Amar Bhidé

At least in the United States, most policymakers understand that in the long run, economic growth requires productivity growth: For per-capita living standards to increase, so must per-capita output. What is less well understood is that productivity growth requires the creation and satisfaction of new wants, not just the more efficient provision of existing wants.

Currently, discussions of productivity tend to focus on increases in efficiency and ignore the development of new markets, which is a dead end: Economies cannot sustain growth in productivity and living standards simply through efficiency. Sure, in the short run, increased efficiency does reduce costs, and as costs decline, people consume more of the good or service. But eventually, the law of diminishing utilities sets in: Sated consumers refuse to buy more even if prices continue to decline. After that, further increases in production efficiencies must come at the expense of the demand for labor.

In principle, societies could accommodate reductions in the demand for labor by increasing the time for everyone’s leisure. Over the last century, economic growth has helped reduce working hours and increase vacations. But somehow, beyond a certain point, societies seem unable to accommodate reductions in labor demand by spreading the work around…It is the entrepreneurial activity of creating and satisfying new wants that keeps the system humming.

Outsourcing jobs to low-wage countries resembles efficiency improvement in its symbiotic relationship to the satisfaction of new wants. It improves living standards in the United States, provided the human capital released here can be used to make new goods and services. Otherwise, as with improvements in efficiency, outsourcing is all too likely to reduce the demand for domestic labor.

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