The productivity paradox
16 May 2018 | Joe Davis
As I Ubered to a meeting on 3 May, a colleague face timed me from Asia.
"What's your read on the productivity numbers?"
I fired up my tablet, downloaded the latest report from the United States Bureau of Labour Statistics and tapped into the cloud to update my dataset. The results underwhelmed: Annualised growth of just 0.7%.
The report marked the latest chapter in a disturbing story. From the beginning of this century until the global financial crisis, productivity – each worker's output per hour – grew at an annualised rate of 2.6%. In the years since, the rate has stagnated at 0.7%.
Productivity growth is much more than just output per hours worked. It's a measure of the pace of improvement in our standard of living. At the 2000–2007 growth rate, the US standard of living would double in about a generation. At its post-crisis rate, it would double in about a century.
Mismeasured? Or down and out for good?
The post-crisis stagnation has prompted puzzlement and hand-wringing. We live in an age of technological disruption. But according to the productivity statistics, this disruption has done almost nothing to help us produce more with an hour's labour.
There are two competing theories about this apparent paradox:
- The optimistic: Productivity is mismeasured. It doesn't capture the growth in the value of "free" services such as search engines, streaming music, social media and more. If we could quantify their value, output and worker "income" would be growing more quickly. And, perhaps counterintuitively, the falling costs resulting from globalisation and technological progress reduce productivity growth in the way we currently measure it.
- The pessimistic: We've entered an age of "secular stagnation". The big inventions have already been invented. Compared with the automobile and indoor plumbing, the smartphone is laughably inconsequential, a view advanced by economist Robert Gordon in his outstanding book The Rise and Fall of American Growth.
Both theories miss a less worrisome reality. Productivity lulls are not unusual, even in eras of technological disruption. Consider the figure below. In the past 200 years, the US economy has experienced at least nine periods of what at the time may have been perceived as "secular stagnation". Over the same 200 years, however, the inflation-adjusted value of output per hour has increased more than thirty-fold.
Productivity has increased in fits and starts
Note: Annualised growth is measured over rolling seven-year periods. Sources: EH.net and Vanguard.
We've been here before
In The Dynamo and the Computer, economic historian Paul David explores the development of electrical power in the late 19th century and its initially disappointing impact on productivity. At the 1900 Paris Exposition, German manufacturers showcased "dynamos" (electric engines) that awed the public with their power and efficiency:
"In a march of material progress that shocked some observers, new machines rendered outmoded and, as if by magic transformed into junk those that were the ultimates in efficiency just a few years earlier."1
If not for its baroque construction, this sentence could come from a modern-day report on new technologies such as self-driving cars, artificial intelligence, and quantum computing. But even though the dynamo's potential seemed obvious in 1900, it gave no boost to productivity until the 1920s, four decades after Thomas Edison built the world's first electric power plant, in New York.
A big reason, according to David, is that engineers first needed to design new work processes and factory structures to exploit the dynamo's power. This took decades. Retrofitting old manufacturing plants "embodying technology adapted to the regime of mechanical power derived from water and steam" yielded limited gains. Not until those plants grew obsolete did new designs take their place, turbocharging productivity growth.
The road ahead
Today, we may be seeing a similar disconnect between new technologies' obvious potential and workaday uses that capitalise on their promise. Consider smartphones. They're more powerful than the computers used in the Apollo space program. But when the iPhone debuted in 2007, we used it to play Angry Birds.
More recently, smartphones have changed from toys to tools. Today, we use smartphone apps to find transportation through Uber and Lyft and accommodations through Airbnb and Couchsurfing. These sites increase "asset utilisation", making the economy more efficient. And they're doing it at a breakneck pace: It took Hilton almost a century to get to 834,000 hotel rooms; Airbnb reached more than 4 million listings in less than a decade.
These innovations have yet to register in the productivity numbers, but I'm confident they will. I can't base this opinion on an economic model. No such model exists. My confidence reflects faith in the same human ingenuity and desire for a better life that have helped us put new technologies to productive use over the past two centuries.
1 Richard Mandell, as quoted in The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox, by Paul A. David, in The American Economic Review Vol. 80, No. 2, Papers and Proceedings of the Hundred and Second Annual Meeting of the American Economic Association (May 1990).
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