The Productivity Paradox
We live today in an age of paradoxes. It is the presence of paradoxes that tell us all is going, as they should be. No paradoxes will signify a world either where everything in the past, present or future is known or where people have become fed up of asking questions. As Charles Handy says, “Paradoxes, I now see to be endemic, inevitable and perpetual. The more turbulent the times, the more complex the world, the more paradoxes there are” (1994)
The term “productivity paradox’ was first used by Eric Brynjolfsson who pointed out the non-conformity between the advances made in IT and computing due to the enormous amounts of money invested in the industry and the comparative growth of productivity and economic growt at the national or organizational or individual company level. It had been expected, that as IT had contributed to the growth of the automation, operations, quality control, supply chain logistics etc., the overall productivity would also increase at equal or close levels, which is not the case. This is the productivity paradox. Productivity is defined here as per tradition i.e. the output value of finished goods divided by the input value of raw materials, machinery and overheads.
IT Linkages in Organizations
There are many theories to explain the productivity paradox. What is an organization? It is a complex mode of obtaining items, which are useful to us. In a complex system, you cannot expect that the change in one parameter will bring about a huge change overall. As an illustration let us consider a huge 10 cylinder diesel engine which drives a generator. The engine is one complex mix of hoses, shafts, pin, bearings, gauges etc. all over it. Now, say a saboteur opens the head of a single cylinder and alter the exhaust valve so that the exhaust stroke finishes at 90% of the original stroke. The next morning he comes and is disappointed to see the engine running well. The next day is also the same story and so on for the entire month. The saboteur stops going to the engine room finally as he is frustrated. However, why did not anything happen? The linkage, which connects the problem of the individual cylinder to the net output, is very small by the engine’s standards. The performance is definitely affected but the rate is too low to satisfy our friend, the saboteur. The effect depends upon the relative lengths and the qualities of the linkages say Schneider and Klein in their paper titled “What Is Enough? A Systems Perspective on Individual-Organizational linkages” (2004).
How to Measure Productivity
Brynjolfsson & Saunders give a very interesting theory to regurgitate the statement that IT investment is meaningless, as it does nothing to increase productivity. They state that our accounting methods do not give us any leeway in measuring IT related productivity. It induced innovative productivity has a tangible part which is the measured value in monetary units, but it also has a non-tangible value which can prove to be very conducive to bring about productivity.
Let us consider say a man who buys the entire volumes of Britannica Encyclopedia for $1000. He spends the money and reads information, whatever he wants whenever it is necessary. Then consider the man who from the comfort of his house refers something he wants to know about in the Wikipedia and becomes at par with the first man without spending 10c. When applied to in the context of both the men working for organizations, this is obviously value addition. However, where does it show in the balance sheet? It simply does not. However these tangible values although ignored is making a difference today. The US was the original birthplace of Information Technology, which is a science like no other. It makes sense that the mother while rearing her first-born makes mistakes, as she has no one to ask or solicit advice. The US has learned today how best to optimize the miracle of IT. In the industry, IT needs to be mixed with the Japanese developed principles of TQM and Kaizen and it is because we did that that we are being able to share the benefits of IT.
The Concepts of Organizational Capital and Consumer Surplus
The value of IT, which we cannot measure, is its organizational capital. As we cannot measure it, we show that it is not there or is insignificant. However, as hypocrites, we protect this organizational capital from being poached by others and put it under the class of “Intellectual Property”. This concept will be clear once the reader refers to Appendix A where the deficiencies of our existing accounting procedures are shown.
Now let us come to consumer surplus. This is the value remaining in an article or even a thought after the value the customer paid for it is recovered. As can be seen, consumer surplus is the area as marked in the figure opposite. Google, Yahoo, Rediff etc. offer their surplus back to the consumer. You can buy books at Amazon more easily and at less cost. Why is this? That Amazon also buys and sells second hand books can be a main reason. It is a well-cited fact that the prices of things are much less on the internet then they are in retail shops. Reason is no overheads. The customer can be passed on the benefit. Humor me and bear with me as I consider an escalation of this phenomenon into the economy. Purchasing Power, Market research, M1 and M2 money etc. Do we really need to make finance so complex? Tomorrow if 25% of India reads their paper online instead of purchasing it, that much of money will be saved by the country because the people are going to spend the money or save it. Let us suppose they save it. What will be the amount? Ten million dollars saved per day minimum. Multiply that by 30 and 365 and look at that figure.
These are amazing facts and you cannot find any blemish on them because they are true. Let us call the IT and productivity relationship “the productivity paradox” if it serves to keep people happy but in reality this paradox can give rise to so much power, that it is frightening. So much can be done for society. Let us try it out will be my judgment because we may strike gold. After all, one never knows.
1. Brynjolfsson.E, Saunders.A (2009); Wired for Innovation : How Information Technology Is Reshaping the Economy ; MIT Press, Cambridge, MA, USA
2. Handy C.(1994);”The Age of Paradoxes”; Printed by the Harvard Business School, USA.
3. Harris, Douglas H. (Editor)(1994); Organizational Linkages: Understanding the Productivity Paradox” National Academies Press, Washington, DC, USA
4. Henry.L.C.(1999); “Information Technology and the Productivity Paradox: Assessing the value of investing in it” Oxford University Press, 194 Madison Avenue, NY