Economists employ the term Total Factor Productivity (TFP) to explain that portion of economic output that cannot be explained by capital (K) and labor (L) inputs to production alone.1In essence, when we get more output (Y) than our economic models can readily explain, we fudge the numbers, crediting the excess productivity to some mysterious factor, TFP (A). But what is this actually measuring?
TFP, “has been shown to be the main driver of economic performance,” economists Christian Bjørnskov and Pierre-Guillaume Méon note in a fascinating paper.2Their research suggests that TFP is, in fact, a measure of what they term “the productivity of trust.” Moreover, the evidence implies that the effect of trust on productivity operates through legal and regulatory governance mechanisms. Establishing “a clear and robust association between levels of TFP and social trust,” Bjørnskov and Méon go on to show, “a clear and robust relation between social trust and the growth of TFP.” These trust effects on TFP, in turn, depend heavily on quality of formal institutions.
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