Andrew Haldane: Productivity puzzles

Speech by Mr Andrew G Haldane, Executive Director and Chief Economist of the Bank of England, at the London School of Economics, London, 20 March 2017.

The views expressed in this speech are those of the speaker and not the view of the BIS.

By common assent, economists do not agree on much. I have lost count of the number of jokes about economists whose punchline ends "and they still couldn't reach a conclusion". That is why Harry S Truman, when President of the United States, famously yearned for a one-handed economist. Whether or not this critique is fair, the issue I will discuss tonight is one on which economists do agree: productivity matters.

At this point, it is customary to wheel out the following, now rather over-used, Paul Krugman quote: "productivity isn't everything, but in the long run it is almost everything." Despite its over-use, this quote does have one important virtue, something not to be taken lightly in this post-fact, post-truth world: it is empirically verifiable and appears to be factually accurate. Let me illustrate that with a simple example.

Since 1850 UK living standards, as measured by GDP per head, have risen roughly 20-fold, a huge gain. How much of that gain can be attributed to higher productivity? Well, if productivity had flat-lined over the period, UK living standards would only have only doubled. Or, put differently, in the absence of productivity growth, UK living standards would be an order of magnitude lower today, stuck at late-Victorian levels.