Productivity growth is vital to economic well-being or economic growth because it enhances standards of living as well as the quality of life. Productivity growth improves economic efficiency, meaning the ability of firms to produce more output at all levels of existing inputs. Economic efficiency leads to increases in income - personal, state, and national - that can then be used for additional consumption and for improvements in social conditions, such as reductions in relative poverty and environmental pollution and improvements in the quality of health care.
The point to be emphasized is that productivity growth ultimately leads to an improvement in the quality of life. Furthermore, it also enhances a nation’s global competitiveness, reduces inflationary pressures, and thus fosters overall economic stability. Finally, productivity growth stimulates market competition within a domestic economy but more importantly it does so within the global marketplace. Thus, productivity growth improves the efficiency of resource allocation.
One factor responsible for productivity growth is technological change, or technical progress. Technological change results in an improvement in the efficiency of production, which in turn leads to productivity growth. And, as just stated, productivity growth improves economic efficiency and ultimately enhances overall economic growth. To understand better the concept of productivity growth both for academic as well as policy-related reasons - and the policy reasons are obvious from the connection between productivity growth and overall economic growth - it is imperative to understand first the nature of technological changes and the linkages between technological change and productivity growth.
The importance of technological change or technical progress and economic growth has long been discussed in the economics literature. Traditionally, scholars have referred to the first chapter in Adam Smith’s (1937) An Inquiry into the Nature and Causes of the Wealth of Nations in order to motivate their discussion regarding the relationship between technological change and economic growth. For Smith, innovation is the product of division of labor, and division of labor in turn depends on the extent of the market. It is innovation - which many scholars today mistakenly associate as being synonymous with technological change, and innovation will be shown herein to be a necessary precursor to technological