Does new technology always lead to higher production and more leisure time?

Published on: 6 July 2023

Current issues related to economics, (responsible) investment, pensions and income: every week, an APG expert gives a clear answer to the question of the week. This time macroeconomist and senior strategist Charles Kalshoven at APG on the question of to what extent new technology leads to higher productivity and more leisure time. “If I really break it down and look at it over a long period of time, this is true”, he says.


Machines replacing traditional manual work, not steam but electricity, not mail but email and Artificial Intelligence (AI) instead of copywriters and voice actors: old ways overtaken by new technologies are commonplace. But where does this lead? To more productivity? More free time?


Boris Veldhuijzen van Zanten, founder of The Next Web, is skeptical in BNR Nexus. He says that the promise that technological revolutions lead to higher productivity and more free time actually always turns out to be a deception. Is this an understatement or is it grossly exaggerated?


Fourteen hours a day in the factory

“After World War II and through the 1970s, we certainly saw productivity improvements of several percentage points a year. And we really did get more free time. Most people no longer work on Saturdays, nor do we spend 14 hours a day in the factory.” Yet that productivity growth has been slower in recent decades. “Less than 1 per cent a year since 2000”, Kalshoven knows. How is that possible? In part, it’s about the fundamental changes that make the real difference in productivity. Kalshoven cites US economist Robert Gordon. “He says: everything important has already been invented. Water pipes, sewers, gas and electricity. These things have improved living standards and increased productivity. In that comparison, Gordon says the introduction of the iPhone is less fundamental. The phone already existed, so did books and music. But the combination is innovative, of course. So, the thinking was that the smartphone might well mean a big productivity improvement. But actually, you don’t really see that reflected in the statistics.”


That picture is distorted, however. Here, Kalshoven refers to what economists call “consumer surplus”. “A consumer who spends less on something than he would have been willing to pay actually has money left over. This difference is the consumer surplus. Take a free navigation app on your smartphone. It’s worth more than what consumers pay for it. But you don’t see that surplus in the economic statistics or in productivity figures, even though it benefits people.”


Beethoven’s Ninth Symphony

There are different sides to the story, Kalshoven acknowledges. “It has always been easier to implement productivity improvements in agriculture and industry than in services. Take the classic example of the barber or the string quartet. When you play Beethoven’s Ninth Symphony, you can’t do it more productively. Because things can be done more productively in industry and agriculture, fewer and fewer people are needed there. And conversely, more and more people work in sectors with less productivity growth. This is called ‘Baumol’s disease’.


The US economist Baumol saw the tendency for more and more people to be employed in sectors where labor productivity growth is difficult, such as services. He pointed out that this causes the price of services to rise faster than that of goods. Another consequence, of course, is that average labor productivity growth is falling.” But this in turn presents opportunities. “If you could increase labor productivity growth by 1 per cent in services, that puts more pressure on the economy than if you do it in agriculture or industry, simply because services are now a much larger sector.”


Creative destruction

He therefore sees opportunities for a further technological revolution within the service sector. “If you can do more with less, you have a couple of options. More production with the same amount of effort, or the same production with less effort. With the latter, it is crucial how you distribute the fruits and whether the transition is not too abrupt.” He cites AI as an example. “Voice actors risk losing their jobs to a life-like text-to-speech application. It’s cheaper for producers of training videos and documentaries. That is a productivity boost. But for voice actors, the grapes are sour. Some even have to compete with their own AI voice. So, technology can also create casualties, also called “creative destruction”.


Kalshoven does not think that is a reason to stop technological progress, incidentally. “But you have to manage it so that the people losing their jobs can go and do other useful things.” Incidentally, not every tech company is equally innovative, he argues. “Take a platform for taxi rides. That is not a fundamental change that creates a new product or a new market. It mainly rpedistributes the pie differently, with profits going to Silicon Valley. That doesn’t really make the economy grow any faster.”


Better homes, better care

But Kalshoven thinks it is going too far to say that the promise that technological revolutions will lead to higher productivity and more free time always ends in deception. “If you look back, we have achieved a lot. Better homes, better hygiene, better healthcare, more leisure time. And it is my expectation that those improvements will continue. Take AI. It can bring unwanted productivity gains. After all, you can do more with less."


And if technology is combined with further specialization, making people more productive, Kalshoven says steps can be made. “So if I really break it down and look at it over a long period of time, it does follow that new technology leads to higher productivity and more free time.”