At What Point Does Increasing Productivity Damage a Consumption-Based Economy?

BY Business Desk  February 18, 2009 at 11:20 AM EDT

Packing bananas; file photo

Question/Comment: At what point does increasing Productivity damage a consumption-based economy? Can this be discussed with respect to the recent historically high levels of productivity in “modern industrialized” economies with relatively inelastic labor pools?

Paul Solman: Most economists will tell you that productivity is the key to economic growth. We produce more with less and therefore we have more, which we can share among us all.

Your question suggests something more subtle, though, if I understand it correctly. Suppose that productivity displaces manual labor – as surely it has, first in agriculture and then in manufacturing. An economy then faces a daunting task: preparing the bulk of its citizens for work that the “productive” members of the economy will value.

The “productive” ones have something to sell. Think doctors and nurses. Think inventors. Think computer engineers. But 70 percent or more of Americans don’t get a four-year college degree. Do they have skills to trade with the doctors and nurses and engineers? The plumbers do. The auto workers may not. If they don’t, WILL we share the added bounty with them? Or might we not?

MIT’s Simon Johnson, our guest vetter: I was just in India and rural Rajasthan in particular. Sure, jumps in productivity can cause the issues you worry about and Paul is right to raise the longer term distributional issues.

But what many Indians really need is access to the kinds of technology, capital, infrastructure, that would allow them to increase productivity ten times. They would still be considerably poorer than we are, but this would lift hundreds of millions out of poverty and save many children’s lives.

Perhaps we have overly focused on growth for growth’s sake in the United States (I see Paul nodding). But India (and actually most people in the world) needs more income, and that means growth – and that’s all about sustaining increases in productivity.

Paul Solman: (Nods twice: once when Simon imagines; more vigorously at Simon’s last line.)