Raising productivity growth is the holy grail of economic policy. Improving productivity – or the efficiency of production – is the surest way of improving human welfare.
The application of new technologies and the reorganisation of work and markets are two of the great engines of productivity growth.
Such innovations have, in the last century, collapsed the cost of living and brought what were once luxuries within the reach of all households.
One way of gauging these effects is to look at the proportion of consumer spending accounted for by expenditure of different goods and services.
Innovation has transformed productivity in agriculture and manufacturing. Productivity in agriculture has been revolutionised by mechanisation, new plant varieties, selective breeding, improved husbandry and the use of fertilisers and pesticides. Along with the growing international trade, consumers enjoy a dizzying array of foodstuffs at ever lower prices.
In 1954, when food rationing in the UK finally ended, food accounted for almost 40% of average household spending; today food accounts for just over 11% of all spending. We are spending far less for a far wider range of foods, many of them pre-prepared, so requiring less labour input than in the 1950s.
The same magic combination of trade and rising productivity has collapsed the cost of goods.
Thus the real price of cars in the UK has halved in the last 25 years.
In 1948 a Freed-Eiseman 16 inch TV cost $795 in the US, roughly a quarter of the average annual salary, or roughly $12,000 in today's money. A top of the range TV can be bought today for less than $1,000. But this comparison fails to capture the huge quality improvements seen in the last 60 years. On a quality-adjusted basis the cost of a TV in the US has fallen by 98% since 1950.
When things become cheaper we consume more of them. Foodstuffs that were, within living memory, luxuries or treats, such as smoked salmon or chicken, have become everyday items.
As Google's Chief Economist, Hal Varian, puts it - "A simple way to forecast the future is to look at what rich people have today; middle-income people will have something equivalent in 10 years, and poor people will have it in an additional decade". Some striking examples include anti-lock braking systems, electronic stability control systems and airbags which first appeared on luxury cars before being incorporated in mainstream vehicles.
We own far more clothing than our parents or grandparents did, even though clothing accounts for a far smaller share of our overall spending. The anti-waste lobby group, WRAP, estimates that the average UK household owns £4,000 worth of clothing. We throw out large quantities of kit an earlier generation would have adapted or handed down.
The supply of second hand clothing is so enormous, and new clothes are so cheap, that 70% of all UK reused clothing is sent overseas. The United Nations estimates that the UK is the world's second largest exporter of used clothing after the US, selling 351,000 tonnes in 2013. The top destinations for our cast offs are Poland, Ghana, Pakistan and Ukraine.
As spending on the necessities of food and clothing has shrunk, so consumers have been able to spend more on non-essentials – everything from meals out to gym membership and trips to the cinema.
In the US spending on non-essentials has risen from 21% of all spending in 1900 to 50% today. Expenditure on services, telecommunications, entertainment and leisure have been major beneficiaries of this shift.
The big story of the last 100 years has been the way in which technology, trade and the re-organisation of production have revolutionised living standards. We think this process has much further to go. If we are right, today's luxuries will be tomorrow's staples.
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