WASHINGTON: Almost nothing in economics is more important, or mysterious, than productivity. It means the amount of stuff — goods, services, economic value — produced for a given amount of input.

It is productivity that separates today’s rich, modern consumer societies from subsistence farmers living on the edge of starvation. The Industrial Revolution created technologies such as electricity, turbines and internal combustion engines that supercharged productivity, which is why we live incomparably better lives than those of our great-great- grandparents. If productivity slows, we can expect our living standards to stagnate, no matter what other steps we take.

The problem is, productivity growth is slowing. After decades of robust growth, it flatlined in the 1970s and 1980s, only to surge ahead again in the 1990s and early 2000s. But for the last decade or so, productivity has stumbled again, and the worry is that the information-technology revolution was only a minor, short-lived reprieve from an inexorable stagnation. This pessimistic case has been made by economists Robert Gordon and Tyler Cowen. As they see it, scientists and engineers have simply picked most of the low-hanging fruit of knowledge available in the universe.

A new report by the Organisation for Economic Co-operation and Develop­ment (OECD), however, paints a more nuanced picture. The organisation, which is made up of the world’s major developed nations, looked at productivity not at the global or national level, but at the corporate level. Different companies have different technologies, different management systems and different levels of talent.

What the OECD found was startling. At a small number of companies, productivity growth hasn’t slowed at all. If you look at only these “global frontier” companies, there has been no productivity slowdown at all! This is especially true in services industries. The top performers have blazed ahead, while other companies have stagnated or even become less productive.

Why is this happening? Here we should turn to the research of New York University economist Paul Romer, one of the most influential theorists of economic growth. Much of Romer’s research is about “excludability,” or the degree to which companies can stop other companies from learning their secrets. Excludability means that new technologies don’t necessarily flow from one company to another. Romer has shown that excludability is, at least in theory, very important to economic growth.

If technology has become more excludable — if ideas and technologies are not spreading from company to company the way they used to — then we’re in trouble. The OECD report suggests that this is happening, but it doesn’t give us a clear answer as to why. In fact, no one really knows.

One possibility is that technology “spillovers” between companies — the term for when methods and practices jump from one company to another — are slowing as globalisation runs its course. Companies that interact with each other via supply chains will naturally tend to exchange ideas, as each company in the chain sees what the others are doing. The burst of globalisation in the 1990s and early 2000s might have allowed a huge transfer of knowledge along these supply chains; that burst might be coming to an end as the integration of East Asia into the global economy is completed.

Another possibility — one not suggested by the OECD report — is that intellectual property law is making it harder for companies to use ideas developed at other companies. There has been anexplosion in the number of patents granted in the US since the early 1980s. In Japan the increase has been even more dramatic. Some of the fastest growth has been in patents for business methods — exactly the kind of thing that ought to diffuse across companies and equalise productivity. In earlier ages, businesses could freely copy each other’s way of doing things; now, it is often illegal.

By arrangement with Washington Post-Bloomberg News Service

Published in Dawn, August 1st, 2015

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