12 August 2015

The Productivity Paradox: Is There a Measurement Problem?

There's been much debate in recent months about the productivity paradox - put simply there's a long standing concern that technology, particularly information technology, does not seem to deliver the productivity gains that might be expected. This concern has resurfaced in the UK, with the Government raising questions about why the UK's productivity has not grown as much as other countries. In fact George Osborne recently called the UK's low productivity growth "the challenge of our time".

This same topic came up in a recent email discussion with colleagues from ISSIP - the International Society for Service Innovation Professionals. This time prompted by an article in the Wall Street Journal entitled "Silicon Valley Doesn't Believe US Productivity is Down". In essence the Wall Street Journal argument was that developments in technology are not captured in the Government's productivity figures - apps that help people find restaurants more quickly or hail cabs from their phones clearly improve the efficiency with which we can do things. Doing more with less is a classic definition of productivity - so these apps must be improving productivity argues the Wall Street Journal (and those it quotes - including Hal Varian, Google's Chief Economist).

While I accept the argument that apps and associated technologies allow us to do more with less, I think there's a need to unpack the relationship between these developments and measures of productivity more carefully. Traditionally governments have measured labour productivity - in terms of GDP per hour worked. As technology replaces labour, GDP stays the same or increases, while labour hours go down - hence productivity increases.

However, there's an interesting new phenomenon which complicates the picture. Take, for example, Uber. I'm a fan of Uber - the app is great. Its convenient. I've never had a bad service from an Uber driver. I love the fact that I can rate drivers and they can rate customers at the end of journeys. I love the fact that the cost of the ride gets charged to my credit card and the receipt automatically emailed to me. But I also love Uber because it is cheaper - I pay less for a Uber car than I do for a black cab in London. Better service, pleasant drivers, lower prices - what's not to like. Other firms have similar business models - think Amazon or Airbnb. Still others provide me a service for free - Google and TripAdvisor - don't charge me for the information they provide, instead making their money through third parties.

When talking about productivity - or the lack of productivity - we need to think about the economic impact of these cheaper and/or free services. Lower prices to consumers must mean lower GDP. The efficiency gains are there, but they are not being captured in productivity gains because the benefits are being passed on to consumers in the form of lower prices, rather than captured in the official GDP statistics. Maybe a more nuanced discussion about productivity is needed - where we look at both sides of the equation - increases in value and hence GDP - and increases in efficiency reflected in lower costs to consumers.


  1. Productivity is primarily a function of economic output and employment. In the UK, most of the recent definitive economic growth has been delivered by sectors that simply do not have the same output value as classic productivity behemoths such as manufacturing. Such sectors are primarily consumer driven - such are retail - requiring a large number of employees without necessarily contributing commensurately to GDP growth, more so that the valuable bulk of consumed products are not even made in the UK. The real issue is that UK manufacturing is globally uncompetitive, thus unable to provide its full potential to overall economic output. This potential, however, cannot be unlocked without a substantial weakening of the pound sterling as cutting wages is too politically unpalatable. The conundrum in this regard, however, is that a weakened pound only stokes capital flight. This is a quite a pickle, more so that the minimal economic growth the UK is experiencing is too dependent on debt-financed consumption; a very unsustainable thing in its own right. People need to have serious conversations about how to generate sustainable economic growth while keeping enough people in fulfilling employment. Concerns about how to measure something, with all due respect, that only is part of the structure obfuscates the whole picture. Perhaps the approach to service driven growth needs to re-examined, so as to de-emphasise industries that barely move the GDP needle while promoting those that could be of substantial impact to both productivity and full employment.

  2. Thanks for posting this blog, Andy. And already an interesting comment from Vincent Sakeni. I think you are getting right to the heart of the matter, by focusing attention on the implications in human lives of the tsunami of connectivity roaring over the planet. The phenomenon of lack of GDP recognition really only says (in my opinion) something about how irrelevant such measures have become. The mere fact that we can have even this interaction on your blog, in real time, and in complete indifference to where our molecular physiques happen to repose on the planet surface -- well, what an absolutely HUGE breakthrough in 'productivity', in any meaningful sense of the word. As you point out there is also a Cambrian Explosion underway of new business models, which are releasing whole classes of assets (privately owned vehicles (Uber), under-utilized varieties of space (Airbnb), etc.) into new forms of productive use.

    So, here are two closely related thoughts that relate to the singularity we're living through, and that the bureaucracies (GNP compilers, etc.) have't caught up with. One concept is that human beings, with their talent, knowledge, creativity, innovativeness, are the real source of value. This, in my mind, is central to the ISSIP idea of service innovation professionals. And the related concept is that a Cambrian Explosion of monetary forms is underway, with potential to dwarf the currently-dominant, banker-created, debt-based moneys. No space here to draw out the details and implications, but just to note that Bitcoin has already stimulated the launch of literally hundreds of cyber currencies, the block-chain innovation seems to have a powerful life of its own, there's now a movement toward artisanal currencies, there are also hundreds of business barter networks, with their own internal currencies.

    The new mammals are underfoot, and the dinosaurs are doomed! To mix geologic period metaphors, of course :-)