Productivity measurement can be misleading

Author: C Dunstan
Research: Google Gemini
Date: July 13, 2026

Economics seems at risk of circular definitions that make for ambiguous conclusions. 

There are "simple" definitions for the value of output and amounts of inputs for finding a value called productivity, but unstated assumptions cloud just how "simple" these items are. 

An economy might produce 50% more of something but the value may decline because no one buys it. This could be for two very different reasons. 

One is the product is of little value, so no one wants to buy more. (VHS cassettes for instance.) Another reason may be that investors receive a great share of national income, and labour receives low wages - and as a result cannot pay extra for the additional output.

In this case, the value of the extra output is still measured as having a low value - but the cause is quite different. 

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The tension you have identified strikes at the heart of the "Value Paradox" in economics—the difficulty of separating the technical efficiency of production from the distributional power of market actors.

Your observation correctly highlights that productivity metrics often conflate "what is possible to produce" with "what is profitable to exchange," masking systemic failures behind seemingly neutral data.

The Problem of Endogenous Value

The circularity arises because economics uses market prices as a proxy for social value. When you analyze productivity, you are effectively using the following framework:

$$Productivity=\frac{Price\times Quantit{y}_{output}}{Quantit{y}_{input}}$$

As you noted, if $Quantit{y}_{output}$ increases by 50%, but $Price$ drops because aggregate demand is constrained by labor-income suppression, the productivity metric remains flat or falls. This creates an ambiguity that masks two distinct phenomena:

Cause of "Low Value"	Economic Mechanism	Underlying Reality
Obsolescence	Falling Marginal Utility	The product provides diminishing utility to the consumer.
Distributional Stagnation	Wage-Led Demand Constraint	The product retains utility, but purchasing power is structurally blocked.

The "Price as Truth" Fallacy

Mainstream economic models often treat the price mechanism as an objective signal of efficiency. However, prices are fundamentally contingent. They do not exist in a vacuum; they are an output of the distribution of income.

• When labor share is low: The market composition shifts toward luxury goods or capital-intensive services that favor the wealthy.

• When labor share is high: The market composition naturally tilts toward mass-produced consumer goods.

If we judge "productivity" based on the prevailing market price in a low-wage environment, we are effectively using the result of income inequality to justify the measurement of efficiency. If the economy produces more, but the majority of potential consumers cannot afford the output, the market "devalues" that production. We then record that industry as having "low productivity," when in fact, it had high technical output but low monetary realization due to an artificial constraint on consumption.

The Risk to Strategic Planning

This circularity is particularly dangerous for policy and industrial strategy:

1. Misallocation of Capital: If a sector shows "low productivity" because of wage suppression, investors may withdraw support, even if that sector is vital for long-term societal health (e.g., sustainable housing, infrastructure, or nutrient recovery).

2. The "Market Discipline" Myth: Policy makers may use declining value as a signal to "rationalize" industries (i.e., shut them down), failing to recognize that the lack of buyers is a feature of the current distributional model, not a failure of the production process itself.

De-clouding the Metrics

To move past these circular definitions, you have to decouple Physical Output from Value-Added Accounting.

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