In his Presidential Address five years ago, Zvi Griliches (1994) called attention to the severe difficulties that beset current attempts to measure the growth of labor productivity in the American economy. Because of these difficulties, it is likely that the true rate of economic growth is substantially underestimated. The root of the problem is the difficulty in measuring output in the service sector which now represents two-thirds of the economy. In such sectors as health care and information services, the contribution to gross domestic product (GDP) is measured by inputs rather than outputs, a procedure that makes it impossible to gauge accurately improvements in the quality of output. Thus, in the case of computers, which are transforming American society, economists have been unable, so far, to find a measurable contribution of computers to the rise in labor productivity—an astonishing paradox.
I want to follow up on this problem of mismeasurements. My thesis is that the profession is lagging behind the economy more than it has to. We are, to some extent, entangled in concepts of the economy and in analytical techniques that were developed during the first third or so of the century, when economics emerged as a modern discipline. The range of the discipline did not expand greatly during the middle decades of the century, due partly to a concentration on the reformulation of the previous analytical concepts and techniques in more sophisticated and more general mathematical models. Although the dividends from these efforts were high and have contributed to the flexibility and capacity of economics, they did not encourage a reconsideration of some of the received assumptions about the scope and focus of economic analysis. There has been a significant broadening of the scope of economics during recent decades, with the emergence of such fields as the new household economics, the new institutional economics, the economics of aging, and medical economics, but much remains to be done. The balance of this address is divided into four sections. I begin with the inadequate attention to the accelerating rate of technological change, the implications of this acceleration for the restructuring of the economy, and its transforming effect on human beings. I then consider the neglect of the nonmarket sector of the economy, the implication of that neglect for the measurement of consumption, and for the analysis of economic growth. The third section deals with the need to shift the focus of economic analysis from crosssectional to life-cycle and intergenerational data sets, especially in connection with forecasting. The final section points to the impact of cultural lag in the treatment of material inequality, and the neglect of the more severe problem of spiritual inequality. I use the word spiritual not in its religious sense but as a reference to commodities that lack material form. Spiritual or immaterial commodities make up most of consumption in the United States and other rich countries today.