Don’t get worked up over productivity lag
Digital-led, across-the-board gains will show up sooner than you think
When Steve Jobs unveiled the iPhone, it seemed reasonable to suppose that smart devices would not only change the way we interact but help us be more efficient. In fact, productivity growth measures across many developed economies have halved since the iPhone’s arrival.
So, why has productivity decreased and why should investors care? The contradiction between game-changing innovations and weak productivity is known as the productivity paradox. How can productivity statistics be disappointing in an age of technological disruptions such as autonomous cars and artificial intelligence (AI)? Is the digital, or fourth industrial revolution, simply less revolutionary than the first three which brought us electricity, chemicals and the telephone?
Several economists blame new technologies for limiting productivity gains while generating high expectations. There are three potential explanations for the mismatch between statistical reality and expectations. Either we are too optimistic about the potential impact of innovations, we are too pessimistic about the measured productivity, or we are a bit of both.
Some argue technology means we are making existing products faster. Over time, low productivity sectors have come to occupy a larger share of the economy. While innovation continues, goods have become cheaper rather than create major new product categories, meaning consumers are spending less on manufactured goods.
Looked at more positively, we know that material wealth maximisation will not make us happier, but services might. The hope is that we may be close to a tipping point. There are synergies between technologies, which means we will see the scaling-up of digitalisation. For example, think of food processing which employs increasing automation and mechanisation.
Or agriculture, where micro-sensors and big data translate into less waste, more efficiently applied inputs and lower costs, or the evolution of the Internet of Things (IoT), which couples real world objects with interconnected management. Put differently, the productivity gains from digitalisation are only at their early stages.
In the same way that after the invention of the electric dynamo to succeed the steam engine, it took decades to learn how to make use of it by reorganising factories.
‘Secular stagnation’ theory
On the other hand, economist and historian Robert Gordon revives a “secular stagnation” theory, arguing that the golden age of innovation is over. We are overestimating the impact of today’s technological advances, Gordon argues, because iPhones, for example, have limited economic impact compared with the “great inventions” such as electricity or automobiles.
Moreover, the iPhone might help us enjoy our free time, but also distracts us when we are supposed to be more productive. Additionally, technological disruptions are probably concentrated in specific companies, sectors or countries and result in private economic profit rather than widespread productivity gains.
Further, it’s argued that instead of technological innovation trickling down throughout the economy as tech-savvy employees move between firms, instead, the tech-savvy tend only to move between the most innovative companies, leaving the majority to their under-performance.
The optimists argue that statistics are missing something because the models cannot capture the contribution of the new economy. Indeed, the sectoral shift from industries to services in advanced economies is key to the puzzle. While representing a small share of GDP, new “digital” services such as social media can improve our standard of living and make the economy more efficient.
Finally, optimists and pessimists may agree that it takes time to translate the benefits of technological progress into productivity growth. This time lag could explain the low productivity growth and the hopes regarding new technologies. In fact, new technologies require new workers’ skills, business models, complementary innovations and adequate regulations. And as Robert Solow acknowledged in 1987, “computers are everywhere but [not] in the productivity statistics”. One decade later, productivity started to pick up.
The two views of productivity also fail to see that there have been intermittent falls in productivity independent of technological innovation. Falling capital expenditure in the wake of the financial crisis damaged productivity as high unemployment meant it was more cost-effective to hire more labour rather than make infrastructure investments. As monetary conditions start to normalise, rising capex may improve productivity as wages increase and companies invest in machinery and equipment. Investors may start to reward companies that invest in their own businesses.
To summarise, the optimists probably anticipate too much, and the pessimists are overly disappointed. Without demographic stagnation, uncontrolled debt and rising inequality, potential growth will remain weak if technology does not eventually enhance productivity.
■ Stéphane Monier is chief investment officer at Banque Lombard Odier & Cie SA.