Productivity is the secret sauce of economic growth—the magic mix that allows the combination of labor and capital to yield a result much greater than the sum of the parts. Yet, over the last decade or so it has been seemingly absent from the growth equation. Some economists argue that despite innovation taking place all around us, we are currently in the midst of a productivity pause. For example, Eric Brynjolfsson et al. argue that there is a J-curve effect, whereby the innovation is there, but the accompanying buildout of investment and the necessary infrastructure to yield broader results still requires significant "investment in business process redesign, co-invention of new products and business models, and investments in human capital and [which are] still lagging". Yet, when these second-round effects start to kick in, we will likely see a surge in productivity growth. In our view, we may already be seeing some of these synergies emerge. Productivity growth, for example, has been quietly improving, seemingly under the radar of most analysts.
If innovation is what drives productivity growth, in this week's Economics Weekly, we look at what one might call "the stuff of innovation"—growth in R&D—and how the trends here bode well for continued future productivity improvements.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.