For investors in Boo.com, Webvan, and eToys, the bursting of the dot-com bubble came as a shock. Companies like them raised vast sums on the promise that the World Wide Web would change everything. Then, in the spring of 2000, stock markets collapsed.
Some economists had long been skeptical about the promise of computers. In 1987, we didn’t have the Web, but spreadsheets and databases were appearing in every workplace. And that seemed to have no impact whatsoever on the economy. The leading thinker on economic growth, Robert Solow, quipped, “You can see the computer age everywhere but in the productivity statistics.”1
It’s not easy to track the overall economic impact of innovation, but the best measure we have is something called “total factor productivity.” When it’s rising, that means the economy is somehow squeezing more output out of inputs, such as machinery, human labor, and education. In the 1980s, when Robert Solow was writing, it was growing at the slowest rate for decades—slower even than during the Great Depression. Technology seemed to be booming, but productivity was almost stagnant. Economists called it the “productivity paradox.”2 What might explain it?
For a hint, rewind a hundred years. Another remarkable new technology was proving disappointing: electricity. Some corporations were investing in electric dynamos and motors and installing them in workplaces. Yet the surge in productivity would not come.
The potential for electricity seemed clear. Thomas Edison and Joseph Swan independently invented usable lightbulbs in the late 1870s. In the early 1880s, Edison built electricity-generating stations at Pearl Street in Manhattan and Holborn in London. Things moved quickly: within a year, he was selling electricity as a commodity; a year later, the first electric motors were used to drive manufacturing machinery. Yet by 1900, less than 5 percent of mechanical drive power in American factories was coming from electric motors. Most factories were still in the age of steam.3
A steam-powered factory must have been awe-inspiring. The mechanical power would come from a single massive steam engine. The engine turned a central steel driveshaft that ran along the length of the factory; sometimes it would run outside and into a second building. Subsidiary shafts, connected via belts and gears, drove hammers and punches and presses and looms. Sometimes the belts would transfer power vertically through a hole in the ceiling to a second floor or a third. Expensive “belt towers” enclosed them to prevent fires from spreading through the gaps. Everything was continually lubricated by thousands of drip oilers.
Steam engines rarely stopped. If a single machine in the factory needed to run, the coal fires needed to be fed. The cogs whirred and the shafts spun and the belts churned up the grease and the dust, and there was always the risk that a worker might snag a sleeve or bootlace and be dragged into the relentless, all-embracing machine.
As electric motors became widely available in the late nineteenth century, some factory owners experimented by using them to replace that large central steam engine, drawing clean and modern power from a nearby generating station. After such a big investment, they tended to be disappointed with the cost savings. And it wasn’t just that people didn’t want to scrap their old steam engines. They kept installing more. Until around 1910, plenty of entrepreneurs looked at the old steam-engine system, and the new electrical drive system, and opted for good old-fashioned steam. Why?
The answer was that to take advantage of electricity, factory owners had to think in a very different way. They could, of course, use an electric motor in the same way that they used steam engines. It would slot right in to their old systems. But electric motors could do much more.
Electricity allowed power to be delivered exactly where and when it was needed. Small steam engines were hopelessly inefficient, but small electric motors worked just fine. So a factory could contain several smaller motors, each driving a small driveshaft—or, as the technology developed, every workbench would have its own machine tool with its own little electric motor. Power wasn’t transmitted through a single, massive spinning driveshaft but through wires.
A factory powered by steam needed to be sturdy enough to carry huge steel driveshafts. A factory powered by electricity could be light and airy. Steam-powered factories had to be arranged on the logic of the driveshaft; electricity meant you could arrange factories on the logic of a production line. Old factories were dark and dense, packed around the shafts. New factories could spread out, with wings and windows to bring natural light and air. In the old factories, the steam engine set the pace. In the new factories, workers could set the pace.
Factories could be cleaner and safer. They could be more efficient, because machines needed to run only when they were being used. But you couldn’t get these results simply by ripping out the steam engine and replacing it with an electric motor. You needed to change everything: the architecture, the production process, how the workers were used. And because workers had more autonomy and flexibility, you had to change the way they were recruited, trained, and paid.
Factory owners hesitated, for understandable reasons. Of course they didn’t want to scrap their existing capital. But maybe, too, they simply struggled to think through the implications of a world where everything needed to adapt to the new technology.
In the end, change happened. It was unavoidable. Partly, of course, it was simply that electricity from the grid was becoming cheaper and more reliable.
But American manufacturing was also shaped by unexpected forces. One of them was the resurgence in the late 1910s and the 1920s of an invention we’ve already encountered: the passport. Thanks to a series of new laws that limited immigration from a war-torn Europe, labor was in short supply and average wages for Americans soared. Hiring workers became more about quality and less about quantity. Trained workers could use the autonomy that electricity gave them. The passport helped kick-start the dynamo.
And as more factory owners figured out how to make the most of electric motors, new ideas about manufacturing spread. Come the 1920s, productivity in American manufacturing soared in ways never seen before or since. You would think that kind of leap forward must be explained by a new technology. But no. Paul David, an economic historian, gives much of the credit to the fact that manufacturers finally figured out how to use technology that was nearly half a century old.4 They had to change an entire system: their architecture, their logistics, and their personnel policies were all transformed to take advantage of the electric motor. And it took about fifty years.
Which puts Robert Solow’s quip in a new light. By 2000, about fifty years after the first computer program, productivity was picking up a bit. Two economists, Erik Brynjolfsson and Lorin Hitt, published research showing that many companies had invested in computers for little or no reward, but others had reaped big benefits. What explained the difference? Why did computers help some companies but not others? It was a puzzle.
Brynjolfsson and Hitt revealed their solution: What mattered, they argued, was whether the companies had also been willing to reorganize as they installed the new computers, taking advantage of their potential. That often meant decentralizing decisions, streamlining supply chains, and offering more choice to customers. You couldn’t just take your old processes and add better computers any more than you could take your old steam-powered factory and add electricity. You needed to do things differently; you needed to change the whole system.5
The Web is much younger even than the computer, of course. It was barely a decade old when the dot-com bubble burst. When the electric dynamo was as old as the Web is now, factory owners were still attached to steam. The really big changes were only just appearing on the horizon.
Revolutionary technology changes everything—that’s why we call it revolutionary. And changing everything takes time, and imagination, and courage—and a lot of hard work.