Friday, November 4, 2011

Measuring Productivity

I'm still discussing Erik Brynjolfsson and Andrew McAfee's book Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy.

They make some very good points about measuring productivity. We don't account very well for improvements in quality as well as quantity, such as ease of use, say, or the availability of ATMs 24 hours a day.

Free digital goods like Facebook or Wikipedia are "invisible to productivity statistics". And we don't measure productivity adequately at all in two sectors which together make up the majority of the economy:

Furthermore, most government services are simply valued at cost, which implicitly assumes zero productivity growth for this entire sector, regardless of whether true productivity is rising at levels comparable to the rest of the economy. ..

Health care productivity is poorly measured and often assumed to be stagnant, yet Americans live on average about 10 years longer today than they did in 1960. This is enormously valuable, but it is not counted in our productivity data. According to economist William Nordhaus, “to a first approximation, the economic value of increases in longevity over the twentieth century is about as large as the value of measured growth in non-health goods and services.”

The point about healthcare is more optimistic than most views of healthcare spending. It is not all simply just cost inflation.

There are other negatives which may offset some of this - such as rising pollution, say. But over the long run productivity is THE main factor affecting growth and incomes. And we do not measure or understand it very well.

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