Productivity paradox https://en.wikipedia.org/wiki/Productivity_paradox is the name for the slow productivity growth (i.e. slow GDP growth) of the developed economies despite the robotics, AI, automation and digitization.

Productivity paradox presents uneasy interpretation of the effects of 4th Industrial revolution to the techoptimists.

Productivity paradox can be interpreted as the supply side constraints/bounds and those are very bad per itself, yet - it is in stark contrast with low-inflation (even negative inflation) regime of the current economy, with the possibility of governments to finance stimulus and Covid-19 idleness without raising inflation. Such low inflation regime generally proves that there are no attained supply side constraints, that there is idle capacity.

Such interpretation - about idle capacity - proves that demand side bounds determine the low inflation, low growth and hence - low productivity? So - can we really say that technology has created ample supply side capacities (and hence - potential productivity growth, I mean - total productivity of technology and humans, human productivity growth can be exhausted already and that is why Artificial Intelligence and robotics almost fully determine the future productivity growth) and only demand side restrictions puts bounds on growth and hence - the productivity doesn't show up in macroeconomic figures?

Of course - I should explain the term "demand side restrictions". Some may argue that there are none: if there is capacity for growth, then investors/workforce will use it, they will earn money and they will fully spend it - either for consumer goods or for capital goods (bank deposits is example how money is spent for capital goods) and hence - the growth should happen. And if growth doesn't happen then that is entirely due to the capacity restrictions, e.g., due to the low productivity. But I don't know - whether one can consider the consumer and capital goods as being the same. Maybe inequality can create "demand side restrictions": if money concentrates in the hands of the wealthy, then they are investing them in capital goods and hence in the supply side capacity building. If the money goes to workers and to all other people as the social assistance of Universal Basic Income, then it is being spent and hence the potential productivity is realized and becomes the actual productivity growth that appears in macroeconomic figures?

So - are there any demand side restrictions (e.g. to wealth concentration) in the period "2010-2020+" in the advanced economies and can such demand side restrictions determine that the potential productivity (e.g. due to the technological achievements) is not realized and doesn't show up in the macroeconomic figures as the actual strong productivity growth. Can this be the explanation of the productivity paradox? If now - what is wrong with this reasoning?


1 Answer 1


Capital accumulation would still appear as investment GDP. Its possible theres other applications for this spending that would result in higher gdp. For example, GDP spiked in ww2 because military spending happens to be very efficient at inflating GDP.

So it is intuitively plausible that potential output is hidden by rising investment- the closest equivalent in economics is baumol cost disease, where the low productivity sectors gain more wages as growth progresses. However, the example you are asking about, in technology, is not that related to macroeconomic investment. The overall infrastructure level in energy production and distribution drives the output of everything- so there isnt much tradeoff there, consumption is made possible by shared infrastructure used for both consumption and investment.

Technology likewise is shared infrastructure- you could use a semiconductor plant for either consumer or business goods- so theres only a limited extent to which it would matter in practice. But there could indeed be Baumol like factors which cause resources to be allocated in a way that results in lower output. Baumol phenomena are almost the opposite of what you are describing but they are the closest thing in economics to the idea that growth may be "hidden" through factor reallocation.


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