The Productivity Puzzle

The Babbage Difference Engine

Why it is that, while the development of digital tools explodes (Tablets, smartphones, big data, the cloud, AI) and spreads rapidly around the world, productivity as measured by economists is steadily declining, is a pretty big puzzle.  All the more so for folks like you and I who – while we may fritter away some time watching movie trailers or cute cat videos when we should be drafting that go-to-market plan – are infinitely more productive than we were 25 years ago.  Fax machine? Haven’t used one for years. Secretary?  Haven’t had one since the early ’90s.  Paper files?  Almost never use them.  Yellow pages?  Whuh?

So, where has all that productivity goodness gone?   As a recent paper from the Federal Reserve in St. Louis notes, economic growth is driven by:  a. population growth; b. inflation; and c. growth in productity.  The first is easy to understand (More people build and buy more stuff.), inflation adds to nominal not real growth but it is the last factor – productivity growth – that is the puzzle.

Productivity growth is driven by:

  1. People working more (Germans work about 1,400 hours a year, Americans 1,600.)
  2. Applying more capital per worker (A carpenter with power tools will likely get more done than a fellow with a handsaw.)
  3. Applying more human capital per worker (Better educated people are generally more productive.)
  4. Technological change

There is a limit to how much more people can work, and both capital and human capital can be misapplied (Giving me power tools would not make me anymore productive as a carpenter, and that Barista at the local Starbucks with an MA in philosophy, isn’t necessarily more productive because of her education.)  So it is the fourth factor, technological change, that we look to for improvements in productivity an hence economic growth.

Productivity growth has been declining in all major economies (ex China) since the early ’60s.  How can this be?

A recent paper by William Janeway details three theories as to why this may be happening.

  1. We may be mismeasuring productivity gains
  2. The benefits of technological change take time to bear fruit
  3. (Most interestingly) “Leaders” in technological adoption are seeing massive productivity gains, while “Laggards” are slowing the economy as a whole up

Janeway notes that, while #1 is probably true, it cannot account for much of the decline in productivity growth we’ve seen and that #2 is certainly true: the benefits of the development of railway networks in the U.S. and Europe in the mid 1800s didn’t drive economic growth for 50+ years and a similar lag was seen with the development of electricity as an energy source.  But he says, it is #3 that is most interesting.  There is clear evidence that leaders in various sectors are far more productive than laggards and are growing at a faster rate.

Since the end of the Dotcom/Internet Bubble, across the developed world, the “best” 5% of firms in terms of productivity have maintained historic trend growth in productivity both in manufacturing and service industries, while average productivity of the laggards has stagnated. 

There is evidence that technological diffusion takes time and this makes sense intuitively: it takes time for people to figure out how to use new tools and then more time for an organization to integrate them into its processes.

The $64 question is will the “Best” pull the “Rest” along and, if so, how long will that take?

 

 

 

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