Theoretical and Conceptual Foundations of Total Factor Productivity Measurement in Services: Looking Back and Ahead

Abstract

For a few decades services productivity was widely discussed but little understood. This was mainly initiated by the productivity slowdown in the US from the 1970s to well into the 1990s. The essence of the debate was that the economy in general was experiencing a development and diffusion of a new technological revolution or techno-economic paradigm that was not being reflected in standard performance indicators, such as productivity. This was puzzling, particularly since the new key factor in creating and widening investment opportunities for productivity gains was information and communications technology (ICT) and microelectronics. At this time, ICT and microelectronics were (i) rapidly increasing supply and available in unlimited supply over longer periods, (ii) readily available in low and rapidly falling relative cost, and (iii) widely expanding their scope and pervasiveness in the sense that there was a clear potential for the use (or incorporation of) the new set of inputs throughout the economic system. Such factors had during previous technological revolutions in new key factors input for the economic system, spurred a jump in productivity levels and sometimes productivity growth rates. Previous technological revolutions include for example (i) the early mechanisation period (1770–1840) with mechanisation as key factor input, (ii) the steam power and railway period (1830–90) with steam-powered transport as key factor input, (iii) the electrical and heavy engineering period (1880–1940) with steel as key factor input, and the Fordist mass production period (1940–90) with oil as key factor input for wide applications (Freeman and Perez 1988).