Information technology: a new era?

# 2.2 The effect of technology on productivity

In each industrial revolution, new inventions radically changed the way that production and distribution were organised, and often led to large and rapid increases in the efficiency of production. The rise of electricity, for example, allowed US productivity to increase in the manufacturing sector (as opposed to the agricultural or service sector) by more than 5 per cent per annum throughout the 1920s.

Let us pause a moment and consider what this means. The term productivity refers to the amount of output that a given amount of inputs (such as hours of labour) can produce. (Productivity is an indicator of the efficiency of production or distribution. Labour productivity can be measured as output produced per hour of labour.) For example, consider an automobile factory that is able to produce 10 cars per day using 100 hours of labour. If a new invention permits those same workers to produce 20 cars in the same amount of time, their productivity has been doubled.

The productivity of a whole economy, such as the UK economy – as opposed to a particular factory – is measured by first calculating the total output produced by the economy in one year. This is called the GDP or gross domestic product. Total output divided by total labour hours in the year gives us a measure of labour productivity. A 5 per cent growth in UK productivity over a year means that the UK economy has become 5 per cent more productive than it was in the previous year. This should mean that the economy can produce 5 per cent more output (GDP) with the same amount of inputs.

## Question 2

Stop here and check your understanding of percentages and growth rates. They are quite simple, but it is important to get them clear. If a group of workers produces 10 000 units of output in one year, and 12 000 units the next year, how would you calculate the percentage increase in productivity?

## Answer

You want to know the percentage increase represented by the second year's output, 12 000, over the first year's output, 10 000. Subtracting 10 000 from 12 000 gives us the increase. Divide the answer by 10 000 to calculate the increase relative to the first year. Then multiply by 100 to turn the answer into a percentage (the dot‘ ·’ means ‘multiplied by’).

So, output increased by 20 per cent. As the number of workers stayed the same, this is also the increase in productivity.

## Exercise 1

If you want to check your understanding of percentages, calculate the percentage increase in productivity if the output expands from 12 000 in year 2 to 15 000 in year 3.

## Answer

15 000 − 12 000 = 3000

The increase is 25 per cent.

In plumbing, for example, productivity would increase if the use of new materials enabled plumbers to fix broken pipes more quickly. This would free up more time for plumbers to work on other operations and hence increase their output per hour, that is, their productivity. Productivity can increase either when work methods are made more efficient without (necessarily) the introduction of new technology, perhaps from a better organisation of the factory floor, or when new methods are introduced to the production process through the introduction of new technology – for example, when new machinery allows work to be done more quickly and with fewer mistakes. Adam Smith (1723–90), one of the founders of modern economics, claimed that increases in productivity lie at the heart of economic growth and prosperity. In his influential book The Wealth of Nations (first published in 1776), Smith uses the example of pin making to describe the process by which productivity can increase through a rise in the division of labour, that is, the degree to which workers divide tasks between themselves. The rest of his classic text is dedicated to describing the effect of increasing productivity on the development of markets and economic growth:

> The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is anywhere directed, or applied, seem to have been the effects of the division of labour … To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business … nor acquainted with the use of the machinery employed in it … could scarce, perhaps, with his utmost industry, make one pin a day, and certainly could not make twenty. But in the way in which this business is now carried on not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another, it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves … make among them upwards of forty-eight thousand pins in a day.

> (Smith, 1937, pp. 65–6)

## Question 3

What are the different tasks, outlined by Smith, involved in pin making? Why does productivity increase when these tasks are divided between workers instead of all being done by one worker, that is, when the division of labour increases?

## Answer

The division of labour (the degree to which the various tasks involved in the production of a good or service are divided among different workers), as described here by Smith, increases the productivity of workers by allowing them to concentrate on a fixed and simple task, and hence to become more efficient at that task over time. (Smith also warned of the negative effect that this repetition could have on the workers’ intelligence and morale.)

The division of labour, and hence productivity, increased with the emergence of the factory system, in which many workers were brought together under one roof for the first time and each worker was responsible for a small part of the final product. This was very different from the craft manufacture system, in which each worker was responsible for producing the entire product.

Increases in productivity, even if just in one industry, can be transmitted throughout the economy for several reasons. First, increases in productivity can lead to higher incomes for an economy's citizens. All output must be transformed, through the process of production and sale, into someone's income (e.g. the boss's profits and the workers’ wages). Hence, increases in productivity, which allow more output to be produced by a given amount of inputs, also lead to more income per head, that is, greater wealth for society. For example, if more cars can be produced due to increases in the productivity of car production, more cars are sold, which means that the car manufacturers’ revenues increase. Furthermore, if, as is sometimes the case, increases in wages are linked to increases in productivity, then workers’ wages may also rise (or, at least, their employment prospects maybe more secure).

Second, increases in productivity diffused throughout the economy have an effect on prices. Increases in productivity tend to lower the cost of production, precisely because more output can be produced with the same amount of inputs. Since cost reductions tend to be translated into price reductions, increases in productivity eventually tend to reduce prices. Indeed, the introduction of assembly lines made a substantial contribution to the affordability of consumer durables such as the car. The increase in income per head and the reduction in prices allow consumers to be better off. This potential increase in the wealth of manufacturers, workers and consumers is the reason Adam Smith's book, which focused on the links between productivity and economic growth, was titled The Wealth of Nations.

Productivity may also increase for reasons not related to technological change, for example if workers are simply ‘exploited’ more (with or without new technology). Output per worker may increase if workers are forced to work more quickly or for longer hours, prevented from taking lunch breaks, or given no holidays. These are all conditions that still persist today in some low-income countries, as well as in some industries in those Western countries in which workers are not unionised and/or work in ‘sweatshops’, that is, factories that operate illegally in terms of international standards for wages and working conditions.

For a new technology to affect economy-wide productivity it must be widely adopted across industries instead of being restricted to a narrow domain. For example, full electrification of factories did not occur until the 1920s. Prior to that, from the 1890s to the beginning of the 1920s, most factories simply added electric motors to existing (older) equipment. Until the 1920s power transmission in factories was still operated through the ‘group drive’ system, in which only parts of the factory were electrified and electric motors turned separate shafts. The ‘unit drive’ system did not appear until the boom period of the 1920s, which opened up the potential for new, fully electrified plants (David and Wright, 1999). The switch from group to unit drive transmission allowed individual electric motors to run machines and tools of all sizes. The new unit drive not only allowed huge savings in fuel and energy efficiency, but also allowed the factory layout to be more amenable to the assembly-line system, which spread throughout the economy in the 1920s (although it had first been used by Ford Motors in 1910). The new technology facilitated the circulation of materials, made workers more productive and reduced downtime, as the entire plant no longer had to be shut down to make changes in just one department.

## Exercise 2

Write a short paragraph (of not more than 100 words) describing the impact of technological change on economic growth. You should use the key concepts introduced in Section 2, although you do not have to define them.

## Answer

Here is my answer

A period of technological change that transforms the way that goods are produced and distributed is known as an ‘industrial revolution’. A general purpose technology such as electricity, which stimulates constant improvements and is used widely across the economy, may initiate improvements in productivity or the efficiency of production. A further elaboration of the division of labour within the economy, exemplified by the factory system, is also likely. The result is an increase in the total output of the economy known as ‘economic growth’ and, usually, an increase in the wealth of producers and consumers.

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