The recent Wall Street Journal article, Silicon Valley Doesn't Believe U.S. Productivity Is Down, notes the widespread improvement in technology that should be improving productivity across the economy, but isn't showing up in the statistics. The article notes that plenty of good free apps are not included in output statistics, but also points out that if productivity were really high, employment and wages would be rising much faster. The truth is a little different: consumers are far better off, but not in a way that shows up in labor markets.

Let's begin with basic concepts. “Productivity” is output per hour worked. Output is the value of what is produced, adjusted for inflation. And therein lie two major issues: the value of production, and the adjustment for inflation. If we could get these right, we'd see hugely higher production, and thus hugely higher productivity, but at hugely lower prices.

Production is valued at the prices we pay for goods. Take beer. Count the number of bottles sold, multiply by the price per bottle, and we have the value of beer produced, by the standard definition. That does not, however, indicate the value to consumers of all that beer. To get value to consumers, we need an immeasurable concept called “consumer surplus.”

After working outside on a hot day, I have a beer. That beer is tremendously valuable to me. I'd pay $20 if that's what it cost. The second beer is not nearly as valuable to me; maybe I'd pay $3. Over the course of a week, I might be willing to pay a couple of dollars for one or two additional beers. Imagine I have a tally sheet showing the maximum amount I'd be willing to pay for different beers.

Your tally sheet would look different than mine. A sot's tally sheet would show lots of beers demanded, fairly insensitive to price. My Mormon neighbor's tally sheet would show lots of zeroes: he won't buy a beer ever. My wife's tally sheet shows some willingness to pay for beer, but it's pretty low because she prefers margaritas.