Magazine article Government Finance Review
"What Drives Productivity Growth?"
Economic Policy Review, March 2001, pp. 37-50.
In this article, the author examines the neoclassical and "new growth" theories and their roles in explaining the recent rise in productivity growth. Labor productivity growth increased by 1.3 percent per year from 1973 to 1995; however, from 1995 to 1999, the growth rate leapt to 2.5 percent per year. The article points out that while both neoclassical and new growth views acknowledge the important role that investment plays in the growth process, the neoclassical economists measure the rate of technical change, while the new growth theorists explain the sources for the technical change. In other words, the neoclassical views explain the "what" and the new growth theorists explain the "why." Both use a broad definition of investment, which includes any expenditure "that provides productive payoffs in the future" such as research and development, human capital, and software expenditures. Additionally, it is important to note the differences in the productive impact of different investments such as information technology and structures. Separating the investments allows economist to more accurately gauge the source of production, and therefore, predict future growth. Economists were puzzled by the computer productivity paradox of the 1980s and early '90s in which investments in technology, such as computers, skyrocketed while overall productivity growth remained slow. …