If you read economic research or follow much of the economic blogosphere, it’s easy to get depressed about the state of productivity growth in the US. Tyler Cowen’s books The Great Stagnation and The Complacent Class are two examples of this trend. Others have observed that many services have gotten much more costly with no corresponding improvements in quality. Are we doomed to a future of low productivity growth, and thus slower wage growth and living standard improvement?
In a new report entitled “The Coming Productivity Boom”, Michael Mandel and Bret Swanson say no. “The Information Age is not over,” they argue, “It has barely begun.” Their optimism stems from their idea that IT has transformed certain industries, but has hardly cracked into others. It’s these latter “physical” industries that are most likely to experience a new productivity boom.
Their argument divides the economy into two groups—“digital” industries and “physical” ones. Digital industries are ones in which a product or service is delivered to customers through “bits and bytes”. Physical industries deliver value in physical form.
In this framing, entertainment, journalism, finance, legal and professional services, and many administrative services are digital. Other fields like medicine, education, and construction are still primarily physical. But these physical industries have massive room for growth as they change over from physical to digital.
Digital firms grow faster than physical ones. They can take advantage of new technologies faster, can scale and outsource IT functions through innovations like cloud computing and the use of SaaS products. The authors are optimistic that currently physical industries are starting to adopt these informational innovations that will allow them to become industries that also deliver their end products through digital forms. In education, for example, rather than going daily to math class, a student might use software that dynamically creates and grades questions based on the student’s current level of mastery.
The story Mandel and Swanson tell is much rosier than the ones I hear from other economists. I certainly hope they’re right. My foremost concern is that the biggest obstacle in the course of physical-to-digital transformation is policy, not technology. Some of the interest groups, regulations, and public policies that concern physical industries may prevent the adoption of digital tools. In medicine, for example, new medical technologies could be blocked by years of litigation or borderline anti-competitive policies.
I’ll be following this debate with much interest and am curious to see what technological improvements software developers like me can bring to physical industries. For a nice introduction to the report, listen to Cardiff Garcia’s interview with Mandel.