Awhile back johnswentworth wrote What Do GDP Growth Curves Really Mean? noting how real GDP (as we actually calculate it) is a wildly misleading measure of growth because it effectively ignores major technological breakthroughs – quoting the post, real GDP growth mostly tracks production of goods which aren’t revolutionized; goods whose prices drop dramatically are downweighted to near-zero, so that when we see slow, mostly-steady real GDP growth curves, that mostly tells us about the slow and steady increase in production of things which haven’t been revolutionized, and approximately-nothing about the huge revolutions in e.g. electronics. Some takeaways by the author that I think pertain to the “AI and GDP growth acceleration” discussion:
“even after a hypothetical massive jump in AI, real GDP would still look smooth, because it would be calculated based on post-jump prices, and it seems pretty likely that there will be something which isn’t revolutionized by AI… Whatever things don’t get much cheaper are the things which would dominate real GDP curves after a big AI jump”
“More generally, the smoothness of real GDP curves does not actually mean that technology progresses smoothly. It just means that we’re constantly updating the calculations, in hindsight, to focus on whatever goods were not revolutionized”
“using price as a proxy for value is just generally not great for purposes of thinking about long-term growth and technology shifts” (quote)
Ever since I read that post I’ve generally discounted claims that AI progress would accelerate GDP growth to double digits unless the claims address the methodological point about how GDP is calculated. This isn’t an argument against the potential for AI progress to revolutionize human civilization or whatever; it’s (as I interpret it) an argument against using anything remotely resembling GDP in trying to quantify how much AI progress is revolutionizing human civilization, because it just won’t capture it.
I’m skeptical. Guzey seems to be conflating two separate points in the section you’ve linked:
TFP is not a reliable indicator for measuring growth from the utilization of technological advancement
Bloom et al’s “Are Ideas Getting Harder to Find?” is wrong to use TFP as a measure of research output
The second point is probably true, but not the question we’re seeking to answer. Research output does not automatically translate to growth from technological advancement.
For example, the US TFP did not grow in the decade between 1973 and 1982. In fact, it declined by about 2%. If – as Bloom et al claim – TFP tracks the level of innovation in the economy, we are forced to conclude that the US economy regressed technologically between 1973 and 1982.
Of course such conclusion is absurd.
Is it absurd? I’m not so sure. Between ’73 and ’82 the oil shock led to skyrocketing energy prices. Guzey acknowledges this economic crisis but goes on to claim that the indicator must be bad since semiconductors got better, crop yields improved, and life expectancy improved. And he’s right, for Bloom’s paper, this is a major discrepancy. TFP is not a good measure of research output. However, TFP roughly measures an economy’s technological capacity given current restraints.
America in ’73 was more productive than America in ‘82 because a key technological input (energy) was significantly cheaper in ’73 than it would be for most of the following decade while the technological advancements made during the same period were not enough to offset the balance.
According to the data provided, France’s TFP peaked prior to the Great Recession and has largely stagnated since. This doesn’t seem surprising given France’s sluggish economic growth since then. French GDP peaked in 2008. Its labor productivity has also barely grown. If one examines the data without holding the bias that tech advancements since 2001 MUST have vastly improved productivity, the results are hardly surprising.
This is harder to explain. According to the data, Italy’s TFP effectively peaked in 1979, remained near this peak until just before the Great Recession, and declined since. Italy’s GDP peaked around the time of the Great Recession and declined since. Nonetheless, its TFP being higher in 1970 than 2019 is shocking. CEPR argues that Italian manufacturing misallocates resources on a massive scale but I’d hesitate to give any firm opinion. Rising energy costs may also play a role? This is worthy of further research, but as Guzey points out, Italy is not on the technological frontier and is a bit of a basket case.
Japan’s TFP in 1990 was higher (a) than in 2009.
Unsurprising. 2009 was an unusually weak year for TFP in Japan given the Great Recession’s effects. Moreover, since the 1990s, Japan has been in its lost decades. Japan’s TFP growth looks more healthy and similar to America’s compared to France and Italy.
Skipping Sweden and Switzerland as they are small countries.
United Kingdom’s TFP in 2003 was higher (a) than in 2019.
The United Kingdom’s TFP peaked in 2007, one year before its GDP peaked. Like France, Italy, and Spain, it has yet to recover from the Great Recession.
TFP is NOT a measure of the pure technological frontier. It cannot tell you how much cutting-edge lab research has progressed over time. What it can tell you is how much technological advancement has soaked into the economy. Recessions, market shocks, structural barriers, and other forms of inertia can slow or even regress TFP.
Guzey goes on to give other takes I find puzzling like the following:
If Google makes $5/month from you viewing ads bundled with Google Search but provides you with even just $500/month of value by giving you access to literally all of the information ever published on the internet, then economic statistics only capture 1% of the value Google Search provides.
He already has his conclusion and dismisses arguments that reject it. “Of course the internet has provided massive economic value, any metric which fails to observe this must be wrong.” What is the evidence that Google Search provides consumers with $500/month of value? The midcentury appliances revolution alone saved families 20 hours or more of weekly labor. No one argues that the digital revolution hasn’t improved technological productivity, economists cite it as the cause of the brief TFP growth efflorescence from the mid-90s to the early 2000s. But Guzey seems to think its impact is far larger and imagines scenarios to support this claim.
Awhile back johnswentworth wrote What Do GDP Growth Curves Really Mean? noting how real GDP (as we actually calculate it) is a wildly misleading measure of growth because it effectively ignores major technological breakthroughs – quoting the post, real GDP growth mostly tracks production of goods which aren’t revolutionized; goods whose prices drop dramatically are downweighted to near-zero, so that when we see slow, mostly-steady real GDP growth curves, that mostly tells us about the slow and steady increase in production of things which haven’t been revolutionized, and approximately-nothing about the huge revolutions in e.g. electronics. Some takeaways by the author that I think pertain to the “AI and GDP growth acceleration” discussion:
“even after a hypothetical massive jump in AI, real GDP would still look smooth, because it would be calculated based on post-jump prices, and it seems pretty likely that there will be something which isn’t revolutionized by AI… Whatever things don’t get much cheaper are the things which would dominate real GDP curves after a big AI jump”
“More generally, the smoothness of real GDP curves does not actually mean that technology progresses smoothly. It just means that we’re constantly updating the calculations, in hindsight, to focus on whatever goods were not revolutionized”
“using price as a proxy for value is just generally not great for purposes of thinking about long-term growth and technology shifts” (quote)
Ever since I read that post I’ve generally discounted claims that AI progress would accelerate GDP growth to double digits unless the claims address the methodological point about how GDP is calculated. This isn’t an argument against the potential for AI progress to revolutionize human civilization or whatever; it’s (as I interpret it) an argument against using anything remotely resembling GDP in trying to quantify how much AI progress is revolutionizing human civilization, because it just won’t capture it.
Is there any GDP-like measure that does do a better job of capturing growth from major tech breakthroughs?
Total Factor Productivity would fit the bill
Nope, see here
I’m skeptical. Guzey seems to be conflating two separate points in the section you’ve linked:
TFP is not a reliable indicator for measuring growth from the utilization of technological advancement
Bloom et al’s “Are Ideas Getting Harder to Find?” is wrong to use TFP as a measure of research output
The second point is probably true, but not the question we’re seeking to answer. Research output does not automatically translate to growth from technological advancement.
Is it absurd? I’m not so sure. Between ’73 and ’82 the oil shock led to skyrocketing energy prices. Guzey acknowledges this economic crisis but goes on to claim that the indicator must be bad since semiconductors got better, crop yields improved, and life expectancy improved. And he’s right, for Bloom’s paper, this is a major discrepancy. TFP is not a good measure of research output. However, TFP roughly measures an economy’s technological capacity given current restraints.
America in ’73 was more productive than America in ‘82 because a key technological input (energy) was significantly cheaper in ’73 than it would be for most of the following decade while the technological advancements made during the same period were not enough to offset the balance.
Let’s look at the other examples provided:
According to the data provided, France’s TFP peaked prior to the Great Recession and has largely stagnated since. This doesn’t seem surprising given France’s sluggish economic growth since then. French GDP peaked in 2008. Its labor productivity has also barely grown. If one examines the data without holding the bias that tech advancements since 2001 MUST have vastly improved productivity, the results are hardly surprising.
This is harder to explain. According to the data, Italy’s TFP effectively peaked in 1979, remained near this peak until just before the Great Recession, and declined since. Italy’s GDP peaked around the time of the Great Recession and declined since. Nonetheless, its TFP being higher in 1970 than 2019 is shocking. CEPR argues that Italian manufacturing misallocates resources on a massive scale but I’d hesitate to give any firm opinion. Rising energy costs may also play a role? This is worthy of further research, but as Guzey points out, Italy is not on the technological frontier and is a bit of a basket case.
Unsurprising. 2009 was an unusually weak year for TFP in Japan given the Great Recession’s effects. Moreover, since the 1990s, Japan has been in its lost decades. Japan’s TFP growth looks more healthy and similar to America’s compared to France and Italy.
(See Italy)
Skipping Sweden and Switzerland as they are small countries.
The United Kingdom’s TFP peaked in 2007, one year before its GDP peaked. Like France, Italy, and Spain, it has yet to recover from the Great Recession.
TFP is NOT a measure of the pure technological frontier. It cannot tell you how much cutting-edge lab research has progressed over time. What it can tell you is how much technological advancement has soaked into the economy. Recessions, market shocks, structural barriers, and other forms of inertia can slow or even regress TFP.
Guzey goes on to give other takes I find puzzling like the following:
He already has his conclusion and dismisses arguments that reject it. “Of course the internet has provided massive economic value, any metric which fails to observe this must be wrong.” What is the evidence that Google Search provides consumers with $500/month of value? The midcentury appliances revolution alone saved families 20 hours or more of weekly labor. No one argues that the digital revolution hasn’t improved technological productivity, economists cite it as the cause of the brief TFP growth efflorescence from the mid-90s to the early 2000s. But Guzey seems to think its impact is far larger and imagines scenarios to support this claim.
this