What is Productivity: Capacity or Welfare Management?

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A number of recent papers have examined the role of environmental variables in accounting for economic growth, and have concluded that net measures of national product are superior to gross measures in portraying the outcome of the growth process. This paper argues that the two measures are not substitutes, but complements which reveal different aspects of economic growth: gross product is the output concept for estimating the structure of production. while net product is the correct concept for getting at the welfare consequences of economic growth. It is then shown that this capacity-welfare nexus is mirrored in the Hicksian and Harrodian definitions of technical change. An alternative to the conventional Solow growth accounting framework is presented in which the change in national wealth is decomposed into components corresponding to labor input and the Harrodian rate of technical change.

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