Saturday, January 06, 2001

Productivity Although productivity sounds boring, it is actually the single most important factor to consider when thinking back on America's recent stock market boom (and subsequent deflation). While things were good, people were claiming that the Internet was making everyone wonderfully more productive, and so we could all expect rapid growth with low inflation. Now that the Nasdaq is trading at well under 4K, the predictable counterclaims are being made, saying that productivity gains are bogus. Some other news magazines have picked this up as well, going so far as to say that productivity has actually declined over the past few years. Time to add some substance to these claims.

1) Productivity is the rate at which time is converted into money. Nothing more, nothing less.
2) Productivity is best increased by INNOVATION, not throughput. This is actually a fairly new way of thinking about productivity, which is not that well understood, so this may change in the future. Basically, this means that when things are completely restructured to make them work better, you get high productivity gains (so individual electric motors in factory machines increases productivity, while replacing a central steam engine with a central electric motor does not). In the same way, Moore's Law, which states that processor speed doubles every 18 months has no bearing on productivity increases. It's not how much more you got, it's what you do with it.
3) Since innovation creates NEW things, it's hard to measure its value. Viagra cures impotence for a few bucks a pop. It used to be IMPOSSIBLE to cure impotence. Is that an infinite improvement in productivity? Is that worth infinite dollars? In the same way, this blog (both me creating and you reading it) would be IMPOSSIBLE without the Internet. What's that worth? It's easy to measure productivity when you go from the expensive to the cheap, but how much does productivity improve when you go from the impossible to the possible?

So, has productivity improved? Probably some. My main point is that most businesses (and people) have no clue about how to use the Internet and computers, and the BIG gains from using IT are still to materialize. Although I hope they will start to over the next 20 odd years.

By the way, I am still technically on vacation, so please do not expect regular postings for a few days yet. Happy 2001.


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