Research Highlights

How Should We Assess Economic Growth?

Thomas Philippon Headshot

New ideas add to our stock of knowledge; they do not multiply it.

Overview: In “Additive Growth,” NYU Stern Professor Thomas Philippon asserts that total factor productivity (TFP), the fundamental engine of growth, does not grow exponentially – as has been the assumption for decades – but rather linearly.

Why study this now: For years, economists have interpreted the falling growth rate of TFP – which can also be referred to as knowledge – as a sign that we are not as innovative as we used to be. Professor Philippon’s research claims that the assumption of exponential TFP growth used in economic models is flawed, thereby impacting economists’ views of how much we are actually innovating.

What the researcher found: Using British data of TFP from 1600-1914 and American data of TFP from 1890-now, Professor Philippon finds TFP growth is linear, and not exponential. He says that “TFP has been growing linearly over the past 90 years in the US and the additive model beats the exponential model for every single country, developed or catching up, where TFP data is available.”

Key insight: Exponential growth rates better apply to situations that are multiplicative – such as the spread of a virus. Professor Philippon’s research suggests that knowledge accumulates linearly.

What does this change: These conclusions imply that we should not be disappointed by slowing rates of TFP growth, as long as annual increments remain high. The good news is that living standards should continue to increase relatively quickly thanks to tangible and intangible capital investments. GDP per capita is convex, just not as convex as the exponential model would imply.

Final takeaways: According to Professor Philippon, “new ideas add to our stock of knowledge; they do not multiply it.”