Category Archives: Growth Causes and Consequences

Michael Mandel and Dietrich Vollrath on Manufacturing Productivity

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Mandel writes,

Since 1994, multifactor productivity has declined in nine out of 18 domestic manufacturing industries. And if domestic manufacturing can’t become more efficient, it will have a tough time competing in the global economy and an even tougher time adding jobs.

Multifactor productivity sounds like something that is tangible and very important. But it is basically what is left over after you subtract from the value of output the measured value of all inputs, including capital. So, if you under-estimate the value of some input, you over-estimate multifactor productivity, and conversely.

Mandel goes on to write

there’s a simple way that domestic factories can increase their productivity, expand their market share, and hire more workers. The answer (perhaps surprisingly) is to invest more in information technology.

Actually, if the value of new capital investment is properly measured, more investment will not increase multifactor productivity at all. Mandel may be correct that manufacturing is ripe for more investment in information technology. But basing his argument on multifactor productivity does not persuade me.

Speaking of the meaning of productivity measurements, Dietrich Vollrath has a nice rant (pointer from Mark Thoma). One of many excellent paragraphs:

If MFP is stagnant but the manufacturing sector has shed workers, then this means either value added in manufacturing has fallen (it has not) or the other inputs like capital have risen (they must have). This indicates that labor productivity, value-added divided by number of workers only, must be rising.

Insight, Proof, and Knowledge

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A commenter writes,

So in your opinion intuition is sufficient. As long as we can tell an intuitive story about something, that is as good as proving it?

I think that “proof” is too high a standard to use in economics. If our knowledge is limited to what we can prove, then we do not know anything. I think that we have frameworks of interpretation which give us insights. This is knowledge, even if it is not as definitive or reliable as knowledge in physics or chemistry.

As an example, take factor-price equalization. The insight is that the easier it is to trade across countries, the more that factor prices will tend to converge. I think that this is an important insight. It is one of what I call the Four Forces driving social and economic trends in recent decades. (The other three are assortative mating, the shift away from manufacturing toward health care and education, and the Internet.)

Paul Samuelson proved a “factor-price equalization theorem” for a special case of two factors, two goods and two countries. However, it is very difficult, if not impossible, to extend that theorem to make it realistic, including the fact that not all industries are subject to diminishing returns. In my view, Samuelson’s theorem per se offers no insight, because it is so narrow in scope. The unprovable broader insight is what is useful.

Incidentally, I also think that factor-price equalization is hard to prove statistically. Too many other things are happening at once to be able to say definitively that factor-price equalization is having an effect, say, on unskilled workers’ wages in the U.S. and China. I believe that it is having an effect, and there are studies that support my view, but it is not provable.

In order to prove something mathematically, you have to make narrow assumptions. In physics or engineering, this often works out well. When you roll a ball down an inclined plane, ignoring friction causes only a small error in the calculation.

In economics, the factors that you leave out in order to build a mathematical model tend to be more important. As a result, the requirement to express ideas in the form of mathematical models is harmful in two ways. We waste time proving false theorems and we miss out on useful insights.

The narrow assumptions lead you to prove something which is false in the real world.. For example, the central insight of the “market for lemons” proof is that a used car market cannot work. However, once we expand the assumptions to allow for warranties, dealer reputations, mechanics’ inspections, and so on, the original theorem does not hold.

Meanwhile, there are insights that are missed because they cannot be represented in an elegant mathematical way. A lot of the insights that I offer in Specialization and Trade fall in that category.

Our goal should be to acquire knowledge. The demand for proof hurts rather than helps with that process.

Alex vs. Tyler on Automation

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A ten-minute video. A bit of talking past one another. In short, Alex says that smart machines are making us rich, and Tyler says that only some of us are getting rich.

My favorite line was Tyler’s, talking about the challenges of adapting to technological change. He pointed out that even though the transition from agriculture to manufacturing was largely completed more than 50 years ago, to this days we still have lots of farm subsidies. I would add that by contemporary standards, the agriculture-to-manufacturing transition was gradual. We might expect even more dislocation from the transition to the New Commanding Heights.

The Folk Dance Test

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Tyler Cowen asks Should we stop worrying about this election so much? Separately, he speculates that Suburbs will Soar on the Wings of Tech.

I have my own test for How We Will Be Affected by X. That is, how will X affect my folk dancing?

The Internet definitely affected my folk dancing. The dances have gotten harder, because dance session leaders know that you can watch YouTube videos to figure out steps that you miss at the sessions. So even though at first I could barely followthis dance watching the teacher, by now I can do it without copying someone (I still sometimes mess up).

Also, good dances spread much faster. And when I travel, I can easily look up dance sessions, and using GPS makes it easier to get to those sessions.

I don’t think that the outcome of election will affect my folk dancing, so I don’t think that the election is so important.

I also don’t think that self-driving cars or drones will affect my folk dancing. They will not make dance sessions less plentiful in the Maryland suburbs or more plentiful in other parts of the country.

My deeper point is that the reasons people have for choosing where they live these days have a large idiosyncratic component. Therefore, I would be reluctant to make sweeping generalizations about how self-driving cars will affect location choice.

And as much as people are emotionally worked up over the election, its effect on your day-to-day life may not be all that great. I’m much more worried about my favorite dancers leaving the area (for idiosyncratic reasons) than I am about who will win the election.

Thete Watch

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Mark Aguiar, Mark Bils, Kerwin Charles, and Erik Hurst write,

we explore the decline in work hours for young men since 2000. Using standard parameterizations, we show that the decline in hours for LEYM (both in absolutely and relative to all prime-age men) is inconsistent with a stable labor supply curve. We propose a new methodology that exploits detailed micro data on how individuals allocate their time away from work to infer how changes in leisure technology have altered labor supply. We find that changes in leisure technology for computer goods broadly, and video games in particular, shifted in the labor supply curve for LEYM by an amount between 10 and 25 percent of the observed decline in market work hours for prime age men and between 20 and 45 percent of the decline in market work hours for LEYM.

LEYM is less educated young men. Pointer from Tyler Cowen.

What I’m Reading

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1. Philosopher John R. Searle’s The Making of the Social World, published in 2010. One excerpt:

How do governments, so to speak, get away with it? That is, how does the government manage to be accepted as a system of status functions superior to other status functions?. . .governmental power is a system of status functions and thus rests on collective recognition or acceptance, but the collective recognition or acceptance, though typically not itself based on violence, can continue to function only if there is a permanent threat of violence

…All political power is a matter of status functions, and for that reason all political power is deontic power.

For some reason, my brain keeps wanting to read “deontic” as “demonic.”

Anyway, I think of a status function as a social convention that assigns people or objects certain properties. I think of a deontic power as a right or obligation.

So, imagine a busy intersection. We could put up a traffic light and by general consent give it a status function to regulate traffic flow. Or we could let an individual direct traffic. For the status function to work, we need to be willing to follow the social convention of obeying the signals, either from the stoplight or from the individual.

Next, suppose that we recognize that the individual wears a uniform and a badge, and we recognize that the individual is permitted to impose fines on people who do not obey. These are stronger deontic powers, and they will deter drivers from trying to cheat the system. We can think of that move as a metaphor for government by consent (although the consent may not be explicit or universal).

As of this writing, I have yet to finish the book. By the time this post goes up, I may have finished a first read, but the book will require some re-reading. It seems to me that Searle is likely to turn out to be on my side of a disagreement with Michael Huemer.

2. Ryan Avent’s new book (not yet out) The Wealth of Humans. I attended a discussion of the book the other night. As the conversation jumped around, I found myself frequently thinking, “Show me the model.” That is out of character for me, because I have spent a lot of the last few years criticizing economists’ use of formal models. But as people tried to speculate about capital accumulation, wealth distribution, and productivity differentials, I found that I could not follow what was being said. I needed to think in terms of supply and demand curves crossing, income adding up to output, and output equal to labor input times output-per-worker. It was hard to get that in a purely verbal discussion, particularly when people were speaking extemporaneously.

An Abundance of Workers?

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I received an advance electronic copy of Ryan Avent’s forthcoming The Wealth of Humans. I have not read very far, but he seems to say that a major social problem these days is an over-abundance of workers. However, consider this WSJ blog post.

traits that are hard to define, but ever-present among good employees: professionalism, determination and adaptability and the ability to communicate, work together and take criticism. Or even just show up on time and follow a dress code.

The claim as that these soft skills are in short supply.

I am going to be old-school and say that whenever you see a “shortage” or an “over-abundance” you should ask what is wrong with the price mechanism. If you are having trouble finding workers with the traits that you want, then you are not paying enough for those traits.

Back to Avent. If there appears to be an over-abundance of workers, then what is going wrong? Maybe those individuals have, in Tyler Cowen’s evocative phrase, Zero Marginal Product. Also, it could be that the required marginal product is high because of minimum wages and labor market regulation. Or it could be that labor supply is reduced because of government programs that subsidize non-work and tax work.

Avent wants to assign a large causal role to capital equipment, especially smarter capital equipment. I think that is only one of the four forces, the others being: a shift toward the New Commanding Heights (education and health care) where soft skills matter more; factor-price equalization, meaning that foreign workers now compete more with domestic workers; and assortive mating, which breeds greater inequality.

When journalists and academics warn of a future with a job shortage, the cynic in me is inclined to say, “You mean a shortage of jobs that journalists and academics think of as appropriate for themselves.” Keep in mind that many colleges attempt to indoctrinate students that business is unfulfilling and profit is evil. But profit-seeking businesses are motivated to find uses for otherwise-idle productive resources. The fate of the next generation of Ryan Avents is not to be unemployable. Rather, some of them may end up in business jobs that journalists and academics might have trouble picturing themselves doing.

Cities that Attract College Graduates

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Rebecca Diamond writes,

the additional benefits college graduates gained from having access to a variety of desirable local amenities actually outweighs the negative effects of high housing costs. The 50 percent increase in the wage gap between high school and college graduates from 1980 to 2000 actually understates the true increases in economic inequality due to changes in wages, housing costs, and local amenities by at least 30%.

Pointer from Mark Thoma.

I think that the story she tells is pretty close to my model of gentrification.

1. Some high-skill enterprises locate in a downtown area. Think of the New Commanding Heights industries of health care and education.

2. This attracts well-educated professionals.

3. This attracts amenities that well-educated professionals enjoy. Bicycle lanes. Sushi restaurants. Opportunities to meet other well-educated professionals.

4. Rents and house prices go up.

5. Former residents are driven away by declines in low-skill jobs, higher housing costs, and lower propensity to enjoy bike lanes, sushi, and opportunities to meet well-educated professionals.

Gains from the Internet not in GDP

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Shane Greenstein writes,

what is the contribution of more timely information to economic productivity? Seems like many gains are not measured. If they are, where do those gains show up in national statistics? In which industries?

In fact, I can think of one way in which more timely information reduces GDP. If firms can monitor sales more carefully in real time, then they will hold less inventory. Inventory investment is a component of GDP.

Read the entire post. It lists many benefits of the Internet that do not necessarily make it into measured GDP.

Wisdom from Hal Varian

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He writes,

Self-driving cars are rapidly becoming a reality. In fact, we would have self-driving cars now if it weren’t for the randomness introduced by human drivers and pedestrians. One solution to this problem would be restricted lanes for autonomous vehicles only. Self-driving cars can communicate among themselves and coordinate in ways that human drivers are (alas) unable to. Autonomous vehicles don’t get tired, they don’t get inebriated, and they don’t get distracted. These features of self-driving cars will save millions of lives in the coming years.

It is a wide-ranging essay. Here is more:

Back in 2000, about 80 billion photos were taken worldwide—a good estimate since only three companies produced film then. In 2015, it appears that more than 1.5 trillion photos were taken worldwide, roughly 20 times as many. At the same time the volume exploded, the cost of photos fell from about 50 cents each for film and developing to essentially zero.

So over 15 years the price fell to zero and output went up 20 times. Surely that is a huge increase in productivity. Unfortunately, most of this productivity increase doesn’t show up in GDP, since the measured figures depend on the sales of film, cameras, and developing services, which are only a small part of photography these days.

In fact, when digital cameras were incorporated into smartphones, GDP decreased, camera sales fell, and smartphone prices continued to decline. Ideally, quality adjustments would be used to measure the additional capabilities of mobile phones. But figuring out the best way to do this and actually incorporating these changes into national income accounts is a challenge.