Productivity polarisation in our ‘Modern Times’
About a month ago, Citi’s Disruptive Innovations report revived the debate over the cause of slowing productivity in Western economies.
One insight related to how modern technology encourages smarter distribution rather than outright production growth. You don’t need to produce as many spoons because, well, in the digital age less is more and everyone drinks Soylent. You probably don’t need a big house either, because, hey virtual reality.
But if true, why does it not feel like quality of life is improving in many corners of the developed world? Perhaps there is something more to it.
Last week, Citi’s chief economist Willem Buiter and team revisited the productivity slowdown topic and interestingly enough found themselves swaying towards a reason. Yes, Robert Gordon’s “all the low hanging fruit are gone” explanation still might be a factor, but it’s also the case that western economies may be suffering from man-made constraints.
These include: excessive or ill-directed legislation and regulation, distortive tax incentives, insufficient spending on education, policy uncertainty, lack of investment (including in infrastructure), lack of access to finance and — most notably of all — lack of competition.
Then there’s the measurement problem.
Conventionally, productivity is the measure most tied to an improvement in living standards. Yet, that’s only if and when other things are equal. And that’s the problem, says Buiter & co, other things may not be equal:
Then there’s the under-measurement of quality improvements. Buiter and team note that national accounts probably understate quality improvements in a number of areas because the methodologies for measuring and evaluating the quality improvements more adequately are underdeveloped, and that their improvement and effective application are costly. This in particular applies to software improvements.
In that regard we measure the price effect but not necessarily the associated quality improvement. The price effects, we can see, have been significant:
Yet, as Citi reminds us, if these innovations are so significant, why are we not seeing them in the data?
That’s a discrete nod to Robert Solow’s 1987 “productivity paradox” point that “you can see the computer age everywhere but in the productivity statistics”.
Although, curiously enough, the answer to that question might lie in biology. It may be us humans who are too set in our ways to allow for the necessary social reorganisation to allow these technologies to flourish. That includes not having the knowledge or cognitive understanding of how to deploy these technologies, and incomplete social infrastructure to ensure the necessary learning does take place. It takes generations to change human habits and technology is moving much more quickly than our social norms and expectations can adjust to. Thus some of the productivity benefits of some of the recent innovations are yet to be reaped.
That’s the positive interpretation. The not so positive interpretation is that the low productivity measures we are collecting reflect weak demand.
The other not so positive interpretation is that it reflects a major bifurcation in the economy between technologically savvy and productive firms and “laggard” firms where growth is slowing. This growing polarisation, says Citi, may be down to the following factors (our emphasis):
If that’s the case, Citi says there may indeed be some feedback between weak aggregate demand and growing polarisation of productivity across workers and firms. And this inevitably leads to larger inequalities in income and wealth.
So what’s to be done?
According to Citi a list of potentially desirable policy measures includes:
This is a fine plan providing… we don’t allow some of the dehumanising practices associated with the hyper-competitive technological firms, which care little for worker rights and protections, to disconnect us from our core human values during the great transition.
That some people want to merge with technology, eat slop for lunch, limit their social footprint with virtual reality and work ever more intensively is their lifestyle choice. It shouldn’t, however, become a standard for the rest of us. Civil protections for things like hours of rest, quality food, personal time and social interaction must be defended. We shouldn’t all be expected to become automatons like Rob Rhinehart.
On which note..
One insight related to how modern technology encourages smarter distribution rather than outright production growth. You don’t need to produce as many spoons because, well, in the digital age less is more and everyone drinks Soylent. You probably don’t need a big house either, because, hey virtual reality.
But if true, why does it not feel like quality of life is improving in many corners of the developed world? Perhaps there is something more to it.
Last week, Citi’s chief economist Willem Buiter and team revisited the productivity slowdown topic and interestingly enough found themselves swaying towards a reason. Yes, Robert Gordon’s “all the low hanging fruit are gone” explanation still might be a factor, but it’s also the case that western economies may be suffering from man-made constraints.
These include: excessive or ill-directed legislation and regulation, distortive tax incentives, insufficient spending on education, policy uncertainty, lack of investment (including in infrastructure), lack of access to finance and — most notably of all — lack of competition.
Then there’s the measurement problem.
Conventionally, productivity is the measure most tied to an improvement in living standards. Yet, that’s only if and when other things are equal. And that’s the problem, says Buiter & co, other things may not be equal:
In particular, GDP and productivity are not measures of the value of the stock of factors from which living standards are derived (let’s call this stock ‘capital, broadly defined’), the change in this stock (i.e. the net increases in broadly defined capital), or the actual flow of (subjective) well-being, utility, or ‘welfare.’ For instance, neither GDP nor productivity reflects destruction of any type, to things or to people (due e.g. pollution and other environmental degradation, natural disasters, war damage, pandemics), unless they affect current production.The discrepancy between GDP statistics and living standards, meanwhile, may also be increasing in a world where many products have very low (sometimes zero) marginal cost, says the team. In those cases, the consumer surplus — the value consumers capture above and beyond what they need to pay for the product — is often very high relative to the price paid, and it is only the latter that is counted in GDP.
Then there’s the under-measurement of quality improvements. Buiter and team note that national accounts probably understate quality improvements in a number of areas because the methodologies for measuring and evaluating the quality improvements more adequately are underdeveloped, and that their improvement and effective application are costly. This in particular applies to software improvements.
In that regard we measure the price effect but not necessarily the associated quality improvement. The price effects, we can see, have been significant:
Yet, as Citi reminds us, if these innovations are so significant, why are we not seeing them in the data?
That’s a discrete nod to Robert Solow’s 1987 “productivity paradox” point that “you can see the computer age everywhere but in the productivity statistics”.
Although, curiously enough, the answer to that question might lie in biology. It may be us humans who are too set in our ways to allow for the necessary social reorganisation to allow these technologies to flourish. That includes not having the knowledge or cognitive understanding of how to deploy these technologies, and incomplete social infrastructure to ensure the necessary learning does take place. It takes generations to change human habits and technology is moving much more quickly than our social norms and expectations can adjust to. Thus some of the productivity benefits of some of the recent innovations are yet to be reaped.
That’s the positive interpretation. The not so positive interpretation is that the low productivity measures we are collecting reflect weak demand.
The other not so positive interpretation is that it reflects a major bifurcation in the economy between technologically savvy and productive firms and “laggard” firms where growth is slowing. This growing polarisation, says Citi, may be down to the following factors (our emphasis):
So, could it be that the laggard firms represent an antidote to the forces of unprecedented digital and dehumanised competition, which are failing to create high quality substitute jobs? Could this time be different, in that where previous manifestations of “robot angst” created new and usually better jobs and sectors to replace those lost, this time there is no automatism for better job creation once existing jobs become redundant?
- A growing number of workers lack the skills needed to take advantage of the technological changes.
- A growing number of firms (especially start-ups without a credit record) or workers (especially younger ones without a credit record or collateralisable assets) lack access to credit to invest in the adaptation/retraining needed to take advantage of innovations/technological change. Some workers may also be forced to accept a job they can find easily as they do not have the resources to search for a better (more productive and presumably higher-paid) job.
- Extraordinary easy monetary policy dulls creative destruction by keeping lowproductivity firms alive (and therefore making it less attractive for new firms to enter or more productive firms to expand). This has been aggravated by lender forbearance (extend-and-pretend/ delay-and-pray) behaviour by banks vis-à-vis likely insolvent customers and by regulatory forbearance of likely insolvent banks by regulators.
- More and more industries may exhibit a ‘winner takes all’ pattern, only tenuously related to effort and skill.
- Competition between firms (or workers) is low: Higher competition would presumably lead underperforming firms and workers to ‘raise their game or go out of business/get fired. There are significant barriers to the reallocation of factors of production (including to labour mobility, but also inefficient bankruptcy laws).
- The nature of recent innovation may also have played a part, i.e. recent innovation may well have become more disruptive. This could be because recent innovations are less complementary (and more substitutive) to widely available skills than in the past and could therefore potentially replace and destroy a large(r) number of jobs.
If that’s the case, Citi says there may indeed be some feedback between weak aggregate demand and growing polarisation of productivity across workers and firms. And this inevitably leads to larger inequalities in income and wealth.
So what’s to be done?
According to Citi a list of potentially desirable policy measures includes:
a) improve and adapt education and training to better align workers’ skills with the demands of firms and technologies,Note with particular attention that last policy recommendation: a basic income for one and all to help society adjust to the new hyper technological environment, in a way that encourages competition and productivity in laggard firms, and dilutes the power of the winner-takes-all corporates.
b) reduce barriers to reallocating resources, including by reducing barriers to labour mobility and simplifying bankruptcy procedures,
c) increase openness to trade and FDI to facilitate knowledge transfers,
d) increase support for entrepreneurship,
e) improve access to credit for restructuring and retraining, and
f) use the tax-transfer mechanism (e.g. through a guaranteed minimum income for all, or an ambitious negative income tax, public funding of health care and long-term care etc.) to support those left behind by technological advances.
This is a fine plan providing… we don’t allow some of the dehumanising practices associated with the hyper-competitive technological firms, which care little for worker rights and protections, to disconnect us from our core human values during the great transition.
That some people want to merge with technology, eat slop for lunch, limit their social footprint with virtual reality and work ever more intensively is their lifestyle choice. It shouldn’t, however, become a standard for the rest of us. Civil protections for things like hours of rest, quality food, personal time and social interaction must be defended. We shouldn’t all be expected to become automatons like Rob Rhinehart.
On which note..
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