First, the good news – the world is wealthier today than it has ever been. Total global wealth now clocks in at around $250 trillion, or almost $34,000 for every man, woman and child on earth. World GDP per capita, a measure of annual global income, is also at all-time highs – more than $16,000 per person. Just a few hundred years ago, we were all a lot poorer, and global GDP is estimated to have been only about $600 per capita. Take a look at the following stunning chart:
How did the world create such vast wealth in such a relatively short amount of time, essentially turning almost nothing into something? The answer can be summarized in one word – productivity. Basically, we got a lot more efficient at making things – using far less time, energy, and raw material inputs to produce each new unit of ‘stuff’. Economists are very interested in productivity, and they attempt to measure it carefully, because it is the main factor behind economic growth (the other factor is the size of the working age population). You should be interested in productivity too, because up until now, it has basically been synonymous with standard-of-living.
There was a veritable explosion in productivity beginning with the industrial revolution around 1820, and a commensurate rise in GDP growth and our standards of living as depicted in the above chart. A century later, there was another surge of productivity growth from the 1920’s to the 1970’s, increasing at an annualized pace of around 3.5%. At that rate of growth, standards of living doubled every 20 years or so, which understandably imparted great expectations for each subsequent generation. Productivity growth declined somewhat in the 1980’s and early 90’s to around 2.2%, but briefly surged again from about 1995-2005, during the “dot com” revolution.
Now for the bad news. Since 2007, the growth in productivity has stalled to a rate below 1%, and is still falling. Economists are understandably concerned, and puzzled, by this slowdown and there is widespread disagreement as to whether this is a permanent or temporary state of affairs. The concerns are not misplaced – if today’s paltry rate of productivity growth is sustained, they say, standards of living in the US won’t double again for another 100 years.
Or will they? There is another school of thought that argues we are simply not measuring productivity correctly, or that the link between old-school productivity growth and our standards of living is broken. There are many examples and anecdotes to illustrate this point, although little hard data, but I find this argument largely persuasive. Certain anecdotes ring especially true for me:
First, thanks to advances in medical care, most of us can look forward to much longer retirements than prior generations. I think of my own parents, recently retired, both healthy and enjoying their post-work years in full. They read, garden, go for walks with their dog, golf, see concerts and visit family and friends often. Where would this show up in productivity statistics? I’m not sure it does, but who could argue that my parents and many others in the baby-boom generation aren’t enjoying a high standard of living?
Secondly, in the last decade (corresponding closely to the time of the great productivity slow-down) we’ve all enjoyed a revolution in the ability to communicate and share updates, photos and videos with our friends and family, thanks to Facebook and other social networks. There have been great advances in entertainment as well – for example, after carefully “collecting” music for 25 years, I’m now a subscriber to the Spotify music service, and I still find it astonishing that I have full access to the entire world’s history of music, on my smartphone, at all times. Buying a physical music CD would show up in traditional measures of productivity, while streaming my favorite songs do not, but my life is enhanced nonetheless. Similarly, today I can also order almost any movie or TV episode ever made on my internet-connected television at home, but this fact is also absent from productivity statistics. And finally, digital photography has decimated the film development industry, actually subtracting from productivity, but who would go back to the old days of physical film cameras?
Anecdotally, it seems clear that much of the recent advancements in technology has focused on improving health, social communication, and entertainment, rather than on the production of physical objects. Perhaps most of us have enough ‘stuff’ already and are choosing instead to improve our lives with exercise, good nutrition, connecting with others, and high-quality entertainment. Again, it’s difficult to see how these kinds of improvements would add up in traditional measures of productivity, but it certainly enhances our standard of living.