The Solow Residual is a number describing empirical productivity growth in an economy from year to year and decade to decade. Robert Solow defined rising productivity as rising output with constant capital and labor input. It is a "residual" because it is the part of growth that cannot be explained through capital accumulation or increased labor...The Solow Residual is procyclical and is sometimes called the rate of growth of total factor productivity.When secondary market formation is confronted by economic stagnation, one result is a reversal of a previously "virtuous" cycle of increased labor force participation, as contributing to manufacturing demand. So long as economies maintain solid growth trajectories, secondary market formation and primary market formation are able to reinforce one another in this process. What's more, until the Great Recession, many believed that secondary markets would be able to substitute for primary markets, if and when the latter didn't provide sufficient employment.
Now that the organizational capacity of secondary markets is facing limits, a new form of organizational structure is needed, so as to restore first mover market positions for long term growth. Unfortunately, knowledge use as the obvious candidate, is still trapped within a limited framework of secondary market terms of engagement. Consequently, a lack of first mover organizational capacity, means governments increasingly resort to long outdated mercantile strategies, as a response to economic stagnation.
No longer are secondary markets for time based product, the employment panacea they might have appeared, scarcely more than a decade ago. As it turns out, the secondary markets of time based product - as a second mover - have been revenue dependent. Hence when this form of organizational capacity seeks greater efficiency via a Solow Residual process, the result is often lost supply and demand of time based product, instead of the productivity gains which normally accrue to the cumulative labor reductions of (total) tradable sector output.
What isn't always evident is that lost supply and demand for time based product also translates into lost productivity. This is all the more important, given the fact tradable sector consumption has also been limited by falling labor force participation. However, a first mover position for knowledge and time based product, requires a different organizational response than what has transpired thus far - one that reinforces the Solow Residual of tradable sector wealth, instead of detracting from its benefits.
Meanwhile, as Arnold Kling noted in a recent entry for the Concise Encyclopedia of Economics:
For most people, viewing trade as a rivalry is as instinctive as rooting for their national team in Olympic basketball. To economists, Olympic basketball is not an appropriate analogy for international trade. Instead, we see international trade as analogous to a production technique. Opening up to trade is equivalent to adopting a more efficient technology.What's important now, is a recognition how rivalry for knowledge use has decreased the work availability that many individuals have sought and prepared for, in the marketplace. Otherwise, populations might not be so inclined to disregard centuries of progress, via the mutual gains from international trade.
Consider Arnold Kling's assertion above, that opening up to trade means adopting more efficient technology. Before anyone can remain comfortable with the efficiency of the Solow Residual model for tradable sector productivity, time value needs its own place in the sun as well. Time based product is particularly scarce and finite. Hence it coordinates best with other forms of time based product. Further, mutual cooperation within a continuum of group patterns, would finally allow economic settings in which both parties gain from the process. This is particularly important, given the fact too much economic activity has become reduced to zero sum outcomes, and the protectionism they imply.
The Solow Residual will always be a vital component of economic activity. However, it functions best on the traditional productivity terms of tradable sector activity. Whereas in the time based product of non tradable sector activity, this approach often translates into lost marketplace potential. It's time to build new primary market formation for knowledge use, which is capable of measuring productivity gains as surely as those which the Solow Residual have indicated for tradable sector activity.