While technological innovation undoubtedly improves social convenience and people’s welfare, it doesn’t necessarily lead to increased economic productivity. This phenomenon, which illustrates the gap between technological innovation and productivity, is called the “Soreau Paradox.” Why does the Solow Paradox occur? (Kei Kitajima)

The productivity bandwagon refers to the effect where productivity improves starting with technological innovation, and the benefits spread not only to entrepreneurs and capitalists, but also to all people, including workers.
The term “bandwagon” refers to the lead vehicle of a parade, and because the parade participants march in a line once the bandwagon starts moving, it came to be used in the context of “riding the wave” or “backing the winning horse.”
If technological innovation can pull the people who follow like a bandwagon, allowing them to ride the wave or back the winning horse, people’s prosperity increases, and society as a whole is revitalized. In other words, this is recognized as the effect of the productivity bandwagon.

However, the book “A Thousand Years of Technological Innovation and Inequality” argues that cases where technological innovation has resulted in a productivity bandwagon are rare. Rather, technological innovation tends to concentrate wealth in the hands of a select few, leaving many poor or even poorer.

Speaking of recent technological innovation, the “IT revolution” that began in the late 1990s is still fresh in our memories. Digital technology innovation continues, and in that sense, we can say that we are living right in the middle of the IT revolution. Considering the AI ​​era as one of the culmination points of the IT revolution makes it easier to grasp the flow of the times.

Digital technology has brought tremendous benefits to society. Just off the top of my head, more than ten examples come to mind. For example, train ticket gates have become incredibly smoother, and we can easily find and buy desired items online. Contacting friends and acquaintances can now be done instantly via email or chat. Booking flights and bullet train tickets has also become much simpler. It’s now possible to perform the same amount of work from home as you would in the office.

Many other benefits could be listed, but all of these are brought about by digital technology. The IT revolution has undoubtedly improved the convenience of society and people’s welfare, and its contribution to economic activity is immeasurable. However, judging from economic statistics, productivity at the operational level hasn’t increased that much. This was first pointed out by Professor Robert Solow of MIT, who won the Nobel Prize in Economics in 1987, and it has now become established as the “Solow Paradox,” a concept illustrating the gap between technological innovation and productivity.

“You can see the computer age everywhere but in the productivity statistics.”

This is a famous quote attributed to Professor Solow, but why does the Solow Paradox occur in the first place? For more information on this, see “The Blind Spot of the Japanese Economy” (by Ryutaro Kono, Chikuma Shinsho).

Whether a productivity bandwagon occurs depends on “average productivity” and “marginal productivity.” Average productivity is the average value added produced per worker. Marginal productivity refers to how much value added is produced when an additional worker is added.
The book states, “…if innovation through the introduction of new machinery leads to automation and simply makes it possible to reduce the number of workers, average productivity will rise, but marginal productivity will fall significantly.”
If marginal productivity increases, the additional value added created will be greater, making it easier for real wages to rise. However, if only average productivity increases, labor demand will decrease, putting downward pressure on real wages.
A paper by Professor Daron Acemoglu of MIT, one of the authors of “A Thousand Years of Technological Innovation and Inequality,” and others, titled “Robots and Employment: Evidence from the US Labor Market,” analyzes that the introduction of industrial robots in the US from 1990 to 2007 had a negative impact on employment and wages. The report suggests that the “substitution effect,” where robots replace routine and manual tasks, significantly reduces the demand for human labor, leading to lower employment and wages.

Incidentally, the opposite of the substitution effect is the “productivity effect.” When the productivity effect is at work, production scale expands, and new jobs are created. In other words, marginal productivity increases.

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