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Productivity lags behind digital innovation 


Smart systems

In the time it will take you to read this text, almost five patents will have come to light worldwide; several industrial robots will have left the factory, ready to banish industrial paradigms, and tens of thousands of people will have made a purchase at a click. However, the probability that these advances will be translated into productivity figures, a key piece in the complex transmission belt that leads to economic growth, is minimal.

The era of computers can be seen everywhere except in productivity statistics.

Today, the world economy is fully immersed not only in the digital era but also in that of automation, artificial intelligence and biotechnology.

The promises made at the dawn of the Internet have given way to a much bleaker reality than the idyllic horizon drawn for years. It is perhaps the greatest economic paradox of our times.

Productivity is, in essence, the production capacity of an economy with the available resources – land, labour, capital and technology.

It increases when you are able to do more with the same wicks, and that efficiency is, in the long term, the biggest determinant of the improvement – or worsening – of the standard of living of a society.

Unfortunately, in this regard, the data is discouraging. The first wave of the Internet brought a considerable increase in labour productivity between 1995 and 2004, and since then entered into a phase of lethargy especially worrying in the case of advanced economies. A deep dream that has left its mark on the economy, based on low growth as a new norm.

Smartphones, e-commerce and algorithms, among other advances, have changed, almost on a daily basis, the lives of millions of people around the world.

But this jolt, palpable since we wake up until we go to bed, is not being felt in the engine room of the economy, with a disconnect between productivity and technological change that could not be more pronounced.

The reasons behind this phenomenon, however, remain part of the realm of: What if it is only a matter of time? What if technological advances are not powerful enough to shake the productivity tree? What if we are measuring badly?

The debate is served and divides the academy roughly into two groups: techno-optimists and techno-pessimists.

The advances of the digital age add incomparably less than those of the era of mass electrification, a century ago. And, they add, if nothing changes, the slowdown in productivity is on the way to becoming something permanent, a factor with which we will have to get used to live with.

The new technologies, apparently have given great press headlines and modest economic results. They would have, therefore, more to do with mere gadgets and pure and hard entertainment than with a radical transformation of the economy.

However, techno-optimists seem to be struggling with a strong idea: current innovations will bring productivity gains, but we must give some more margin.

The transition from an economy from the tangible to one based on ideas, they allege, is difficult and takes much longer than we think. But change will come and artificial intelligence, big data and, finally, the torrent of innovation will allow the economy to recover.

It is understandable that the advances of the last 15 years were thought to lead to a productivity boom, but history has taught us that there is always time between the time of commercialization of new technology and the moment in which it has an effect real.

We saw it with electrification and combustion engine, and it is a reasonable hypothesis. What we still cannot know is whether this acceleration will occur in two, 10 or 15 years.

Perhaps, the real paradox is that economists expected that with digitalization history would be different and that productivity would respond before the innovation.

Whenever there is a strong technological revolution, there is a temporary lag until the advances are put into practice and it shows in the economy. Many new technologies have arrived, but we still don’t know how to incorporate them.

It will take time and we have to ask if enough has happened to make these innovations felt?” Optimistic people say that things have only started. In the meantime, productivity will continue to be that guest who has confirmed and reconfirmed attendance but does not end up joining the party.

As the debate about this puzzle gains notoriety, new contributions have been added and opened up that extend the radius of thought beyond the dichotomy between pessimists and optimists.

Among them, the possibility that, in reality, everything is due to a mere measurement error: that the growing supply of free access goods and services were being statistically invisible both in GDP as in productivity. However, this current has more detractors than defenders.

When something makes us doubt, we tend to question the models. But that’s not the problem. We challenge the widespread view that the productivity paradox is simply due to poor measurement. This phenomenon may only offer a partial explanation of the puzzle.

The crisis that began in 2008 left an indelible scar on virtually all economic and social indicators: unemployment, precariousness and poverty skyrocketed, and millions of people remained in the gutter. Those were the most obvious and visible effects.

But, more silently, the crisis also meant a jug of cold water for the adoption of emerging new technologies just as they entered the takeoff runway.

The aggregate demand plummeted and companies, like people, changed their behaviour.

It has been shown that during the recessions the pace of technology adoption falls and the cycle has not helped at all, so why would you invest in innovation if your products are not sufficiently demanded?

The cycles explain an important part of the history of this Rubik’s cube that has not been solved. But a look at the statistics invites us to think that productivity had been growing at a slower pace than expected even before the financial crisis entered the scene. And when recovery has come, far from redirecting the road, the stagnation has remained.

In this recent bullish phase, a lot of work and capital have been added, both necessary to trigger growth, but with a very discrete contribution of productivity, the key ingredient in fostering a tangible improvement in well-being. The expansion, we could say, has been rich in carbohydrates and poor in protein.

A much more short-term reading of the data, centred only in the last year, invites, instead, hope and gives wings to the theses of techno-optimism.

In the US, labour productivity has resumed – still timidly – the positive path. In 2019 the increase was 1.7%, four-tenths more than in the previous two years.

The theory of cycles does not forgive and it depends a lot on world growth in the coming decades. Even more so when the economy faces a capital challenge:  population aging.

In sum, productivity is not everything, but in the long-term, it is almost everything.

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About the author: Luis R. Miranda

Luis R. Miranda is an award-winning journalist and the founder & editor of The Real Agenda News. His career spans over 23 years in every form of news media. He writes about environmentalism, education, technology, science, health, immigration and other current affairs. Luis has worked as on-air talent, news reporter, television producer, and news writer.

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