Total factor productivity
Total factor productivity is the part of output growth not explained by added labour and capital, often attributed to technology and efficiency.
Add up all the extra workers and machines and they still do not explain most of how rich the modern world became. The unexplained remainder has a name: total factor productivity.
Total factor productivity is the portion of output growth that cannot be explained by increases in measured inputs such as labour and capital. It captures how efficiently inputs are combined, and it is the part of growth attributed to technology, knowledge, and better organisation rather than to simply using more.
The residual that matters most
Total factor productivity is measured as a residual: take the growth in output, subtract the growth explained by more labour and more capital, and what remains is attributed to productivity. Because it is a residual, it is sometimes called a measure of our ignorance, since it lumps together everything that raises output without raising inputs. Yet that residual turns out to account for much of the long-run growth in rich economies, which is why it commands so much attention.
What lies inside it
The black box of total factor productivity contains the real engines of lasting prosperity: technological progress, the diffusion of better methods, improvements in skills and management, gains from reallocating resources to more productive uses, and the quality of institutions. These are harder to measure than counting workers and machines, which is precisely why they hide in the residual rather than in the input figures.
Why it is the long-run prize
Adding inputs faces diminishing returns: more capital per worker eventually yields less and less. Productivity growth does not face the same ceiling, because a better idea can be used by everyone without being used up. This is why sustained increases in living standards depend chiefly on rising total factor productivity rather than on ever more inputs, and why a slowdown in measured productivity growth, as seen in many advanced economies, is a matter of such concern.
Total factor productivity is the economist's name for the deep source of prosperity that cannot be bought simply by working more or investing more. It is about working and investing better, and because it resists easy measurement and easy policy, it remains both the most important and the most elusive driver of growth.