The Competitiveness of Nations in a Global Knowledge-Based Economy
Paul
A. David *
The Dynamo and the Computer: An Historical Perspective
on the Modern Productivity Paradox
American Economic Review, 80
(2)
May 1990, 355-361.
Content
I - Relevance of Historical Studies
HHC: index and titling added
Many observers of recent
trends in the industrialized economies of the West have been perplexed by the
conjecture of rapid technological innovation with disappointingly slow gains in
measured productivity. A generation of
economists who were brought up to identify increases in total factor productivity
indexes with “technical progress” has found it quite paradoxical for the growth
accountants’ residual measure of “the advance of knowledge” to have vanished at
the very same time that a wave of major innovations was appearing - in
microelectronics, in communications technologies based on lasers and fiber
optics, in composite materials, and in biotechnology. Disappointments with “the computer revolution”
and the newly dawned “information age” in this regard have been keenly felt. Indeed, the notion that there is something
anomalous about the prevailing state of affairs has drawn much of its appeal
from the apparent failure of the wave of innovations based on the
microprocessor and the memory chip to elicit a surge of growth in productivity
from the sectors of the U.S. economy that recently have been investing so heavily
in electronic data processing equipment (see, for example, Stephen Roach, 1987,
1988; Martin Baily and Robert Gordon, 1988). This latter aspect of the so-called
“productivity paradox” attained popular currency in the succinct formulation attributed
to Robert Solow: “We see the computers everywhere but
in the productivity statistics.”
If, however, we are
prepared to approach the matter from the perspective afforded by the economic
history of the large technical systems characteristic of network industries,
and to keep in mind a time-scale appropriate for thinking about transitions
from established technological regimes to their respective successor regimes,
many features of the so-called productivity paradox will be found to be neither
so unprecedented nor so puzzling as they might otherwise appear.
I - Relevance of Historical Studies
My aim here simply is to
convince modern economic analysts (whether perplexed by the productivity
slowdown, or not) of the immediate relevance of historical studies that trace
the evolution of techno-economic regimes formed around general purpose engines.
[1] The latter, typically, are key functional components
embodied in hardware that can be applied as elements or modular units of the
engineering designs developed for a wide variety of specific operations or
processes. Accordingly, they are found
ubiquitously distributed throughout such systems when the latter have attained
their mature, fully elaborated state. James Watt’s (separate condenser) steam engine
design springs to mind readily as an example of an innovation that fulfilled
this technological role in the first industrial revolution. My particular line of argument will be better
served, however, by directing notice to the parallel between the modern computer
and another general purpose engine, one that figured
prominently in what sometimes is called the “second Industrial Revolution” - namely,
the electric dynamo. (But, see also Herbert Simon, 1986.)
Although the analogy between
information technology and electrical technology
*Department of Economics, Encina
Hall, Stanford University, Stanford, CA 94305. Discussions with Paul Rhode were particularly
helpful early in the research. I am
grateful for comments from Steve Broadberry, Jonathan
Cave, Nick Crafts, among the participants in the Economic History Summer
Workshop held at Warwick University, July 10 -28, 1989; from Timothy Taylor;
and from Shane Greenstein, Avner Greif,
Edward Steinmueller, and other participants in the
Technology and Productivity Workshop at Stanford, October 1989.
1. This paper draws upon material developed in a longer work - my 1989
paper
would have many limitations if taken very literally, it
proves illuminating nonetheless. Computer
and dynamo each form the nodal elements of physically distributed (transmission)
networks. Both occupy key positions in a
web of strongly complementary technical relationships that give rise to
“network externality effects” of various kinds, and so make issues of
compatibility standardization important for business strategy and public policy
(see my 1987 paper and my paper with Julie Bunn, 1988). In both instances, we can recognize the
emergence of an extended trajectory of incremental technical improvements, the
gradual and protracted process of diffusion into widespread use, and the confluence
with other streams of technological innovation, all of which are interdependent
features of the dynamic process through which a general purpose engine acquires
a broad domain of specific applications (see Timothy Bresnahan
and Manuel Trajtenberg, 1989). Moreover, each of the principal empirical
phenomena that make up modern perceptions of a productivity paradox had its
striking historical precedent in the conditions that obtained a little less
than a century ago in the industrialized West, including the pronounced
slowdown in industrial and aggregate productivity growth experienced during the
1890-1913 era by the two leading industrial countries, Britain and the United
States (see my 1989 paper, pp. 12-15,
for details). In 1900,
contemporary observers well might have remarked that the electric dynamos were
to be seen “everywhere but in the productivity statistics!”
At the turn of the century,
farsighted engineers already had envisaged profound transformations that
electrification would bring to factories, stores, and homes. But the materialization of such visions hardly
was imminent. In 1899 in the United
States, electric lighting was being used in a mere 3 percent of all residences
(and in only 8 percent of urban dwelling units); the horsepower capacity of all
(primary and secondary) electric motors installed in manufacturing establishments
in the country represented less than 5
percent of factory mechanical drive. It would take another two decades, roughly
speaking, for these aggregate measures of the extent of electrification to
attain the 50 percent diffusion level (see my 1989 paper, Table 3, for
estimates and sources). It may be
remarked that, in 1900, an observer of the progress of the “Electrical Age”
stood as far distant in time from the introduction of the carbon filament
incandescent lamp by Edison, and Swann (1879), and of the Edison central
generating station in New York and London (1881), as today we stand from
comparable “breakthrough” events in the computer revolution: the introduction
of the 1043 byte memory chip (1969) and the silicon microprocessor (1970) by
Intel. Although the pace of the
computer’s diffusion in the business and public sectors of the industrialized
societies during the past two decades has been faster than that recorded for
the dynamo during its comparable early phase of adoption, it has been estimated
that only 10 percent of the world’s 50 million business enterprises today are
using computers, and only 2 percent of the world’s business information has
been digitized (see Peter Lewis, 1989).
The history of
electrification after 1900 (see I. C. R. Byatt, 1979;
Thomas Hughes, 1983; Ryoshin Minami, 1987) lends
considerable plausibility to the “regime transition thesis” of Christopher
Freeman and Carlotta Perez (1990). They
suggest that productivity growth has been sluggish, and very well might remain
so because the emergence and elaboration of a new techno-economic regime based
on computer and communications innovations (supplanting the mature, ossified Fordist regime of mass production) will, more than likely,
be a protracted and historically contingent affair.
Certainly, the
transformation of industrial processes by the new electric power technology was
a long-delayed and far from automatic business. It did not acquire real momentum in the United
States until after 1914-17, when regulated regional utility rates for electricity
were lowered substantially in relationship to the general price level (see my
1989 paper: Table 4, Fig. 14), and central station generating capacity came to
predominate over generating capacity in
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isolated
industrial
plants. Furthermore, factory
electrification did not reach full fruition in its technical development nor
have an impact on productivity growth in manufacturing before the early 1920s. At that time only slightly more than half of
factory mechanical drive capacity had been electrified. (On the significance for
derived productivity growth of attaining 50 percent diffusion, see my 1989
paper, Appendix A.) This was four
decades after the first central power station opened for business.
The proximate source of the
delay in the exploitation of the productivity improvement potential incipient
in the dynamo revolution was, in large part, the slow pace of factory
electrification. The latter, in turn,
was attributable to the unprofitability of replacing
still serviceable manufacturing plants embodying production technologies adapted
to the old regime of mechanical power derived from water and steam. Thus, it was the American industries that were
enjoying the most rapid expansion in the early twentieth century (tobacco,
fabricated metals, transportation equipment, and electrical machinery itself)
that afforded greatest immediate scope for the construction of new, electrified
plants along the lines recommended by progressive industrial engineers (see
Richard DuBoff, 1979, p. 142; and Minami, pp. 138-41).
More widespread opportunities to embody
best-practice manufacturing applications of electric power awaited the further
physical depreciation of durable factory structures, the locational
obsolescence of older-vintage industrial plants sited in urban core areas, and,
ultimately, the development of a general fixed capital formation boom in the
expansionary macroeconomic climate of the 1920s.
The persistence of durable
industrial facilities embodying older power generation and transmission
equipment had further consequences that are worth noticing. During the phase of the U.S. factory
electrification movement extending from the mid-1890s to the eve of the 1920s,
the “group drive” system of power transmission remained in vogue (see Duboff, p. 144; Warren Devine, 1983, pp. 351, 354). With this system (in which electric motors
turned separate shafting sections, so that each motor would drive related
groups of machines), the retrofitting of steam- or water-powered plants
typically entailed adding primary electric motors to the original stock of
equipment. While factory owners
rationally could ignore the sunk costs of the existing power transmission
apparatus, and simply calculate whether the benefits in the form of reduced
power requirements and improved machine speed control justified the marginal
capital expenditures required to install the group drive system, productivity
accountants would have to reckon that the original belt and shaft equipment
(and the primary engines that powered them) remained in place as available
capacity. The effect would be to raise
the capital-output ratio in manufacturing, which militated against rapid gains
in total factor productivity (TFP) - especially if the energy input savings and
the quality improvements from better machine control were left out of the
productivity calculation.
This sort of overlaying of
one technical system upon a preexisting stratum is not unusual during
historical transitions from one technological paradigm to the next. Examples can be cited from the experience of
the steam revolution (G. N. von Tunzelmann, 1978, pp.
142-43, 172-73). Indeed, the same
phenomenon has been remarked upon recently in the case of the computer’s
application in numerous data processing and recording functions, where old
paper-based procedures are being retained alongside the new,
microelectronic-based methods - sometimes to the detriment of each system’s performance
(see, for example, Baily and Gordon, pp. 401-02).
Finally, it would be a
mistake to suppose that large potential gains from factory electrification were
obtainable from the beginning of the century onward, just because there were
farsighted electrical engineers who at the time were able to envisage many
sources of cost savings that would result from exploiting the flexibility of a
power transmission system based on electric wires, and the efficiency of
replacing the system of shafting and belts with the so-called “unit drive”
system. In the latter arrangement, individual
electric motors were used to run
machines of all sizes (see Devine, pp. 362ff). The advantages of the unit drive for factory
design turned out to extend well beyond the savings in inputs of fuel derived
from eliminating the need to keep all the line shafts turning, and the greater
energy efficiency achieved by reducing friction losses in transmission. Factory structures could be radically
redesigned once the need for bracing (to support the heavy shafting and
belt-housings for the transmission apparatus that typically was mounted
overhead) had been dispensed with. This
afforded 1) savings in fixed capital through lighter factory construction, and
2) further capital savings from the shift to building single-story factories,
whereas formerly the aim of reducing power losses in turning very long line
shafts had dictated the erection of more costly multistory structures. Single-story, linear factory layouts, in turn,
permitted 3) closer attention to optimizing materials handling, and flexible
reconfiguration of machine placement and handling equipment to accommodate subsequent
changes in product and process designs within the new structures. Related to this, 4) the modularity of the unit
drive system and the flexibility of wiring curtailed losses of production incurred
during maintenance, rearrangement of production lines, and plant retrofitting;
the entire power system no longer had to be shut down in order to make changes
in one department or section of the mill.
Although all this was clear
enough in principle, the relevant point is that its implementation on a wide
scale required working out the details in the context of many kinds of new
industrial facilities, in many different locales, thereby building up a cadre
of experienced factory architects and electrical engineers familiar with the
new approach to manufacturing. The
decentralized sort of learning process that this entailed was dependent upon
the volume of demand for new industrial facilities at sites that favored
reliance upon purchased electricity for power.
It was, moreover, inherently uncertain and slow to gain momentum, owing
in part to the structure of the industry responsible for supplying the capital
that embodied the new, evolving technology. For, the business of constructing factories
and shops remained extremely unconcentrated, and was
characterized by a high rate of turnover of firms and skilled personnel. Difficulties in internalizing and
appropriating the benefits of the technical knowledge acquired in such
circumstances are likely to slow experience-based learning. A theoretical analysis of an interdependent
dynamic process involving diffusion and incremental innovations based upon
learning-by-doing (see my paper with Trond Olsen,
1986) demonstrates that where the capital goods embodying the new technology
are competitively supplied, and there are significant knowledge spillovers
among the firms in the supplying industry, the resulting pace of technology
adoption will be slower than is socially optimal.
The preceding review of the
sources of “diffusion lags” bears directly on the relationship between the
timing of movements in industrial productivity, and the applications found for
electric power within the industrial sector. A somewhat different class of considerations also
holds part of the explanation for the sluggish growth of productivity in the
United States prior to the 1920s. These
have to do more with the deficiencies of the conventional productivity
measures, which are especially problematic in treating the new kinds of
products and process applications that tend to be found for an emergent general
purpose technology during the initial phases of its development. Here, too, the story of the dynamo revolution
holds noteworthy precedents for some of the problems frequently mentioned today
in connection with the suspected impact of the computer (see, Baily-Gordon; and Gordon-Baily,
1989): 1) unmeasured quality changes associated with the introduction of novel
commodities; and 2) the particular bias of the new technology toward expanding
production of categories of goods and services that previously were not being
recorded in the national income accounts.
In the case of the dynamo,
initial commercial applications during the 1890-1914 era
were concentrated in the fields of light-
358
ing equipment and urban transit systems. Notice that qualitative characteristics such
as brightness, ease of maintenance, and fire safety were especially important
attributes of incandescent lighting for stores and factories, as well as for
homes - the early electric lighting systems having been designed to be closely
competitive with illuminating gas on a cost basis. Likewise, the contributions to the improvement
in economic welfare in the form of faster trip speeds and shorter passenger
waiting times afforded by electric streetcars, and later by subways (not to mention
the greater residential amenities enjoyed by urban workers who were enabled to
commute to the central business district from more salubrious residential
neighborhoods), all remained largely uncaptured by
the conventional indexes of real product and productivity.
Measurement biases of this
kind persisted in the later period of factory electrification, most notably in
regard to some of the indirect benefits of implementing the “unit drive”
system. One of these was the improvement
in machine control achieved by eliminating the problem of belt slippage and
installing variable speed d.c.
motors. This yielded better quality,
more standardized output without commensurately increased costs (see Devine,
pp. 363ff). Factory designs adapted to
the unit drive system also brought improvements in working conditions and
safety. Lighter, cleaner workshops were
made possible by the introduction of skylights, where formerly overhead
transmission apparatus had been mounted; and also by the elimination of the
myriad strands of rotating belting that previously swirled dust and grease
through the factory atmosphere, and, where unenclosed within safety screening,
threatened to maim or kill workers who became caught up in them.
These more qualitative
indirect benefits, however, came as part of a package containing other gains
that, as has been seen, took the form of more readily quantifiable resource
savings. Consequently, a significantly
positive cross-section association can be found between the rise in the
industry’s TFP growth rate (adjusted for purchased energy inputs) during the
1920s, vis-à-vis the 1910s, and the proportionate increase of its installed
secondary electric motor capacity between 1919 and 1929. Making use of this cross-section relationship,
approximately half of the 5 percentage point acceleration recorded in the
aggregate TFP growth rate of the U.S. manufacturing sector during 1919-29
(compared with 1909-19) is accounted for statistically simply by the growth in
manufacturing secondary electric motor capacity during that decade (see my 1989
paper, Table 5, and pp. 26-27).
But, even that did not
exhaust the full productivity ramifications of the dynamo revolution in the
industrial sector during the 1920s. An
important source of measured productivity gains during this era has been found
to be the capital-saving effects of the technological and organizational
innovations that underlay the growth of continuous process manufacturing,
and the spread of continuous shift-work, most notably in the petroleum products,
paper, and chemical industries (see John Lorant,
1966, chs. 3, 4, 5). Although these
developments did not involve the replacement of shafts by wires, they were
bound up indirectly with the new technological regime build up around the
dynamo. Advances in automatic process
control engineering were dependent upon use of electrical instrumentation and
electro-mechanical relays. More
fundamentally, electrification was a key complementary element in the foregoing
innovations because pulp- and paper-making, chemical production, and petroleum
refining (like the primary metals, and the stone, clay and glass industries
where there were similar movements towards electrical instrumentation for
process control, and greater intensity in the utilization of fixed facilities)
were the branches of manufacture that made particularly heavy use of
electricity for process heat.
Closer study of some
economic history of technology, and familiarity with the story of the dynamo revolution
in particular, should help us avoid both the pitfall of undue sanguinity and the
pitfall of unrealistic impatience into which current discussions of the
productivity paradox seem to plunge all too frequently. Some closing words of caution are warranted,
however, to guard against the dangers of embracing the historical analogy too
literally.
Computers are not dynamos. The nature of man-machine interactions and the
technical problems of designing efficient interfaces for humans and computers
are enormously more subtle and complex than those that arose in the implementation
of electric lighting and power technology. Moreover, information as an economic commodity
is not like electric current. It has
special attributes (lack of superadditivity and
negligible marginal costs of transfer) that make direct measurement of its
production and allocation very difficult and reliance upon conventional market
processes very problematic. Information
is different, too, in that it can give rise to “overload,” a special form of
congestion effect arising from inhibitions on the exercise of the option of
free disposal usually presumed to characterize standard economic commodities. Negligible costs of distribution are one cause
of “overload”; information transmitters are encouraged to be indiscriminate in
broadcasting their output. At the user
end, free disposal may be an unjustified assumption in the economic analysis of
information systems, because our cultural inheritance assigns high value to
(previously scarce) information, predisposing us to try screening whatever
becomes available. Yet, screening is
costly; while it can contribute to a risk-averse information recipient’s personal
welfare, the growing duplicative allocation of human resources to coping with
information overload may displace activities producing commodities that are better
recorded by the national income accounts.
In defense of the
historical analogy drawn here, the information structures of firms (i.e., the
type of data they collect and generate, the way they distribute and process it
for interpretation) may be seen as direct counterparts of the physical layouts
and materials flow patterns of production and transportation systems. In one sense they are, for they constitute a
form of sunk costs, and the variable cost of utilizing such a structure does
not rise significantly as they age. Unlike
those conventional structures and equipment stocks, however, information
structures per se do not automatically undergo significant physical
depreciation. Although they may become
economically obsolete and be scrapped on that account, one cannot depend on the
mere passage of time to create occasions to radically redesign a firm’s information
structures and operating modes. Consequently,
there is likely to be a strong inertial component in the evolution of information-intensive
production organizations.
But, even these cautionary
qualifications serve only to further reinforce one of the main thrusts of the
dynamo analogy. They suggest the
existence of special difficulties in the commercialization of novel
(information) technologies that need to be overcome before the mass of
information-users can benefit in their roles as producers, and do so in ways
reflected by our traditional, market-oriented indicators of productivity.
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