What good is information technology?

Most companies ought to have an IT department. This appears to be an obvious observation. However, it is worth recognizing that, in the memories of more than half the working population of the US, a company department organized solely around information technology was unheard of. The IT department has evolved from a narrowly focused data processing element of the accounting department to a function that supports and, in many cases, drives, nearly every area of the company. This has happened in a mere 40 years. Stand-alone IT departments are a relatively recent development. The number of people working in technology-related jobs grew six times faster between 1983 and 1998 than the US workforce at large. Information technology related industries doubled their share of the US economy between 1977 and 1998. Practically overnight, technology related services have become a global, trillion-dollar industry.

The principle driver behind this remarkable, rapid creation of a vibrant, sophisticated, and enormous industry and the attendant inclusion of a department dedicated to it in every credible company, is the quest for business productivity improvement.

The notion of technology investments as a driver of US business productivity has a controversial history. The benefits of technology investments (and IT departments) were not always so apparent. Productivity growth in the US faltered from the mid-1970s through the early 1990s, in spite of large technology investments from most major US corporations. The disconnect between heavy capital and expense investment and the theoretically associated improvements in productivity led to a so-called productivity paradox. In reaction to the failure of such large investments to produce the expected productivity gains, MIT Nobel Laureate Robert Solow famously remarked in 1987, "You can see the computer age everywhere but in the productivity statistics." More recent research suggests that the productivity benefits from the deployment of technology have had a massive, albeit delayed, impact on the US and world economy.

A variety of researchers have concluded that investments in IT have been instrumental in the improved productivity seen in the US economy beginning in the mid 1990s. In early 2000, the Federal Reserve gave information technology investments credit for approximately $50 billion in productivity improvement, which represents more than 65% of the total $70 billion in productivity gains seen by businesses in the US in the last half of 1990s.

The Federal Reserve staff report, by Kevin J Stiroh, concluded, "Industry-level data show a broad productivity resurgence that reflects both the production and the use of IT. The most IT-intensive industries experienced significantly larger productivity gains than other industries." The report went even further, attributing most of the productivity improvement to technology. "Results show that virtually all of the aggregate productivity acceleration can be traced to the industries that either produce IT or use IT most intensively."

Business 2.0 magazine summarized the turnabout in top economic thinkers viewpoints on the productivity gains from technology, saying that those gains: ...materialized in force beginning in 1995. What followed was a five year run in which productivity grew an astonishing 2.8 percent a year, or double the rate of the previous two decades. (The numbers may sound small, but at 2.8 percent, living standards double every 25 years; at 1.4 percent, they double every 50.)