The Solow Paradox Essay

This essay has a total of 2210 words and 12 pages.

The Solow Paradox

Sam Vaknin's Psychology, Philosophy, Economics and Foreign Affairs Web Sites


The world is debating the Solow Paradox. Named after the Nobel laureate in economics, it
was stated by him thus: "You can see the computer age everywhere these days, except in the
productivity statistics". The venerable economic magazine, "The Economist" in its issue
dated July 24th, quotes the no less venerable Professor Robert Gordon ("one of America's
leading authorities on productivity") - p.20:

"...the productivity performance of the manufacturing sector of the United States economy
since 1995 has been abysmal rather than admirable. Not only has productivity growth in
non-durable manufacturing decelerated in 1995-9 compared to 1972-95, but productivity
growth in durable manufacturing stripped of computers has decelerated even more."

What should be held true - the hype or the dismal statistics? The answer to this question
is of crucial importance to economies in transition. If investment in IT (information
technology) actually RETARDS growth - then it should be avoided, at least until a
functioning marketplace is there to counter its growth suppressing effects.

The notion that IT retards growth is counter-intuitive. It would seem that, at the least,
computers allow us to do more of the same things faster. Typing, order processing,
inventory management, production processes, number crunching are all managed more
efficiently by computers. Added efficiency should translate into enhanced productivity.
Put simply, the same number of people can do more, faster, more cheaply with computers
than they can without them. Yet reality begs to differ.

Two elements are often neglected in considering the beneficial effects of IT.

The first is that the concept of information technology comprises two very distinct
economic activities: an all-purpose machine (the PC) and its enabling applications and a
medium (the internet). Capital assets as distinct from media assets are governed by
different economic principles, should be managed differently and be the subject of
different philosophical points of view.

Massive, double digit increases in productivity are feasible in the manufacturing of
computer hardware. The inevitable outcome is an exponential explosion in computing and
networking power. The dual rules which govern IT - Moore's (a doubling of chip capacity
and computing prowess every 18 months) and Metcalf's (the exponential increase in a
network's processing ability as more computers connect to it) - also dictate a
breathtaking pace of increased productivity in the hardware cum software aspect of IT.
This has been duly detected by Robert Gordon in his "Has the 'New Economy' rendered the
productivity slowdown obsolete?".

But for this increased productivity to trickle down to the rest of the economy a few conditions have to be met.

The transition from old technologies to a new one (the computer renders many a technology
obsolete) must not involve too much "creative destruction". The costs of getting rid of
old hardware, software, of altering management techniques or adopting new ones, of
shedding redundant manpower, of searching for new employees to replace the unqualified or
unqualifiable, of installing new hardware, software and of training new people in all
levels of the corporation are enormous. They must never exceed the added benefits of the
newly introduced technology in the long run. Hence the crux of the debate. Is IT more
expensive to introduce, run and maintain than the technologies that it so confidently aims
to replace? Will new technologies be spun off the core IT in a pace sufficient to
compensate for the disappearance of old ones? As the technology mature, will it overcome
its childhood maladies (lack of operational reliability, bad design, non-specificity,
immaturity of the first generation of computer users, absence of user friendliness and so

Moreover, is IT an evolution or a veritable revolution? Does it merely allow us to do more
of the same only in a different way - or does it open up hitherto unheard of vistas for
human imagination and creativity? The signals are mixed. IT did NOT succeed to do to human
endeavour what electricity, the internal combustion engine or even the telegraph have
done. It is also not clear at all that IT is a UNIVERSAL phenomenon suitable to all climes
and mentalities. The penetration of both IT and the medium it gave rise to (the internet)
is not uniform throughout the world even where the purchasing power is similar and even
among the corporate class. Countries post communism should take all this into
consideration. Their economies may be too obsolete and hidebound, poor and badly managed
to absorb yet another critical change in the form of IT. The introduction of IT into an
ill-prepared market or corporation can be and often is counter-productive and


Then, of course, there is the Internet.

The internet runs on computers but it is related to them in the same way that a TV show is
related to a TV set. To bundle to two, as is often done today, obscures the true picture
and can often be very misleading. For instance: it is close to impossible to measure
productivity in the services sector, let alone is something as wildly informal and dynamic
as the internet. It is clear by now that the internet is a medium and, as such, is subject
to the evolutionary cycle of its predecessors. Central and Eastern Europe has just entered
this cycle while the USA is the most advanced.

The internet is simply the latest in a series of networks which revolutionized our lives.
A century before the internet, the telegraph and the telephone have been similarly
heralded as "global" and transforming.

So, what should the CEE countries expect to happen to the internet globally and, later,
within their own territories? The issue here cannot be cast in terms of productivity. It
is better to apply to it the imagery of the business cycle.

As we said, every medium of communications goes through the same evolutionary cycle:

It starts with Anarchy - or The Public Phase.

At this stage, the medium and the resources attached to it are very cheap, accessible,
under no regulatory constraints. The public sector steps in : higher education
institutions, religious institutions, government, not for profit organizations, non
governmental organizations (NGOs), trade unions, etc. Bedevilled by limited financial
resources, they regard the new medium as a cost effective way of disseminating their

The Internet was not exempt from this phase which is at its death throes. It started with
a complete computer anarchy manifested in ad hoc networks, local networks, networks of
organizations (mainly universities and organs of the government such as DARPA, a part of
the defence establishment, in the USA). Non commercial entities jumped on the bandwagon
and started sewing these networks together (an activity fully subsidized by government
funds). The result was a globe encompassing network of academic institutions. The American
Pentagon established the network of all networks, the ARPANET. Other government
departments joined the fray, headed by the National Science Foundation (NSF) which
withdrew only lately from the Internet.

The Internet (with a different name) became public property - with access granted to the chosen few.

Radio took precisely this course. Radio transmissions started in the USA in 1920. Those
were anarchic broadcasts with no discernible regularity. Non commercial organizations and
not for profit organizations began their own broadcasts and even created radio
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