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ARP Observations

Innovation ≠ Productivity

Further reading
See all articlesThe Absolute Return Letter

When I was a child in the 1960s, the most life-changing innovation was probably the introduction of colour TV and, today, when our nieces and nephews come to London to visit us, their first question is always the same: “Is the password still the same?” It is all about streaming these days.

Just because something is innovative does not translate into increased productivity. Today’s innovations are not likely to have nearly the same impact on productivity as, say, the car had on the productivity of our parents, or the arrival of the washing machine had on one’s ability to free up precious time. Productivity enhancements simply get more and more marginal, even if we think that all these new gadgets are wonderful.

I am aware that there are people out there who would disagree with that statement; they don’t think the marginal impact of innovations is diminishing at all, but the macro-economic data suggests otherwise.

Take the driver-less car – probably the innovation-to-come that excites the most. According to at least one well researched estimate from the MacroStrategy Partnership, the introduction of the driver-less car would only boost U.S. GDP directly by 1.3% – and that is before the cost of servicing the additional debt has been taken into account.

At the most fundamental level, the change in economic output is equal to the sum of the change in the number of hours worked and the change in the output per hour. If you assume that the size of the workforce is a good proxy for the number of hours worked (and it is), you can express the relationship the following way:

ΔGDP = ΔWorkforce + ΔProductivity

I have just argued that improvements in productivity are not as significant as they used to be, and that is certainly the case, even if some years are better than others. The biggest spike in productivity in more recent times came around the millennium, prompted by the dot-com boom, which regrettably turned into the infamous dot-com bubble, but that is another story. Since 2006-07, productivity changes have trended down pretty much everywhere.

Workforce growth will turn negative in many countries in the years to come, and that is in absolute numbers. It is therefore more or less a given that GDP growth will stay relatively muted for a very long time to come, unless some kind of productivity miracle were to happen.

Just to be absolutely crystal clear: The workforce will fall nearly 1% per year in Japan and Korea between now and 2050; it will fall almost 0.5% per year in the Eurozone but only marginally in the UK, whereas it will rise almost 0.5% per year in the U.S. Significant regional differences in economic growth are therefore to be expected, but economic growth will be weak everywhere, at least when compared to what we became used to between the early 1980s and the Global Financial Crisis.Those who argue that GDP growth will be disappointingly low for many years to come are on very solid ground. Welcome to the New Normal.

About the Author

Niels Clemen Jensen founded Absolute Return Partners in 2002 and is Chief Investment Officer. He has over 30 years of investment banking and investment management experience and is author of The Absolute Return Letter.

In 2018, Harriman House published The End of Indexing, Niels' first book.