Does Greater Productivity Actually Lead to Greater Prosperity?
I happen to watch economics videos in the evening, to relax. Like I really actually do.
Tonight, I watched a Wall Street Journal video called "Worker Productivity's Steepest Drop in 74 Years: What That Means for the Economy."
Here it is, if you’d like to watch:
Right at the start of the video, Jon Hilsenrath, (WSJ Economics Editor) frames the conversation:
"The prosperity of the whole country, and the prosperity of you and me, depends on productivity."
Sounds serious.
But what does this really mean? And is it always true?
Personally, I don't trust absolutes—and "prosperity depends on productivity" sounds pretty absolute to me. Let's closer look at this claim and see if it stands up to scrutiny.
Okay, so how does productivity relate to prosperity?
Paul Krugman, who writes about the economy for the New York Times, says:
“Productivity isn't everything, but, in the long run, it is almost everything.
A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”
On the surface, this statement seems reasonable enough. After all, if a country can produce more goods and services per worker, then shouldn't that lead to a higher standard of living for its citizens?
Well--not necessarily.
For one thing, "raising output per worker" simply means that a country is producing more goods and services. It doesn't necessarily mean that those goods and services are being distributed in a way that benefits everyone.
In fact, it's quite possible for a country's output (AKA productivity) to increase while the standard of living for most of its citizens decreases (if, for example, the increased output is going to a small elite group while the majority of citizens see no benefit).
Second, is more consumption really a sign of prosperity? After all,"a country's ability to improve its standard of living over time" could just mean that households are buying more and consuming more.
Is overconsumption a good thing?
And what is a 'standard of living' anyways? Here's what Investopedia has to say:
So "standard of living" means "well being of the average person", and the metric for that is "GDP per capita"? AKA we are measuring prosperity by just how much the country produces divided by how many people live there?
Hard to believe that's true, when the benefits of that "prosperity" are not equitably distributed across the population.
According to the Brookings Institution:
"Income and wealth inequality has risen in practically all major advanced economies over the past two to three decades. It has risen particularly sharply in the United States.
The increase in inequality has been especially marked at the top end of the income distribution (Figure 9.1). Those with middle-class incomes have been squeezed and the typical worker has seen largely stagnant real wages over long periods.
Intergenerational economic mobility has declined. Income distribution trends are more mixed in emerging economies but many of them have also experienced rising inequality, including some major emerging economies such as China and India."
Does that sound like prosperity to you?
As productivity increases, the wealthy and powerful earn more, sure. So is that prosperity?
My question is: "Prosperity for whom?"
These are important factors to consider when evaluating the claim that "greater productivity leads to greater prosperity." We should be careful about accepting this claim blindly without critically examining what it really means.