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Rethinking Productivity

Today, about four out of every five dollars spent in the OECD economies purchases services or intangible goods. This “dematerialization” of economies demands a more nuanced understanding of what drives productivity.

CAMBRIDGE – The word “productivity” typically calls to mind industrial assembly lines pumping out cars or washing machines, breakfast cereal or shoes. The word may also conjure images of crops being harvested, livestock being butchered, or houses being built. It is less likely to elicit thoughts of haircuts, streaming television, or mortgages. Yet nowadays, it is largely these kinds of intangible goods and services that define economies.

Many economists equate “total factor productivity” with technological progress. Northwestern University’s Robert Gordon, for example, predicts that productivity growth will continue to slow – as it has done in most developed economies since the mid-2000s – because today’s digital innovations are, in his view, less transformative than earlier advances like the flush toilet, radio, and the internal combustion engine.

But, today, about four out of every five dollars spent in the leading OECD economies purchase services or intangible goods. This “dematerialization” of economies – which I observed in the 1990s, and which figures like digital economy expert Andrew McAfee have lately been exploring – is complicating our understanding of productivity.

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