Do we have a productivity problem? Entrepreneurs might disagree

While the discussion around the UK’s lagging productivity statistics drags on, entrepreneurs have been busy creating the the innovative products and services that have transformed our lives over the past several decades. Have we exaggerated the impact of these innovations, or do we simply have a measurement problem?

Take a look at any mainstream economic or political publication these days, and you are sure to find an article or two discussing the so called ‘productivity’ problem. Since the 1970s, productivity growth (measured either as GDP divided by the number of hours worked, or by the number of workers) appears to have stalled. In other words, compared to the first half of the 20th century, Western economies have been less successful at extracting ever-increasing amounts of economic value from each individual. In recent years this problem has become a major topic of debate in the UK among politicians, businesses and academics; although we are growing at a faster rate than most of our European neighbours, we lag behind many of them – France, Germany and Spain to name a few – in terms of economic productivity.

Yet although there exist likely causes of slowing developed country productivity on the whole – these include decreasing returns to education, disadvantageous demographic trends, insufficient investment in infrastructure, and technological slowdown (more debatable) – there are also strong reasons to believe that inadequate measurement is part of the problem. Alongside the major but relatively rare leaps in technology bestowed upon us by scientists, universities and the military – think GPS, airplanes, the Internet and electricity – entrepreneurs have proved instrumental in developing the innovative new products and processes that drive productivity gains.

The impact of some of the most exciting entrepreneurial inventions in recent decades – primarily since the Internet era – is not accurately captured by our current methods of measuring productivity. Services and products such as email, social networking, search engines, smartphones and countless other apps and websites have made innumerable aspects of our daily lives easier, but because most are (at least at point of access) free they do not add to the totality of economic transactions we call the Gross Domestic Product. Although the measurement aspect of the productivity debate has so far remained on the margins, there are signs that this is changing.

Sharing Economy UK, a body set up by the industry to advocate the burgeoning sector, recently released a report which argues that the government’s inability to measure these new activities is contributing to lethargic productivity statistics. The sharing economy primarily facilitates transactions between individuals, rather than between individuals and corporations. While companies like Uber, Airbnb and TaskRabbit take a cut of the transactions they enable, most of this income goes to individuals, which – according to the report – is not properly accounted for in current surveys. Many of today’s most creative entrepreneurs are active in the sharing economy, so failing to measure it means ignoring their notable contributions.

Other entrepreneurial innovations that precede the sharing economy also create measurement difficulties that have a similar (lack of) impact on productivity statistics. Travel agents have been made largely extinct by online travel platforms such as Skyscanner, Lastminute and Expedia, but those platforms – despite taking a cut on each booking – are unlikely to have made up for the lost revenues of their former competitors. Free mapping software on smartphones makes it far easier for people to get around while reducing their spending on physical maps and GPS devices, but the advertising revenues earned by Google and Co. do not equal the lost revenues of companies previously selling maps and GPS devices. Thanks to email, social networks, apps and search engines, it is more straightforward than ever to find and share information, build and maintain networks, and streamline our professional and personal lives. In all these cases, major efficiency gains to consumers and businesses are missed by our productivity measurements.

If we accept that productivity as currently measured is unfit for purpose, what should be done to change this? In the Sharing Economy UK report, author Diane Coyle argues that statisticians need to refine existing measures and introduce new ones in order to better capture the economic impact of a fast-growing sector. While improving the recording of income from part-time freelancing and the renting out of apartments and driveways should be feasible, it is far less obvious how activities such as home swaps, online learning and language exchanges can be assigned a monetary value. Ditto for the time and effort saved by free apps and GPS. Then there is the growing importance of volunteering, charities and social enterprises – the latter sharing many traits with traditional start-ups – which represent another area of exciting activity ignored in our productivity figures.

Ultimately, we probably need to accept that in a world characterised by an unprecedented and growing array of experiences, exchanges and activities, relying on any single blunt measure of progress is unlikely to cut it. Politicians and statisticians take note.