At the beginning of the 20th century, in one place, teams of workers gradually assembled a car. The chassis took 12 hours to finish while magneto production required 15 minutes and 29 workers. (A magneto helped to start the ignition.)
Imagine people’s astonishment when the Ford Motor Company experimented with conveyor belts that streamed parts to the worker. Yes, they suspected they would slice some time off production. But the results were stupendous. Using 14 workers doing repetitive tasks, magneto assembly time plunged to five minutes. Chassis production time dropped from 12 hours to 2.3. The result? Output soared and per car cost dropped. By the mid-1920s, the lowest priced Model-T was $260.
An economist would say that productivity had created an affordable car.
Where are we going? To why our productivity growth slowdown is a 2016 worry.
U.S. productivity growth has been declining:
A Productivity Mystery
No one is sure why U.S. productivity growth has been declining.
One possibility is the understated output for unpaid services. We could look for example at Wikipedia. During the 1990s, having purchased an economy set of the Encyclopedia Britannica for $1500, I would have boosted the recorded output of the U.S. economy. Now though, when I use Wikipedia to read about the history of Britannica, I give the U.S. Department of Commerce no indication that a service had been produced.
Similarly, a record of national output could exclude data about any of the following:
It is also possible that the productivity problem is capital. Defined as the tools, equipment and inventory that we use to make goods and services, our capital stock has been growing more slowly. Less of a boost in capital can mean a decline in the growth of output.
Or we could have an innovation pullback. Whether from less entrepreneurial zeal or a dearth of new technology, the problem could be creativity. A University of Maryland economist says that since the 1980s we’ve had insufficient “creative destruction” through which firms die and more successful start-ups ascend. To that we could add economist Tyler Cowen’s hypothesis in The Great Stagnation that, having picked all of the low hanging fruit, innovation has plateaued.
Princeton economist and former Fed Vice Chair Alan Blinder perfect sums up our productivity woes at the end of a WSJ column: Asking whether we really have a technology slowdown or just a temporary hiatus, he says, “Tune in 20 years from now to find out. In the meantime, worry.”
Our Bottom Line: Why Productivity Matters
Because productivity is all about getting more output per unit of input, our standard of living has been able to rise during the last century. And that returns us to where we began. One result of more productivity was the Model T and the countless ways that an affordable auto elevated our standard of living.