Productivity growth, often heralded as a key indicator of innovation and material progress, plays a crucial role in determining a country’s ability to enhance its standard of living. However, there are some complexities and limitations of using productivity growth as a sole measure of economic and societal advancement.
At its core, productivity growth measures output per worker, but this simple metric can be misleading. It might reflect changes in labor quality, such as better education or experience, or increased capital like machinery, rather than genuine improvements in efficiency. Economists aim to isolate ‘total factor’ or ‘multifactor’ productivity growth – the output achieved from given inputs of labor and capital. This residual figure, as described by economist Moses Abramovitz, represents what remains after accounting for all known factors of growth, essentially measuring our ignorance about the causes of economic growth.
The Niskanen Center think tank’s article by Brink Lindsey (read it here) argues that innovation encompasses more than just technological breakthroughs. It includes both invention and diffusion – the gradual acceptance and integration of new products or methods by investors, workers, and consumers. In the United States, the struggle with ‘blocked diffusion’ is evident. For instance, restrictive housing policies hinder population movement to productive regions, and slow expansion of renewable energy infrastructure impedes the full utilization of cheaper solar and wind energy.
Productivity growth must be understood as a broad category that captures both invention and diffusion, both critical for expanding economic output and improving living standards. However, when considering human flourishing beyond mere economic terms, productivity growth as a metric becomes overbroad. It’s still a useful proxy, signaling the need for technological advances in various sectors for mass flourishing. Encouraging signs in fields like renewable energy and biotechnology suggest a potential turnaround from a period of low dynamism marked by weak productivity growth.
Yet, assessing productivity growth requires a nuanced approach, distinguishing between types of growth: the good, the bad, and the ugly. ‘Bad’ productivity growth refers to innovations that, while economically beneficial, harm physical and mental well-being. An example is the rapid increase in cigarette production in the late 19th century, which led to a surge in consumption and consequent health issues, despite initial unawareness of the risks.
In conclusion, productivity growth is a complex and multifaceted indicator, crucial for understanding economic progress and innovation. However, its role in assessing human flourishing is more nuanced, requiring careful consideration of the nature and impact of different types of productivity increases.