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Focus on Productivity, Not Technology

Scientific and technological innovation may be necessary for the productivity growth that enriches societies, but it is not sufficient. Without the right kind of complementary policies, technological progress may not lead to sustainably rising living standards; and in some cases, it may even set a country back.

CAMBRIDGE – Economists have long argued that productivity is the foundation of prosperity. The only way a country can increase its standard of living sustainably is to produce more goods and services with fewer resources. Since the Industrial Revolution, this has been achieved through innovation, which is why productivity has become synonymous, in the public imagination, with technological progress and research and development.

Our intuition about how innovation promotes productivity is shaped by everyday experience in business. Firms that adopt new technologies tend to become more productive, allowing them to outcompete technological laggards. But a productive society is not the same as a productive firm. Something that promotes productivity in a business may not work, or may even backfire, at the level of a whole country or economy. Whereas firms have the luxury of focusing on the productivity of only those resources they choose to employ, a society needs to enhance the productivity of all of its people.

But many economists (and others) have failed to appreciate this distinction, owing to the assumption that technological progress will eventually trickle down to everyone, even if its immediate benefits accrue only to a small group of firms and investors. As economists Daron Acemoglu and Simon Johnson remind us in their useful new book, this belief has not quite been true historically. The Industrial Revolution may have inaugurated the period of modern economic growth, but it did not produce advances in well-being for most ordinary workers for the better part of a century.