Productivity opportunities and risks in a transformative, low-carbon and digital age
The low-carbon and digital transitions are likely to deeply transform economies and societies in the coming decades, with substantial implications for productivity. The scale of the digital, renewable and energy efficiency transition is so large, and replete with a mix of uncertainty and economies of scale in production and discovery, that it cannot be analysed using a static optimisation approach based on historic data.
Explicit account must be taken of the processes which drive and steer innovation and adoption of new networks, including strategic complementarities, expectation formation and the role of multiple actors. A study of systemic change must also acknowledge and confront barriers to change, which are as much political, behavioural and institutional, as they are technological and economic in nature. The evidence suggests these and other switching costs have the potential to delay long run productivity improvements and may even reduce productivity in the short run.
Analysing these implications requires an interdisciplinary conceptual approach that addresses the specificities of non-marginal transitions, including technological discontinuities, systemic transformation and uncertainty. The findings suggest policy must aim to clearly and credibly ‘steer’ the economy through an uncertain and changing environment by generating self-reinforcing feedbacks in the desired direction.
This requires replacing cost benefit analysis with analysis of risk and opportunity; a process which has already promoted financial markets to alter their asset pricing and investment decisions. Policy action to boost productivity in these conditions must focus on dynamic market shaping rather than static market failures. In line with the theory of endogenous technical change, governments seeking to sustainably boost productivity must strategically design, rather than passively forecast, the future.
This is part of a series of working papers outlining the key issues and questions of The Productivity Institute’s key research themes. This paper covers the Social, environmental and technological transitions theme. Other papers will provide an overview of Human capital, Organisational capital, Knowledge capital, Geography and place, Macroeconomic trends & policy, Institutions & governance and Measurements & methods.