Productivity, technology and economic growth: What is the relationship?

Abstract

The relationship between productivity, technology and economic growth has been debated extensively in the endogenous growth, growth accounting, New Economy and policy literature. This paper briefly surveys the literature on total factor productivity (TFP) calculations - the various techniques and problems associated with it. We argue that TFP is not a measure of technological change and only under ideal conditions does it measure the supernormal profits associated with technological change. The critical driving force of economic growth is not the super normal profits that technological change generates but rather the continuous creation of opportunities for further technological development. Six illustrations of when TFP fails to correctly measure these super normal profits are provided. A version Carlaw and Lipsey's (2003b) model of endogenous general purpose technology-driven growth is then utilized to make some progress toward answering Prescott's (1998) call for a theory of TFP. The model is used to simulate artificial data and connect theoretical assumptions of returns to scale and resource costs to the conditions under which TFP miss-measures the actual growth of technological knowledge.