The question of productivity growth couldn’t be more relevant in the aftermath of the economic crisis of 2008–09. High productivity — the ability of large companies, small entrepreneurs, and government to accomplish more with less — has always tracked closely with strong economic growth. And high levels of productivity will probably be needed to solve other problems facing business and society: urbanization, ecological change, global competitiveness, and health care and education costs.
But the dynamics of productivity growth have always been a bit mysterious. In the U.S., for instance, productivity grew rapidly from 1948 to 1973 (about 2 percent per year), slowed to 1 percent between 1973 and the early 1990s, and then accelerated again, reaching 3 percent per year in the early 2000s. Then, in 2009, it soared: The U.S. Bureau of Labor Statistics estimated in September that American productivity in nonfarm businesses had risen 6.7 percent during the previous 12 months. Later estimates were even higher — as much as 9.5 percent for the third quarter of 2009. Could this foreshadow a robust recovery, in the United States or everywhere?
For answers to that question, strategy+business turned to Erik Brynjolfsson, the Schussel Family Professor at the Massachusetts Institute of Technology’s Sloan School of Management. Brynjolfsson is one of the leading economists tackling the dynamics of productivity, and he was one of the first to research the impact of information technology on it. Now he has taken a further step into studying the root cause of this economic engine. In Wired for Innovation: How Information Technology Is Reshaping the Economy (MIT Press, 2009), Brynjolfsson and coauthor Adam Saunders (a professor at the Wharton School of the University of Pennsylvania) argue that productivity growth is driven primarily by organizational capital: improved management practices and operational processes.
If Brynjolfsson and Saunders are correct, it would bring a pragmatic perspective to a field that often seems biased by ideology. Several years ago, for instance, a McKinsey & Company report declared emphatically that the root cause of productivity growth was laissez-faire governance; the less regulation, the more productive the economy. Others have linked productivity gains to farsighted central planning, like that of some giant companies or of the Chinese government, and still others to information technology on its own. Brynjolfsson is well positioned to explore these issues as head of the MIT Center for Digital Business, a seedbed of research on the information economy. (Among those associated with the center are Predictably Irrational author Dan Ariely, The Future of Work author Thomas W. Malone, “trust-based marketing” innovator Glen Urban, and s+b contributing editor Michael Schrage.) In a variety of projects, Brynjolfsson and his fellow researchers have been developing the concept of a “digital organization,” one that mixes IT innovation with management effectiveness and thus (according to Brynjolfsson) will tend to lead its industry in productivity growth — and in quality, convenience, customer service, and profitability.
In September, s+b met with Brynjolfsson in his office on the MIT Sloan campus in Cambridge, Mass. We discussed productivity, the digital organization, information technology, and the remarkable and discomfiting future to which these trends may lead.
S+B: Since the Great Recession began, productivity numbers have risen dramatically. Is that signal as positive as it seems to be?
BRYNJOLFSSON: By mid-2009, we already knew that the growth of GDP would be positive, or at least flat. But employment continued to fall. So by just doing the arithmetic, dividing output by employment, we knew in advance that there would be a big productivity number. This was triggered by the recession, but it was not a sudden reversal. It was part of a longer pattern we’ve seen with the recent wave of so-called jobless recoveries. Companies have discovered that they can produce a lot of output without needing as many people.