Cracking the productivity puzzle: Plutonomics 101
The original (Spanish) version of this post can be found here.
This article is part of Plutonomics, a series aimed at shedding light on what may be the greatest challenge of modern society: the collapse of the 20th-century way of life and the emergence of a new, yet-to-be-illuminated reality. The goal of these articles is to provide a theoretical foundation for a generalist book I am working on, where I won’t be able to explore this topic in such detail. To receive future installments in your inbox, don’t forget to subscribe!
10 Predictions About What Is Already Happening (Coming Soon)
Plutonomics. Toward a New Science of Meeting Human Needs.
It was the year 2012. The Bank of England, in a routine report, flagged an anomaly. Its analysts had observed that, despite the labor market recovering robustly after the 2008 crisis, GDP was not growing at the same pace.
This was the first time someone identified a phenomenon that, since then, has turned the world upside down. And it was given a name: "the productivity puzzle."
Productivity is the relationship between hours worked and the output produced. Countries with high productivity typically have many jobs we call "high-value-added," and conversely, where productivity is low, people often have jobs that don't produce much. As a result, the most productive countries, regions, and companies are wealthier: they achieve more with less.
Until the Bank of England identified this trend shift, productivity had been growing in developed countries for about 250 years. Each year or decade brought better jobs, better companies, more opportunities, and more wealth. People earned more, accessed things they couldn't have dreamed of, and material well-being kept increasing. The future seemed guaranteed.
Over time, we became so confident in this mechanism that everything we are as a society rests on the idea that the economy will keep becoming more productive. The "American Dream" and "equal opportunity" are built on this mechanism. When we buy a house, we assume our jobs will keep improving over the next decades. The same goes for sending kids to college. Even democracy, which didn't exist in most countries until productivity started growing, has always been tied to the belief that things would keep getting better for everyone.
What the Bank of England found 13 years ago were the first signs that this perpetual growth machine had stopped working. Since then, although jobs continue to be created and the economy grows for other reasons, the ability to produce more and more with the same hours of work has stalled, not just in the UK but in all developed countries. Despite being the era with the most new technologies in history, in the US, annual labor productivity growth fell from 2.8% (1995-2005) to 1.2% (2005-2019). In the European Union, it dropped from 2% in the 1990s to less than 1% after 2010.
As a result, people's lives have stopped improving. If we strip away local phenomena, we can see how all the tensions in society can be explained by this stagnation. From the anger of white American men who can't find their place in the world to the disappointment of Chinese youth. If Trump won the US election, if the far-right is rising in Europe, it's because of the discontent generated by this stagnation. As a famous Nobel Prize-winning economist said, "Productivity isn't everything, but in the long run, it's almost everything."
I've spent much of the last five years trying to understand why society seems to be drifting aimlessly. In my opinion, this is the answer to the puzzle driving the world crazy and threatening to tear apart the seams of our society.
It all began with the ambition to measure everything.
Robbins and the Scarce World
Adam Smith, not only the father of liberalism but also of modern economics, defined economics as the study of the nature and causes of wealth. But the contours of this idea of "wealth"—like almost everything surrounding humans—weren't very clear, and in 1932, another economist, Lionel Robbins, decided to redefine it. Economics had gone astray, Robbins argued, and was colliding with sociology, psychology, political science, and moral philosophy. Clinging to vague and hard-to-quantify ideas like "well-being" or "markets," it had become a shapeless discipline that, by trying to encompass everything, ended up explaining nothing.
It was urgent to define the limits of economic science so it could become an exact, precise, and systematic discipline, more like chemistry or mathematics than philosophy. To do this, it had to stop dealing with abstract wealth and become a science that studies how people make decisions to allocate scarce resources among competing needs.
Robbins' thesis made sense because if you want a science that can measure precisely, you can't include things that aren't quantifiable. This is how economics became an empirical science, focused on measuring what it understood well but largely uninterested in explaining what couldn't be measured. Anything that wasn't scarce was irrelevant.
This logic had one problem: not all goods are scarce. In fact, most aren't.
Public Goods, Private Goods
A good is any object—tangible or intangible—that satisfies a person's needs or desires. Paul Samuelson proposed in 1942 the first version* of the theory that divides goods based on their nature, distinguishing two main groups:
On one hand, there are private goods, which are those we compete to consume. The perfect example is a lollipop. If I eat it, someone else can't. Private goods are depleted when used, so we say their consumption is "rival." Cars, hamburgers, clothes, or furniture are examples of this type of good.
Private goods are scarce. Since we can't consume them simultaneously, we must decide who gets to consume them. Over time, we've developed various mechanisms to make this decision: from private property to war, and finally, to trade. What we call "markets" are decision-making mechanisms for private goods. The ability to exchange these goods in markets makes them easy to measure and account for. These are the goods that econometrics has so precisely handled over the last 100 years.
But there's another type of good whose consumption isn't rival. These goods, once available, can be enjoyed by multiple people without being depleted. The classic example taught in textbooks is a coastal lighthouse. Once built and lit, any ship can use its light without depleting the resource, so multiple ships can consume it simultaneously—at the same cost. Other examples include national security, GPS signals, or street lighting.
Since their consumption isn't rival, we can't decide who consumes them. That's why public goods can't be exchanged in markets. And since they don't have a price or are transacted, they're hard to measure. When economics became the science of allocating scarce resources, it consciously chose to abandon measuring them.
All the major criticisms of modern economics—from omitting the work people (especially women) do at home to ignoring the negative externalities of industrial activity on the environment—can be explained by this decision: these are goods not exchanged in markets, and economics has chosen not to measure them.
Goods whose consumption isn't rival are called "public goods" in economics because Samuelson was trying to figure out the state's role in producing goods and services. But these goods don't have to be publicly owned. Radio, television, or satellite signals, among many other things, are examples of privately owned public goods. To avoid confusion, from now on, we'll call them "abundant goods."
To prevent abundant goods from completely escaping measurement, and focusing on those provided by public administrations—like justice, national security, or public health—national accounts adopted a solution tailored to Robbins' proposals. Since the costs of provision—hours of work or infrastructure investment—were scarce resources, abundant goods could be measured by their costs. This is why public services are accounted for in GDP based on their expenditure.
This leads to some absurdities, like the fact that the same services, when provided by the public sector, are counted by their costs, while when provided by the private sector, they're counted by their sale price. For example, US healthcare, which is private, represents 17% of GDP, while in European countries, where it's public, it's around 8%.
But even this patch wasn't enough to fix the accounting gap for abundant goods, because there are also abundant goods not produced by a centralized entity that assumes the costs, but rather created by society in a dispersed manner. In these cases, since they have no scarcity component, neither in provision nor in consumption, they aren't measured at all: they're the dark matter of economics.
Some examples include culture, folklore, collective memory, journalistic information, languages, social norms, proverbs, historical records, art, literature, rituals, traffic rules, laws, maps, music, vaccines, or cooking recipes.
Counting the Uncountable
The mainstream argument for not measuring all these things is that they're irrelevant. That they don't matter much or can be assumed to be measured when we measure private goods because the price of private goods already incorporates everything society does that isn't exchanged in markets.
But this argument falls apart if we consider that at the heart of the very production process that econometrics has so successfully measured... are also abundant goods!
Scientific knowledge, technical knowledge, databases, chemistry, physics, mathematics, medicine, pharmaceuticals, fertilizers... and technology are also "public" or abundant goods.
All these things we depend on for industrial production behave exactly like folklore or proverbs. They don't belong to anyone in particular; they're transmitted, copied, and reused without one person's use limiting another's access. Just as a folk song doesn't disappear because someone else sings it, the laws of physics aren't depleted by being applied in new inventions, nor does a mathematical equation lose its validity when a company uses it to design a product.
Just as traditional stories have evolved over time, incorporating anonymous and collective contributions, technology and scientific knowledge are the result of centuries of accumulation, experimentation, and dissemination. There's no clear line separating one innovation from another: each discovery builds on previous ideas, open research, and freely circulating knowledge, regardless of who formulated it first. The internet, for example, wouldn't exist without decades of advances in telecommunications, mathematics, computer science, and physics.
So economics isn't just surrounded by dark matter it can't measure; it also has it embedded in its very core, at the heart of the entire production model.
Naturally Abundant
Although 250 years of industrial economics have pushed us to think otherwise, the primary way humans satisfy our needs is through abundant goods. Only if we can't find a solution among them do we turn to scarce goods. That's why no one buys their own language, develops their own recipe book from scratch, creates their own fuel, or walks around armed. We use shared language just as we use the gastronomy and technology of our society. We don't need to develop our own remedies for fever because medical culture already has a solution for that ailment. And we rely on national security for our personal safety.
In this, we're no different from other social animal species. Primates, elephants, dolphins, and many types of birds also rely on signals, learned behaviors, and group culture to solve many of their needs: from finding food to social order or territory defense. The shared information within a pod of orcas or a group of elephants, for example, is a common good that enables cooperation and group survival, without the need for exchange or exclusion of individuals.
It's not that we're a particularly altruistic, idealistic, or communist species; it's that public goods are extraordinarily efficient, much more so than private ones. For starters, their production costs are distributed among all individuals of a species. Each of us produces and sustains a very small part of the culture, language, or technology of our society. So small and so naturalized that we don't even perceive it as a cost we have to bear.
Moreover, public goods are cumulative and renew over time: they don't decay as long as they remain useful. Unlike private goods, which always have an expiration date, abundant goods aren't perishable. Even more, in this process of constant updating, they incorporate the contributions made by a species' ancestors to their heritage. A society's medical culture includes all the innovations and contributions made by that human group since its existence.
And since their consumption isn't rival, once available, they can be consumed at zero cost! Private goods, which carry all their production costs to each and every consumer, simply can't compete.
That's why no one creates their own language: it would be prohibitively expensive. In other words, it would be much less efficient than using existing languages. Only those things that can't be created and distributed as abundant goods can be the subject of what we call "economics."
Thus, there isn't a single sphere where humans satisfy our needs but at least two. One subsidiary and auxiliary, which we've called 'economics,' and another broader, primary, and much less studied sphere where abundant goods are exchanged and consumed. We'll name this second sphere here. From now on, we'll call it 'plutonomy,' from the Greek pluto, 'abundance,' and némein, 'to distribute' or 'to manage.'
It's not only possible but actually happens all the time that the satisfaction of needs jumps from one sphere to the other.
The Hybrid Society
Until the expansion of trade, humans survived, like other species, thanks to a combination of abundant goods and available natural resources. The technology shared by a community—for example, the knowledge to make an axe or a cart—was enough to obtain from natural resources—like wood from the nearest forest—the satisfaction of needs—heating the house.
Of course, these were very rudimentary methods. Trade was the mechanism by which some communities began exchanging their public goods with others through the materialization of those goods. A country specializing in producing a product—like textiles or oils—was essentially selling its scientific, cultural, and technical knowledge. Since it couldn't sell the knowledge directly (as it's an abundant good), it sold the materialization of that knowledge in products. Trade, therefore, became a way to access the results of another social group's public goods that one's own group lacked.
Over time, groups of people with specific knowledge organized into companies or industries, specialized in providing certain goods, and gave rise to the industrial revolution. To prevent other groups from using the knowledge they had, intellectual and industrial property laws were created.
In the following centuries, an endless list of needs shifted from being satisfied by abundant goods to being satisfied by private goods. Information, for example, which until the 18th century was transmitted through bards, heralds, or public notices, started being distributed through printed gazettes and newspapers. Medicine, which previously relied on local healers and natural remedies shared by the community, transformed with the rise of private pharmaceuticals and doctors. Energy, obtained from common resources like firewood, started being supplied by private gas and electricity companies. Education, once imparted through informal apprenticeships, became a service offered by specialized institutions. And so, a flood of things became commodified because the solutions offered by the private goods market weren't available among abundant goods.
Like hybrid cars with both an electric and a diesel engine, humans learned in those years to use two engines to satisfy our needs. Since then, whenever there's battery—meaning we can draw from an available and renewable source like abundant goods—we turn to plutonomy. If we can't rely on the battery, we turn to the diesel engine, which is economics: the exchange of scarce goods.
Abundant Goods and Commoditization
This preference for abundant goods occurs both at the end of a good's value chain—when it's finished—and throughout it, within the stages of production and transformation.
When the knowledge to produce something spreads, we say a product becomes commoditized. In economics, commoditization is explained as when a good loses differentiation and competes mainly on price, but in reality, we can understand it as the process by which part of a product's value chain escapes the realm of private goods that can be traded and moves into plutonomy, the realm of abundant goods.
When the first mobile phones hit the market, the technology needed to produce them was only in the hands of a few manufacturers. But the nature of that technology isn't different from proverbs: it can be shared without one manufacturer's use detracting from another's. Thus, the knowledge to produce touchscreens, batteries, optics, and wireless connection technologies spread until it became universally available. This diffusion, this manifestation of technology's nature as an abundant good, means part of the mobile phone's value chain stops behaving like a private good and starts behaving like a public good that isn't bought or sold. This is the mechanism by which products lose part of their price.
The same mechanism can occur from the manufacturer's side, for example, by incorporating new technologies or processes into a device's production, or from the customer's side. When Ikea customers started assembling their own furniture, they were incorporating knowledge they'd acquired into the product they were buying in exchange for a price reduction. Though Ikea's business model is often seen as unique, this is no different from what supermarket customers did when they started weighing their own fruit or doing their own checkout.
If we don't observe both spheres—economics and plutonomy—simultaneously, we'll have the perception that, with commoditization, goods lose value. But it's an optical illusion; what's happening is that part of the product's value has leaked into plutonomy.
Plutonomics: A Solution to the Productivity Puzzle
Just as many abundant goods were replaced by private ones during the industrial era, the opposite is happening today.
The internet, with its ability to connect the minds of billions of people, is a catalyst for abundant goods like never before. Since its expansion 25 years ago, more and more human needs are being met through this type of good and fewer through private goods.
First, it happened with music, movies, and newspapers. Around 2000, the world was filled with "pirates" sharing music and movies on an unprecedented scale, in a distributed system where no one was in charge and no one made money. Everything that could be copied was copied and shared freely. Music went from being a private good locked in discs and cassette tapes—which could be traded in markets—to being an abundant good shared freely.
Around 2010, with the rise of distributed publishing tools like blogs, social media, and review sites, decision-making took its turn.
Alongside industrial machinery, a gigantic recommendation system had been built, employing and serving as the backbone of much of the economy and society. Bank branches, much more than money depositories, were advisory centers on managing savings or investments. Stores, much more than warehouses, were influencers that, before you even wondered which washing machine to buy, had already decided which distributor to trust. Travel agencies existed to tell you which hotel in a country you'd never been to was reliable.
Hundreds of millions of people worldwide worked to make, or help us make, purchasing decisions and create a chain of trust between the product's manufacturer and its buyer. A chain that was essential because we constantly had to choose between things we didn't understand.
When the internet expanded, trust and information about products became abundant goods again. Through reviews, recommendations, and publications anyone could contribute to and consult, it was no longer necessary to have someone in the store to tell you which washing machine to buy.
As a result, any manufacturer from any country can open a market in another country. And experts in stores are no longer needed. Since experts aren't needed, we can have what we've called "big-box stores" filled with all kinds of appliances we can buy without anyone advising us.
Quietly, this phenomenon has ended traditional retail and a large part of the jobs characteristic of the middle class. Neither Amazon, Airbnb, Walmart, Carrefour, Uber, Shopify, eBay, Booking, Alibaba, Etsy, DoorDash, Instacart, Vinted, Wallapop, nor any of the other similar platforms would exist without this phenomenon.
The example that best illustrates this transformation is tourist accommodations. As the ability to trust a stranger has been cemented in collective learning and digital platforms, the tourist accommodation market has shifted from being entirely a private good across its value chain—from travel agencies to hotels—to first eliminating agencies (with the advent of online booking websites) and then hotels (with the rise of Airbnb). With the emergence of non-monetary home exchange platforms like Homelink and Homeexchange, virtually all economic activity related to tourist accommodations is on the verge of disappearing. With this evolution, an entire sector is transitioning from the realm of economics to that of plutonomy.
In recent years, the same has been happening with entertainment. Social media, viral videos, and streaming platforms have not only changed how we access movies and television but have also blurred the lines of content creation. Entertainment, like information and purchasing decisions, has become a public good—accessible to all and generated by all.
The cause of these new practices has been explained as a shift in attitude among younger generations who prefer the sharing economy over the traditional economy—a sort of slightly hippie cultural preference that could change again if tastes shift. But this is far from the truth: it is actually a central trait of human nature that has been manifesting long before this generation reached the age of making purchasing decisions.
The mobile phone itself is the perfect symbol of the transformation of countless marketable private goods into public goods that escape market laws, and this predates millennials. As it became an extension of our lives, it dragged a series of private goods into the realm of public goods.
In the past, accessing a map required buying an atlas; today, anyone with a phone has access to real-time maps. Similarly, photography, watches, calculators, notepads, voice recorders, and even dictionaries have followed the same path, disappearing as market products and becoming ubiquitous tools accessible to anyone with a phone.
And since this process isn’t limited to replacing one good with another but also operates within the value chain, the substitution of private goods with abundant goods is also affecting the prices of private goods through what we’ve called commoditization.
Some might argue that this rhythm of commoditization and the shifting of jobs to other industries has been happening for a long time and cannot, by itself, explain the productivity puzzle.
For example, in the late 19th and early 20th centuries, mechanization revolutionized agriculture. Staple crops like wheat and cotton became mass-produced, drastically reducing the need for agricultural labor. In the U.S., agricultural employment dropped from around 50% of the workforce in 1870 to about 25% in 1930, as tractors, mechanical harvesters, and reapers replaced workers. Millions of displaced farmers migrated to cities, where they found jobs in rapidly expanding industries like steel, textiles, and automobile manufacturing. Henry Ford’s assembly line (1913), for instance, created a huge demand for factory workers, absorbing much of the rural labor surplus and accelerating the transition from an agrarian to an industrial economy.
While the first part of that process is analogous to what we’re experiencing today, the difference now is that the new industries emerging do not absorb the jobs being destroyed, because all the technologies that have emerged since the internet are born as abundant public goods. Email, GPS, digital payment platforms, video repositories, the web, vaccines, DNA sequencing techniques, medical imaging technologies, gene-editing tools like CRISPR, molecular modeling for drug development, and what we’ve called “artificial intelligence” are technologies that require almost no material support to be available and are replacing entire segments of what we’ve called the economy and the associated jobs.
We’ve reached a level of technological evolution and complexity where it’s no longer possible to develop a technology in isolation and trade its materialization in physical products. The era of inventors in garages is over. Today, technological discoveries are invariably the result of distributed research across universities, R&D departments, and startups. And in almost all cases, they don’t hold much value until they are disseminated, applied, tested, and refined through widespread use. As is happening with LLMs (large language models), technology is either born commoditized or becomes commoditized so quickly that the effect is the same.
These transformations create the impression that productivity is shrinking when, in reality, it’s an optical illusion. Humans are becoming more productive than ever, on a scale that far exceeds the productivity growth of the last century. It’s just that this productivity is no longer reflected in the economy but is occurring in a different sphere, which we don’t yet know how to measure and which operates under different rules: plutonomy.
Meanwhile, in economic measurements, all these transformations appear as if value has evaporated—as if it’s been swallowed by a black hole. This is what’s been happening in recent years and how we can explain the productivity puzzle.
Over time, we’ll see more and more sectors of the economy stop being exchanged in markets and move into the realm of plutonomy. Even in the last frontiers, those considered the stronghold of private goods—such as energy, artificial food production, and digital housing construction—the world is clearly heading in the direction of transforming the last private goods into public goods.
Of course, the economy won’t disappear overnight. We’ll still need scarce goods—and especially services. There will always be a need to produce tangible goods and develop infrastructure for geostrategic, national security, or other reasons. There will also be—and already are—companies that create personalized applications of abundant goods, as well as many other business models unique to plutonomy.
But it’s crucial that we recognize, to put an end to these “puzzles,” that we’re facing a paradigm shift marking the end of the industrial era. And it’s up to us—humans in the year 2025—to make the best of it.
Next week…
Beyond Scarcity
Human cognition is filled with many myths, and one of them is that one day, thanks to technology, a world beyond scarcity will arrive. In movies, this place—which is surely a reflection of the religious idea of paradise—always seems like a world of serene sages inhabited by people dressed in white clothes, flying around in gadgets while being attended to by various types of robots.
And perhaps the world will become like that someday, but what we’re living through is the meantime. The paradox of this historical moment, which would be hilarious if it weren’t so dramatic, is that as plutonomy grows with its abundant goods, the economy is shrinking. And it’s from this perception that the world’s discontent arises.
We’ve made so many things dependent on people’s participation in the economy that the evident availability of intangible goods can’t compete with the feeling of scarcity produced by, for example, stagnant wages in the face of rising housing prices or the fear of a future without pensions.
In the second part of this article, we’ll explore the relationship between the rise of plutonomy, the retreat of the economy, and the forms the immediate future might take.
But that will be next week. If you don’t want to miss it, make sure to subscribe to receive it in your inbox (which is also an abundant good :p ).
Photo by Xavier von Erlach on Unsplash
Wow, thank you for sharing and giving me a clearer perspective on this which I have only understood hazily and implicitly on a micro scale before!
Thank you! I have developed those ideas further since I wrote that piece. I actually published a book about it. But I'm yet to find an English publisher!