The Giant Productivity Gap
And the potential for A.I. and DOGE to unleash a new productivity boom.
One of the biggest economic stories of the last two decades is the productivity differential among varied industries.
In a 2017 Tech CEO Council report, The Coming Productivity Boom, Michael Mandel and I showed that digital industries were innovating far faster than physical industries. The 30% of companies we classified as digital were making 70% of the investments in information technology. Physical industries, which comprised 70% of the economy, made just 30% of info-tech investments. We showed that the digital firms were leaping ahead, while the physical firms were far less productive, and were, in fact, acting as an anchor on the larger economy.
By 2019, overall productivity appeared to be ticking up. Was the productivity boom beginning its takeoff? Maybe. But then the response to Covid – with mass layoffs and unprecedented trillions of extra government spending and money printing – swamped both the real economy and our measurements of it.
Now, as we exit the Covid era, we are in a position to revisit productivity growth, which can also be thought of simply as “innovation,” as the central question of the economy.
Artificial intelligence investment is roaring, and this new general purpose technology is poised to sweep across every job, firm, and sector of the economy. It will transform existing industries and create new ones.
Meanwhile, there seems to be a mandate for a revolution in government spending and regulation. The excesses and incompetencies of recent years have led to ideas like DOGE – Elon Musk’s “Department of Government Efficiency.” Yes, every powerful interest will fight DOGE to the death. But this is the most serious chance for real reform we’ve ever seen.
We are now updating our productivity research for the A.I. and DOGE eras. Could the productivity boom be here?
Very interesting. The obvious answer is that digital products and services often have near-zero unit costs. To produce 1,000,000 or 1 copy of a piece of software you need the same development costs. The unit costs are basically just the server/energy costs to host the software/distribution and any marketing costs. There is a very very low tax burden on digital products. All physical productivity passes through the “traditional” economy with layers of taxation, monopolies and loads of fixed regulatory costs. There are no environmental reviews in producing software. There are no building permits. There are no health authorities
Digital products and services are very very profitable because they are only manipulating the physical world at the electron (and photon) level and not at the real stuff level. If you want to be rich, go into software not agriculture.
I think this is downstream of the finacialization of everything. Delta doesn’t make profit from getting people to destinations on time, they make it from trading oil futures. Apple makes more profit selling financing than products. GM makes more money issuing loans than building vehicles. Everyone wants to be a bank, because they have monopolies on private monetary creation through fractional reserve banking. Everyone in our fiat focused economy wants to position their mouths as close to the money printers as possible. And digital products are a great thing for money to flow into because their unit costs are so low. Financial services and digital products are a match made in heaven because their lift is low and the payout is high.
So who is going to be buying all this produce whatever it is. No point in super productivity unless youve got a market be that tiny steel screws,ball bearings,iconic photographs,apples or chairs and tables. I do not + cannot see the point of "growth" and "productivity" when it's just making stuff,straight to landfill stuff too.