We are on a clear trajectory towards impoverishment, and have been for quite some time.
“There is a very strange debate going on at the moment about productivity. Everyone knows that, however it is measured, the performance on productivity has been poor over the past decade and particularly woeful recently. ”
so says Judith Sloan over at catallaxy. I was unaware of the debate, but I’d probably find myself mostly in the Quiggin camp, though likely for totally different reasons to the Professor.
But here is something interesting that tends to confirm my prejudices.
“Krugman didn’t really mean ‘productivity is everything’; he meant technical progress is everything.”
This is Judith summarising the thoughts of what I assume to be the other side of the argument. But what I’m noting here is the rather daft idea that we ought to be interested in what Krugman REALLY meant.
You see Australian economists don’t study deeply about economics. To do that you really ought to be reading economic TREATISES. But your average working economist wouldn’t be seen dead with a treatise on the trains. So by default they’ve gotten their thinking from three sources.
1. Economic textbooks. Not treatises. Just textbooks.
2. A book called “Free To Choose” by Milton Friedman.
3. Another book called “The Age Of Diminished Expectations” (First Edition) by Paul Krugman.
I’ve been sorely let down by Paul Krugman. Perhaps I was being weakminded but on the strength of the first edition he became the economist I acknowledged as “my favorite” for a short time. I was briefly in a welfare joint upon first coming to Sydney (jobs were harder to get back then) and I can remember the needlemen and juicers thinking how weird it was that someone would have a “favorite economist.” They were right that I was being weird.
What swayed me in what now looks to be such a odd-ball direction? Well firstly there were the research paper bona-fides.
You see Paul was a workaholic through his 20’s. He’s actually a crap economist, but he was a machine at turning out statistical research in trade economics. The second thing is that he did not let show through his big government tendencies in those days, but instead came over as a bit of a breath of fresh air since he seemed to be a small-government egalitarian.
You know normal people LIKE small government egalitarians. They really do. I’m not kidding. They do. Thats probably one reason a lot of folks have repeatedly been lenient with me.
But no-one will pay a small-government egalitarian for their thoughts, generally speaking, because the people who like them aren’t the government or bigshots. They are just good, smart, normal individuals.
Pauls rise to being a canoninical economist, when he didn’t really have a firm grasp of economics, came about through unintentional triangulation. The modern insiders are super-impressed with statistical applications. Completely unimportant in economics except for the fact that to impress people you need to be able to confirm your reasoning using these statistical applications.
So anyhow when he came out with that impressive little book the left loved him because he was a lefty. And the right gave him good wraps because back in those days they were so put-upon, they needed to defend themselves, by over-praising lefties doing good. Also everyone was impressed by Krugman’s ability to look at a situation, and reduce it to various exercises in applied maths and statistics.
The degree to which Australian economists are influenced by these three sources is simply astounding. Its hard not to imagine them (when students) as being “empty vessels, waiting to be filled” or blank sheets upon which to write. When someone comes along who actually has an interest in economic thought, the Australian economists seem to find it hard to make head nor tail of him.
So thin is the exposure of Australian economists to deep thinking in economics, that 3 or 4 years ago it seemed that everyone was getting their talking points from over at Greg Mankiw’s blog. Truly the things you wind up witnessing can be unbelievable.
Another eye-catching feature of Paul Krugmans first edition was that it was small and economists weren’t afraid to read or buy it. Plus it was very well written, particularly for being his first book and coming from such a young fellow. So in those days Krugman walked on water and could do no wrong.
It may have been a small book. But I’ve noticed that Australian economists are heavily influenced by some things he said RIGHT AT THE START OF THE BOOK. Implying that they read small books, or at least they read the first few pages of very small books.
Right at the start of the first edition, as I remember, Krugman brings up productivity. He makes a very clever analogy that seemed to convey wisdom upon the small-government Keynesian. He said something about the way we don’t prioritize, and I remember him making the analogy in quite an endearing way. He said that he ought to be concerned with only maybe two-three or four things, like love, health, and work. Whereas he finds himself worrying about the poor state of all the gear in his attic.
Something like that anyhow. I’ll read it again sometime and see how close I got. But then he likened it to economists who get worried about this and that. Perhaps inflation and the trade balance, or whatever. But Krugman said that really the thing to worry about is PRODUCTIVITY.
Well as I recall the analogy was so well-written and it sounded so damn nice and thats probably the explanation for why the comments have caused no end of mischief ever since.
For starters high productivity is an outcome. One of the many outcomes of good policy that is made in accordance to economic science. The study of economics is the study of WEALTH CREATION. Not resource allocation. WEALTH CREATION. Economics tells us how to go about creating wealth, or its just no good for anything.
So of course should you follow good policy. Policy that creates wealth. You’ll wind up with high productivity.
Now there is another thing. The over-focusing on fluency with numbers and statistical packages leads to people mistaking their metrics for the thing itself. So they have a metric for productivity and they begin to call that metric “productivity” and they begin to believe that the metric is the thing itself.
Currently the main national aggregate used in productivity is GROSS DOMESTIC PRODUCT. Gross Domestic Product has many items in it that are not elements of production. Rather they are elements of consumption.
Gross Domestic Product equals Government spending plus net Investment, plus net exports plus consumer spending.
or to shorten these items we say:
GDP= C+(net)I+G+ (X-M)
Well look what we have here. You see all of consumer spending and most (if not all) of government spending has to be seen as consumption. So why are we including these in a measure of productivity? Which ought to be all about production? The only reason that this metric “works” even a little bit is that REAL GDP will be boosted by productivity improvement insofar as this will lead to a lower price level for any given level of money-and-spending in the economy.
Now I would like to make a statement that ought to be emblazoned prominently somewhere in every economics faculty within the realm (if you cannot think of anywhere else the noticeboard will do just fine). You cannot have a single mathematical metric to define a CONCEPT.
YOU MUST NOT USE ONLY ONE METRIC TO DEFINE ONE CONCEPT.
To understand one valuable concept requires thinking beyond the reaches of a single ratio. Any attempt to follow the “fallacy of the one-best-metric” will have the faculty-entire mistaking the metric chosen for the concept, and neglecting the “REAL” concept as such.
Usually productivity is thought of as production per hour. So someone jives up a figure for average HOURS worked. Probably this would be done by surveys. Then you get the number of people multiplied by the average hours worked. And then you put that figure in the denominator and “real” GDP in the numerator. So you get “output” per hours worked. Well for starters GDP isn’t output, nor is it a good proxy thereof. GDP is far more close to a description of consumption.
Supposing I was to ask you “How would a government focused on increasing “the productivity metric” during their 3 year tenure act?
Pretty clear isn’t it? Since GDP is to a great degree a measure of consumption, and only a measure of production due to the price deflation effect ….. then the short-term government, focused on “productivity” (ie the productivity metric) …. will:
1. SELL EVERYTHING. AND MOST PARTICULARLY THEY WILL SELL EVERYTHING NAILED DOWN.
2. BORROW AS MUCH AS POSSIBLE. BUT WORSE STILL THEY WILL SET POLICY FOR THE PRIVATE SECTOR TO BORROW MORE THAN OTHERWISE.
And here we have the connection to “productivity” (the focus on the productivity metric) as the goal ……….. AND DE-INDUSTRIALISATION.
The productivity metric or metrics are NOT the thing to aim at. The thing to aim at is the very object of economic science and that is WEALTH CREATION. If we aim at wealth creation, justice and fairness there is no possibility that success will not bring with it vast output per labor hour.
Thinking about it so many years after the fact its pretty amazing how seductively Krugman put forward this productivity case. Writing is a funny thing. The writing sometimes takes over the reality of the argument. And it was a fine piece of writing by the youthful statistical researcher. But its a very foolish policy goal to follow.
What Australians ought to do is own more and be in less debt every year. What the short-term pursuit of the productivity metric has lead to has been for us to own less and be in more debt every month. And the weak performance of the productivity metric simply reflects the long-term effects of owning less and less and owing more and more.
We have to hand it to Bob Brown. He was the first person in a long while to hire someone to show very clearly what we all really knew; That we were impoverishing ourselves by selling off the farm.
THE REALITY IS THAT WE ARE IN A CYCLE OF IMPOVERISHMENT. Thats the reality of it and we aren’t getting away from that without serious and wrenching changes to policy.