Thursday, May 25, 2017

Why is Input/Output Measure So Important?

In my last post, I briefly explained how - alongside time arbitrage (a different form of productivity quantification) - the Solow residual could be further accounted for, as two distinct conceptual relationships for determinate and indeterminate product. Even though it's not possible to accurately portray output for indeterminate time based product, only remember how its total wealth capacity reflects determinate product aggregates. If economies are to grow, more determinate product is needed, to offset the growing uncertainties of indeterminate product formation.

To this end, I have suggested time arbitrage as determinate product service formation, and as a direct wealth source to help stabilize the output of indeterminate time based services. Doing so becomes all the more important, as governments become less able to secure healthcare for a growing percentage of their populations. A new form of productivity measure, could help to quantify time value in relation to itself, as a complete (decentralized) resource aggregate.

Normally, money provides complete coordination patterns for other forms of resources, but today's nominal income aggregates only partially fulfill this function for time value - in spite of very real time scarcities by which we fulfill our obligations. Skills sets, thus far, have remained isolated and tapped in limited institutional settings. While this isolation is understandable, the growing efficiency of tradable sector activity, means that too much potential time value has been externalized and left on the economic sidelines.

What makes the Solow residual so important, for the continuation of economic progress? Determinate product, which presently consists mostly of tradable sector output, shows when output gains move ahead of the total investments required to generate new product. This is progress in a nutshell, in that it makes room for more producers, more consumers, and a larger pie.

Part of the present day confusion, revolves around the fact that even though tradable sector activity (due to increased output) translates into wage increases, the "more output for less labour hours" approach, does not necessarily work the same way for other sectors. High skill levels may mean more human capital input for less human capital output, when the desired output is time based product. For indeterminate time based services, expecting substantial compensation can translate into claims on already existing wealth capacity, which diminishes the pie in terms of monetary representation for output, and personal participation.

Hence progress is not a certainty, for the marketplace of indeterminate time based services product. In times of economic stagnation, this circumstance can make the widespread use of knowledge, increasingly fragile. What's more: Institutional time reductions to reduce input in relation to output for time based product, are not desirable in every instance. In what I have termed asymmetric work, the input for high skill time based product involves extensive human capital investment, which is externalized in separate institutions. Yet the resulting high wage compensation, moves the input to output equation even further in the wrong direction. Consequently, human capital as investment for indeterminate time based product, cannot help but detract from total factor productivity gains. It's useful to be able to pay for valuable skills as one desires, but there are trade-offs to be had, when the educational costs for doing so cannot be aligned within the the same institutional settings which generate output.

Nevertheless, use of the Solow residual can still assist indeterminate time based services product, insofar as meeting the budget requirements of non tradable sector secondary markets. But there's at least two problems with this approach. When does automation conflict with, or even negate, an already extensive personal obligation to fulfill the required human capital investment? Also: When do institutional reductions of time value, result in the loss of personal interaction which matters most for provider and recipient alike?

By capturing input and output in the same institutional setting, time arbitrage would register ongoing productivity gains for time increments as a whole, with time aggregates as a relative constant for quality service gains. This determinate time arbitrage measure, could help to maintain the delicate balance which exists between today's indeterminate time based services, alongside the wealth of tradable sector activity. In particular, the balancing act of knowledge use has become more difficult for larger nations, which tend to experience too great a divergence in income levels to successfully manage social safety nets.

It's important to make certain that secondary market formation, does not eventually drag down the stability of primary market wealth. However, there is an important cultural context. Following the Solow residual, only means less employment is needed for the production of tangible goods. This is why it is vitally important, to define knowledge use as part of a tangible and measurable time based product, for broader societal participation. Yet today, it is believed that only a certain, small percentage of the population is intelligent enough to utilize knowledge on economic terms. That's a perception that will have to be overcome, in order to successfully move forward. Otherwise, there are few means by which to bridge the growing divide between loss and opportunity.

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