The electric lag

From Tim Harford’s book Fifty Inventions That Shaped the Modern Economy:

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 had 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, bu 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…

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…

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. 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.

(pp. 93-94)

Here’s Paul David on the parallel between the dynamo and the computer. Here’s the Brynjolfsson/Hitt paper that Harford cites on organizational transformation as a limiting factor in productivity growth from computers. Here’s a previous post I did with links to a few other relevant papers and articles, including Rebecca Henderson’s classic paper on architectural innovation. And here’s one other post on the same idea.