Tuesday, May 2, 2017

Can Productivity Address the "Race Against the Machine"?

Recently, Focus Economics asked a group of 23 economists, "Why is productivity so low?" From the opening paragraph of their post:
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...It is why a worker today makes much more than a century ago, because each hour of work produces more output of goods and services."
Let's take a look at this last sentence, which is true, but in a partial sense. It's complicated, because human capital has become a more important component over time, of final product output. Even though this is only true for certain product categories, the process still affects the resource redistribution for other marketplace factors. Human capital as a component of both input and output, has not been seriously considered. Sometimes people realize income gains because of their level of human capital investment, which is quite different from the income relationships which are associated with institutional output.

Consequently, time based product which includes human investment factors, skews the hours worked per output relationship at an aggregate level. In particular, high skill time based product, generates output on a different set of terms from what is associated with goods manufacture. Should we be designating the differences between time based product, versus the product where human input is not tied to finished product? After all, doing so, could ultimately help address what is sometimes termed the "race against the machine".

Final product which exists separately from time value, still adheres to the productivity gains of the Solow Residual. Here, reductions in human input at an institutional level, continues to ensure greater output over time, even if at a slower pace than before. Many tradable sector firms should be able to continue sharing output gains (and associated benefits) with core employees.

On the other hand, institutions where product output is more closely associated with time value, increasingly struggle to provide either monetary or other benefits to all employees. Unfortunately, much of today's time based product is not capable of providing what populations have come to expect as an optimal standard of living. Productivity needs to be approached differently for time based product, as input costs (quality) are beginning to short circuit output results.

Presently, without a separate designation for time based product, a growing response to labour costs is the substitution of expensive time value via technology. It's an understandable approach. Nevertheless, when time based product is at stake, both input and output potential are affected. When people try to acquire more skills to access today's knowledge use template, the result is the race against the machine. And where only the terms of the Solow residual apply (for knowledge production processes), it's a race that can't be won.

We need to formally acknowledge that human capital is an integral component of both input and output, not just input. Otherwise, too much experiential product value might be summarily dismissed, given the budgetary demands of the present. A formal designation of time based product as a separate and distinguishable category in its own right, could eventually help to overcome the race against the machine.

The time based product (versus non time based product) difference particularly matters, as it becomes more difficult to match labour potential across multiple income levels. An important challenge for the future, is to determine how to generate time based product via sustainable terms, especially as nations struggle to support the knowledge benefits of time based product through already stretched budgets.

Addressing the race again the machine, requires seeking additional value via places and means which until now have been summarily dismissed. The potential economic value of people and places can be completely forgotten, should they become rationalized as "no longer efficient" and fall away from economic participation. Yet this approach is resulting in the lost input of individuals, and lost output in the marketplace. Miles Kimball, one of the economists in the above Focus Economics link, highlights the need to look beyond the "normal" places of improvement to generate better productivity gains. He emphasized these same points in a recent talk, as well.

As societies came to qualify the terms of economic engagement, some institutions responded by adding value in terms of ever increasing input costs for human capital. These additional investment commitments, translate into input costs which are beginning short circuit output results. Indeed, the technological response to these excessive investment costs, affects the value of education as economic access. When machines begin to substitute for humans, it's time to consider alternate investment means, so that input costs can eventually coordinate more readily, with time based output.

In all of this, ongoing reduction of time input (in relation to output) makes the most sense when time value is not integral to the actual product a consumer desires. Whereas assumptions of "efficiency" through removal of people and places which "don't matter", needs to be rethought. Instead of being so quick to declare something less than optimal, why not look more closer at the myriad of infrastructure factors which inhibit participation and resource potential. Time based product needs a more carefully considered approach, so that goods and services might be restored in places where they have been lost. Input potential matters for output potential, and human capital deserves to be a better understood part of that equation.

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