Productivity can drive sustainable prosperity
It is often said that ‘a rising tide lifts all boats’.
Economists commonly believe the same thing. By increasing the size of the pie, it is believed that everyone can be made better off.
As we explored in a previous article, a growing economy does not necessarily translate into higher living standards for everyone. The economic pie can get bigger, even as the average citizen finds it harder to get a fair slice.
Economic growth means that the value of what a nation produces is rising year on year. This value flows as income to different groups. To landlords who provide land and buildings. To workers who contribute labour. To business owners who provide equity capital. To banks who supply finance. And to the government who, on a good day, maintains the market by protecting private property, enforcing contracts, and adjudicating disputes. This income is spent on private goods, like pizza, or public goods, like street lights, that provide people with satisfaction and increase their living standards and overall quality of life.
Since the turn of the century, this seemingly simple process has lifted more than a billion people out of extreme poverty.
However, despite this remarkable achievement, increasing the size of the pie is not always a sign of progress. According to Goodhart’s Law, “when a measure becomes a target, it ceases to be a good measure”. GDP is a measure of economic production, yet somewhere along the line it became an economic objective in its own right. The government, like a teenage boy playing videogames in his mother’s basement, can get the GDP number to go up by resorting to various hacks. Economic growth may be achieved, but without the accompanying improvements in human wellbeing.
In this article, we’ll explore why economic growth numbers may be misleading, and what actually drives sustainable economic prosperity.
The nature of growth
Not all economic growth is created equal.
When economists talk about a growing economy, they are referring to increasing Gross Domestic Product, which measures the total value of goods and services produced within a particular country during a given time period.
However, there are at least four important limitations to GDP as a measure of economic growth.
Firstly, total GDP is not the same thing as GDP per capita. An economy can grow by growing the size of the population. With more workers the total economic pie gets bigger, but there are also more mouths to feed. If output grows more slowly than the population, the math requires the average person to get a smaller slice of the pie.
Australia provides a striking example. Following COVID, Australia opened the immigration flood gates, leading net overseas migration to surge to more than 500,000 in 2023, and it has remained above pre-COVID levels ever since. This contributed to economic growth of 1.3% in 2023-24, even as GDP per capita declined by 1.1%. The economic pie grew, but thanks to Albo and his merry band of ministers, the average citizen got a smaller slice of the pie.
Secondly, nominal GDP is not the same as real GDP. Rising prices can increase the dollar value of economic output without increasing the quantity or quality of goods produced.
Venezuela provides an extreme example. In 2018, nominal GDP increased by more than 130,000%, even as real GDP contracted by almost 20%. Inflation made the pie look bigger, even as people had less to eat.
Thirdly, debt-fuelled growth may be unsustainable. Borrowing allows an economy to spend more than its income, effectively borrowing from the future. This is not necessarily a problem. For instance, if the government borrows to finance infrastructure investment, such as a railway, then future income may be higher, and may be more than enough to cover repayments. In contrast, borrowing that funds consumption spending, or which pushes up house prices, can leave the economy more indebted with little to show for it.
Australia is a cautionary tale. The average new mortgage has increased from around $400,000 in 2016 to more than $700,000 in 2026, requiring people to spend more on interest and debt repayments, all for the privilege of living in a proverbial dogbox.
Fourthly, production is not the same as human wellbeing. GDP measures the value of production, which is presumed to lead over time to improvements in living standards and quality of life. However, this may not occur, especially if more production leads to greater stress, longer working hours, chronic illness, or environmental pollution.
Australia provides a troubling example. During the 2025-26 financial year, Australians lost a staggering $36 billion on various forms of gambling, more than $1,200 per person. Gambling contributes to GDP. Some view it as a harmless form of entertainment, but it also leaves problem gamblers battling the dragon of addiction, which can lead to loss of personal autonomy, financial hardship, and the breakdown of family relationships.
The driver of sustainable prosperity
If growing the economic pie does not necessarily make people better off, what does?
The answer lies in understanding how growth is generated.
One way to grow the economy is to increase spending. When individuals and firms become more confident, they are more willing to spend. More spending leads to higher incomes, making firms and individuals more creditworthy. This allows banks to expand the supply of credit, which further fuels spending. As aggregate demand increases, businesses increase production, especially if there are spare resources available, like unemployed workers or unused machinery.
However, there is a limit to how much extra output can be squeezed from existing resources. Once the economy approaches full capacity, further spending tends to push up prices as more money chases after a finite supply of things to buy.
A more sustainable way to grow the economy is by increasing productivity.
Consider a management consultant producing thought leadership articles. By working longer hours, she might be able to write more articles. However, her time and energy are limited. Give her access to ChatGPT, and she may be able to quadruple the number of articles she can publish, while also freeing up time to spend with her children or catch up with friends.
The difference is productivity.
Productivity measures how efficiently an economy can transform inputs into outputs. By increasing output per hours worked, productivity improvements can allow individuals to produce more without sacrificing more of their time, which is the ultimate scarce resource.
Capital deepening, providing each worker with more tools and equipment, can boost output per worker. However, merely accumulating more capital eventually leads to diminishing returns. Imagine a pizzeria. One pizza oven gets lots of use. A second oven might also increase production, but by less, as Mario and Luigi struggle to prepare enough pizzas to keep both ovens fully occupied.
Technological progress and better methods of organisation can improve productivity without increasing the amount of capital employed. Consider New York City at the turn of the twentieth century. Over 100,000 horses were used for transportation, creating an enormous challenge to feed them and clean the mountains of horse manure from the streets. The arrival of motor vehicles allowed for more efficient transportation by eliminating the costs associated with maintaining an army of horses.
The bottom line
A rising tide can lift all boats.
Throughout history, nations that have opened the throttle and cranked up production have seen their citizens escape poverty and enjoy higher living standards, sometimes to a remarkable extent. Case in point, China’s output per person increased roughly sixfold from 2000 to 2026, meaning the average citizen has gone from bicycle (自行车) to BMW in one generation.
However, growth may not lead to prosperity. Genuine prosperity is not about growing the population, raising prices, borrowing more, spending more, producing more things nobody needs, or working harder.
The real engine of long-term prosperity is productivity. It is about producing more with less. By investing in capital, technology, and better ways of doing things, we can produce more without sacrificing more of our most precious resource: time.
In the next article, we will explore how the benefits of sustained economic growth are shared amongst members of society.
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