COMPUTERS, PRODUCTIVITY, AND INPUT SUBSTITUTION

I. INTRODUCTION The last two decades has been a puzzling time for many productivity analysts. While computer prices fell at extraordinary rates and firms invested hundreds of billions of dollars in new computer equipment, aggregate productivity growth remained sluggish. This "computer productivity paradox" has generated a large literature that examines the economic impact of the computer revolution.(1) This paper offers a simple solution to the computer productivity paradox by making careful distinction between computers as an output from one sector and an input to other sectors. Data for 35 manufacturing and service sectors for 1947-1991 show that sectoral differences are crucial in understanding the impact of computers. Aggregate analysis is inappropriate since it obscures basic distinctions between a shifting production function in the computer-producing sector (multi-factor productivity growth) and movements along production functions in the computer-using sectors (substitution and capital accumulation). Once these differences are isolated, the growth impact of computers is readily observable. The computer-producing sector experienced fundamental technological progress and now produces cheaper, better computers. The sectoral data show this as rapid Multi-Factor Productivity (MFP) growth for 1973-1991. Although aggregate MFP growth remains below historic averages, the computer-producing sector has clearly done its part - MFP growth in this sector is many times the economy average and has contributed over one-third of aggregate MFP growth for 19811991. The sectoral detail shows that the slowdown in aggregate productivity would have been much more severe were it not for such large MFP gains in the computer-producing sector. For the other sectors of the economy, computers affect growth in a more traditional, although less glamorous, way. When the price of real computing power fell so dramatically in the 1970s and 1980s, firms responded by substituting away from relatively expensive labor and non-computer capital and investing heavily in cheap computers. For these sectors, the computer revolution affects output growth not by raising MFP, but by inducing firms to accumulate computers at extraordinary rates. Real computer services, for example, grew in excess of 20% per year in 14 out of 35 sectors for 1973-1991. Although virtually all sectors are rapidly accumulating computer equipment, computers remain small in levels. In 1991, for example, computer investment was only 10% of private fixed investment so the growth contribution of computers remains small relative to sectoral aggregates of labor and non-computer capital. The rapid rates of accumulation, however, are clearly making computers a more important source of growth across sectors. With this heavy investment also came the wide-spread expectation that computers would fundamentally alter the way firms operate and lead to higher MFP. The reality has been very different as the most computer-intensive sectors show steep declines in MFP growth after 1973. With three-quarters of all computers concentrated in three service sectors (Trade, FIRE, and Other Services), however, this finding must be interpreted with caution. As Griliches [1994] notes, output in these sectors is largely "unmeasurable" and thus MFP growth will be understated. Nonetheless, it is quite reasonable that even computer-using sectors where output is easier to measure show no MFP gains. Computer investment creates a capital input that enters the production function like any other purchased input. Since constant-quality deflators embody productivity improvements in investment, the direct impact is seen through the rapid capital accumulation. Only if the adoption of computers leads to production externalities or spillovers would computer investment also increase MFP growth. The data, however, show no evidence of this. II. COMPUTERS AND GROWTH The national statistics most clearly show the computer revolution in the investment data. …