In Robert Solow‘s (in)famous growth model, perhaps the most important part was what is now called the “Solow residual” or “Total Factor Productivity” (TFP)–the part of economic growth that cannot be explained by changes in the input of the factors “capital” and “labour”, which is, in effect, the result of technological progress. In other words, TFP is a reflection of us learning how to produce more with the same amount of input. A recurrent theme in this blog is that quantitative GDP growth is highly problematic, mainly due to the related pressures on natural ecosystems. However, even if we decide to stop growing–or, better, to stop focusing on growth–, it is not obvious that we can actually achieve it. And TFP is one of the reasons why this isn’t as simple as many in the degrowth movement seem to believe.
Productivity growth is a process that essentially “just happens”. It is the result of the intrinsically human strive to make things better, more efficient, easier. It is the result of human inventiveness and creativity. Hence, it cannot be stopped if required. However, increases in productivity are a growth driver. While themselves being only a qualitative factor, productivity growth confronts us with a dilemma–when we as a society become more productive, it means that we need less labour to produce the same amount of goods as before. If we do not want increases in unemployment rates, we have then two options to absorb this effect: either to produce more goods or to reduce average working hours. Many post-growth theorists have a simple response to this challenge–let us reduce working hours to a more pleasant level, say 20 hours per week, and use the so gained free time for whatever social and individual activities we might wish to engage in. There is not much I could say against that–except for the question: what are we supposed to do when productivity growth doesn’t stop?
Let us assume that we as a society agree that 20 hours per week (on average) is the optimum, which would mean a gradual reduction by a factor of around two (today we are working around 40 hours per week on average–actually somewhat less, since the unemployed do not count in working hours statistics). I assume here that there exists an optimum amount of labour per week that we would like to have, i.e., that a reduction in working hours towards zero is not socially desirable (labour having an intrinsic value for most human beings). Assuming now a productivity growth rate of 1 per cent per annum, after some 60-70 years we would arrive at an output level equal to today, but with 20 hours labour per week. We do not want the economy to grow bigger, but we also do not want to work less. So, when the reductions in working hours have already absorbed all productivity growth without the latter to stop, what then?
The only answer I got for this question so far is: productivity won’t keep growing so long as for the problem to emerge. As can be seen in the chart on the right (I “stole” it from The Economist, hopefully they won’t notice), it seems that those who gave me that answer might well be right. Productivity growth in rich countries has been falling for years. However, just to count on this development to continue exhibits a striking similarity with what many pro-growth economists do when confronted with the problems current levels of production cause: they tell us that our economies have grown so long that it is reasonable to assume that they will grow further, they talk about backstop technologies and other beneficial effects of human ingenuity and market mechanisms, effectively saying that catastrophe won’t happen because it has not happened yet. This is wishful thinking, in both cases. Things might work well, but actually we do not and cannot know whether they will. According to the precautionary principle, we should at least consider the worst-case scenario: that productivity will keep growing. It might grow at a very low pace, but if it does grow, we will encounter problems sooner or later. What then?
I do not have an answer to this question. And I still believe that it is better to start the transition towards a post-growth society as soon as possible than to wait until we know the answers to all relevant questions. But we should be aware that these questions are still there, unsolved, and try to find answers. Because sooner or later we might need them.
The Sceptical Economist 
Nice post again. Two additional ideas from my side: First thing – I am not so sure about this “inevitable decline” of productivity growth. The US-rate in your figure looks more stable than constantly declining to me. Furthermore, the time period covered is very small and according to the theory of Kondratieff-cycles the basic innovation-dynamics have to be thought of in terms of half-centuries.
Second, I do not think that productivity growth by human creativity is unstoppable or inevitable. We just have to go back some centuries before the growth-take-off in 1740 – until then the average annual growth rate was 1/19 percent. Or look into the socialist societies before 1990. Have been people back then / in the socialist countries been less creative than today / in the West? Probably not. The dffference rather lies in the structures / institutions of society:
First of all, humans surely have the potential to be creative; however, whether they realize this potential largely depends on their education – is their creativity encouraged by their family and in school? Or does it shrivel by endless tedious labor in agriculture or stupidious classic confrontative schooling-methods making you learn things by heart only?
Second, how does society frame creativity? Does it honor creative people with nobel prices or will it burn them as witches on pyres?
Third and probably most important, is creativity stimulated by economic competition, that is, is it rewarded in economic terms?
In this light, breaking the growth dynamic coming from human creativity may be way more simple then many hope (and even more fear). Not that we have to return to witch-burnings – but what if we just break the mechanisms that rewards creativity economically? Think for example of abolishing patent laws: Due to the external effects of many inventions (benefits can be reaped by all which leaves no reward for the inventor) they would not be created without this supporting legal institution.
Furthermore, there are so many structures boosting innovations which could be easily removed if society wants. Think of the Japanese forerunner-legislation making the best available technology in a certain sector the minimum standard for all competitors every 2 years or so, thus creating a huge incentive to go ahead.
Finally, we can even implement negative incentives for creativity: Think of the infamous “Schweigekartell der Oberingenieure” – the disincentive for inventions in enterprises faced with emissions-standards, because with such standard each invention threatens to raise the obligatory state of the art and with it your costs.
The question is, can we do without creativity in the economy? Does not the Great Transformation, that is the creation of a sustainable society need creativity most of all? Will there be solutions to the challenges regarding clean energy or growing mountains of waste without new inventions? If not (which is what I believe), how can we make sure that creativity is channelled into creating sustainable solutions only instead into more technology to extract the very last natural resources from our soils, forests and oceans? Sounds like an interesting dissertation-topic to me…
You are right in pointing to Kondratieff cycles. Still, my imagination fails me when I try to envision continuous productivity growth. There is a nice argument put forward by the Polish economist Stanislaw Gomulka (not related to the former First Secretary of the Communist Party Wladyslaw), not really a growth critic himself, who showed that there likely are limits to the innovative potential of an economy, as at some point we won’t be able to produce innovations at fast enough a pace to offset capital depreciation/deterioration.
The other reasons why creativity does not necessarily lead to innovations (or is stifled itself) are quite convincing. One point only: I do not think that economic incentives really have influence on creativity/inventions. They do have an influence on innovations in the actual sense (i.e., the whole process from the theoretical idea or a prototype to actual market diffusion). But this is more about semantics, because it is innovations that are important for our discussion, not creativity itself.
I share your intuition that while there exist mechanisms that may effectively stifle innovation, we do not actually want that. There are many fields where we arguably still need innovation, “clean(ing) technologies” being one important example. Another dilemma with no imminent solution.