Will paying for internet content raise productivity growth?

Productivity growth is important because the opportunities available to our children and grandchildren depend on it. As I write that I can almost hear some people saying: “Oh yeah, who needs more stuff?” It would be great if people who are satisfied with their current living standards didn’t have to worry about productivity growth. Unfortunately, even those people need productivity growth because their governments have already spent some of their future income on their behalf. Material living standards will depend on the income that remains after governments have taken away a slice (via reduced welfare payments and services or higher taxes) in order to service the public debts that continue to accumulate.

Some economists are worrying that the rate of productivity growth in high-income countries has declined since the turn of the century and is hampering recovery from the great recession in Europe and North America. In an article published by the Australian Treasury in 2013, Christine Carmody suggested that the substantial decline in productivity growth that has occurred in Australia might be related to a more general decline in productivity growth in other high-income countries. However, when I went looking for more recent OECD data on productivity to illustrate the slowdown I started to doubt whether it is a general phenomenon. The Figure below shows that in only about half of the countries covered by the OECD data was the rate of multifactor productivity (MFP) growth during the 2001 to 2007 lower than that in 1995 to 2001.

(Please click on graph for a better view.)

Multifactor productivity (MFP) measures the growth in value added output per unit of labour and capital input used. Labour productivity is sometimes still used in such comparisons but if we are interested in productive efficiency it makes sense to remove the impact of capital deepening (i.e. increasing capital per unit of labour).

After I saw the ambiguous OECD data I decided to take another look at Tyler Cowen’s book, The Great Stagnation, because that was where I had first come across the idea that all the low hanging fruit has been picked. As it happens Tyler’s book was about America and he did not rely on national productivity data to make his point. In fact he was highly critical of national productivity data. (Tyler relied heavily on data on median family incomes, which have growth slowly since the mid-1970s. Some analysis by Scott Winship suggests to me that there may also be problems in using that data to measure trends in productivity and earnings.)

Robert Gordon’s view that there has been a secular decline in productivity growth that is likely to continue is based on an examination of longer term trends in productivity growth in the United States. He notes that in the eight decades before 1972 labour productivity growth in the U.S grew 0.8 percent per year faster than in the four decades since then. He is sceptical of claims by techno-optimists such as Erik Brynjolfsson and Andrew McAfee that the global economy is on the cusp of a dramatic growth spurt driven by smart machines taking advantage of advances in computer processing, artificial intelligence, networked communication etc.

Tyler Cowen seems to be in broad agreement with what Bob Gordon writes about the past, but tends to agree with the techno-optimists about productivity growth in the future. There are other important contributors to this debate, including Joel Mokyr who makes the point that that the indirect effects of science on productivity through the tools it provides scientific research – such as searchable databanks, quantum chemistry simulation and highly complex statistical analysis - may, in the long run, dwarf the direct effects. The views of various contributors to the discussion have been summarised by Andrew Flowers in EconSouth.

In a recent article in the New York Times Paul Krugman made a useful contribution by suggesting that the productivity numbers are missing the benefits of new products and services. He wrote: “I get a lot of pleasure from technology that lets me watch streamed performances by my favourite musicians, but that doesn’t get counted in GDP”.

That point is, of course, not new. Australia’s Productivity Commission (with which I am still proud to claim past links) has recognized the problem of measuring the outputs of the information and communications technologies (ICT) industries - for example, see the staff paper on productivity concepts and measurement by Jenny Gordon, Shiji Zhao, Paul Gretton. The problems of measuring productivity of the internet were discussed at some length by Tyler Cowen in Chapter 3 of The Great Stagnation.

In order to answer the question I posed above I had hoped to point to some concrete evidence that content providers are finding effective ways to charge the users of their products. It seems all too obvious that it is happening with respect to a great deal of music, video and news, but I have not been able to find a summary of relevant information on the extent to which this is happening. Information such as that is usually easy to find on the Internet, but when I type in the words ‘revenue’, ‘internet’ and ‘content’ into search engines what comes up is a lot of information on models that firms can use to charge for content. Perhaps that is a sign of the times! The success of major sporting organisations in obtaining revenue from the entertainment they provide via all communications media seems to point toward a future in which consumers will pay for content directly and/or expose themselves to greater, and more personalised, advertising.

As people have to pay for more internet content it seems likely that will,of itself, make the productivity numbers for ICT industries look better, even though underlying productivity will not have improved and well-being of consumers may have declined. The potential upside of this return to old style capitalism is that as people pay for content there will be an increased incentive for firms to invest in providing content and to employ more people to produce content. 

Postscript 1:

Jim Belshaw has some related comments on his blog raising some questions about education, on-the-job learning and retention of corporate knowledge. My discussion with Jim in the comments section below has introduced me to the concept of productisation, which involves combining suitable elements to form something that is standardized, repeatable and comprehendible as product (a longer definition is provided in this abstract).  It has also prompted me to think more about the implications for productivity of ICT investment at the firm level.

The Productivity Commission’s research report "ICT Use and Productivity: A Synthesis from Studies of Australian Firms" published over a decade ago indicates that the rate of ICT uptake and effects on performance differ substantially across firms, even in similar circumstances. The differences were attributed to: differing technology and innovation strategies; availability of complementary skills; and differences in capacity to ‘learn-by-doing’. The Commission also suggests that differences between firms in their accumulation of organisational capital sets them apart from each other in their effective use of technology and in related innovation. 

A report by Ben Miller and Robert Atkinson entitled “Raising European Productivity Growth Through ICT” (prepared for the Information Technology and Innovation Foundation and published in June 2014) also draws heavily on firm-level productivity studies. The report cites many recent studies suggesting that investment in ICT has continued to have a strongly positive impact on productivity at firm level. The report argues that the regulatory environment in Europe has hindered the ICT investment needed to close Europe's increasing productivity gap with America.  

Postscript 2:
Noric Dilanchian has drawn my attention to a post by Timothy Taylor, the Conversable Economist, on a new OECD report entitled "The Future of Productivity". The OECD report seems to cover some similar ground to the report by Ben Miller and Robert Atkinson referred to above. I will read it properly and write more about it later.