Monday, October 10, 2016

Growth Potential: A General Equilibrium "Constraint" Example

Does increased educational capacity still contribute to long term growth? It depends, and as Ryan Avent emphasized in "The Wealth of Humans", there's still room for emerging markets to benefit from education investments in terms of added long term growth. In particular, the knowledge intensive nature of high skill work provides the "social-capital infrastructure" which emerging markets need. Given fortuitous circumstance, social-capital infrastructure can move emerging markets toward greater economic complexity and higher income levels.

However, Avent also notes how increased educational attainment for developed nations, now faces somewhat diminished returns. Interestingly, some of his explanations in this regard, illustrate the relationship between primary and secondary market capacity, in terms of long term growth potential. Here's Avent:
Where increased education alleviates fundamental growth bottlenecks - by increasing the numbers of knowledge-frontier-expanding engineers and scientists, for instance - it can increase growth and the size of the economic pie to be distributed. If other economic factors are the bottleneck, however, then education mostly boosts the fortunes of some groups by reducing the relative scarcity of others: nurses who train to become doctors earn more, but they also reduce the bargaining power of the existing pool of doctors by increasing their numbers. And if increased education raises effective available labour by enough - if it mostly adds to the abundance of effective labour available in the world economy - then it might simply reduce the bargaining power of labour as a whole relative to other factors in the economy, such as land or social capital.
Regular readers may realize that I would attribute the bargaining power of labour per Avent's "other factors", to existing growth capacity in the form of first mover or primary market formation. While the knowledge and time based product of secondary market means can be most essential, the problem is that - as secondary markets - they are not positioned to move the marketplace forward on real growth terms.

Consequently, the resources that time based services require just as a steady state, can keep the dimensions of the existing (general equilibrium) pie mostly in place. One reason the physician's pay is also subject to these constraints - much as any teacher or day care worker - is the fact it depends either on existing redistribution or discretionary income through the same economic mechanism that other secondary markets face, in relation to the existing scope of primary market formation.

Knowledge use systems could increase the trajectory for long term growth, because the matched time for knowledge use would serve as a new point of wealth formation. In other words, since this organizational capacity would move growth ahead (or outward) with no additional debt structure, it also expands the pie, via newly generated and accounted for product at the outset. Time based healthcare services as primary market capacity, wouldn't face the same constraints which impact today's existing healthcare supply - given its dependence on the growth level of already existing equilibrium.

Ryan Avent further elaborates regarding healthcare's dependent status on other growth factors:
Doubling the number of doctors working in America - either by increasing the educational attainment of native workers or by accepting immigrant workers - would not generate an appreciable increase in American economic growth. It would make doctors more abundant relative to the labour force as a whole: doctor bargaining power would fall, and doctor incomes would rise more slowly - or perhaps would fall a bit. The doctor doubling would therefore be good for the new doctors (whose salaries would rise), for American consumers (who would enjoy a one-off rise in real incomes thanks to the drop in the cost of medical services) and for the managers and owners of healthcare firms (who would be able to reduce their labour bill and boost profits). Those benefits would derive, for the most part, from the reduction in bargaining power and pay of the original doctors.
When I think about Avent's framing, it actually becomes a bit easier to understand today's supply side restrictions in healthcare, even though I have often railed against them. Whereas many forms of product contribute to overall growth, time based healthcare product - as currently structured - instead acts as a drag on growth via further debt formation. Any increased supply on secondary market terms would further exacerbate this process, by diluting the available amount of redistribution and discretionary income from today's existing equilibrium. Perhaps physicians could have more incentive to prepare future students for healthcare as a primary market structure, than I'd previously realized.

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