Wednesday, December 12, 2018

AI and the Productivity Paradox

Recently I was on a panel discussion at the Greenwich CIO Executive Leadership Summit (CIO Summit) on how innovation and new technologies like AI and machine learning can benefit the enterprise. During the discussion one of the audience members asked a question about the Productivity Paradox and how we can reconcile it with spending more on technology innovation. This is a type a question that a former coworker of mine would lovingly refer to as a "Stump the Chump" question as it is an economics question and none of us on the panel were economists; instead we were management, marketing and technology types.

I really don't feel any of us really nailed a great response but I did some research on the topic and have come to the conclusion that as an enterprise question it is somewhat meaningless. But it is something that we should understand as it tends to come up from time to time in industry and economics articles. Since it does, some in senior management will always think that it is a reason, perhaps, to cut back or remove technology spending. It is not.

Before we get too far, what is the Productivity Paradox? In simple terms it is the idea that as technology spending has increased, from an economic perspective there has not been a similar increase in the productivity of the economy as a whole. The cynical interpretation is that our technology spending is wasted. This is now coming up in relation to new spending on artificial intelligence and machine learning.

Why is the Productivity Paradox happening? These are some of the common answers.

The technology isn't as impressive as we think it is - On the surface this is the most obvious answer, and as I said, the cynical one. We are spending all this money on technology and by extension AI and machine learning but these expenditures are not gaining us anything. Sure, could be.

We don't know how to use the technologies yet or productivity trails adoption - This isn't the first time we have heard of the Productivity Paradox. It had popped up in the 1980's as well. Then the late 1990's happened and economic productivity went through the roof. Not only did everyone have computers, but they were all connected through the internet and all kinds of new possibilities opened for us. This could be where we are at now, on the cusp of some large economic surge as other technologies come together with AI and ML to change the landscape. Similarly, it could be.

We are measuring the wrong things - The economic measure of productivity primarily deals with output of goods and services. Is economic productivity the only thing that makes or breaks a society. Probably not. Facebook, from a business perspective, is primarily an online ad revenue supported company. The economic measure of productivity would not measure in any way the benefit (or lack thereof) of social media. Similarly it doesn't measure a lot of subjective quality of life activities. It may measure the creation of a video game but not anything to do with the use of that game. Similarly if machine learning can make our shopping experiences subjectively "better" it would not measure that either. This could also be at play.

While these are all very interesting rationals, I don't think they have any day to day impact on your business. The real answer is, it just doesn't matter ... or at least it shouldn't matter. Why do I say this? Because the Productivity Paradox is dealing with a macroeconomic question of the best use of scarce resources. Individual companies probably do not measure their success on maximizing the productivity output of the world economy. Instead they likely do have a mission and that mission will be negatively impacted if they can't gain mind and/or market share.

For the sake of argument let's just say the emergence of companies like Uber and Lyft didn't change the size of the pay for ride market at all. Let's say their new business model enabled by new technology didn't increase overall productivity of the economy one bit. If you were a cab or other ride based transportation company, did you care?

My argument is they didn't laugh off Uber and Lyft saying, "look at those idiots spending all that money on technology, don't they know that isn't going to raise the productivity of the economy?". No instead they were pulling out their hair with the realization that Lyft and Uber were taking away large portions their market share. That is why the Productivity Paradox is, and will likely remain, an irrelevant question for the enterprise. Corporate missions and goals do not deal with overall economic productivity and as long as technology can deliver competitive advantage it will continue to be relevant for the enterprise.

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