University of Canterbury

What Does Total Factor Productivity Measure?

Email address: k.carlaw@econ.canterbury.ac.nz

Abstract:
We have two main concerns in this paper. First, we wish to assess the extent to which total factor productivity (TFP) can be taken as a measure of an economy’s long-term technological change or technological dynamism. We are interested in long run technological change and have argued elsewhere that much of the world has been living through a series of massive technological shocks that are associated with what is called information and communications technologies (ICTs). Some economists doubt this judgement because, among other things, there was no evidence of big technological shocks in the measurements of total factor productivity (TFP) over the 1990s. If anything, judging from the TFP figures, technological change seems to have slowed over the last two decades of the 20th century. In this paper, we consider this objection. We first introduce some basic concepts concerning technological change and ask what it means conceptually to hold technology constant while accumulating capital. We then outline the concept of total factor productivity and mention some well-known concerns relating to it and go on to express some of our own concerns related to embodied technical change, the treatment of natural resources, the timing of cost reductions, aggregating out of static equilibrium, and the problem of measuring technical knowledge and human capital. Second, we wish to better understand the complex set of technological interrelationships that we believe underlie the process of long-term growth. These go far beyond externalities as they are conventionally defined and measured. We argue that the really important benefits that are conferred by technological change are measured neither by conventional definitions of externalities, nor by TFP. There are, nonetheless, large and persistent benefits of technical changežbenefits that we call technological complementarities. We also argue that these complementarities cannot be analysed in an equilibrium model of the sort that underlies most TFP measurements. A simplified formal version of these arguments is presented in a model in which endogenous technological change produces continuous growth in the absence of externalities, increasing returns, constant returns to the accumulating factors, and a balanced growth path. We conclude that whatever may or may not be measured by TFP, it cannot be understood as measuring technological change or technological dynamism.

PDF file of paper: carlaw_abstract.pdf

Session: Applied Econometrics I

Time: Sunday, 8 July, 8am - 9:30am

Room: F