Posted by: graemebird | April 25, 2010

Judith Sloan: Half Understanding Productivity.

Brought to the front on account of me now realising that the slippery foreign devil Jason Soon had distracted everyone from my economics contribution by highlighting my investigation into BIG CONSPIRACY. Bloody crafty foreigners.

Inscrutable:

Here we will do a quick run-through of an article on productivity written for the Australian a few days ago. Judith Sloan delves into the ins and outs of productivity and peels a layer off the onion on the subject. Unfortunately she peels just that one layer off and stops right there. What is revealed is the ongoing curse of using only GDP as a metric for national production. Whereas it ought to be obvious that GDP ought to be used as one metric amongst many. And definitely not the most important one. Watch how the simple mistake of obsessively using GDP as the NUMERATOR (capitals to note that in the early draft I put these the wrong way around and am in the process of fixing this up) messes up almost the entirety of her analysis. We will show that the final conclusion she comes to is quite wrong. We will also show that there is much work to be done on this very subject of bringing to bear a range of techniques to more adequately tell us how we are going with our productivity improvement.

Let me make it clear that comparatively speaking this is really an excellent article. But mostly because of the appalling state of economics in Australia. One bright light had Professor Kates making a triumphant presentation before the Mises Institute in the US. He now seems to have gone into hiding for the localised shame of his actions. Kates didn’t even so much as drop by at Catallaxy to gloat. This despite the fact that the Mises institute is the real centre of action in economics in the world today. Most but not all of the rest are really just mucking about. One hopes that Kates will discover George Reisman and so round out his excellent but incomplete understanding of things.

“AT the beginning of the year, Kevin Rudd made a number of speeches about productivity, arguing that “we must take decisive action to drive productivity growth forward to improve living standards: to deliver better services, while keeping the budget on a sustainable footing, and to improve Australia’s international competitiveness”.

No you idiot Rudd. You must choose decisively less action in the form of closing down one government department after another if you want more productivity growth. As we shall see. The obsession with productivity growth came with the first few pages of Krugman’s first edition of the book “The Age Of Diminished Expectations.”

This emphasis became more or less bi-partisan. Krugman was known then as a leading statistical researcher of that time and had not blown it all as a dumb leftist partisan columnist. Being a leading statistical researcher was equated with being a great economist if such statistical research was married with a post at an Ive League College. Its actually a very good book. Utterly flawed in the light of Reisman’s work at around the same time. But nonetheless by and large a good effort. And in no way detracted from his academic work.

Actually Krugmans book seemed to vastly enhance his reputation. Since it pitched him as a fellow with great dexterity. And he was seen at that time as a centre-left equivalent of Milton Friedman but at a far younger age. Immediately then the first few pages of his book became etched in stone. Most politicians being too stupid to read and retain more than the first few pages.

Productivity became all the rage in the labour party. New spending programs were eyed greedily as a supposed way of bringing forth this productivity.

Judith Sloan sez:

“Productivity is a concept often misunderstood, particularly by politicians who often confuse it with labour-force participation.
Productivity is simply the ratio of output to inputs.
The best measure is multifactor productivity (the ratio of output to both capital and labour inputs) but because of difficulties in estimating the ratio in the non-market sector, it is common to quote figures for the market sector only.”

This SOUNDS right. Or at least hopeful. But how does one assess the productivity of capital and why would one do such a thing? I don’t see much use in assessing the productivity of capital inputs. The idea is to have a great deal more capital inputs. Not to assess their productivity. That would seem very strange. Are we to get uptight if the mop and bucket that we bought as a capital input isn’t being used around the clock?

No what we want is to have the best cleaning gear available and use it when we have the chance. Productivity of capital is a non-issue. Really we want hard money, no tax on profits, freedom of action and capital accumulation. The way in which these capital resources will be used will not speak highly of capital goods productivity. The idea is to have a lot of this gear lying around a lot of the time. Really there isn’t a great deal of point talking about much else except for human productivity.

Judith Sez:

“So how has Australia been going on the productivity front? In a word, abysmally.
Between 2003-04 and 2007-08, market-sector multifactor productivity fell by an average of 0.2 per cent per year.Since then, the decline has been even greater, at 2.7 per cent.”

Well you see that is not much to go on is it? “Multifactor productivity” could be anything at all and by its very description would seem to relegate itself to the land of the arbitrary. Since she doesn’t spell out what on earth is the alogarithm behind this phrase she is telling us next to nothing. Further if she is throwing in capital goods productivity she is telling us next to nothing important.

The only way I think we could get a massive uptick in capital goods productivity is if, along with massive spending cuts, we had some version of the Ken Henry congestion tax. Done right this might force people to be rostered around the clock. Perhaps we might get early school-goers, where the kids got up at the well before dawn, and late school-goers who started school at 1.00pm. Such rostering might work as akin to a one-off DEFACTO leap in capital accumulation. Roads, classrooms, government offices and even our photocopiers getting more usage per item, and there might be real gains from such a state of affairs. As shift-work might become the norm, even in the factories and offices of quite quite moderately sized towns.

Aside from all that any attempt to combine the productivity of capital goods is really just getting in the way.

Judith sez:

“More generally, the performance in the first decade of this century has compared very unfavourably with the performance in the 1990s, when annual average multifactor productivity grew about 2 per cent per year.”

One wonders what all this could have been about. Perhaps us adapting to the networking usage of the computer revolution. Perhaps longer shopping hours coming in. Perhaps more workplaces going to multiple-shift. One can only guess given the mystery of the alogarithm used. So we are no enlightened even a little bit as to the progress of labour productivity.

Judith Sez:

“So what explains the superior performance of the past decade? And what explains the recent poor performance?

It is now generally agreed the combined impact of freeing up product, capital and labour markets (principally the result of explicit government policy changes) created both commercial pressures on, and the capability for, managers to improve productivity of their operations.”

That certainly makes some sense. And therefore it would not be surprising to see this mysterious metric tap out when the reform also started diminishing if not going backwards. It looks like our poxy economists have developed this multi-factorial mathematical analysis and not yet figured out that it is next to useless.

Judith sez:

“As well, the effect of the policy changes was to redirect resources in the economy to their best uses, hence improving the macro-level outcomes on productivity.
Fortuitously, the widespread take-up of the new information and communication technologies (including falling costs of these technologies) added momentum to the growth in productivity.”

Right. Just what I was thinking.

“What accounts for this decade’s dismal performance? It is important to look beyond the macro figures, in particular the performances of three sectors: mining, agriculture and electricity, gas and water, which have been pulling down the figures.
In the case of mining, the surge in capital expenditure has meant higher inputs without commensurate outputs as projects take time to complete.”

Right now here we have the confession that whatever the mystery alogarithm is it has GDP as its NUMERATOR. And nothing could be so foolish. Suppose we have a two nations commisioning mines, plants, and nuclear power factories all over the place. And suppose one of those nations were the you beaut early-mine-developers and commisioners of factories. Supposing in this nation instead of doing a gravity flyover with one pilot and another gravity measuring machine operator, we have the ridiculously productive spectacle of one bloke doing the whole thing from a centralized office with 5 drone planes. Supposing in this nation it takes only 100 blokes to put up this factory and get it working in one year, whereas in the other country it takes 500 blokes 3 years.

Well since Judiths metric is only using GDP the outstanding productivity of the people in the hyper-productive country will not be registered until such time as the factories and mines are either churning out exports or consumer goods. Now clearly this is just ridiculous.

In fact the country so incredibly productive at turning out these capital goods may actually be handicapped as to its productivity figures. Its fast and productive creation of capital goods may draw in all these imports which will disproportionately bugger its NUMERATOR;

Remembering that GDP= consumer goods plus net investment plus government spending plus exports minus imports. WHERE IS THE GROSS INVESTMENT IN THIS METRIC??? ITS NOT BLOODY THERE. So any analysis with GDP in the NUMERATOR is playing golf in the dark . Its guessing. Yes you might have one or two metrics with GDP in the NUMERATOR. But most of your metrics ought to be on the basis of GROSS DOMESTIC REVENUE.

Judith sez:

“But when these projects come on stream, productivity in mining should pick up.”

And here is the fatal flaw spelled out. The statement gives us a botched view of what productivity is. We use all these work-hours being sunk into the creation of capital goods ……. there they are in the numerator ….. and with her mystery metric all the capital goods being poured into producing more capital goods will also be in the composite DENOMINATOR…..

Since the more productive country will have more capital resources to pour into the DENOMINATOR this will also cock up the outcome. You see the metrics are all hashed up. Judith may be doing a sterling job of speculation with the metrics she has. But she hasn’t figured out the metrics themselves are utterly useless. She must be putting way too much faith in the ridiculously elevated blockheads who have developed these metrics. Could someone tell me who these dummies are so I know who to blame?

How is that any sane way to measure productivity????? Since the production we are talking about, or very little of it, will find its way into the NUMERATOR. This is insane. And the utter insanity of it reveals an immense amount of solid work that needs to be done in economics to close that gap in how we measure productivity. And in back-engineering a lot of our figures for productivity to give us the real story.

At first this task will be quite simple. Piss off all this nonsense about capital goods input. Or at least just have that as one figure and send it to the fringes. Then deal with labour input alone, but using Gross Domestic Revenue in the NUMERATOR. Thats the first step but it doesn’t end there. Because while using GDR, deflated by consumer price inflation will give us a better metric, well it won’t be enough on its own. So the researchers ought to come up with a range of measures to fill this gap. They won’t do it without someone like me surpervising them. Like a new General Groves supervising all these uppity nuclear scientists. I shit you not. This type of supervisory job I was born, bred and honed for. Particularly if I have unrivaled sacking privileges.

“High commodity prices have led to poorer quality ore bodies being exploited which, in turn, has dragged down productivity in the mining sector….”

Good point. But remember she is not talking about actual productivity. Only productivity wherein exports and consumer goods are concerned. Not the creation of new capital goods. Also here she may have morphed her definition to the more specific issue of the productivity of mining operations.

“Agriculture was badly hit by drought through much of the decade and lack of water has adversely affected electricity, gas and water.”

Right.

“Construction of large projects in this sector (desalination plants for example) has also dragged down productivity in this sector.”

See how stupid this is. Heaps of people involved in putting up new capital goods. They may be powerfully productive. Yet they are still there in the DENOMINATOR in terms of their labour hours.

“By excluding these sectors, the overall movements in productivity do not look as bad, although productivity growth is still negative on the 2008-09 figure.

In a recovering economy, it is reasonable to expect a pick-up in multifactor-productivity growth in coming years, but whether there will be a return to the higher trend rates of growth in the 1990s, is a moot point.

The lack of any real reform zeal on the part of federal and state governments for the past decade or so has meant the conditions that underpinned the higher-than-trend growth rates of the 1990s are now largely absent.”

No major objections in the above block of comments.

“When considering determinants of productivity growth, it is important to distinguish between underlying and immediate influences.”

Well Judith. You are going to get far more gratification from good policy if you employ the right metrics. This gets very frustrating. Because its not her fault since she is merely doing her due diligence to try and stay abreast at what the blockheads in quakademia have come up with and settled on so far.

“A fair portion of the human capital story (improving literacy and numeracy, for example) will raise productivity, but only down the track. Similarly, well-conceived infrastructure spending should lead to higher productivity, but with a lag. Moreover, these are areas that require large up-front expenditure.”

We will see it is less of a lag if you get the metrics right. In reality good policy brings fast results.

“On the other hand, other government policies can negatively influence productivity: throwing money at the car industry and the associated costly distortion in resource allocation, for instance.

The immediate determinants of productivity growth are bound up with the commercial and competitive pressures experienced by key economic factors and the decisions that are made in relation to capital spending, adopting new technologies, rationalising operations, workplace practices and the like.”

Right.

“A final point to note is the very significant gains that could be made through higher productivity in the large sectors of education and health, both with their private and public components.”

Word.

“Accounting for less than one-fifth of the economy, major improvements to the productivity of the delivery of services in health and education would feed through to higher per capita incomes.”

Blood oath.

“Productivity is a means not an end: is the major source of improvements to living standards.”

Sure.

“But there are no magic bullets that, in the short term, can deliver sustainable gains.”

THIS IS THE FAULT IN THE CONLUSION I WAS REFERRING TO. We can get massive gains in productivity. We can get them VERY fast. And Sloan and all the others would know this by now if they were singing from the right sheet music.

What is the take home story to all this?

THE FACT IS THAT IF WE ARE SERIOUS AND RUTHLESS WE CAN BE IMPROVING PRODUCTIVITY IN A MATTER OF WEEKS AND MONTHS. Its no slow process at all if we know what we are doing.

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Responses

  1. If this ignorant stupid cunt isn’t Mark Hill, I’ll eat my hat:

    “……Bird doesn’t get that GDR is a useful metric but it measures turnover. Sure you’re better off with a higher GDR given a GDP level, but confusing revenue and income hardly qualifies him…..”

    What can you do when they are handing out PHD’s like toilet paper to the terminally stupid.

  2. Matt Taibbu’s latest piece reproduced everywhere (even the Fairfax press) is ringing dem bells all over the world. I do like a bright boy with a way with words and influence. Poor ol’ Ayn Rand. Looking’ very shabby indeed in Matt baby’s wake lol.

    http://www.theage.com.au/business/how-ayn-rand-caused-the-gfc-20100424-tknu.html

    http://www.alternet.org/story/146611/taibbi:_the_lunatics_who_made_a_religion_out_of_greed_and_wrecked_the_economy__?page=entire

  3. Right. Thanks Philomena. I’ll have to read it a bit later. One thing I must warn you about. If you want to understand anything in economics be sure not to let Mark Hill confuse you.

    “Bird doesn’t get that GDR is a useful metric but it measures turnover.”

    The fellow is just unbelievably idiotic. Gross domestic revenue is not a measure of turnover. The gentleman has lost his mind.

    “For a company, the ratio of annual sales to inventory; or equivalently, the fraction of a year that an average item remains in inventory. Low turnover is a sign of inefficiency, since inventory usually has a rate of return of zero. here also called inventory turnover. For a mutual fund, the number of times per year that an average dollar of assets is reinvested.”

    One doesn’t use Gross Domestic Revenue to measure turnover Mark Hill you moron. Not in any sense of the word “turnover”. Rather Hill you dumb shit, we use Gross Domestic Revenue since Gross Domestic Product leaves too much spending and production out of our ratios.

    Got it now Hill you thicko? No you don’t get it. And you are not going to get it. Because you are too fucking dumb.

  4. Can anyone, with the exception of the lunatic Mark Hill, explain why it makes sense to exclusively use GDP in the numerator when you are discussing productivity? I’ve explained why this is not the right thing to do above. I’ve already explained it.

    Now if someone, who isn’t a complete fucking lunatic, like Mark Hill can explain otherwise then you dumb shits might not lose the argument simply by default.

    Economists in this country are so fucking dumb they seem to think you have to create ONE GOOD MEASURE to appraise anything to do with the country as a whole. It wouldn’t be so bad if they were smart enough to find the best metric. But they cannot even do that right.

    The problem with listening to Mark Hill is that he is deranged. The dumb shit started talking about Gross Domestic Revenue as if it a measure of turnover. Idiot.


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