Mini-book-length analysis of the question, by Cowen and Southwood. I'd love to read quotes and summaries of key arguments
They ask whether TFP and related measures undervalue the tech sector. They conclude no:
Disentangling science and GDP:
For instance, Norwegian GDP per capita is typically 20-30% above that of Sweden and Denmark, but Norway is accessing the same general stock of scientific knowledge. Similarly, US agricultural productivity per labourer and labour hour outperformed Europe during the 19th and 20th centuries, but some of that gap probably sprung from a high ratio of land to inhabitant, rather than an inherent technological advantage, and for some of that time American science may have been behind that of Europe.
The relevant footnote:
On agricultural productivity comparisons, see Broadberry, Stephen, and Mary O’Mahony. "Britain’s Twentieth-Century Productivity Performance in International Perspective." Work and pay in the twentieth century (2007): 301-329, and Broadberry, Stephen N., and Douglas A. Irwin. "Labor productivity in the United States and the United Kingdom during the nineteenth century." Explorations in Economic History 43, no. 2 (2006): 257-279.
They look at Total Factor Productivity instead:
Total factor productivity is an attempt to measure overall economic effectiveness: how much a society can do with the inputs it has. TFP, multi-factor productivity, or the Solow residual are all different names for this same concept. It refers to the amount of output growth left unexplained after accounting for all inputs, i.e. it is a residual and not something we measure directly. So if output grew by ten, and the contributions of land, labor, and capital each were judged at 3 (total of 9), TFP would be measured at one. As such, it is vulnerable to measurement errors in any of the main series that go into its calculation. Nonetheless the hope is that this variable measures the “left over” contribution of ideas to the process of production, and thereby helps us measure the efficacy of science. It won’t confuse progress in science with a country having a large stock of oil.
This seems to match the historical record better:
One advantage of TFP is that it seems to correspond to common intuitions as to when scientific progress was especially high. Robert H. Gordon, in his book The Rise and Decline of American Economic Growth, has argued at great length that scientific and technological progress reached a peak in the early part of the twentieth century. That was a time when fossil fuels, electrification, industrialization, nitrogen fertilizer, cars, radio, telephones, clean water, vaccines, and antibiotics all took on major roles in human lives in the wealthier countries. Within a matter of decades,, human life was transformed, in large part because of the extension and application of the earlier Industrial Revolution. Consistent with this picture, American TFP typically grew quickly in the 1920s and 1930s, ranging from between two to slightly over three percent per year. In more recent times, in contrast, TFP growth often has ranged between one and one and a half percent.
Problems with the TFP:
For instance, all attempts to measure scientific progress through productivity come up against a timing problem: the innovation does not happen at the same time as it is adopted.
Comin, Diego, Bart Hobijn, and Emilie Rovito. Five facts you need to know about technology diffusion. No. w11928. National Bureau of Economic Research, 2006.
Undervalues enhancements to labor, capital, or land:
many scientific advances work through enabling a greater supply of labor, capital, and land, and those advances will be undervalued by a TFP metric. Let’s say someone invents a useful painkiller, and that makes it easier for many people to show up to work and be productive. Output will rise, yet that advance will show up as an increase in labor supply, rather than as an increase in technology or scientific knowledge.
Some ideas are counted as capital:
The more general problem is that many scientific and technological advances are embodied in concrete capital goods.
Some ideas are counted as labor:
If a worker generates and carries forward a new scientific idea for producing more with a given amount of labor, that measures the same way as the worker being taught greater conscientiousness and producing more.
It is not clear how consistent this is:
In defense of TFP measures, these problems are not always so serious if these biases are roughly constant over time. In that case, changes in TFP still would reflect changes in the rate of progress of science and technology. The absolute level of TFP could be biased by capital-embodied and labor-embodied technical change, but over time, for comparisons, the expected sign of that bias might be close to zero. Still, it is not obvious that the rate embodiment of new ideas into capital and labor, in percentage terms, should be constant over time.
TFP may be a proxy for scientific progress but I'm not sure it really captures that cleanly. I think if on tosses in the lens of external economies of scale (think network type effects or Smithian type division of labor and wealth of nations) then I think the mental image of "scientific progress" most hold in their heads doesn't quite fit. I think much of that then is more viewed as improved management or coordination or resources.
The question, at least to me, then is do we want to lump the knowledge on how we combine existing resources into "science" or something else. The case can be made either way but I think it needs to be made explicitly.
They agree, and even raise approximately the same point:
To consider a simple example, imagine that an American company is inefficient, and then a management consultant comes along and teaches that company better personnel management practices, thereby boosting productivity. Does this count as an improvement in TFP or not? Or is it simply an increase in labor supply, namely that of the consultant? On one hand, some hitherto-neglected idea is introduced into the production process. That might militate in favor of counting it as TFP. On the other hand, the introduced idea is not a new one, and arguably the business firm in question is simply engaged in “catch up” economic growth, relative to more technologically sophisticated firms.
I am confused by their distinction between "catch up" growth and regular growth; it seems to me it should not matter how long it takes for an idea to diffuse when counting its value. Consider if each idea were like a corporation: it's not like anyone dismisses the growth that happened after the iPod came out as "catch up" value, and only gains during Jobs' original tenure count as "real" value.
It does seem clear to me that the timing problem makes it very difficult to disentangle from other ideas at this high level.