Will productivity growth ever recover?
The bleak thesis of Robert J. Gordon in his new book, ‘The Rise and Fall of American Growth’, is that the good times are truly over. Where Americans saw their standard of living double roughly every 35 years between 1870 and 1970, they can now only hope to maintain a standard slightly better than their parents.
Economists generally measure standards of living by something called real income per capita — this is equivalent to the national income (i.e. total amount of money earned within an economy) divided by the population. For real income per capita to increase, productivity also needs to increase. Therefore, the decline in productivity growth seen since 1970 relative to the previous century presents a bad picture for growth and living standards.
Between 1870 and 1970, annual productivity growth was so high due to the pace of technological innovation. For example, the rise of machinery and automation meant that substantially more could be produced with the same resources. While innovations since 1970 have been radical in different ways (e.g. the rise of the internet and the way it has transformed our social lives), they have not had the same impact on productivity.
Gordon argues that there is no reason to believe there will be another wave of radical productivity-boosting technological innovations. This has put him at odds with the bright future still predicted by technology monoliths such as Google and Microsoft.
Silicon Valley believes that the internet will allow workplaces to become smarter and more efficient than ever possible in an offline world. To take it a step further, some have even envisioned the so called ‘smart workplace’ where automated processes are connected via the ‘internet of things’ and managed by AI technologies.
On the other hand, the shift of America’s technology sector toward internet software and away from hardware is perhaps further evidence that Moore’s law has come to an end. For those unaware, Moore’s law is the idea that the number of transistors in a microchip double approximately every years — a testimony to the huge increases in computer processing power since the 1980s. Manufacturers such as Intel are now, however, seeing diminishing returns from R&D into increasing raw computing power.
While information technology has had a profound impact on the way we live our social lives, its impact on the workplace has been less substantial than, for example, the invention of steam power. Where the big industrial inventions completely transformed the productive capability of each worker, inventions such as the internet have only supplemented the production processes already in place.
Will productivity growth ever recover to the pace seen before 1970? This is the biggest macroeconomic question facing nearly all advanced economies. The answer depends on the future of technological innovation and whether it has the capacity to transform the workplace in the age of information technology.
