Productivity Measurement – A Short History

The year 1970 saw the publication of two books, Kuznets’ “Economic Growth of Nations” and Solow’s Economic Growth” in 1971. Unwittingly, it marked the start of a rare professional consensus on economic growth.

In his book, Kuznets summarized his decades of empirical research. Solow’s work meanwhile contained his own summary of his decades of theoretical research.

Solow’s theory, Kuznets empirical studies

For the economists, Solow’s neo-classical theory of economic growth, especially his analysis of steady states with constant rates of growth, provided conceptual clarity and sophistication.

Kuznets, for his part, quantified the long sweep of historical experience of the United States and 13 other developed economies. He combined this with quantitative comparisons among developed and developing economies during the postwar period.

Same topic

Without knowledge of each other’s work, both authors worked independently on their books without any connection from one another. Evidence of this was the total absence of cross-references between their works. Strangely, they were working on the same topic, within the same framework, and even within the same vicinity at Cambridge, Massachusetts.

After being challenged by Denison, Kuznets recognized Denison’s approach to measuring labor input and presented his own version in 1971.

Solow, on the other hand, made extensive references to Denison’s findings on the growth of output and capital stock. However, he adhered to hours worked (or ‘man-hours’ as it was termed in the 70s) as a measure of labor input.

Kuznets showed that “…the contribution of the factor inputs per capita was a minor fraction of the growth rate of per capita product’. According to his estimates, the contribution of increases in capital input per capita over this extensive period was negative.

Relevant to these, Tinberger in 1942 analyzed the sources of U.S. economic growth a century ago. He found that efficiency accounted for only a little more that a quarter of growth in output, while growth in capital and labor inputs accounted for the remainder.
This was precisely the opposite of the conclusion that Kuznets (1971) and Solow (1970) reached 30 years later.

Total factor productivity

The ‘total factor productivity’ (or efficiency) was introduced independently by Stigler and became the starting point for a major research program at the National Bureau of Economic Research.

This program used data on output of the U.S. economy from earlier studies done by the bureau including the pioneering estimates of the national product by Kuznets.

However, much of the data was generated by Kendrick who used an explicit system of national production accounts. These include measures of output, input and productivity for national aggregates and individual industries.

In Solow’s article “Technical Change and the Aggregate Production Function” he identified “technical change” with shifts in the production function. Like Abramovitz, Kendrick, and Kuznets, Solow attributed almost all of U.S. economic growth to the “residual” growth in productivity.

Kuznets later reinforced the findings of Abramovitz, Kendrick and Solow. It declared that economic growth was largely attributable to the Solow residual (productivity) between the growth of output and the growth of capital and labor inputs.