Total factor productivity - a misleading concept

Abstract

The paper criticises the concept of total factor productivity as a measure of technical change and economic performance on two grounds: (i) theoretical, because it shares all the weaknesses of the neoclassical production function from which it is derived; (ii) its relevance in helping to understand the present technological revolution in computer and information technologies, since it concerns only disembodied technical change. The practical conclusion is that total factor productivity is more a measure of noise than a genuine indicator of technical progress. In spite of the above drawbacks, total factor productivity is still widely used in empirical work on technical change. This is all the more surprising since the alternative concept of productivity of labour not only avoids the above mentioned criticisms but is theoretically superior to its rival concept because it captures the true nature of present technical change. JEL Codes: J24, D24, O47 Keywords: Factor Productivity, Production Function, Production, Productivity, Total Factor Productivity