January 29, 2023

Productivity Slowdown: Capitalism Caught in its Own Trap

Sanjay Roy

BESIDES gloomy global macroeconomic environment infested by high food and energy inflation leading to cost of living crisis together with rising costs of input and corporate credit because of higher interest rate triggered by inflation targeting monetary stance across countries, the crisis of capitalism is also manifested in a deeper manner by slowing down of aggregate productivity growth.

Productivity in its different measures is a ratio of economic output to economic inputs. Labour productivity measures output per worker, the growth of which is a combined result of many factors including technology growth and enhanced skill and capacity to absorb the new technologies in the broader sense. In capitalism, innovation and adoption of new technology by an entrepreneur is driven by profit motive where introducing a new technology would result in higher productivity compared to the industry average and hence lead to a premium over and above the average rate of profit. The diffusion of this new technology over a period of time redefines the upgraded average productivity of the industry which once again ignites the quest for a new vintage of machine and investment of an individual capitalist so as to reap higher profits compared to the ongoing average.

Therefore, growth of technology in capitalism entails a spontaneous process ensuring productivity growth. Productivity growth results in higher welfare returns by way of both increasing real incomes of workers as well as profits of capitalists and as real income of workers increases together with profits of enterprises it also leads to higher tax revenues for the governments augmenting the resource base of public spending in physical and human infrastructure. As the profits of enterprises increase with the increase in demand due to higher wages of workers, capitalists also become stimulated to invest in new machinery or innovation. But this virtuous cycle of growth in productivity, higher wages and profits leading to higher demand for both consumption and investment goods stimulating for further investment and innovation leading to successive rounds of productivity growth, critically depends on the distribution of productivity gains, diffusion of new technology and enhancement of education and skill of emerging workforce. If the crucial links are disrupted for some reason productivity growth in capitalism faces a crisis. Productivity slowdown seems to have become a perennial feature of advanced capitalist countries followed by similar trends in developing countries since the past three decades.


Since the early 1980s particularly after the second oil price shock advanced countries face a slowdown in productivity growth despite tremendous progress being achieved in technological innovation driven by ICT and later on involving artificial intelligence and other Industry 4.0 technologies. Globally according to a recent ILO report aggregate labour productivity growth increased since 1990 which continued till the global financial crisis and then productivity growth again slowed down. In 1991 workers in advanced countries on an average were 14 times more productive than average workers of developing countries. In 2021 the ratio increased to 18 times. This implies that productivity gap between advanced and developing countries increased in the past three decades. This happened not because productivity grew very fast in advanced economies, instead in advanced economies average labour productivity grew by only 46 per cent in the three decades but productivity growth was only 16 per cent in low income countries. Needless to say that within the developing countries, China’s productivity growth increased very fast since 1980 and for central and South Asian countries faster growth was experienced since 2000s but it subsequently slowed down since the financial crisis. The gap between advanced economies and upper middle income countries show a decline in the past thirty years but the latter group could not pull the productivity growth enough to compensate the slowdown in the other parts of the world.

If the current pace of growth continues for both advanced and low income countries, studies suggest low income countries will require 175 years to close half the labour productivity gap with a typical advanced country. Hence any sign of convergence as it is sometimes claimed is a remote possibility. And almost all major economies of the world including developing countries are facing a productivity growth slowdown. What seems to be paradoxical that world capitalism is facing this productivity slowdown in a period when apparently we have entered a new technology revolution and apparently in the midst of liberalized open economy when capital and technology are ‘free’ to move across borders. This simply manifests a structural crisis which is of protracted nature and the answer lies not in the science of technology but on the social configuration that disrupts the crucial links between productivity growth and distribution of productivity gains.


Productivity growth faces a secular decline primarily because of the broken links in the process of distributing productivity gains and diffusion of technology across the economy. The gains of productivity achieved through new technology are largely being appropriated by the rich. Also high concentration of propertied technology in the hands of few giant companies restricts the process of diffusion down the production line. In fact, the consumer-producer interface has become very important even in conceptualizing and designing products for the future. In order to have a control over these critical inputs and huge data which are generated in digital platforms through human engagement, big companies try to institute a global control regime on produced data. Both these processes restrict the diffusion of productivity. Moreover, particularly during neoliberalism, the share of workers in value added has declined globally in the past three decades, which is indicative of the fact that productivity gains are skewed in favour of the profit earners. In fact, higher share in the hands of the workers of the value added could have increased demand for existing goods and services in greater proportion with respect to income added and also would have increased demand for diversified commodities which stimulates investment for innovation.

In the past three decades of neoliberal regime capitalist accumulation largely relied on technology of the North and cheap labour and natural resources of the South. This actually led to a proliferation of non-standard employment in the form of precarious or informal labour across the world. For capital, labour arbitrage became one of the major source of profit both globally and locally. In order to reduce cost of production and compete in the global market developing countries are rather pushed to a ‘race to the bottom’ relying more on outsourcing and off-shoring. Expansion of the informal sector and precarious labour even in advanced economies created an all pervasive uncertainty in the world of work which actually helps the employers in squeezing the workers further. It could increase profitability as an immediate effect but increased competition within the developing country group eventually pushes down their margin over time. More the competition relies on easily replaceable labour at the lower end of the value chain it is easier for MNCs to capture the surplus produced by exploited workers.

But the flip side of such a strategy is the crisis of productivity that gradually seeps in. Workers receiving low wages are also less productive. Increasing productivity also demands investment in education and training to impart skills necessary to handle new machines or technology. If the market becomes extremely volatile and highly uncertain for future returns, incentives are low for investment in education both for the worker and the employer. In such a context the government should step in providing education and skill for the larger workforce to prepare them for the upcoming challenges of new technology use. But neoliberal governments on the contrary are hell bent to create a market for education, privatise public institutions which would actually exclude a vast majority of young people from the realm of education.  In other words, low-road competition reaches a limit demanding a scaling up of the workforce in terms of attaining capabilities. On the other hand, if future returns remain uncertain informal firms do not choose to become formal as the net returns may turn out to be low. All these perpetuate a low investment-low wage-low productivity regime which drags down aggregate productivity while very few ‘superstar’ global tech giants make huge profits out of the technological innovations. In short, this goes against the assumed virtuous cycle of high productivity-higher wages- higher demand for goods and services leading to further innovation. Capitalism seems to be caught in its own trap!