Why Economic Productivity?

Why am I interested in economic productivity? I was asked this question at a conference on ‘Productivity in the North-East’ by the lady sitting next to me. I gave an explanation, but didn’t feel I was able to get my core idea across. Writing this is an attempt to better articulate that idea.

In a nutshell, I like the tools used by productivity-focused economists to understand major economic events. In particular, I like the way these economists often start with the development of technology in their analyses. Crucially, I find explanations from these technology-focused economists feel more satisfying. This feeling is the key reason I am so interested in using technology as a lens to understand the economy, and why I attended a conference, looking to hear more from productivity economists.

This feeling of satisfaction is not fully logical, but I like the idea that our emotions can know things before we consciously realise them. I think it is useful to treat an emotion like satisfaction with curiosity and dig into its causes. My exploration of this feeling of satisfaction will be the long answer for ‘why productivity’. I hope there are some useful ideas behind this feeling, explaining why technology is such an effective lens to understand major economic events. 

To first show what I mean, I can contrast a satisfying and dissatisfying explanation of the economic stagnation of the UK in the 2010s (I would argue the most important economic event of my lifetime).

There are several headline-grabbing explanations for economic stagnation, which never left me feeling entirely satisfied. One idea, popular in the early 2010s, was that we were dealing with the legacy of the great recession of 2008 (weak demand and nervous investors), another is that there was too much public debt (a popular idea during the austerity debate of early 10s), and another is that the UK economy was not competitive in the face of international competition (discussed during Brexit). Although these explanations provide key insights into the causes of stagnation, for many years I found they left me with a sense of dissatisfaction. When learning of these conventional explanations, I still didn’t feel like I really understood why the economy was stagnating. If someone were to ask me, why isn’t the economy growing, I could give this list of reasons, but wouldn’t feel confident in my answer.

I finally felt I had a satisfying explanation when, a couple years ago, I came across productivity economists’ discussion of the UK’s stagnating economy. They emphasised the limited progress in technology during the 2010s as a cause for weak growth. There were few revolutionary new technologies to transform our economy in this decade. Perhaps we had the emergence of social media and cloud computing, but if we contrast this with the emerging technologies which enabled the golden age of growth of the 1960s (motorways, commercial air travel and early computers) a picture becomes clear of having less to work with to transform the economy. The new technology in the 2010s was mostly in the world of software and bits, making transformation possible only in a small area of the economy. I like the example Eric Weinstein gives for this: it’s easy to be tricked into a sense of accelerating technological change by our phones and laptops, but if we look up, the rooms around us are strangely old. If we wanted 60s style growth, we would need 60s style innovations, in the world of atoms, not just bits, and across a wide range of industries, not just IT.

As I try to understand what leads to the feeling of satisfaction with this explanation of stagnation (and the feeling of dissatisfaction with the conventional explanations), an important difference is in the coherence of each group of explanations. With the conventional explanations of stagnation, each factor is treated as relatively independent. The financial crisis, the debt burden and global competition would get a lot of airtime individually when economic stagnation was discussed, but little to no emphasis would be placed on how these factors linked to one another. Taking these explanations together, the result ends up feeling like a list, rather than part of a coherent model for understanding the economy. On the other hand, with the technology-based explanation of stagnation, we have one basic explanation which has so much power to explain other events in the economy. For example, it can link together all the conventional explanations for weak growth. Competition from globalisation is a side-effect of weak innovation because we haven't implemented new technology to increase economic output while other countries have. The national debt burden is a result of not successfully transforming government spending into more efficient production through technology - government spending has increased, without a corresponding increase in GDP, increasing the debt to GDP ratio. And the financial crisis of 2008 can be understood as a failure to convert large private investments into increased output through new technology, leading to vastly inflated asset prices that needed correction. To understand why a coherent explanation is more satisfying would likely take a psychologist, but my guess is if everything fits together neatly in an argument, we intuitively feel there is less likely to be something unknown and lurking, like a piece of evidence that contradicts your conclusion. In the same way you can trust someone who has their facts straight, you can trust a coherent model of the economy over a simple list of explanations.

Another reason why I find the lens of technology within productivity a more satisfying way to explain the economic stagnation in the 2010s is that it's easier to relate it to your own personal experience of the economy. To give one example, let's say that you work in a factory, attaching panels to cars. You’ve been doing this manually for the last 10 years. You read about economic stagnation and hear it explained with increased global competition, increased government debt, and as an after effect of the financial crisis. These are abstract - it takes several steps of reasoning to understand how government debt affects your ability to attach panels to cars, for example. It’s difficult to relate these conventional explanations to your daily personal experience with the economy. On the other hand, if you take the productivity and technology-focused perspective, you could simply focus on the fact that your ability to attach panels to cars hasn't changed in the last 10 years. You were attaching 100 panels per day 10 years ago, and you’re attaching 100 panels per day now. There's no new machine that helps to do this any quicker. The conveyor belt, carrying cars through the factory and out into the world, moves at the same speed. The stagnation of the 2010s suddenly makes more sense because you have experienced it in your own work. From this point, you can see this trend playing out across the wider economy, for all sorts of different workers and in different industries. The technology-focused explanation of stagnation is backed up by your personal experience, you don’t have to take an economist’s or a journalist’s word for it. If you’ve seen something with your own eyes, it’s easier to accept, which is a key reason technology-driven explanations of productivity are more satisfying.

The technology-focused lens may also be more satisfying than conventional explanations because it gives you the sense that you have more control over what’s happening in the economy. To continue with the factory worker example, they don’t have very much control over the conventional factors which contributed to the economic stagnation of the 2010s. National debt, the response to the financial crisis and economic competitiveness are primarily controlled by the government. The most you can do to influence these factors is to vote, but this feels like a drop in the ocean of 30 million other voters. Besides, it isn't even especially clear which party will handle these matters better. Meanwhile, if you understand what stagnation looks like in your own work with the help of the technology-driven view of the economy, you can also see more clearly your personal role in addressing stagnation. You can aid in the development of a new way of attaching panels to cars or encourage your child into a STEM path with a view to them developing and applying new technology in the economy. Compared to voting, both are far more personal and direct ways to feel like you’re having an influence on the economy. The sense of control gained from perceiving stagnation as something within your personal influence is satisfying.

To bring this back to the start, what is my answer to the lady at the conference who asked, why are you interested in economic productivity? I like the way productivity economists use a technology-driven view of the economy to explain economic events. Their explanations often feel more satisfying to me than conventional explanations. I believe these explanations feel satisfying because they seem more coherent, are easier to relate to personal experience of the economy, and because they encourage a view of the economy where you have control.