Quantifying technology’s role in transforming the economy

Over the past 130 years, technological innovation has been the primary driver of productivity growth and improvements in living standards.
Such innovation includes includes general-purpose technologies (GPTs) such as electricity and the computer.
Vanguard research suggests that AI has the potential to be a worthy successor to electricity as a general-purpose technology.

“If the AI impact approaches that of electricity, our base case is that productivity growth will offset demographic pressures, producing an economic and financial future that exceeds consensus expectations.”

Joe Davis

Chief Economist and Head of Investment Strategy Group, Vanguard

US economic growth has suffered from a lack of both automation and new general-purpose technologies (GPTs) for more than a decade. These developments have the potential to unleash “creative destruction” on a massive scale throughout the economy.

If the impact of AI approaches that of electricity, our base case is that productivity growth will offset demographic pressures, producing an economic and financial future that exceeds consensus expectations.

Transformational tech

The chart below shows the importance of GPTs in driving periods of above-trend growth over the last 130 years.

A chart shows the contribution of technology to the trend rate of US productivity growth over the last 130 years. The chart also breaks technology's contribution to productivity changes into three drivers—augmentation, efficiency and transformation—that have tended to move in waves. Efficiency and transformation have played much bigger roles than augmentation. One of the largest spikes in productivity over the full period accompanied the widespread diffusion of electricity as a general-purpose technology (GPT) in the 1920s. At its peak, electricity lifted the trend rate of US productivity growth rose by about 0.8 percentage point. The biggest productivity boom is attributed to World War II—when the peak increase in the trend rate of US productivity growth was more than 1 percentage point—while another, electricity-sized surge in productivity owed to automation in the wake of the war. A much smaller rise in productivity in the 1980s and '90s reflected the diffusion of information and communication technologies. Since roughly 2010, however, a lack of GPT and automation has been dragging down the trend rate of US productivity growth by amounts approaching –0.8 percentage point.

Past performance is not a reliable indicator of future results.

Notes: The chart shows the historical contributions of transformation, efficiency and augmentation to the deviation of productivity growth from its long-term average from 30 June 1891 through to 30 September 2023. Transformation refers to general-purpose technologies (GPTs) that (eventually) unleash creative destruction through the economy. Efficiency refers to advances that raise GDP per worker, usually by automating away tasks previously performed by human labour. Augmentation refers to technological advances where humans benefit from machines, such as personal computers and power tools, raising productivity and trend employment. Our research quantifies the prospects of AI transforming the economy in the years ahead.

Source: Vanguard calculations, as of 30 May 2024.

This new research harnesses a uniquely long and rich dataset that captures historical shifts in megatrends, which have driven about 60% of the change in per capita GDP growth.

It finds that, among megatrends that also include demographics, fiscal deficits and globalisation, only technology has been a consistent, powerful driver of growth as well as inflation, stock market valuations and the US Federal Reserve’s nominal target for short-term interest rates.

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Transformational tech

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