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The Productivity Problem

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Productivity growth is apparently trending downward around the globe. The problem is addressed in Focus Economics, Why is Productivity Growth So Low: 23 Economic Experts Weigh In. The author, whose name I can’t find, begins by explaining the problem as economists see it.

Productivity is considered by some to be the most important area of economics and yet one of the least understood. Its simplest definition is output per hour worked, however, productivity in the real world is not that simple. Productivity is a major factor in an economy’s ability to grow and therefore is the greatest determinant of the standard of living for a given person or group of people. It is the reason why a worker today makes much more than a century ago, because each hour of work produces more output of goods and services.

It’s certainly true that the concept is important. The simple definition gives us the rough idea but the details are very difficult indeed. The text gives us the example of productivity at a branch bank.

Bill Conerly put it well in an article for Forbes: “Take banking, for example. Your checking account is clear as mud. The bank provides to you the service of processing checks, for which you don’t pay (aside from exorbitant fees for bounced checks and stop-payments). However, the bank does not pay you a market rate of interest on the money you keep in your checking account. It’s a trade: free services in exchange for free account balances. Government statisticians estimate the dollar value of the trade, so that the productivity of bankers can be assessed, but the figures are not very precise.

At least in that example, we can see how productivity improvement at a bank might improve your standard of living, perhaps indirectly by enabling the bank to pay a bit more interest on your checking account. Here are three different kinds of examples, in which we can see how improvements in reported productivity result in worse outcomes for us.

Productivity is defined as the ratio of output to hours worked. Output is measured by receipts to the producer. Hours worked are collected by the Census Bureau.

1. A pharmaceutical company raises the price of its generic drugs with no change in its costs. Its receipts go up while hours worked remain the same. Under the definition, productivity goes up.

2. A high frequency trading company inserts itself into an increasing number of purchases of securities on stock exchanges. The purchaser pays a higher price. The HFT company has higher revenue but hours worked remain the same. Again, by this definition, productivity goes up.

3. Two dominant corporations in the same industry merge. The new company fires a lot of people. Hours worked go down. Prices remain the same in the short run, and rise as the new entity exercises oligopoly power. With hours down and receipts up, productivity rises by definition.

Are these examples realistic? In the medicine example, this article lays out the issues. For those interested, this chart shows the value of pharmaceuticals and medicines shipped by manufacturers beginning in 2000. It shows that there was a steady rise, with a sudden jump in 2013. This chart shows that per capita expenditure on pharmaceuticals and other medical products has nearly doubled since 2000.

It’s likely that there are several causes for this, not least the startling prices sought for new drugs. Government productivity figures do not take into account any improvement in the results that new drugs bring, although quality adjustments are made in calculating inflation figures. Given the increased pressure from insurers and doctors to switch to generics, and increased focus on drug prices as a problem, it’s reasonable to see this data and various reports as support for my drugs example. But it’s hard to put a dollar value on it.

On the second example, here’s an article from CFA Magazine written in 2011, detailing the costs of high frequency trading. More recent reports say that the problems are going away, and who knows because it’s hidden behind a wall of words mostly from the people who run the systems and their friends at the exchanges, and the captured SEC. Here’s a review of the literature (behind a paywall), which concludes with this: “This suggests that the identified economic benefits of HFTs (market making, venue competition, more trading opportunities) outweigh their economic costs (large-order predation and run games).” For my purposes, it’s clear that the older article tells us that initially, at least, HFT operated as my example suggests, raising productivity without doing anything useful.

As to the third example, the impact of private equity on employment is everywhere, and the concentration of economic power in oligopoly control of most industries is obvious. Dave Dayen has been writing about it for some time; here’s a recent example. Oligopolistic control also reduces paychecks for the remaining workers.

In these examples, and I could produce many more, productivity as defined by economists goes up but individual consumers are worse off. That is maddening. Once upon a time, we might have thought we could just ignore this kind of thing as an insignificant part of GNP, but that’s not true today, either in the US or globally. The economy, measured by output, is growing, but it is the opposite of the notion of productivity as good for society: it makes people’s lives worse. Except, of course, for a few rich people.

My three examples are exercises of market power. Here’s a long but worthwhile discussion of the harm it does and its increasing presence in the economy. Market power is not the same as rent-seeking, which is usually defined as an effort to get the government to give special treatment to one of a number of competitors. Both are damaging and both inflate productivity figures.

My examples show that reported productivity growth is most likely higher than the kind of productivity growth that the author discusses, the kind that increases the amount of goods and services available in the economy. It’s not unusual for an economics writer to assume only good people operate in the capitalist economy, and ignore the crooks and the cheats. Suppose the author is right that rising productivity that makes for a better life. If real productivity growth is even lower than the low reported productivity growth, his logic explains why life is getting worse for most of us.

The Great Transformation Part 4: Reaction and Counter-Reaction To Self-Regulating Markets

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Previous posts in this series:

The Great Transformation: Mainstream Economics and an Introduction to a New Series

The Great Transformation Part 1: The Market

The Great Transformation Part 2: More on Markets

The Great Transformation Part 3: Neoliberalism Before It Got Its New Name

The standard history of the industrial revolution in England says that it was accompanied by environmental messes in cities, miserable lives for those with jobs, and even worse misery for those without. One of the victims of that misery was Charles Dickens who worked in one of those factories for several months at the age of 12, while his father was imprisoned for debt. That experience informed much of the social commentary in his novels The damage was not limited to the lives of the poor, but extended to all sorts of problems affecting much of society. There was plenty of agitation for legislation to rein in the excesses of the self-regulating market, and gradually legislation was enacted.

Polanyi gives a list prepared by Herbert Spencer, most widely knows as the father of Social Darwinism, “a social theory that applies the law of the survival of the fittest to society; humanitarian impulses had to be resisted as nothing should be allowed to interfere with nature’s laws, including the social struggle for existence.”, as Wikipedia explains it. The list ranges from restrictions on hiring of boys under the age of 12 to vaccinations to laws requiring the inspection of gas works and requiring vaccinations. Spencer and other liberals decried these laws as betrayal of liberal principles, or as the deleterious actions of the enemies of liberalism, the collectivists.

This is the myth of the anti-liberal conspiracy which in one form or another is common to all liberal interpretations of the events of the 1870s and 1880s. Commonly the rise of nationalism and of socialism is credited with having been the chief agent in that shifting of the scene; manufacturers’ associations and monopolists, agrarian interests and trade unions are the villains of the piece. Thus in its most spiritualized form the liberal doctrine hypostasizes the working of some dialectical law in modern society stultifying the endeavors of enlightened reason, while in its crudest version it reduces itself to an attack on political democracy, as the alleged mainspring of interventionism. P. 150-1

Polanyi explains these and all of the myriad regulations passed by Parliament in the wake of the industrial revolution as the natural response of a healthy society to the intrusions of the self-regulating market. There was no conspiracy, and there isn’t even a theory justifying these challenges to the self-regulating market, merely a pragmatic case-by-case examination of a specific problem and a more or less reasonable response to that problem.

That won’t do, of course. There were two lines of attack by the liberal economists who pushed the theories of laissez-faire. The first one, just emerging when Polanyi wrote, was that the Industrial Revolution was steady evolution of the economy that steadily benefited the poor. Polanyi explains their argument that by normal measures of population growth and wage income, things were getting better for everyone, including the nascent working class, throughout the industrial revolution. As a result, there was no need for the kinds of interventions that the Parliament imposed.

The controversy continues to today. Here’s a brief recent summary by Clark Nardinelli. The data cited by Nardinelli supports the claims of commenter Ian Turner on the previous post in this series, suggesting that despite the theory that subsistence wages were good and useful, manufacturing and other interests were unable to push wages to that level. Today the dispute among economic historians over standards of living, as Nardinelli explains it, isn’t as simple as wages and population growth. The concept of standard of living now includes many non-cash items, like living conditions, wars, taxes, famines, working conditions, social ties, social status, and much more. We have a good example of this discussion in the wake of the recent speech by Paul Theroux on poverty in Mississippi, as this by Dave Dayen. Oddly, this discussion mirrors Polanyi as well.

Polanyi explains that the real damage done to the workers was through a cultural catastrophe:

The economic process may, naturally, supply the vehicle of the destruction, and almost invariably economic inferiority will make the weaker yield, but the immediate cause of his undoing is not for that reason economic; it lies in the lethal injury to the institutions in which his social existence is embodied. The result is loss of self-respect and standards, whether the unit is a people or a class, whether the process springs from so-called culture conflict or from a change in the position of a class within the confines of a society. P. 164-5.

At one level, this is an argument about measuring standard of living, as in the Nardinelli article. Polanyi however uses it to support his idea that when a society is threatened, it seeks to protect itself.

The second main thrust of the liberal argument is that laissez-faire was never fully implemented, and therefore it hasn’t had the chance to improve the lives of everyone everywhere.

… Its spectacular failure in one field did not destroy its authority in all. Indeed, its partial eclipse may have even strengthened its hold since it enabled its defenders to argue that the incomplete application of its principles was the reason for every and any difficulty laid to its charge.

This, indeed, is the last remaining argument of economic liberalism today. Its apologists are repeating in endless variations that but for the policies advocated by its critics, liberalism would have delivered the goods; that not the competitive system and the self-regulating market, but interference with that system and interventions with that market are responsible for our ills. P. 149-50.

We hear that argument all the time, regardless of the subject, from conservative economists and conservatives generally. Some things never change.

One of the things that doesn’t change is that people accept the general idea of capitalism so firmly that only changes around the edges are allowed in polite discourse, and all regulation effectively requires the consent of the people who benefit from things as they are. This was true in the 1830s, the 1860s and the 1930s (to a somewhat lesser extent) and today. Thus, in the wake of the Great Crash, it was obvious that something was badly wrong with the financial sector. Any benefit it might provide to society was swamped by the misery inflicted by the Great Crash. And yet, when Congress and the Obama Administration considered changes to the regulatory structure, the financial sector was on all sides of the table, and essentially won. Dodd-Frank is weak, and it gets weaker as bad regulators like Mary Jo White listen to the financiers and ignore social demands.

That’s why Bernie Sanders, the Portuguese Leftists, and Jeremy Corbyn are so scary to the oligopoly. These politicians don’t think twice about throwing out broken regulatory and other systems and replacing them with social controls over capitalism.