Rethinking productivity: the crucial role of demand

Abstract

Building on the macroeconomic Cambridge capital controversies and issues regarding capital reversal, this article develops a novel microeconomic way of understanding productivity figures and demonstrates that thinking using a two-dimensional model corresponding to scale and pricing. The two-dimensional depiction enables a deeper understanding of the demand and supply forces that lie behind GVA figures, underscores that demand factors are critically important, and stimulates reflection on how the absence of aggregate demand in conventional supply-side productivity models perverts our understanding of the evolution of GDP productivity figures.