The Productivity Equation: Marginal Productivity vs. Average Productivity
We risk automating away our value
In the analytical world, there’s often a desire to simplify — to distill things into just a few metrics. And that motivation make sense. In large organizations, it’s just too hard to have everyone understand nuance and complexity. Thus, it’s much easier to have everyone focus on a few easy to understand metrics and optimize around them.
And that’s why people love averages. Averages are easy to understand and calculate. And in general if the average is going up (e.g. GDP per capita), that’s a good thing.
But sometimes it’s not that simple. Take productivity for example. Average productivity is defined as output over number of workers (used to produce that output). It seems reasonable to assume that when average productivity rises, things are good. But that’s only true if certain assumptions hold true — that the productivity increase (e.g. automation) isn’t replacing workers and there is enough demand to absorb the increased output.
If these hold true, then rising productivity signals a rosier future where each of the workers of today will be able to produce more and more stuff going forward. This will likely lead to some combination of lower prices (increased affordability), higher profit…
