The Internet and the Productivity Speedup

Robert Waldmann

The unexpected increase in US productivity growth in the 90’s and naughties is an economic puzzle. At the time it was widely argued that investments in information and communications technology had finally finally paid off, that computers and the internet allowed vastly improved corporation wide inventory control and the increased output given inputs reflected lower work in progress inventories. … hmmmm maybe.

After the jump I will get serious, but here I will describe a theory which just came to me. I was thinking “The internet caused productivity to Increase ?!?!? That doesn’t fit my experience. The internet caused my personal productivity to drop from low to minimal, and I know I’m not the only one.” In fact, my impression is that office workers, that is cubicle serfs, now spend a large fraction of their working time time in the office, surfing the internet.

Heeey, I thought, maybe that’s it. Maybe office workers contribution to actual production is negative. So my theory is that office workers, on average, mostly harass the people who actually make goods and provide services. Now that the internet has distracted us, the people who actually produce things have more time for actual production and waste less time responding to us.

You got to admit it answers a whole lot of quetions.

OK seriously what do I really think. I do think it has to do with office workers and, in particular, middle management. I don’t think middle management actually interfered with production, but middle managers and affiliated secretaries and janitors and such count in the denominator of labor productivity. In the 90s there was a wave of downsizing and delayering. Basically top management in many firms decided to thin the ranks of middle management on the grounds that middle managers weren’t doing aything useful. The outcome says that the top managers were ruthless and right.

To me the key figure is the almost completely forgotten and hated by the few who know who he is Phillip Caldwell. He’s the guy who replaced Henry Ford II as CEO of Ford about the time Ford president Lee Iacocca was fired went off to save Chrystler. Iaccoca was very famous for a while, the guy after Caldwell — Donald Peterson — was a corporate hero for a while. Caldwell was a subject that the business press preferred to avoid. When he arrived, he laid of 30,000 people from Ford headquarters staff. He totally disrupted the lives of hard working people who were doing the jobs they were assigned and who had no responsibility for any strategic mistakes (made by various actual human Fords and Mr Iacocca). What a total jerk.

However, no one noticed a decline in the contribution of Ford headquarters to Ford, and, by the way, Ford is not bankrupt.

An even earlier example was the ruthless Jack “the ripper” Welch at GE. Ruthless layoffs in his first years, record profits later.

Basically I think the story is simple — Parkinson’s law — bureaucracies naturally grow without limit. That includes the management of large corporations. Everyone knows that middle managers are mainly making work for other middle managers writing memos and calling meetings and stuff, but top management does not want to lay people off and especially not managers who are sort of like them instead of production workers who are sort of like equipment.

Before the productivity speed up there was the takeover wave. Corporate predators who converted huge amounts of equity to debt had to be ruthless to survive. Current top management decided they had to do what a predator would do after a takeover to avoid a takeover. They discovered that it was actually quite easy (middle managers don’t riot or even strike) and very very profitable. The Drexel Burnham Lambert turned out to have roots as solid as Burham woods, junk bonds turned out to be junk, gambling S&L’s went bankrupt and the takeover wave ended.

But CEOs had found a source of huge flows of profits — slash middle management, and decided to keep the money for themselves paying themselves monster compensation for their ruthlessness.

That’s my theory.

I think the standard theory is investment in computers and long slow painful learning what the hell to do with a computer by doing. The huge investment started in the 70s, but, given how helpless most people were with computers (and how user unfriendly computers were back then). Basically this is a theory that the productivity slowdown of the 70s and less so in the 80s was due to measurement error. Learning how to deal with computers is, in fact, investment in human capital, but the stock of human capital is not measured so measured GNP = consumption plus government consumption plus net exports plus investment in *physical* capital was much lower than GNP = measured GNP plus people learning to work with computers (plus other learning at a normal rate).

OK maybe. Betcha the person who came up with that theory had a *lot* of trouble learning to deal with computers *and* that he or she typed it up on a beloved PC.

Another theory is that output in the 90s and naughties was grossly missmeasured as houses and fiber optic cables and stuff were booked at their bubbly market prices, that is, that people weren’t producing more they were just imagining that the things they were producing were worth a lot compared to (among other indices) the wages of the workers.

I’m sure my brand new play on the internet and leave actual workers alone hypothesis is false, so back to work pressing a graduate student who is doing actual research while I blog to deliver the written product.