The paradox of the productivity slowdown in the knowledge economy

Abstract Paul David’s intellectual legacy provides a powerful framework for understanding the new productivity paradox: the knowledge age is visible everywhere but in the productivity statistics. The apparent and hopefully transient decline in productivity growth rates is due to the diffusion of new knowledge-intensive technologies and the increase in the size of production inputs resulting from the capitalization of intangible assets in national accounts. This capitalization generates a shift effect and an increase in the size of capital inputs, which will continue to increase as long as firms continue to introduce and adopt knowledge-intensive technologies. Once their diffusion is complete, this shift effect and the apparent productivity decline will cease. Using sectoral data for 11 European countries, we provide empirical evidence of this process. We show that intangible assets exert a strong positive effect on total factor productivity (TFP) when not capitalized but have a negative impact on TFP when capitalized and included as inputs in the production function. These findings highlight the central role of accounting practices in shaping the measurement of productivity during the transition to a knowledge-based economy.