Economist Eli Dourado discusses total factor productivity as a measure of progress, institutional influence on wealth, and the impact of technological innovations on society. They also explore energy superabundance, state capacity in China and the US, and the importance of elite consensus in politics.
Total factor productivity (TFP) is a measure of economic growth that accounts for improvement in output with the same amount of inputs, with TFP growth rates declining significantly since the 1970s.
The quality of institutions, including governance structures and social norms, plays a crucial role in economic growth and determines the relative wealth of countries applying similar technological ideas.
Deep dives
Total factor productivity and its role in measuring economic growth
Total factor productivity (TFP) is a measure of economic growth that accounts for improvement in output with the same amount of inputs. TFP estimates how much growth is not explained by changes in labor and capital, considering it as a residual. TFP consists of unexplained variation in growth, which could be attributed to better recipes or ideas for production, such as technological advancements and improved institutional quality. The heyday of TFP growth was from 1920 to the early 1970s, when it averaged around 2% per year. However, since then, TFP growth has slowed down considerably, with rates dropping to 0.3% per year since 2005.
The importance of institutional quality in economic growth
In addition to technological advancements, the quality of institutions plays a crucial role in economic growth. Institutions, such as governance structures and social norms, complement technological progress in driving economic development. Over time, societies become wealthier due to the accumulation of knowledge and better recipes for production. While technological ideas contribute to long-term economic growth, the quality of institutions determines the relative wealth of countries applying similar ideas. Institutions encompass factors like governance, rule of law, and social cohesion, and their decline can lead to decreased TFP growth, as seen in examples like Venezuela and Italy. Therefore, a complete picture of economic growth requires considering the influence of both technological advancements and institutional quality.
A historical perspective on TFP growth rates
Historically, the TFP growth rate was around 2% per year during the period from 1920 to the early 1970s. However, since then, TFP growth rates have declined significantly. Between 1973 and 1995, the growth rate fell to around 0.5% per year, representing a 75% decrease compared to the earlier period. From 1995 to 2005, TFP growth experienced a brief resurgence, reaching approximately 2% per year. However, since 2005, TFP growth has been abysmal, with rates as low as 0.3% per year in the United States. This slow TFP growth is a concerning trend, as it hinders overall economic progress and represents a significant departure from historical growth rates.
Factors influencing TFP growth
Several factors contribute to variations in TFP growth rates. The mid-1990s witnessed a temporary increase in TFP growth due to innovations like word processing and email, which allowed for increased productivity and reduced reliance on manual labor. Additionally, increased trade with China played a significant role in enhancing TFP growth during that period. However, it is noteworthy that not all IT advancements lead to increased TFP growth. Only technologies that enable job replacement, such as automation, contribute significantly to TFP growth. It is critical to identify and invest in technological advancements that bring about substantial productivity gains and promote overall economic growth.
Eli Dourado (@elidourado) is an economist, researcher & writer. He is currently a Senior Research Fellow at the Center for Growth and Opportunity at Utah State University (@cgousu).
In this episode, we discussed TFP as the right measure of progress for society, regulatory hacking in practice, energy superabundance, state capacity in the modern era, and the importance of culture in avoiding a zero-sum future.
Remember Everything You Learn from Podcasts
Save insights instantly, chat with episodes, and build lasting knowledge - all powered by AI.
