Michael and Gerard examine Productivity Growth in Australia, New Zealand and the United States
“Change is the law of life. And those who look only to the past or present are certain to miss the future.”
John F. Kennedy
The world is changing faster than ever before. We all have mini supercomputers in our pockets that are increasingly an extension of our own brainpower. Advancements in Robotics, Cloud Computing, Artificial Intelligence, 3D Printing, and other technologies are going to render us all jobless. At least that’s what we are told.
While we haven’t read the book (yet), we have recently been following some of the online commentary covering Robert J Gordon’s ‘The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War ‘. Gordon’s assertion, contrary to conventional wisdom, is that there is too little change, not too much. His argument is that in the period from 1870 to the early 2000s everything changed. Electricity, the internal combustion engine, and computers changed our cities, homes, and working lives. This general purpose, “only once” inventions constituted large, progressive steps forward, in contrast to the more incremental change we have seen since then. Gordon argues that we are unlikely to see the same level of change in the future unless another “only once” invention comes along.
Economists call this recent slow in the pace of change ‘The Productivity Paradox’; despite us being at the peak of our technological advancement and having more access to information than ever, our productivity growth is pretty flat. Productivity grew steadily until 2004 and then declined into the financial crisis. The consensus was that productivity growth would recover as we emerged from the credit crunch, but this has not come to pass, and economists are getting nervous.
As you might guess, there has been a significant backlash to Gordon’s opinions on the future. How can he say that growth is dead when we are on the cusp of the Industrial Revolution 4.0? Won’t AI, Big Data, and Robotics automate the mundanity of our jobs, lifting and shifting us to the utopia of a Universal Basic Income? One of the weightiest of these responses has come from Bill Gates, in an essay on his own blog, gatesnotes. His subtitle sums up his sentiment perfectly: “Rise? Sure. Fall? Nope”. A portion of Gates’ argument is that the metrics we use to define productivity are out-dated and no longer fit for purpose. As he puts it, “while economic measurements like TFP (Total Factor Productivity) can be useful for understanding the impact of a tractor or a refrigerator, they are much less useful for understanding the impact of Wikipedia or Airbnb.”
This got us thinking: how can we measure productivity in a way that reflects modern advancements in technology? How can we account for the rate of adoption of new technologies? With the mix of capital investment to human labour changing, the number of hours worked reducing, and employment increasing, is output based on human labour the best way to measure overall productivity?
As we often do at walkerscott, we turned to Microsoft Power BI to compile the data to answer these questions. Our main source was the Penn World Table, which adjusts economic measures like GDP for advancements in technology, the capability of people, and the amount of hours we work. When we look at modern productivity and output measures, adjusted for changes in technology, human labour, capital investment, and other parameters, the data does support Gordon’s argument that the pace of change is slowing. Just see for yourself!
Our own view is that this period of flat growth is a necessary lull, after a period of exponential growth.
As our data shows, growth in the 50s and 60s was high with the widespread adoption of electricity and engineering, slower in the 70s and 80s, and then higher again in the 90s and early 2000s, as computers and the internet became widely adopted. As this trend suggests, the next “only once” technology could just be around the corner…
As always, we would love to know what you think about what the data has to say. Get in touch with us at hello@walkerscott.co on 1300 490 795 in Australia, or 0800 111 728 in New Zealand.