Monday, June 26, 2017

Notes on Human Capital in Relation to Productivity

Why have we been slow to recognize the relation of excessive inputs for human capital, for the total output of time based product? Possibly one reason, are expectations for rising income over time, as automatic with aggregate output gains, regardless of sector. To this end, purveyors of time based product have additional rationale to increase aggregate inputs (human capital investment requirements) in relation to total output, as a quality factor.

Rising wages as automatically correlated with rising productivity, are a major point of contention, where productivity mysteries are concerned. Since productivity benefited from centuries of expanding tradable sector output, it's an understandable societal expectation. But ever more demands on human capital input in relation to output (for time based product), greatly affects total factor productivity. There's also the Baumol effect, which lends further weight to the expectations of human capital input, prior to output.

Also interesting, are the cultural factors involved. The difficult impasse of today's healthcare as a contributor to poor productivity, is due in part to society's acceptance of low final product output, in relation to the human capital input that has been required. Many years of formal education take place, before students can pass the torch of knowledge to others, either through understanding or knowledge application. Even though such requirements detract from total factor productivity, these organizational patterns are backed by such strong cultural expectations, that it is difficult to contextualize them as lost output or marketplace capacity.

Indeed, one normally associates cultural factors with positive economic gains, even though cultural expectations for human capital investment, stand in the way of long term growth and productivity! Fortunately, for a long time, tradable sector productivity was dominant to such an extent, it provided sufficient revenue that extensive cultural requirements for human capital weren't so problematic. In "Good Capitalism, Bad Capitalism and the Economics of Growth and Prosperity", the authors (including William Baumol) agree with the importance of culture for economic dynamism, while wondering if Hernando de Soto's emphasis on turning informal economic activity into formal activity, might have been oversold to some degree.

Yet as it turns out, Hernando de Soto has been proven right in downplaying culture's role as a positive contributor to economic dynamism. All the more so, since many individuals held reservations regarding his efforts to formalize capital. In all of this: Only remember that when human capital is held in check by excessive input in relation to total output for time based product, this gets reflected in the physical capital that receives a "green light" for aggregate representation. Not everyone wants the additional wealth valuation for general equilibrium settings, which is also expressed via monetary means.

Human capital investment in the form of education "inputs" (also noted in "Good Capitalism, Bad Capitalism") ultimately occurs in a total factor productivity context. At least one recent study has highlighted the problematic nature of total factor productivity since the Great Recession, alongside what I believe to be a consequent diminished labour force participation. Again, note the confusion of human capital as it relates to total factor productivity, in tradable/non tradable sector context, where Liberty Street Economics explains,
A major economic concern is the ongoing sluggishness in the growth of output per worker hours, generally called labor productivity. In an arithmetic sense, the growth of the economy can be accounted for by the increase in hours worked plus that of labor productivity.
However, standard productivity gains have accrued on behalf of employees, due to a centuries long process of output gains via tradable sector dominance. What has yet to be actively considered, is that non tradable sector time based product works differently, which is particularly important given its recent market dominance. Marketplace expansion takes place when time participation is allowed to expand through both inputs and outputs. Yet when wages automatically rise for time based product alongside tradable sector wages, equilibrium coordination for time based services gradually becomes reduced to higher income categories. Which then limits the total marketplace for time based product. The result? Limits to both labour force participation and total factor productivity (marketplace size), as mentioned (above) in "The Disappointing Recovery of Output after 2009".

Understandably, economists continue to view rising income - regardless of sector - as crucial to progress. However, this view of continuous progress was established long before anyone imagined a services dominant economy, in which total inputs (while externalized in the form of educational investment) might come to dominate actual output. Again, what matters in terms of time based product, is what the consumer can buy. If output could be incrementally gained alongside input, individuals with limited incomes would no longer remain locked out of vital, time based service markets.

Tradable sectors multiply output gains via resource capacity. Whereas the time based product of non tradable sectors, contributes to marketplace output and knowledge diffusion via replication and additive means. Or, one could express this as passing on the torch of knowledge for economic progress, two people and one shared interaction at a time. Continuous output, while it can certainly appear as though small and incremental, nonetheless adds up a lot more quickly than decades of human capital preparation, so often required before many have a chance to participate on economic terms for the first time.

In alternative equilibrium settings, the human capital investment that is part of time based product, would quickly become eligible as continuous output for final product. Individuals would have the chance to pass on the torch of knowledge, even as they are experiencing its benefits for the first time. The result? Not unlike the output gains in relation to input, which are a result of far more complicated versions, of technological progress.

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