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Analysis: The Productivity Paradox, Digital Abundance and Scarce Genius

Thursday, March 28, 2019
Irving Wladawsky-Berger

Despite the relentless advances of digital technologies, productivity growth has been declining over the past decade.  Investment and interest rates have remained low, and income has continued to stagnate for the majority of workers in the U.S. and other developed economies. The world seems to be stuck in a period of slow growth and no one is quite sure what’s causing this apparent contradiction.

Opinions abound.  Harvard economist Larry Summers has argued that secular stagnation is the reason behind this unusual situation, caused primarily by a reluctance of companies to invest and of consumers to spend, with the ensuing excessive savings acting as a drag on economic growth.

Some contend -- most prominently Northwestern University economist Robert Gordon-- that over the past few decades there’s been a fundamental decline in innovation and productivity.  Perhaps our current technologies, advanced and exciting as they might be, aren’t as transformative as the technologies from the period between 1870 and 1970 when we experienced high productivity growth and a rising standard of living.  

Demographic change, namely, the declining population and labor force growth around the world, is another potential cause for slow economic growth. The global labor force grew at an average of 1.8% per year between 1960 and 2005, but since then it’s been growing at just 1.1% annually, and it’s already shrinking in a number of countries, including Japan, Germany, and China.

Another possible explanation,  advanced by Erik BrynjolfssonDaniel Rock, and Chad Syverson in AI and the Modern Productivity Paradox,  is that the paradox is primarily due to a time lag between technology advances and their impact on the economy.  We’ve been living in a time of major transformative technologies-- the Internet, smartphones, IoT, big data, AI --whose deployment and impact on productivity growth are still lagging.

While technologies may advance rapidly, humans and our institutions change slowly.  Moreover, the more transformative the technologies, the longer it takes for them to be embraced by companies and industries across the economy.  Leading edge firms are already benefiting from these advances, but most are still in the early learning stages.  Translating technological advances into productivity gains requires major transformations in business processes, organization and culture, and these take time.

In a recent paper, Digital Abundance and Scarce GeniusSeth Benzell and Erik Brynjolfsson introduce a new, quite interesting argument: slow economic growth and stagnating wages are inexorably linked to the rise of our global superstar economy.  A striking feature of digital technologies is their replicability at low or even zero cost, enabling digital innovations to spread almost instantly around the world.  As a result, digital labor and capital are becoming more abundant because they can be reproduced much more cheaply than their traditional, physical forms.  Why then is productivity growth so lukewarm?  What is constraining growth?

To address this paradox, Benzell and Brynjolfsson propose a novel production model.  In addition to capital and labor, their model adds a third factor, a bottleneck which prevents economies from taking advantage of the abundance of digital capital and labor. They dub this third factor genius (G).

The G factor is primarily associated with exceptional talent, which -- unlike labor and capital -- isn’t subject to digitization.  Its relative scarcity thus becomes a production bottleneck.  “Many have the sense that intangible assets and superstar workers are more abundant than ever.  Perhaps the most surprising thing then about our result is that these factors are increasingly scarce.”

The model helps explain “why ordinary labor and ordinary capital haven’t captured the gains from digitization, while a few superstars have earned immense fortunes.  Their contributions, whether due to genius or luck, are both indispensable and impossible to digitize.  This puts them in a position to capture the gains from digitization.”  

The paper discusses three different manifestations of this scarce and growth-limiting genius factor: superstar individuals, organizational talent, and ‘virtual real estate’.

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This blog originally appeared on Wladawsky-Berger's blog, here.

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