). The Economic Impact of ICT. London School of Economics: Centre for Economic Performce.

  4. Dedrick & Kraemer (2001). The Productivity Paradox: Is it Resolved? Is there a New One? What Does It All Mean for Managers? University of California: Center for Research on Information Technology and Organization.

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April 2015
| Duncan Stonebridge. Back