Solving the Productivity Paradox

Despite all the productivity we see around us, most mainstream economists believe we are in era of low productivity growth, reflecting the reported productivity numbers. That’s a problem for the Great Disruption argument, because if productivity growth is low, then surely talk of disruption is at best overblown. Maybe the robots aren’t coming after all.

Those of who believe the data – “true believers” – offer several explanations for this disconnect: low productivity growth in the service sector which dominates the economy; innovations that aren’t sufficiently important to move the economy; lags between innovations and the subsequent diffusion of innovation; and growing gaps between leading companies and lagging ones in many sectors of the economy, fueled perhaps by a disinclination to invest.

But maybe these true believer theories explain outcomes that don’t really exist. Maybe the productivity data are bad.

There are a lot of problems with the data:

  • They are poor at capturing both quality changes and new products.
  • They are especially bad at measuring services (about 80% of the economy), where it’s hard to conceptualize outputs, let alone measure them.
  • They struggle mightily with free (Facebook/Google) and near-free (Netflix) services.
  • They completely fail to address nonprofit and government sector productivity, and don’t include non-market activity (like environmental gains).
  • They don’t account properly for rapidly growing investments in intangible assets.
  • And they miss out entirely on the black economy and on much of the gig economy.

Together, these arguments easily explain the “missing” 1.5 percent of annual growth that separate low and high growth economies.

The heretics can also adopt some of the true believer arguments: it may be that productivity is indeed depressed by lags and the growing innovation gap. But the overall conclusion is inescapable: the productivity paradox is mostly driven by bad measurement. There is nothing here to suggest that the Great Disruption is unreal, or even that it will be much delayed.



Amazon 2027: the Future of Retail

Amazon only accounts for only about 5 percent of all US retail sales.[1] And online retail as a whole has only 11 percent. So there are plenty of folks who believe that the transition to online retail will happen slowly, and that while Amazon is growing fast it will be long time before it reaches the top of the heap. They see what’s happening as just another twist in the long and winding tale of US retail, the latest installment in a story where department stores rose to replace clusters of small stores, malls and chains exploited the growth of the suburbs, and then Walmart and the big box category killers sliced off large chunks of the US retail market, leaving the big mall anchor stores alive but bleeding. On this view, Amazon is just another shark in a sea of predators, and not a very big or dangerous one at that.

They could not be more wrong. The current “Retail Apocalypse” is just the start. Online retail is entering a period of explosive growth; Amazon is quickly becoming entirely dominant in ecommerce; and  these changes will have a massive impact on retail employment as 3-4 million of retail salespeople lose their jobs over the next ten years.

So this post is about three things:

  • Why Amazon is winning online now and will continue to win right across the retail sector by exploiting the network effects that will make the biggest online player effectively the only online player. Amazon is systematically building strategic competitive advantage to become impregnable. 85 million US households already have Amazon Prime subscriptions.
  • How online shopping is just entering the acceleration phase of technology adoption. Steady growth of about 10 percent annually in recent years will become 20 percent as Amazon’s tools and strategy provides reinforce normal adoption patterns.
  • The impact on work. Workers in retail face a catastrophic future. 2.7-4 million existing jobs at bricks and mortar retailers (B&Ms) will vanish over the next ten years. They will be replaced by far fewer jobs at online retailers, and those new jobs will require different skills and will be located in different places. Amazon also has every intention of automating many of these jobs, as soon as possible, and B&Ms will respond by cutting wages and  benefits for those that remain.