Why Is Productivity Such A Confusing Concept?

Important though we know productivity to be for human progress, there are economists who nonetheless question the role of productivity in the present. Or - if they don't - some still discuss productivity in traditional terms which are reminiscent of the roles productivity played before services became such a vital part of the economies of the developed world. Whereas I share some of the same structural concerns that Austrians have, just the same I find myself limited in dialogue with many of those who are referred to as "Internet Austrians" because of this factor. I have two basic questions for them: "Have you created a valid mental space for services in the economy? Have you even considered the lack of innovation in construction as important?" Likewise, I worry that some on the left take services provision too much for granted, even as the services we need most continue to be outsourced to our families and ourselves in non economic ways.

Arnold Kling notes that he is becoming a "productivity measurement pessimist". He continues, "That is, I am becoming pessimistic that what we call 'productivity' is anything but a crude indicator of trends in living standards." His pessimism is certainly understandable, because the "waters" of production measurement have definitely been muddied to the point where some forms are nearly unrecognizable. However, it is my contention that we need to gain a better understanding of the ways productivity measurement functions, especially regarding the groups who utilize both knowledge and resources for economic gain. This is important not just for the future potential of nominal targeting, but also because of present and ongoing implications as to the stratification of income and the separation of classes.

In earlier posts I have touched on the inadvertent battle against globalization, on the part of local economies which have often been responsible for production confusions of the present. What are the sectors local economies turn to most, especially when they don't rely on manufacturing, mining or extraction activities? This argument from the Spring 2013 issue of the International Productivity Monitor (HT Conversable Economist)  gives us a clue, where the authors write:

Education, healthcare, infrastructure (construction) and government are large sectors of the economy that have lagged behind in productivity growth historically. This is not because of a lack of opportunities  for innovation and change but because of a lack of incentives for change and institutional rigidity.

First I'll consider the more obvious of these: education and healthcare. It's important to stress that innovation in these areas does not have to mean the negative results of further economic exclusion and income stratification that may immediately come to mind in such arguments. What I'm concerned about is avoiding eventual default settings in this regard, where doing nothing does lead to less access and more extremities in long term economic outcomes. The problem for all of us is that everyone relies on education and health in their lifetimes, yet both structures were set up as exclusionary institutions whereby only some can expect to access them both in terms of use and participation. While such a services "production" setting may make sense for the institutions that profit from them, they set up imbalances that only grow over time, as governments struggle to include more individuals in knowledge use sets which are continually expanding.

The basic issue in this regard is that education and healthcare needs are the most representative of overall aggregate demand needs that any society has. However, aggregate need and participation in terms of time components is an anomaly for the residual component of time measurement in productivity. That sets up serious limits in access and definition for services, which can not be overcome as they are currently structured. Services can be set up as (integrated) self supporting structures at local levels, but people need clear rights to knowledge use before such a proposition is a true possibility. This is why I also advocate for the right to heal, because without such knowledge use rights and delineations for skills use potential, not only will people continue to lose access to health care over time, but knowledge use limitations in healthcare  also set up monetary devaluations in all other areas of knowledge over time. That means healthcare participation has the potential to overcome equally important and vital aspects of our educational lives - an ongoing process which has already been discussed extensively online.

There is much explaining to be done regarding the above paragraph but I need to move forward in this post! One aspect of this line of thought is especially important in the measurement of per capita individual participation, through nominal targeting. Just as Scott Sumner stresses that it is important not to reason from a price change, Marcus Nunes noted in a recent post: "Don't infer from a GDP component change". Why? Because when we consider monetary stability from the standpoint of per capita measures by participating individuals, prices and markets adjust to how the individual shapes the markets themselves through one's participation in them. George Selgin has considered the marketplace in a similar fashion, and his work with the productivity norm in a sense also intended to maximize economic participation to the fullest degree possible, by making certain that productivity measures are understood. When his PDF, Less Than Zero was put online in 2009, lots of interesting discussion ensued, and just Google "productivity norm" to check some of it out, where you will find posts by Scott Sumner, Bill Woolsey and David Beckworth from that time frame, discussing the concept.

Here's why adhering to productivity norms matters: the greater transparency they would allow also means a potential for more vital and inclusive services structures. A first glance and one might think "austerity", but by no means is that necessary, especially given the fact that so many today want to find work in the areas they study, only to end up settling for work in other areas. Local skills arbitrage systems can change that, over time, to allow many areas of knowledge to once again  flourish. Through productivity norms, nominal targeting and greater transparency, special interests would not have the same opportunities they have now, to steal participation from those who want and need it most. Something needs to be said, however, if Germany is indeed following a productivity norm, as I read in one argument against such norms: Germany, you're doing it wrong if you are...yet don't recognize the vital role for services instead of just partitioning your jobs part time! One reason Germany doubtless "gets away" with part time jobs, however, is the fact that its real estate markets are not as highly valued as many nations.

This post has already gone on a bit long, but I at least want to touch on the inefficiencies of construction and how they contribute to the problems of our present. Here's a thought experiment: why are health dollars able to go so much further in countries which lack infrastructure? They are not forced to take place in buildings of such expense that much of a nation's health care budget has to account for the ongoing use of that limited space (In the U.S. patients get juggled around in hospitals a lot). That's not to say that we should save money by doing healthcare "in the open", by any means.

However, the fact that building codes never took advantage of ongoing innovations in technology means we are all paying the price, in terms of limited access. The fact that innovation was never allowed in the buildings we inhabit needlessly stratifies society, which in turn destroys trust over time. We need to remove the building regulations that prevent mass market building innovation. Anyone who is allowed ownership of small scale building components efficiently produced, is also an individual who can be trusted in society to a greater degree. These are "dots" that need to be connected and acted upon. We do not need the distortions of outdated building codes making our incomes appear depressed when they could buy so much more with innovative construction - perhaps that could be one of the greatest money illusions of all.