These slides show why IT has not delivered large improvements in productivity and why new forms of IT like AI will also not deliver large improvements, except in selected sectors. The main reason is that the improvements in AI are over-hyped and because most sectors do not have large inefficiencies in the organization of people, machinery, and materials.

1. IT and Productivity:
Solow’s Computer Paradox
and the Impact of New
Technologies Like AI
Jeffrey Funk
Technology Consultant
Retired Professor

2. Robert Solow, Nobel Laureate in Economics
 “You can see the computer age everywhere but in the
productivity statistics”
 How could this be true?
 Robert Gordon’s The Rise and Fall of American Growth
documents slowdown in productivity since 1970, thus lending
support to Solow’s statement
 Why haven’t computers led to massive improvements in
productivity?
 Manual systems weren’t as inefficient as ordinarily thought
 Thus computers didn’t contribute large improvements in
productivity outside of communications and entertainment
 Let’s look at sectors using data from Gordon’s book

3. Agriculture
 Productivity improvements since 1940 have been small
 No decline in inflation adjusted food prices
 Biggest change has been increase of food variety, partly
through global supply chains
 greater variety of fresh, packaged, and frozen food
 Helped by computers
 But computers don’t impact on crop yields or increase
productivity of machines, key factors in agriculture
 Implications for Future
 Internet of Things, Big Data, Artificial Intelligence will probably
not enable large productivity increases, except in some cases
 They must impact on crop yields to improve productivity

4. Logistics, e.g., Groceries
 Large-scale deployment of bar-code scanners in 1980s reduced
the cost of groceries consumers bought by an estimated 1.4%
 Why so small?
 Probably because manual system wasn’t that bad
 Paper wasn’t so bad at keeping track of products
 Computers didn’t help stock shelves, unload trucks
 Largest benefit of bar-code scanners may be increased variety
 Implications for Future
 Internet of Things, Big Data, Artificial Intelligence will probably
not enable large productivity increases, except in some cases
 But e-commerce may succeed because it provides convenience
http://www.mckinsey.com/~/media/McKinsey/Business%20Functions/McKinsey%20Digital/Our%20Insights/Where%20machines%20
could%20replace%20humans%20and%20where%20they%20cant/SVGZ-Sector-Automation-ex3.ashx

5. Clothing
 Clothing prices fell 1.5%/year between 1940 and 2012
 Variety also rose, with greater emphasis on aesthetics
and fashion
 But computers didn’t revolutionize factories
 Their biggest impact has been on globalization
 Computers facilitated production in low-wage countries
 Implications for future:
 Internet of Things, Big Data, Artificial Intelligence will
probably not enable large productivity increases, except in
some cases
 But e-commerce will continue to gain share because it
provides convenience

6. Construction
 Cost per square foot of homes has risen since 1940 due to
few improvements in construction productivity
 Stagnant productivity, higher wages, and rising labor costs
also caused housing prices to rise from 2.9 times of annual
salary in 1969 to 4.5 times in 2011
 Why didn’t computers enable increases in productivity?
 Most construction tasks are difficult to automate
 Manual scheduling system weren’t as inefficient as ordinarily
thought
 Implications for future
 Internet of Things, Big Data, Artificial Intelligence will probably
not enable large productivity increases, except in some cases

7. Power/Electricity
 Price of electricity has risen since 1970
 Why haven’t computers enabled increases in
productivity?
 Systems were largely automated long before computers
became available
 Manual scheduling, planning, and maintenance systems
weren’t as bad as ordinarily thought
 Implications for future
 Internet of Things, Big Data, Artificial Intelligence
will probably not enable large productivity
increases, except in some cases

8. Health Care
 Health care costs have grown dramatically
 Increases in life expectancy were twice as large in
first than second half of 20th century
 Why haven’t computers had positive effect?
 Small use of computers in health care
 Managing people, materials, and equipment occupies
small part of health care costs
 Government regulations complicate health care
 Keeping old people alive causes expenditures to rise
 Implications for future
 Little productivity increases from IoT, Big Data, AI
 They must enable better treatments, not just higher
efficiency. But IBM’s recent disclosure about Watson
suggests probably won’t happen
https://www.statnews.com/2017/09/05/watson-ibm-cancer/ http://big.assets.huffingtonpost.com
/2013_09_HealthCareCosts3.png

9. Education
 Cost of education has grown quickly
 Still haven’t replaced teachers or textbooks
 Computers have small impact, so far
 Might change in future
 But education is not very responsive to user
needs and very dependent on government
regulations and subsidies
 so it will probably resist change
 Implications for future
 Internet of Things, Big Data, AI will probably
not enable large productivity increases
 They must enable higher quality (more useful
content), not just higher efficiency
College Tuition vs.
Consumer Prices

10. Airlines
 Little drop in cost per passenger mile since 1970
 Cheap flights are result of airlines segmenting users into
business and consumer travelers
 Occurred as deregulation implemented in 1970s in the U.S.
 thus enabling consumers to benefit from higher prices for
business travel
 Why haven’t computers had a larger impact?
 Computer reservations began in 1970s and now reservations is
highly automated process
 But reservations and scheduling contribute much less to costs
than do airplanes and airports

11. Factories
 Computer-controlled machines have probably had large
impact on productivity, larger than other sectors
 But what about information systems?
 During 1980s there was lively debate between MRP (material
resource planning with computers) and JIT (just-in time
manufacturing)
 MRP is now widely used along with some JIT-hybrid systems
 But little impact on productivity of individual factories because
MRP doesn’t add large amounts of value
 Bigger impact was on globalization and creation of complex supply
chains
 Implications for Future
 Internet of Things, Big Data, Artificial Intelligence will probably not
enable large productivity increases, except in some cases
 Computers enable some new processes such as 3D printing

12. Vehicular Transportation
 Inflation-adjusted cost of vehicles has risen over
last 50 years
 City traffic has increased, thus reducing the value
of private automobiles
 Why haven’t computers had a larger impact?
 Automobile factories benefited little from computers,
as with other factories
 City traffic systems also haven’t benefited much from
computers – still lots of congestion
 Big changes in future with ride sharing and
driverless vehicles? See below

13. Implications for Future
 Assessing the impact of new technologies on productivity
requires an understanding of a sector’s cost structure
 What contributes to cost?
 What contributes to customer value?
 This is rarely done, because there is so much hype about
new technologies
 Most sectors will not benefit from more information
technology (Internet of Things, Big Data, Artificial
Intelligence) because
 existing system are already very efficient in terms of
organizing people, machines, and materials
 capability of new technology is over-hyped

14. Big Exception is Intra-City Transportation
 Most private vehicles are parked 95% of the time
 While being used, they also sit in traffic much of the
time and thus underutilized
 Big opportunity for IT (Internet of Things, Big Data,
Artificial Intelligence)
 Ride sharing services, driverless vehicles, and bike
sharing systems can reduce the need for private
vehicles
 Driverless vehicles can reduce congestion
 But outside of intra-city transportation, the impact of IT
will probably be small

15.  Funk Jeffrey 2017. Technology Change, Economic Feasibility and Creative Destruction: The
Case of New Electronic Products and Services, Industrial and Corporate Change, Forthcoming
 Funk Jeffrey 2017 What Does Innovation Today Tell Us About the US Economy Tomorrow? Above
all, that the nation needs to get a lot better at linking scientific advance to economically and
socially valuable technologies. Issues in Science and Technology September/October
 Funk Jeffrey 2017 Assessing Public Forecasts to Encourage Accountability: The Case of MIT's
Technology Review, PLOS ONE, August
 Funk Jeffrey and Magee Chris 2015. Rapid Improvements with No Commercial Production:
How do the improvements occur? Research Policy 44(3): 777-788
 Funk Jeffrey 2013. What Drives Exponential Improvements? California Management Review
55(3): 134-152, Spring 2013. Reported in Relax about robots but worry over climate change, Robin
Harding, Financial Times, July 27, 2016 and TodayOnline, August 4, 2016.
 Stop the Hype! Using Patterns of Technology Change to Rethink America’s System of R&D,
Book Manuscript, Book Manuscript, 2018
For More Information

16. Or If You Like Power Point Slides
 Mission-based research
 www.slideshare.net/Funk98/mission-based-rd-to-restore-productivity-growth
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 https://www.slideshare.net/Funk98/phds-dont-found-successful-startups-why-they-
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 Silicon Valley Startups
 www.slideshare.net/Funk98/silicon-valley-startups-for-which-sectors-and-why
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 https://www.slideshare.net/Funk98/do-corporate-engineers-and-scientists-read-
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 Finding Billion-Dollar “Opportunities”
 https://www.slideshare.net/Funk98/finding-billion-dollar-startup-club-opportunities-
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 MIT’s Research
 https://www.slideshare.net/Funk98/mits-poor-predictions-about-technology