The Productivity Paradox – Comparing Innovations
by Paul Winghart
Would you rather be the only one with a motorcar in 2013 or the only one with a smart phone in 1913? Assuming the entire current infrastructure is in place so your phone would work then as it does now, the question gets harder the longer you think about it. The idea of comparing innovations throughout time and weighing them against each other seems futile, but it is especially critical to gaining a deeper appreciation of what its really transpiring with productivity and the economy today. Solving the productivity paradox, therefore, can go along way in increasing your personal standard of living.
Many economists, including those at the Federal Reserve[1] are loath to reconcile the dearth of productivity growth in the economy. Growth in this case is italicized to indicate what we are talking about here is the realization of an actual productivity gain versus levels of productivity. Growth also implies that productivity first exists in an enigmatic state prior to being discovered and subsequently transformed into something more tangible, an “innovation” as it were. It is the “lack” of innovations lately that has many bemoaning the end of U.S. economic dynamism, as we know it. In fact, it has now been over a year since Northwestern University professor Robert Gordon declared that faltering pace of US innovation may very well end GDP growth altogether[2]. But before we turn economics from the laboratory of common sense into a playground for curmudgeons, let’s take a broader look at how innovations (and hence productivity growth) have changed and how our thinking about productivity must evolve likewise.
Innovations were once entirely thought in terms of melding of two independent physical things to produce one good or service so that its combined output was greater than the sum of its parts. To borrow from Professor Gordon: steamships, electric circuits, railroads, and motorcars were just a few examples of such innovations from the past. And innovations they were, especially for an economy based almost completely on agriculture and manufacturing activity- like the US was back then. However, times have clearly changed.
I have a feeling that most people reading this article are not coming in from the back 40 or taking their union-mandated 15-minute break off of the assembly line. Although the economy was shifting already in the 1980s and 1990s, it really wasn't till 2000 that the US become a service-dominated economy with almost three-quarters of US GDP coming from the service sector. More people work in management, sales, or other service positions today than at any other point in our economy’s young history and it is only getting larger. (Just ask any Windows 95er – kids born after 1995 – and see if they want to put 50 hours a week in a plant or with a plant or be planted in front of a computer) And with this change, so to has what constitutes meaningful innovations.
Economically speaking, productivity is merely a function of output per hour. Linguistically, though, productivity is the function of the word “product” (in this case a good or service) and the suffix “ivity”. As in the case with the words creativity and activity, the suffix “ivity” is present to modify the entire word in order associate the human influence on the root. For productivity, that means the melding of a mental quality and a physical good or service. It is for this reason alone that, since 2000, we now live in a world dominated by smart “things” (phones, TVs, watches, cars, water, food,…etc.).
Productivity in a service-based economy is much more impactful to our overall standard of living if it is augmenting goods and services with human characteristics. This new appreciation of productivity is what separates traditional media from social media, (the social being the human quality). It is what differentiates Healthcare and Obamacare. Is it any surprise, therefore, that a company specializing in search engines is back in 1996 is now one of the largest and fastest growing businesses in the world?
Innovation is not dead, we just haven’t learned to fully appreciate the mental relief it gives versus the physical help productivity was once known for. Sure, I’d hate to be without my car, especially getting the kids and the dog to baseball practice or getting back and forth from the grocery store. However, I’m just as dependent on my smartphone to juggle practice time with my grocery list in conjunction to with staying in touch with people or finding what I need. Productivity hasn’t gone away, it is all around us; we just have to look beyond or nose and teach ourselves to recognize it.
A note about the author, the founder and chief contributor of the economic website www.surplusproductivity.com, Paul Winghart graduated from the University of Minnesota in 1998 with a BA degree in Economics. Over the course of the next 15 years, Paul has been employed in the financial sector working as a Senior Fixed Income Strategist for a global wealth management company, achieving the level of Vice President. Based on the reputation earned over the years as a consistent prognosticator of economic fundamentals, Paul has also had the opportunity to speak at a number of events as well as serve as an adjunct professor of business for Bethel University. Most recently he presented the topic “Productivity and the Future of Interest Rates” to the World Futures Society’s 2013 annual world conference. Additionally, Paul is a two-time nominee (2011, 2012) for selection into the Financial Advisor/Private Wealth magazine’s national Due Diligence/Research Manager All-Star Team. Paul resides in St.Paul, MN with his wife and four children.
[1] Lockhart, Dennis President and CEO of the Federal Reserve Bank of Atlanta “Is the US losing its Dynamism? September 23rd, 2013
[2] Gordon, Robert J “Is U.S. Economic Growth Over?” Faltering Innovation Confronts the Six Headwinds NBER Working Paper No. 18315Issued in August 2012
by Paul Winghart
Would you rather be the only one with a motorcar in 2013 or the only one with a smart phone in 1913? Assuming the entire current infrastructure is in place so your phone would work then as it does now, the question gets harder the longer you think about it. The idea of comparing innovations throughout time and weighing them against each other seems futile, but it is especially critical to gaining a deeper appreciation of what its really transpiring with productivity and the economy today. Solving the productivity paradox, therefore, can go along way in increasing your personal standard of living.
Many economists, including those at the Federal Reserve[1] are loath to reconcile the dearth of productivity growth in the economy. Growth in this case is italicized to indicate what we are talking about here is the realization of an actual productivity gain versus levels of productivity. Growth also implies that productivity first exists in an enigmatic state prior to being discovered and subsequently transformed into something more tangible, an “innovation” as it were. It is the “lack” of innovations lately that has many bemoaning the end of U.S. economic dynamism, as we know it. In fact, it has now been over a year since Northwestern University professor Robert Gordon declared that faltering pace of US innovation may very well end GDP growth altogether[2]. But before we turn economics from the laboratory of common sense into a playground for curmudgeons, let’s take a broader look at how innovations (and hence productivity growth) have changed and how our thinking about productivity must evolve likewise.
Innovations were once entirely thought in terms of melding of two independent physical things to produce one good or service so that its combined output was greater than the sum of its parts. To borrow from Professor Gordon: steamships, electric circuits, railroads, and motorcars were just a few examples of such innovations from the past. And innovations they were, especially for an economy based almost completely on agriculture and manufacturing activity- like the US was back then. However, times have clearly changed.
I have a feeling that most people reading this article are not coming in from the back 40 or taking their union-mandated 15-minute break off of the assembly line. Although the economy was shifting already in the 1980s and 1990s, it really wasn't till 2000 that the US become a service-dominated economy with almost three-quarters of US GDP coming from the service sector. More people work in management, sales, or other service positions today than at any other point in our economy’s young history and it is only getting larger. (Just ask any Windows 95er – kids born after 1995 – and see if they want to put 50 hours a week in a plant or with a plant or be planted in front of a computer) And with this change, so to has what constitutes meaningful innovations.
Economically speaking, productivity is merely a function of output per hour. Linguistically, though, productivity is the function of the word “product” (in this case a good or service) and the suffix “ivity”. As in the case with the words creativity and activity, the suffix “ivity” is present to modify the entire word in order associate the human influence on the root. For productivity, that means the melding of a mental quality and a physical good or service. It is for this reason alone that, since 2000, we now live in a world dominated by smart “things” (phones, TVs, watches, cars, water, food,…etc.).
Productivity in a service-based economy is much more impactful to our overall standard of living if it is augmenting goods and services with human characteristics. This new appreciation of productivity is what separates traditional media from social media, (the social being the human quality). It is what differentiates Healthcare and Obamacare. Is it any surprise, therefore, that a company specializing in search engines is back in 1996 is now one of the largest and fastest growing businesses in the world?
Innovation is not dead, we just haven’t learned to fully appreciate the mental relief it gives versus the physical help productivity was once known for. Sure, I’d hate to be without my car, especially getting the kids and the dog to baseball practice or getting back and forth from the grocery store. However, I’m just as dependent on my smartphone to juggle practice time with my grocery list in conjunction to with staying in touch with people or finding what I need. Productivity hasn’t gone away, it is all around us; we just have to look beyond or nose and teach ourselves to recognize it.
A note about the author, the founder and chief contributor of the economic website www.surplusproductivity.com, Paul Winghart graduated from the University of Minnesota in 1998 with a BA degree in Economics. Over the course of the next 15 years, Paul has been employed in the financial sector working as a Senior Fixed Income Strategist for a global wealth management company, achieving the level of Vice President. Based on the reputation earned over the years as a consistent prognosticator of economic fundamentals, Paul has also had the opportunity to speak at a number of events as well as serve as an adjunct professor of business for Bethel University. Most recently he presented the topic “Productivity and the Future of Interest Rates” to the World Futures Society’s 2013 annual world conference. Additionally, Paul is a two-time nominee (2011, 2012) for selection into the Financial Advisor/Private Wealth magazine’s national Due Diligence/Research Manager All-Star Team. Paul resides in St.Paul, MN with his wife and four children.
[1] Lockhart, Dennis President and CEO of the Federal Reserve Bank of Atlanta “Is the US losing its Dynamism? September 23rd, 2013
[2] Gordon, Robert J “Is U.S. Economic Growth Over?” Faltering Innovation Confronts the Six Headwinds NBER Working Paper No. 18315Issued in August 2012
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