Here is an interesting read I came across about measuring productivity and the various differences in cost between products in the 1920’s versus today. It should make you think about the author’s point and see how far we have come through the advances of technology since then. The article below was written by Nick Colas of Convergex (via ZeroHedge).
One way to consider the question (of productivity) is to look at what productivity-enhancing technology cost in the 1920s and compare it to popular consumer products today. The idea is simple: technology that truly boosts productivity should be expensive since buyers will happily pay a price premium for that benefit.
Take one nearly antediluvian example: the sewing machine. In the 1850s one of these devices cost $100 – about $2,700 in today’s dollars. Why so much? First, they increased household productivity dramatically since most clothes were homemade. Second, the better designs enjoyed strong patent protection. Fun fact, and not surprising given these numbers: sewing machines were the first product sold in the U.S. on an installment plan. After all, who could afford $100 all at once?
Fast forward a bit to the 1920s, and consider the prices of other household appliances:
- A washing machine for $81.50. That is $970.39 today. Actual current price of a nice GE or Whirlpool top loading washer (courtesy of PC Richard’s website): $450.
- A vacuum cleaner for $28.95, or $344.70 today. Actual current price of a Shark Navigator on Amazon: $179.00
- An electric refrigerator for $285.00, or $3,393.38 today. A nice chrome one from Best Buy today: $899.99.
- If you are feeling nostalgic, here are the ads: http://www.thepeoplehistory.com/20selectrical.html
As for office productivity, the typewriter was all the rage at the turn of the 20th century, costing all of $39.80 around 1915. That is $627.66 today. Funny enough, a medium range Dell desktop with screen costs $699 today on Amazon.
Now, if we are getting so much productivity out of the current range of offerings from Silicon Valley, I have a question: why aren’t these products really expensive, as the technology of the 1920s clearly was? In fairness, a cell phone is costly – good monthly deals from major carriers usually make you pay about $600 for the phone. Which, funny enough, is what the typewriter cost (inflation adjusted) exactly 100 years ago.
But what about all the free apps and services? Even Uber has to pay bonuses to recruit drivers. Why is that, if the model is so good? Yes, getting to scale is important for the service, but shouldn’t drivers come running if their productivity is so much better in the new model? Something is off. Either the competitive pressures of excess venture capital in the system is dampening pricing power, or perhaps the latest wave of tech just doesn’t hold a candle to the real productivity enhancements of sewing machine, typewriter, washer and fridge.
I know – none of this really answers the question of Solow’s paradox satisfactorily. At the margin, it does seem that the technologists have it right: something is wrong in the measurement of productivity. The world has changed dramatically in the last decade, from iPhones to Uber and Facebook. Whenever I write on this topic I get one consistent retort: productivity is flat because we’re all on social media. Maybe so… But then why isn’t Facebook expensive to use? In fact, I hear it is basically free.