Paul Krugman famously wrote, “Productivity isn’t everything, but in the long run it is almost everything.” He is right: Higher living standards depend on increased productivity. But what can policymakers do to raise productivity? Most economists would start their answers by tamping down expectations, arguing that government can do little, other than perhaps to get out of the way. This is why Krugman went on to conclude, “So what are we going to do about productivity growth? Nothing.” Others offer only vague palliatives such as spurring competition, increasing public spending on education and science, and improving macroeconomic policy. But policymakers desiring higher productivity would be well advised to look beyond such advice from purveyors of the “dismal science,” because conventional economics is of little help in understanding the sources of productivity growth, much less in providing useful or actionable advice on productivity policy.
