Disrupted Economy – Technology and the productivity puzzle

Why productivity is worrying the West

iDisrupted Commentary

The number one economics challenge in the world today is productivity. It isn’t very good. It’s odd, because you would have thought that new technology would have led to an unprecedented surge in productivity.

Economic output depends on how many people work, and how much the people who work produce. If an economy grows at a pace roughly commensurate with growth in employment, then that means productivity growth is close to zero. Without sustained rises in productivity, wages cannot rise, without rising wages, governments may find income tax receipts are disappointing, and find it is devilishly difficult to reduce government debt.

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Productivity matters. It has hard to think of an economic indicator that is more important.
In recent years, and across the world, productivity growth has been disappointing. Up until recently, China was the exception, but even that is changing now.

Take as an example, the UK economy. For job creation, between 2010 and 2015 the economy experienced a boom, with no less than a 2.5 million rise in employment. Yet over that same period, economic growth was barely any faster than that. That is strange, in fact the UK appeared to experience a recovery-less boom in jobs – that is to say the opposite of a jobless recovery, which is what used to haunt the UK economy. Over this five year period, productivity growth was a tiny 3.2 per cent, – that’s total, over half a decade.

The numbers are not identical, but it is a similar story in the US.  Just as in the UK, US employment has grown at a staggering rate. Alas, the wider US economy was unable to match this performance.

This all begs the question, why? There are many possible explanations: among them an ultra-flexible labour market has meant companies have invested less. Another explanation is that banks have channelled funds into propping up struggling businesses rather than supporting new ones – giving rise to the problem of so called zombie companies. Maybe it was all just down to lack of confidence and, once the economy turns, investment will surge and with it productivity.

Some economists might suggest there is another reason. The likes of Robert J Gordon say that technology is not advancing like it used to. They say that the technological advances of recent years, such as video games, smart phones and social media, are all very nice, but they don’t do much to improve productivity.

Gordon says, ‘Imagine you have two choices. In one option you have technology circa 2002, complete with Windows ’98 PCs.  In the other you have iPhones, and tablets, and Facebook, but you lose indoor toilets and hot and cold running water. Which option will you select?’
But is that really right? Computers and robots are clearly making it possible for one person to do what might once have required many to accomplish.

Maybe the problem is that there are benefits to technology that do not show up in the economic stats. So for example the iPhone is a camera, a map, a newspaper, a TV, a torch, a watch, an alarm clock, a video games console, as well as something else. . . What is it now? Oh yes, that’s right a phone. Thanks to our smart phones we are taking more photographs than ever before. Most of us have a rich tapestry telling the story of our recent life, but the cost is negligible. Maybe there are benefits to technology that are not being measured.

There is a wider point. Robert Gordon may or may not be right about the diminished importance of innovation in recent years, but he is surely wrong if he thinks this will continue.

We are on the verge of a new industrial/technological revolution. The internet of things, will transform industry – both manufacturing and extraction of materials from the earth, it will also change retail.  Likewise robotics will transform manufacturing – indeed it is already doing so. 3D printing will create a new way of making goods to order – of customisation but on a mass scale. Healthcare is set to be disrupted, as wearable devices, big data, genome sequencing and AI converge to transform health from being disease centric to preventive centric. AI will also change many service industries, meaning fewer accountants and actuary workers will be required for the same level of output. Thanks to advances in renewables in combination with progress in energy storage, supported by new material such as graphene, the cost of energy will fall. New materials will transform the process of water desalination, and food production will be changed such that we will grow our meat, and crops will be grown in smart cites or from vertical farms.

How can productivity not improve?

A cynic might say there are certain jobs that won’t change. A doctor cannot increase the number of patients he/she can see in a day. But what will change is the quality of the service provided, the accuracy of diagnosis, for example. In any case, it has been estimated that within a decade or two 80 per cent of what GPs currently do will be carried out by computers.

There is one problem though. A successful economy pulls off a tough balancing act. It ensures demand equals potential supply in the most efficient way possible. The real threat to the economy relates to the way new technology may destroy jobs and distort distribution of income such that demand is insufficient to meet potential supply. If technology transforms the productivity of some sectors, there is danger that the resulting rise in unemployment will be such that economic growth and aggregate productivity fails to rise.