Private Equity and Consulting as Dengism with American Characteristics

Tyler Cowen and Ben Southwood have a great piece asking: “Is the rate of scientific progress slowing down?” To any student of headlines, the answer is “No,” but this essay is the exception that proves the rule: progress is slowing down. Probably.

But the meat of the essay is the “probably” part, because as it turns out, progress is extremely hard to measure.

The standard way to measure productivity growth is the Solow Residual, i.e.: once you account for changes in the labor supply and the quantity of investment, how much unexplained GDP growth is left? This turns out to be less straightforward than you’d hope, both because of what’s not measured (leisure time, quality time, and the value-add of home cooking are not incorporated into GDP) and because some advances in productivity show up as a change in inputs, rather than outputs. If a cheap new medicine reduces the number of sick days, that increases GDP, but the increase shows up as an increase in labor supply. It’s a productivity improvement that doesn’t affect measured productivity.

But the really interesting question in the essay is about the role of consultants: they point out that when a consultant shows up and tells a company how to get more efficient, it’s partly an increase in labor supply (the consultant), and also it’s an example of catch-up growth rather than a fundamental advance.