“You can see the computer age everywhere but in the productivity statistics.” — Robert Solow, 1987
The economy has been growing steadily since we started to recover from the 2020 pandemic and shutdown; the unemployment rate is and has been near the bottom of the range normally considered to be full employment; and, wages adjusted for inflation are the highest they’ve ever been. Nevertheless, the productivity slowdown observed by Robert Solow forty years ago seems to have returned, and surveys of consumer confidence are at or near their all-time lows. This essay explores possible reasons for the productivity slowdown and widespread economic uncertainty in the midst of our AI boom.
Measurement Problems
Among the possible explanations of the productivity slowdown or what merely appears to be a productivity slowdown is our limited ability to measure productivity in an economy increasingly dominated by services.
It wasn’t so long ago that productivity was measured in the sectors of the economy concerned with physical output such as agriculture and manufacturing. The productivity of office workers was either ignored or simply subsumed into the productivity of goods-producing companies.
There were problems of measuring quality differences in goods, but these could in theory be surmounted. For example, by comparisons of the prices of old and new vintages of similar products. And, the changing composition of production could be represented by slowly-changing weights in indexes of production.
As much effort as was put into measuring production, systematic discrepancies persist in indexes of the prices of services versus the prices of commodities. The CPI, for example, typically registers a 1 or 2 percentage point higher rate of inflation than the PPI. With the digital economy, now augmented by AI, a serious effort must be made to measure the production of information, entertainment and services. For example, an hour of broadcast time prior to the development of the internet might have cost something like $1 million (in today’s dollars). What about the several hundred thousand hours of video uploaded to YouTube nowadays?
Prototypes (as Opposed to Practical Inventions)
In the past, it took a while for breakthroughs such as the steam engine to have a discernible impact on production. It was more or less a century from prototype steam engines to when steam engines were first put to a practical use (in the refreshing of air in coal mines). Then, several more decades until steam engines were used to run industrial machinery. Then, yet several more decades until steam-powered locomotives were used in transportation.
Even when the steam-powered locomotive was developed, horse-drawn trains were more reliable. The story is told of a race in 1830 between a steam-powered locomotive and a horse-drawn train along the Baltimore & Ohio Railroad from Baltimore to Endicott City. The horse won the race since the locomotive broke down. Nevertheless, over the next century, horses lost their jobs in transportation.
Ditto, the steam-powered hammer. According to folklore, John Henry who—through superhuman effort—beat the steam-powered hammer, preserving jobs for the men of railroad work gangs. Nevertheless, over the next century, men lost their jobs to industrial machinery. Warehousemen who relied on their strength to manhandle barrels of pork, flour, and other produce were replaced by forklifts. Dockworkers lost their jobs to electric-powered derricks.
It is easy, looking back, to see the impact of the Industrial Revolution on productivity, on wages, and on standards of living. But, in real time, it took time for these benefits to accrue. In the meanwhile, workers had to deal with disruptive change.
More recently, in 1996, a super-computer named Deep Blue challenged Gary Kasparov, the world chess champion of the humans. Kasparov won the match 3 games to 1 game to 2 draws. However, the victory was fleeting. A year later, Deep Blue won a rematch; and, nowadays, a decent laptop computer can easily defeat a grandmaster. Today, in the current phase of the Industrial Revolution, computers, robots, and AI are coming after our jobs, not steam-, gasoline- and electric-powered machines.
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