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Sources of Productivity Advance in the Twentieth Century: An Historical Perspective
Alexander J. Field
Productivity can be measured as the ratio of real Gross Domestic Product (GDP) to aggregate labor input (labor productivity) or relative to a denominator reflecting the inputs of both capital and labor (multi-factor productivity). The growth rate of multi-factor productivity¾the rate of real output increase less a weighted average of the growth of capital and labor inputs¾is a crude measure of the impact on the economy of new product and process innovations. Studies of multi-factor productivity changes during peacetime business cycles indicate that productivity growth in the mid-twentieth century was higher than in previous periods and higher than in the past thirty years during which the information revolution occurred. Two possible explanations of the relatively slower growth of productivity during the information revolution are the narrowing of channels of private sector productivity advance associated with the patterns of research and development spending during the “Cold War,” and the lag time between the introduction of information technologies and the associated increases in productivity.
Much attention has been devoted in recent years to productivity trends in the United States, and rightly so, because the growth in our material standard of living ultimately depends on them. There are two widely used measures. The most frequently referenced is labor productivity, the ratio of real GDP to aggregate labor input, usually measured in hours. Trends in labor productivity are similar, but not identical to those in per capita output, because the denominator in the latter case is population, not labor input. Because of changes in labor force participation rates, or hours worked per person, per capita output can change while labor productivity does not, or vice versa. But over the long run, per capita output, and thus our standard of living, cannot rise without sustained increases in labor productivity. The growth in labor productivity is measured as the difference between the growth rate of real output¾ the numerator in the ratio¾ and the growth rate of labor hours¾ the denominator.
But labor productivity is not the only measure of output per unit input explored by statisticians and economists. The second is total factor, or multi-factor productivity, a ratio of real GDP to a denominator reflecting both labor and capital inputs. The growth rate of multi-factor productivity is equal to the growth rate of real output less a weighted average of the growth rates of capital and labor, with the weights corresponding to the shares of these factors in national income. Typically labor receives a roughly two-thirds weighting, capital, approximately one-third. Physical capital consists of the nation’s stock of structures, equipment, and inventories, and is adjusted to take account of such factors as the rising equipment to structures ratio in recent years; equipment tends to have a higher gross return because of its faster depreciation rate. Labor input is also adjusted to take account of its changing age, gender, and educational composition.
Changes in multi-factor productivity measure growth in output that cannot be attributed to growth in labor and capital inputs, as conventionally measured. Such changes are commonly viewed as reflecting the impact of major scientific and technical advances¾the discovery or development of new products as well as new recipes for combining the services of capital and labor to produce goods and services¾as well as the effects of improvements in the efficiency whereby resources are allocated within firms and among sectors, and the effects of increasing returns to scale.
There are consequently two conceptually distinct mechanisms whereby labor productivity, and thus our standard of living, may grow. These two ways are capital deepening, a rise in the ratio of physical capital to labor input, and technical progress, a rise in output due to the availability of new technologies. Capital deepening results from investment in the macroeconomic sense¾ additions to the stock of structures and equipment that go beyond that necessary to compensate for depreciation. Roughly two-thirds of the flow of GDP represents consumption goods and services, 15 to 18 percent gross investment, and the remainder government spending and net exports. Gross product and gross investment both include the portion of output used to replace worn out structures and equipment.
Capital deepening requires sacrifice of current consumption so that output per worker, and thus consumption per head, may be higher in the future. For example, a laborer digging a ditch will be more productive, as measured in cubic meters of earth moved per hour, when using a backhoe than when armed only with a shovel. But during the period in which the backhoe is constructed, resources must be detailed to its production that would otherwise be available for producing consumption goods and services.
Technical progress, on the other hand, represents, in a sense, manna from heaven. It allows for an increase in output per hour of labor input absent the need for the sacrifice of current consumption reflected in the accumulation of capital conventionally measured. Thus a second route whereby labor productivity may grow is as a consequence of such progress, the primary factor reflected in measures of the growth of multi-factor productivity.
In sum, and with some simplification, growth in labor productivity can be decomposed into that portion reflecting capital deepening, and that which results from technical change. Given deflated (real) output data from the national income and product accounts (NIPA), and series data on labor and capital input, it becomes possible to explore historically which of these two factors has been more responsible for labor productivity growth in different historical periods.
Productivity Growth in the Twentieth Century
For the purpose of comparing productivity, historical periods are typically defined from peak to peak of peacetime business cycles, so as to abstract from the effect of recessions on the one hand, and wartime distortions on the other. When this analysis is undertaken, it shows a remarkable pattern over the past thirteen decades. What is distinctive is that the experience during the period extending from the 1920s through the 1960s registers substantially higher rates of multi-factor productivity growth, and presumptively of technological progress, than the periods preceding and following. Consequently, labor productivity growth in the decades both preceding and following this half-century depended much more heavily on capital deepening.
Most of us are aware that labor productivity growth in the last three decades has been slower than it was before, and that growth in the material standard of living has been partially fueled by increases in labor force participation, particularly among women, as well as an arrest in the previous downward move in the average age of retirement. What is less commonly understood is the degree to which growth in output per hour has been so heavily dependent on capital deepening in recent years, just as it was at the end of the nineteenth century, in the great era of railroad construction.
In contrast, between the 1920s and the 1960s, and particularly during the 1928-1964 period, a very high fraction of labor productivity growth resulted from the effect of multi-factor productivity growth reflecting, predominantly, the influence of technical change. Most remarkable is the period 1928-1950, in which the ratio of capital to labor actually declined, because of the low rates of investment during the Depression and World War II. But output per hour soared anyway. The only period that registers higher labor productivity growth is the 1950-1972 period, when continuing multi-factor productivity growth was paired with the consequences of renewed capital deepening.
Comparing Recent and Mid-Twentieth Century Productivity
There are some rather striking comparisons between late twentieth century technical change and the changes that took place in mid-century. There is no question that our life today has, in the last three decades, been revolutionized by remarkable change. And its main location is, I think, evident, even to casual observers. For those who experienced life in the 1960s and earlier, an invitation to compare what is different and what is similar in our life today will yield a remarkable uniformity of response. Some will talk about bioengineering, but its impact on our lives remains still modest at this writing. The main experienced changes have involved technical change in the manufacture of computers, software, and telecommunications services. The way we write papers, add numbers, correspond with each other, obtain information, and entertain ourselves, for example, have all been radically transformed by personal computers and the networks that interconnect them.
But much of the rest of our life and consumption experience is not qualitatively different from what it was four decades ago. Automobiles and controlled access highways today are much as they were in the 1960s. The same is true of house construction, plumbing, the clothes we wear, or the experience of going to the movies or taking an airplane ride from New York to San Francisco. Transformational as opposed to evolutionary change has been remarkably localized in the areas of computers, software, and telecommunications.
As a working hypothesis, I suggest, in contrast, that transformational change in the 1930s took place across a much broader range of industries and sectors. Building on the advances in automobile production and electrification of the 1920s, such progress laid the foundation not only for the extraordinary productive achievement associated with U.S. victory in the second World War, but also for what Walt Rostow called the age of high mass consumption that ensued in the 1950s and continued into the 1960s and beyond.
This is perhaps a difficult proposition to entertain, because the 1930s was such a disastrous decade from the standpoint of capacity utilization. Big ticket consumption spending took a downward move after 1929, and real gross fixed investment collapsed, falling almost 75 percent between 1929 and 1933. Real output fell almost 30 percent over the same four years. More than four million passenger vehicles were produced in 1929, but because of the depression and the conversion of automobile production to military production in the first half of the 1940s, that rate was not equaled again until 1950. The construction boom that characterized the 1920s began with residential construction and was followed by an apartment and then a central business district boom. After its meltdown in the early 1930s, private construction never fully recovered until the 1950s. Residential construction revived with the mass produced Levittowns and Eichler developments of the postwar epoch. Central Business District re-building took even longer. Double-digit unemployment, which peaked at 25 percent in 1933, persisted for more than a decade, with rates as high as 19 percent experienced as late as 1938.
Yet, when we measure productivity performance peak to peak from 1928-50, we register the highest or the second highest rate of multi-factor productivity growth over similar periods in the last two centuries. In spite of tremendous losses due to underutilized labor and capital, the 1930s were, paradoxically, also an extraordinarily fertile period from the standpoint of technical change, one in which a disproportionately large number of key product and process innovations took place. It was also a decade in which a regime of privately funded organized research and development activity, of which Edison’s work in the 19th century was prototypical, reached maturity. During the 1930s a number of companies, such as AT&T, RCA, IBM, GE, Kodak, Alcoa, and Dupont regained profitability well before the end of the decade, even though many small and medium sized companies continued to flounder. In aviation the DC3 was introduced in 1936, and dramatically cut the cost of delivering a passenger mile of air service. Building on innovations from the 1920s, RCA perfected television transmission and reception. Dupont made major breakthroughs in synthetic fibers, resulting in the introduction of nylon, neoprene, Plexiglas and Lucite. All of these advances in manufacturing were complemented by major advances in structural engineering, reflected in the building of the Boulder (later Hoover) and Grand Coulee Dams, the Golden Gate and George Washington bridges, and the working out of design principles for building efficient residential subdivisions for an automobile age and controlled access highways for long distance travel. In automobiles themselves, although much progress had been made in the 1920s, the thirties saw the fleshing out of a paradigm that remains largely unchanged to this day. Real wages of those workers who managed to keep their jobs in the 1930s increased after 1933.
All of these new technologies and more were on display at the New York World’s Fair in 1939, and visitors were enthralled, for example, by Norman bel Geddes Futurama exhibit in the GM pavilion¾ presaging the Interstate Highway system that President Eisenhower would begin building in 1956. Not all of the impact of technological developments from the 1930s would have showed up fully in the 1928-50 calculations¾ certainly much spilled over into the 1950-72 period, in which a roughly comparable rate of multi-factor productivity growth was complemented by a revival of capital deepening, producing years of extraordinarily rapid labor productivity growth ¾the highest in U.S. economic history.
Observations on the Productivity in the Past Three Decades
There have been many explanations for the slowdown in U.S. productivity growth that began in the 1970s. During that decade, scholars pointed to the oil shocks of 1974-75 and 1979, although much less has been heard of this theory since oil prices collapsed in the 1980s and productivity growth remained slow. Also popular in the 1970s were explanations associated with the growing burden of environmental and safety regulations, although this explanation has also been less frequently advanced in recent decades. Some have suggested that we suffer from “technological depletion,” or argue that there may be an unavoidable asymmetry in the rates at which new commercially exploitable technologies arrive in different decades. But perhaps the narrowing of the channels of transformational change is not entirely accidental.
If we are interested in the productivity slowdown, comparing technical change over the last three decades with the half-century previous, a natural question to ask is why has it been so relatively localized? I suggest as a partial and largely unexplored explanation the impact of the federalization and militarization of research and development activity associated with the forty-year Cold War. Although this effort resulted in a major increase in the capacity for training scientists and engineers in the United States, in the postwar years-as during the war itself- a very high fraction of research and development energy and manpower was concentrated in atomic energy, aeronautics, missiles, and, to a lesser degree, computers.
It may be that with the end of the Cold War, the effective privatization of the Internet, and the increasing importance of commercial as opposed to military markets, American research and development efforts have been partially freed to migrate back within broader channels. And we may not yet have fully experienced the effect of productivity improvements in sectors that utilize computers and telecommunications services (as opposed to those that produce them).
There are strong arguments on both sides of this question. Proponents maintain that there are enormous yet to be reaped savings in capital costs associated with the use of information technology to reduce inventory costs (through achieving higher turnover) and enabling higher utilization rates on fixed capital. These gains are largely unrealized, it is argued, because businesses and organizations have not yet fully figured out how most effectively to use these new tools. Others emphasize the gains from substituting computers for clerical labor, and argue that the bulk of these benefits were booked already in the era of mainframes. Still, whether discussing businesses or households, it is striking to note how much the future of productivity growth appears to turn in these debates on the consequences of advances in a few rather narrow sectors of the economy. It may be helpful at least to pose the question of why so much of the debate has turned on whether the greatest gains from the use of computers are behind or ahead of us, as opposed to involving directly a broader range of sectors.
Whether the accelerations in both labor and multi-factor productivity growth evident in the last few years of the twentieth century represents a temporary phenomenon or the beginning of a return to a productivity regime more characteristic of mid-century is a major unanswered question. In trying to address it, it is worth placing current trends in historical perspective, and reflecting on the remarkable breadth of technological achievement of the U.S. economy in mid-century and the institutional regime that gave rise to it.
Moses Abramovitz and Paul David. “American Macroeconomic Growth in the Era of Knowledge-Based Progress: The Long Run Perspective.” In Stanley L. Engerman and Robert E. Gallman, The Cambridge Economic History of the United States, vol. 3 (Cambridge, England: Cambridge University Press, 2000), 1-92.
Robert J. Gordon. “Does the New Economy Measure up to the Great Inventions of the Past?” Journal of Economic Perspectives 14 (Fall, 2000), 49-74.
Stephen D. Oliner and Daniel D. Sichel. “The Resurgence of Growth in the Late 1990s: Is Information Technology the Story?” Journal of Economic Perspectives 14 (Fall 2000), 3-22.