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If technology is advancing crazy fast, why aren’t those advances showing up in the broader productivity and economic growth numbers? Or as economists Erik Brynjolfsson, Daniel Rock, and Chad Syverson describe this mystery in their 2017 paper “Artificial Intelligence and the Modern Productivity Paradox: A Clash of Expectations and Statistics:” “Systems using artificial intelligence match or surpass human-level performance in more and more domains, leveraging rapid advances in other technologies, and driving soaring stock prices. Yet measured productivity growth has declined by half over the past decade, and real income has stagnated since the late 1990s for a majority of Americans.”
But those researchers remain optimistic. “The breakthroughs of AI technologies already demonstrated are not yet affecting much of the economy, but they portend bigger effects as they diffuse.” And one possible role for policymakers is to remove barriers to the spread of productivity-enhancing technologies when possible. Which brings us to “What Happened to US Business Dynamism?” by Ufuk Akcigit and Sina Ates. From that paper:
Market economies are characterized by the so-called “creative destruction” where unproductive incumbents are pushed out of the market by new entrants or other more productive incumbents or both. A byproduct of this up-or-out process is the creation of higher-paying jobs and reallocation of workers from less to more productive firms. The US economy has been losing this business dynamism since the 1980s and, even more strikingly, since the 2000s.
The explanation Akcigit and Ates focus on is “declining knowledge diffusion in the economy” such that “market leaders are shielded from being copied, which helps them establish stronger market power. …When they face less threat, market leaders relax and they experiment less. Hence, overall dynamism and experimentation decrease in the economy.” (Though, to be clear, the researchers are not directly linking the dynamism issue to the productivity issue.)
And what is the mechanism here driving this decline in diffusion? Akcigit and Ates: “We document a higher concentration of patenting in the hands of firms with the largest stock and a changing nature of patents, especially in the post-2000 period, which suggests a heavy use of intellectual property protection by market leaders to limit the diffusion of knowledge.”
Finally, some advice to policymakers (bold by me):
The findings of this paper also present a direction for both future research and policy design. As discussed previously, several channels could have distorted the diffusion of knowledge. A short list of candidates include globalization, regulations, the changing nature of production and the increasing use of data. In addition, our empirical investigation points to an intensified use of patents to deter knowledge spillovers and potential competition. Opening the black box of the nature of knowledge diffusion and determining the drivers of its slowdown are vital topics for future research in this direction. In terms of policy, the results suggest that the appropriate response to revive business dynamism should focus on post-entry distortions that impede competition between leader and follower firms. Such competition policy would not only affect incumbent firms, but also incentivize business entry through positive trickle-down effects.