Wednesday, February 15, 2017

Thoughts on Knowledge and Equilibrium Dynamics

Some aspects of economic equilibrium are relatively straightforward, such as measurable output and the ability of central bankers to provide reasonable monetary representation such as NGDPLT. However, the dynamics of time based service output versus tradable sector output, are mysteries which - at least for this blogger - are begging to be solved. In particular: how do today's revenue dependent sectors affect nominal income potential? If all forms of product are solely represented by money (i.e. time value lacks an economic platform so as to exist in a sustainable relation to itself) the Solow Residual could ultimately mean widespread deflation, for total factor productivity.

In other words: regardless of perceived value of labour or lack thereof; money as the sole representation of economic value, means more labour will eventually be excluded - wherever politically possible - in the foreseeable future. Dietz Vollrath provided a simple explanation of this equilibrium problem, in a post from a year or so earlier. He noted a technology driven decision making process, in which present day output is being maintained at a relative constant. Whereas the input for said output is gradually being reduced.

But why? For centuries, the productivity enhancing effects of the Solow Residual, guaranteed the importance of both inputs and outputs. It was reasonable to expect reliable growth gains, alongside increased dispersal and application of knowledge. Presently, however, the incredible efficiency of tradable sector activity, finally means far less labor force participation is necessary - even should tradable sector output be increased. Consequently, with less tradable sector income available for redistribution, there's growing pressure to reduce employment in sectors which operate by an altogether different set of equilibrium dynamics.

Meanwhile, aggregate output is being maintained via increasingly unorthodox monetary policy means, as lower labor force participation translates into a smaller customer base for a more direct support of total output. And when less input is required for total output, wages decrease in relation to total output as well.

However, in the past, less employment in relation to total output, meant employee pay gains. Why not now? When manufacturing activity was a larger GDP component, tradable sector activity provided wage gains through vastly increased output of final product. Whereas the time based final product of non tradable sector activity - since it cannot multiply the actual product of an individual's time - lacks the additional output which would normally translate into wage gains. Here, should productivity gains occur, they may be relegated to instances in which time based product can be diverted, to replication of knowledge on the indirect terms of automation or technology.

When non tradable sector time based product is asymmetrically compensated, there's a reduction in total factor productivity since other resource options are consequently reduced. Even though asymmetrically compensated time based product provides flexibility for large systems service coordination, the process involves considerable trade offs. In what is necessarily a permissions only context, time based product cannot create sustainable patterns via internal means. Paradoxically, since this form of time based product remains dependent on broad equilibrium conditions, the only way to gain gain greater "efficiency" is by reducing the amount of available time, for a product whose primary appeal may be directly linked to the time involved.

Given the experiential reality of human nature, further reductions of time based product don't always provide optimal solutions. For instance: when and how do higher income levels seek to minimize their own consumption of time based product? When do they prefer the time of others to automation? The answers are important for the consumption potential of all income levels, given the need for greater time based productivity. Should it turn out that people of all incomes appreciate the value of time based product, perhaps this fact needs some formal economic recognition, before the slow but steady removal of labour in the marketplace becomes even more pronounced.

More to the point: time based services are also needed, because of the knowledge they disperse, and the societal networks they both coordinate and maintain. Consider a local example, regarding growing backlogs of stored evidence for previous unsolved homicide cases. In some instances, tales of partially destroyed backlogs reach the news media. Is this due to the growing futility of gaining the time based resources those backlogs suggest? Even though many observers find the destruction of criminal evidence outrageous and unbelievable, this act is only one of countless others, re the economic reversal which was expressed by John Cochrane in a recent post:
How can economies forget? How is it that once we learn to do something better, that knowledge can be lost and economies move backward? How can productivity decline? Viewing productivity as knowledge, it would seem almost impossible for it to do so - and real business cycle theory was often derided on that point. Yet middle ages Europeans lost the recipe for concrete, and time after time we have seen economies get worse. How can our own productivity be growing so slowly overall when so much we see around us is progressing so fast?
Ultimately, productivity also needs to be measured in time based units, so that the productivity of knowledge linked time can finally evolve. Until this occurs, the demands of time based product on other resource capacity could mean more political peril.

Knowledge use will always be valuable, via the asymmetric compensation that societies can sometimes provide for their best and brightest. Still, this process alone is scarce enough to disperse, protect and promote the use of knowledge in society. Manufacture is actually becoming too efficient, to reliable serve as additional revenue for asymmetric compensation. Before additional output and growth can be regained, time value also needs to serve as a direct unit or point of wealth creation.

We need more than just the highest skilled and lowest skilled individuals in the marketplace of the future. The time of the average skilled individual needs its own productivity calculation and application, for the growth and preservation of valuable knowledge to endure. So long as the Solow Residual is the only means by which to capture productivity gains (and money the only means to capture economic value), the likelihood of less input for a stable but lackluster aggregate output, is likely to continue - along with an implied loss of nominal income.

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