Shifting the Curve

By Kristina Manalo, ERC Blogger

With good news in the wider global theatre being in rather short supply of late, rather than discussing any one of a number of unsettling developments, I’ll take a step back and turn my attention to the question of total factor productivity.

In national economies, Total Factor Productivity (TFP) is a measure of efficiency which considers all factors affecting output. It is not explicitly a factor of production; Solow’s theory states that the growth in TFP is equivalent to the sum of growth from:

• multi-factor productivity (MFP)
• labour output, and
• capital accumulation

As such, we see that MFP is a variable which directly impacts TFP, but is unrelated to growth in labour output or capital accumulation.

At this point, it may seem that MFP is vague and abstract. Increases in labour output mean more people working more hours in the day, and this results in growth. Similarly, the growth from capital accumulation is clear; a larger number of transactions with higher margins result in accumulation of currency, and this results in growth.

MFP, on the other hand, is less clear. Growth in MFP is frequently associated with less tangible contributions from technological innovation, investment in education, the acknowledgement and management of corruption and ensuing government reforms... MFP is what shifts the growth curve upwards, rather than thoughtlessly following the upward slope of accumulation.

Growth from MFP is about growth from doing something different, rather than growth from doing more of the same. It is about growth from progress.

Growth from Progress

I put my view forward herein: Growth from MFP is from all other types of capital apart from human capital (output of labour) and financial capital (capital accumulation). It is directly related to growth in social capital and knowledge capital, where social capital is the sense of civic mindedness, participation and trust in our communities, and knowledge capital encompasses education and innovation.

From an individual perspective, the lessons are clear. Growth from capital accumulation and labour output alone is precarious and vulnerable. Putting our savings in the bank, waiting for the value of our homes to rise, working more or longer hours... These have limited impact on our overall growth as individuals. It is the growth from progress - these immeasurable investments in new ways of thinking; the quiet resolve to challenge ourselves with what more we can contribute, rather than what more we can receive; these understated moments of observing and seeking to understand the dynamics of the human and social economies in which we’re immersed, which shift our individual growth curve upwards and widen our spheres of influence. And in a perfect economy, such an outcome will equate with greater and more enduring growth in our individual total factor productivity and financial capital.