Mismeasurement may be at the heart of the productivity paradox

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My brother Rob is an economist by background and we have an ongoing debate that is repeated between techno-optimists and economists around the world. Every day I see improvements in technology helping us to live fuller lives and do more of the things we want to do but Rob and I struggle to reconcile that with the meagre growth and stagnant productivity statistics that he looks at.

Getting more specific, I believe that advances in robotics and artificial intelligence will most likely displace a significant percentage of human labour over the next 20-30 years (the Bank of England is saying up to 50%), but if robots are replacing humans in the workforce the productivity of the remaining humans should be rising, and that isn’t happening.

This is the productivity paradox.

One explanation for the productivity paradox is that economic output and productivity statistics are broken. Many people on the techno-optimist side, myself included, have pointed to the rise of free services from companies like Google and Facebook as an example of valuable goods that aren’t caught in the stats. That explanation has always been a little unsatisfactory though, because to my knowledge the free services dividend hasn’t been quantified and it’s hard to be confident that it will add up to enough to explain what will eventually be a massive discrepancy between labour replacement and productivity stats.

The good news is that I’ve just read another explanation, which is that improvements in quality of products aren’t being caught in the stats. This is a view held by Larry Summers, amongst others. As you can see from the chart above official statistics (i.e. the PPI) overstate the real price of computation by 27x. That’s a massive difference and it’s quantified. If this overstatement of prices is repeated across enough other categories then we could be misunderstanding today’s world due to mismeasurement and we have the basis of a calculation which could solve the productivity paradox.