The Significance of Productivity Growth
Long ago, economics was known as the “dismal science”
because some of its predictions were grim. Thomas Malthus
(1766–1834) and other Classical economists predicted that the
pressure of more and more people on the world’s limited
resources would cause a decline in output per person because
of the law of diminishing returns. Human history would see
more and more people living less and less well and the surplus
population, which could not be supported, dying off from
hunger and disease.
This prediction has proven wrong for industrialized countries
for two main reasons. First, their populations have not
expanded as rapidly as predicted by early economists, who
were writing before birth-control techniques were widely used.
Second, technological advances have been so important during
the past 200 years that output has increased much faster than
the population. We have experienced sustained growth in
productivity that has permitted significant increases in output
per person—often referred to as material living standards. As
the accompanying figure shows, real output per employed
worker in Canada increased by 330 percent between 1926 and
2017, an average annually compounded growth rate of 1.68
percent.
Even such small annual productivity increases are a powerful
force for increasing material living standards over many years.