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Naive question from someone who never took economics courses: Could some of the "missing" productivity come from measuring productivity in units of money instea

Naive question from someone who never took economics courses: Could some of the "missing" productivity come from measuring productivity in units of money instead of physical units? Sectors with highly competitive markets can rapidly increase real-product output but then see most of the dollar-gains erased by competition. For example, you could look at solar PV where last year the industry set a record of 70 gigawatts-peak of modules installed. The price competition is so fierce that manufacturer revenue has barely budged over 2012, when only ~30 GWp were installed, and actually declined from 2015. If an economist looks at this sector do they see spectacular productivity improvements like I see (far more watts, at lower prices, with real physical improvements up and down the supply chain), or do they consider productivity "missing" because the physical improvements aren't leading to revenue/profit growth? And if it's the latter, does that imply that economists only recognize productivity improvements when markets are imperfect enough that improved production technique delivers more money instead of fiercer competition? Is there no such thing as growing productivity (that would be recognized by mainstream economists) in a deflationary environment?

oli5679 10y ago
Productivity is measured in terms of a price index (the cost of a 'basket' of goods). There are some obvious challenges with defining this basket in practice, and it is plausible to argue that inflation is persistently overestimated and so actual productivity growth is higher than the reported figure. However, this could apply equally to previous time-periods. Just as modern generations benefit from superior electronics products and mobile network speeds, previous generations benefited from massive increases in the variety and freshness of food, or the household appliances that reduced the time cost of household chores. It could be that productivity growing at a rate that is both faster than measured but slower than trend? https://www.bls.gov/cpi/ https://www.bls.gov/cpi/
edblarney 10y ago
"rapidly increase real-product output but then see most of the dollar-gains erased by competition." What you mean to say is 'can we measure consumer surpluses' instead of 'producer surpluses' - i.e. profits. Indirectly - yes - this may be the root of the problem. When products improve in quantity and quality, but profits go down - we generally say the 'economy is shrinking'. But the value to consumer has gone up. We don't measure 'consumer surplus' i.e. the value captured by a consumer when they buy something. Essentially - you pay $1 for a pen. How much would that pen cost so that you felt 'it was not worth it'. Well, you might pay $100 for a pen, if you need to write sometime in your life. You'd probably treat it very well, but you'd still need to buy it. Maybe $500 is the real value of a pen. In this case - there is $499 'consumer surplus' every time a pen is bought for $1. (Again, not quite fair as you might buy several $1 pens whereas you'd only buy one for $500 - but you get the picture). The GDP is just the cost of everything sold in the economy + government spending. Which is a really bad measure if you think about it :)
RA_Fisher 10y ago
Bingo. Measures of productivity got knocked down by massive inflation. Neither are measured directly, and they've negated each other. All we see is the shadow on the wall of the cave and presto "low inflation and low productivity." The Mises Institute is a great place to start studying this: https://www.mises.org/ https://www.mises.org/. I learned the mainstream economics way in undergrad. It's absurd and so full of hubris. The reason being that the most prestigious institution for economists is the Federal Reserve and they're able to keep almost everyone in line. That and public scientists don't actually have to be rigorous to be successful without the teacher of the market (though there are wonderful exceptions to be sure!). What I'm thinking about is, how can I exploit this? We don't know when productivity is going to take a break and yield run away inflation. Central Banks are starting to deflate, so you have to figure we'll start hearing about massive productivity gains. Where is the most misallocated? Certainly Sillicon Valley to some degree. Student loans seem to be the largest single misallocation, but the government backs them. So I suppose the banks will be the first to feel it and then the government. If the banks feel it then I guess it'll flow through commercial paper and real estate. It's just not clear to me how to hedge yet, but it's something I'm thinking about.
- spangry 10y ago
  This is simply incorrect. From a theoretical standpoint, productivity is a volumetric measure (Outputs / Inputs). From a more practical standpoint, even if output is measured in dollar denominated terms, the methodology used to measure TFP/MFP minimise the effects of inflation on the calculated residual, primarily by: - also measuring inputs in these terms (e.g. wages paid to labour, rents paid to capital) - adjusting prices with reference to a selected base-year so that movements in MFP/TFP are comparable across years And empirically, what has been historically observed is actually the opposite of what you suggest: productivity and inflation are inversely correlated (i.e. periods of high inflation have show low productivity and vice-versa). Here's a paper from some absurd and hubristic mainstream economists on this issue: https://www.rba.gov.au/publications/rdp/2003/pdf/rdp2003-10.pdf https://www.rba.gov.au/publications/rdp/2003/pdf/rdp2003-10.... It's actually even more complicated than just this. But I can't really be bothered to get in to it. But good luck with that Mises Institute stuff.
spangry 10y ago
To your first paragraph question, the answer is essentially 'no' (but it's complicated). From a theoretical standpoint, productivity is a volumetric measure (Outputs / Inputs). From a more practical standpoint, even if output is measured in dollar denominated terms, the methodology used to measure total/multi factor productivity (TFP/MFP) minimise the effects of inflation on the calculated residual, primarily by: - also measuring inputs in these terms (e.g. wages paid to labour, rents paid to capital) - adjusting prices with reference to a selected base-year so that movements in MFP/TFP are comparable across years And empirically, it has been historically observed that productivity and inflation are actaully inversely correlated (i.e. periods of high inflation have show low productivity and vice-versa). This is what you'd generally expect if MFP/TFP estimates are largely unaffected (directly) by inflation. The inverse correlation is likely due to the efficiency sapping effects of high inflatation (which imposes frictional costs and mispricing inefficiencies) at the 'whole of economy' level. And at the industry level, it's likely a mix of the latter and, in cases of exogenous output price increases (e.g. booming commidity prices), due to firms throwing more inputs at producing more marginal outputs (which is now a profitable thing to do due to higher sale prices). Here's a paper on this issue: https://www.rba.gov.au/publications/rdp/2003/pdf/rdp2003-10.pdf https://www.rba.gov.au/publications/rdp/2003/pdf/rdp2003-10....
austenallred 10y ago
No serious economist should be measuring things in "productivity" today without a number of asterisks behind it. This is pretty well accepted. As a rule of thumb, it's generally safe to ignore anything that uses old measures of "productivity." But that doesn't get clicks.
- philipkglass 10y ago
  What are old measures of productivity and what are new ones? I know it's dangerous to try to learn things from Wikipedia but I went there to read about Total Factor Productivity, which seems to hinge on the definition of economic output. When I read about output the introduction says Output in economics is the "quantity of goods or services produced in a given time period, by a firm, industry, or country", whether consumed or used for further production. The concept of national output is essential in the field of macroeconomics. It is national output that makes a country rich, not large amounts of money. https://en.wikipedia.org/wiki/Output_(economics) https://en.wikipedia.org/wiki/Output_(economics) Makes sense so far. A rich country is one that has abundant goods and services for its people, regardless of how that abundance comes to be. But then I read the examples below the introduction and everything's measured in money. Which do economists consider a more fundamental measure of Output -- increasing access to tomatoes, or increasing the revenue of the commercial tomato sector? If the latter, that's nuts. It implies that all sorts of smart investments in efficiency and/or self-sufficiency are unproductive or even destructive if they lead to less future paid exchange of goods and services.
  - tedsanders 10y ago
    It is a little nuts, but there are three points that make it a little less nuts than it first appears. (1) Inflation correction. If technology makes tomatoes cheaper, now dollars are worth more, counted in tomatoes. Technology is almost by definition deflationary. Economists do try to correct for deflation and inflation in these statistics, though everyone admits it's not possible to do a perfect job. I think this correction partly addresses your concern about measuring goods vs dollars. Inflation measurement tries to keep the ratio of tomatoes to dollars accounted for, so that when we measure dollars, we can do inflation correction to translate into tomatoes. (2) Elasticity. If the cost of tomatoes goes down, then presumably the quantity of tomatoes produced will rise in response. This may increase the overall value of tomatoes produced (though it also may not). Over the arc of human history, technology that makes things cheaper to produce has tended to stimulate overall production. E.g., we work longer hours than many hunter-gatherers. (3) Objectivity. Many economic measurements fail to get what after we really want, which is how much happiness are we producing. But since happiness measurement is even more fraught with error, counting up widgets is hopefully not too bad a substitute. Although it is theoretically flawed, in practice I think it clearly succeeds. The people in countries with high GDPs seem more prosperous than the people in countries with low GDPs. But yeah, GDP is flawed. A state with awful weather where everyone needs to work to air condition their homes will have a both a higher GDP and a lower quality of life compared to a state with great weather.
three14 10y ago
Naively, I'd say that there really is a lot of missing productivity. The Empire State Building took a little over a year to build, while the Freedom Tower took 8, if I'm reading Wikipedia correctly. On the one hand, the safety precautions during construction were clearly different, but on the other, you get a lot less for a investment in many areas these days. Empire State Building according to Wikipedia: $645 million in 2017 dollars One World Trade Center: $3.9 billion
- philipkglass 10y ago
  That's what I'm trying to figure out -- whether the standard productivity definition uses physically grounded measures (like how much skyscraper floor area can be built per year or per full time employee, how many bytes of DRAM are manufactured per year or per full time employee...) or just money-units. In the latter case building skyscrapers at much higher costs than in the past might count as increased production, as long as you can get people to pay the higher prices. That seems backwards to me but I'm trying to temper my reaction until I learn more from people with a deeper economics background than I possess.
  - three14 10y ago
    I'm saying that even if the measure they use is imperfect, I wouldn't be surprised if "real productivity", however you define it, is also down.
- sandworm101 10y ago
  Not only regulation, but construction expectations have changed. Take a construction worker back 100 years an they would be shocked at the lack of detailed plans. Today's buildings are planned and costed down to ever bolt. Every square foot is pre-sold and must be built to spec. A 4-year build that delays into a 6, thats a nightmare. So too is a 6-year build that finishes after 5 as that screws up the financial/tax planning -> profits. So we aim for slow, measured, and built to expectations. That is a change in business methods not tied to regulation.
- bborud 10y ago
  In terms of complexity the two projects are not comparable. Modern buildings have more bits and more of those bits need to work with other bits. And, for the two projects to be comparable, you have to compare them at the time of completion. (Empire state building has enjoyed 86 years of upgrades and retrofits). And that is before we look at things like worker safety, bureaucratic demands etc. We do harder things now.
tedsanders 10y ago
Potentially, but my take is that this is unlikely to explain the productivity puzzle. I think your question is asking whether we are mismeasuring the value of dollars over time. And certainly there are worthy criticisms of inflation measurement, and good reasons to think that they overstate inflation as a result of undermeasuring quality improvements. But these flaws are not unique to recent history, so by themselves, they cannot explain why productivity growth has ostensibly slowed. One way to sidestep the issue of statistical dollar measurement is to just read direct history of past time periods. Doing so has given me a much richer appreciation for the radical transformations caused by industrialization, urbanization, electrification, etc. A terrific article on this subject was published last year in the New York Times, comparing the years 1870, 1920, and 1970: https://www.nytimes.com/2016/05/15/upshot/what-was-the-greatest-era-for-american-innovation-a-brief-guided-tour.html https://www.nytimes.com/2016/05/15/upshot/what-was-the-great... The article was inspired by Robert Gordon's lengthier book, The Rise and Fall of American Growth, which followed a somewhat similar structure: http://amzn.to/2jc6zkF http://amzn.to/2jc6zkF His descriptions of 1870 really made me appreciate how truly impoverished the average person was in those days. The rise in quality of life as electricity and automobiles and running water percolated through society over the next 50 years was radical, far more radical (in my view) than getting computers and the internet and phones, as monumental as those achievements have been. Ultimately, it's impossible to objectively compare value across different situations. But my own semi-informed take is that productivity growth is indeed slowing.
- philipkglass 10y ago
  I have read a lot of history about chemical process industries, energy, and allied sectors. I'm trying to compare inputs and outputs of processes without invoking dollars: number of laborers, tons of sulfuric acid, megawatt hours of electricity... My impression is that many commoditized products continue to see decent year-over-year improvements in the ratio of inputs to outputs. But if economists don't care about material input:output ratios, only currency-values, then improvements-plus-fierce-competition could look like stagnant productivity. You would need process improvements plus GDP growth to recognize productivity gains; flat GDP per capita and simultaneous shrinking inputs of matter and energy wouldn't count.

oli5679 10y ago

Productivity is measured in terms of a price index (the cost of a 'basket' of goods). There are some obvious challenges with defining this basket in practice, and it is plausible to argue that inflation is persistently overestimated and so actual productivity growth is higher than the reported figure. However, this could apply equally to previous time-periods. Just as modern generations benefit from superior electronics products and mobile network speeds, previous generations benefited from massive increases in the variety and freshness of food, or the household appliances that reduced the time cost of household chores. It could be that productivity growing at a rate that is both faster than measured but slower than trend? https://www.bls.gov/cpi/ https://www.bls.gov/cpi/

edblarney 10y ago

"rapidly increase real-product output but then see most of the dollar-gains erased by competition." What you mean to say is 'can we measure consumer surpluses' instead of 'producer surpluses' - i.e. profits. Indirectly - yes - this may be the root of the problem. When products improve in quantity and quality, but profits go down - we generally say the 'economy is shrinking'. But the value to consumer has gone up. We don't measure 'consumer surplus' i.e. the value captured by a consumer when they buy something. Essentially - you pay $1 for a pen. How much would that pen cost so that you felt 'it was not worth it'. Well, you might pay $100 for a pen, if you need to write sometime in your life. You'd probably treat it very well, but you'd still need to buy it. Maybe $500 is the real value of a pen. In this case - there is $499 'consumer surplus' every time a pen is bought for $1. (Again, not quite fair as you might buy several $1 pens whereas you'd only buy one for $500 - but you get the picture). The GDP is just the cost of everything sold in the economy + government spending. Which is a really bad measure if you think about it :)

RA_Fisher 10y ago

Bingo. Measures of productivity got knocked down by massive inflation. Neither are measured directly, and they've negated each other. All we see is the shadow on the wall of the cave and presto "low inflation and low productivity." The Mises Institute is a great place to start studying this: https://www.mises.org/ https://www.mises.org/. I learned the mainstream economics way in undergrad. It's absurd and so full of hubris. The reason being that the most prestigious institution for economists is the Federal Reserve and they're able to keep almost everyone in line. That and public scientists don't actually have to be rigorous to be successful without the teacher of the market (though there are wonderful exceptions to be sure!). What I'm thinking about is, how can I exploit this? We don't know when productivity is going to take a break and yield run away inflation. Central Banks are starting to deflate, so you have to figure we'll start hearing about massive productivity gains. Where is the most misallocated? Certainly Sillicon Valley to some degree. Student loans seem to be the largest single misallocation, but the government backs them. So I suppose the banks will be the first to feel it and then the government. If the banks feel it then I guess it'll flow through commercial paper and real estate. It's just not clear to me how to hedge yet, but it's something I'm thinking about.

spangry 10y ago
This is simply incorrect. From a theoretical standpoint, productivity is a volumetric measure (Outputs / Inputs). From a more practical standpoint, even if output is measured in dollar denominated terms, the methodology used to measure TFP/MFP minimise the effects of inflation on the calculated residual, primarily by: - also measuring inputs in these terms (e.g. wages paid to labour, rents paid to capital) - adjusting prices with reference to a selected base-year so that movements in MFP/TFP are comparable across years And empirically, what has been historically observed is actually the opposite of what you suggest: productivity and inflation are inversely correlated (i.e. periods of high inflation have show low productivity and vice-versa). Here's a paper from some absurd and hubristic mainstream economists on this issue: https://www.rba.gov.au/publications/rdp/2003/pdf/rdp2003-10.pdf https://www.rba.gov.au/publications/rdp/2003/pdf/rdp2003-10.... It's actually even more complicated than just this. But I can't really be bothered to get in to it. But good luck with that Mises Institute stuff.

spangry 10y ago

To your first paragraph question, the answer is essentially 'no' (but it's complicated). From a theoretical standpoint, productivity is a volumetric measure (Outputs / Inputs). From a more practical standpoint, even if output is measured in dollar denominated terms, the methodology used to measure total/multi factor productivity (TFP/MFP) minimise the effects of inflation on the calculated residual, primarily by: - also measuring inputs in these terms (e.g. wages paid to labour, rents paid to capital) - adjusting prices with reference to a selected base-year so that movements in MFP/TFP are comparable across years And empirically, it has been historically observed that productivity and inflation are actaully inversely correlated (i.e. periods of high inflation have show low productivity and vice-versa). This is what you'd generally expect if MFP/TFP estimates are largely unaffected (directly) by inflation. The inverse correlation is likely due to the efficiency sapping effects of high inflatation (which imposes frictional costs and mispricing inefficiencies) at the 'whole of economy' level. And at the industry level, it's likely a mix of the latter and, in cases of exogenous output price increases (e.g. booming commidity prices), due to firms throwing more inputs at producing more marginal outputs (which is now a profitable thing to do due to higher sale prices). Here's a paper on this issue: https://www.rba.gov.au/publications/rdp/2003/pdf/rdp2003-10.pdf https://www.rba.gov.au/publications/rdp/2003/pdf/rdp2003-10....

austenallred 10y ago

No serious economist should be measuring things in "productivity" today without a number of asterisks behind it. This is pretty well accepted. As a rule of thumb, it's generally safe to ignore anything that uses old measures of "productivity." But that doesn't get clicks.

philipkglass 10y ago
What are old measures of productivity and what are new ones? I know it's dangerous to try to learn things from Wikipedia but I went there to read about Total Factor Productivity, which seems to hinge on the definition of economic output. When I read about output the introduction says Output in economics is the "quantity of goods or services produced in a given time period, by a firm, industry, or country", whether consumed or used for further production. The concept of national output is essential in the field of macroeconomics. It is national output that makes a country rich, not large amounts of money. https://en.wikipedia.org/wiki/Output_(economics) https://en.wikipedia.org/wiki/Output_(economics) Makes sense so far. A rich country is one that has abundant goods and services for its people, regardless of how that abundance comes to be. But then I read the examples below the introduction and everything's measured in money. Which do economists consider a more fundamental measure of Output -- increasing access to tomatoes, or increasing the revenue of the commercial tomato sector? If the latter, that's nuts. It implies that all sorts of smart investments in efficiency and/or self-sufficiency are unproductive or even destructive if they lead to less future paid exchange of goods and services.
- tedsanders 10y ago
  It is a little nuts, but there are three points that make it a little less nuts than it first appears. (1) Inflation correction. If technology makes tomatoes cheaper, now dollars are worth more, counted in tomatoes. Technology is almost by definition deflationary. Economists do try to correct for deflation and inflation in these statistics, though everyone admits it's not possible to do a perfect job. I think this correction partly addresses your concern about measuring goods vs dollars. Inflation measurement tries to keep the ratio of tomatoes to dollars accounted for, so that when we measure dollars, we can do inflation correction to translate into tomatoes. (2) Elasticity. If the cost of tomatoes goes down, then presumably the quantity of tomatoes produced will rise in response. This may increase the overall value of tomatoes produced (though it also may not). Over the arc of human history, technology that makes things cheaper to produce has tended to stimulate overall production. E.g., we work longer hours than many hunter-gatherers. (3) Objectivity. Many economic measurements fail to get what after we really want, which is how much happiness are we producing. But since happiness measurement is even more fraught with error, counting up widgets is hopefully not too bad a substitute. Although it is theoretically flawed, in practice I think it clearly succeeds. The people in countries with high GDPs seem more prosperous than the people in countries with low GDPs. But yeah, GDP is flawed. A state with awful weather where everyone needs to work to air condition their homes will have a both a higher GDP and a lower quality of life compared to a state with great weather.

three14 10y ago

Naively, I'd say that there really is a lot of missing productivity. The Empire State Building took a little over a year to build, while the Freedom Tower took 8, if I'm reading Wikipedia correctly. On the one hand, the safety precautions during construction were clearly different, but on the other, you get a lot less for a investment in many areas these days. Empire State Building according to Wikipedia: $645 million in 2017 dollars One World Trade Center: $3.9 billion

philipkglass 10y ago
That's what I'm trying to figure out -- whether the standard productivity definition uses physically grounded measures (like how much skyscraper floor area can be built per year or per full time employee, how many bytes of DRAM are manufactured per year or per full time employee...) or just money-units. In the latter case building skyscrapers at much higher costs than in the past might count as increased production, as long as you can get people to pay the higher prices. That seems backwards to me but I'm trying to temper my reaction until I learn more from people with a deeper economics background than I possess.
- three14 10y ago
  I'm saying that even if the measure they use is imperfect, I wouldn't be surprised if "real productivity", however you define it, is also down.
sandworm101 10y ago
Not only regulation, but construction expectations have changed. Take a construction worker back 100 years an they would be shocked at the lack of detailed plans. Today's buildings are planned and costed down to ever bolt. Every square foot is pre-sold and must be built to spec. A 4-year build that delays into a 6, thats a nightmare. So too is a 6-year build that finishes after 5 as that screws up the financial/tax planning -> profits. So we aim for slow, measured, and built to expectations. That is a change in business methods not tied to regulation.
bborud 10y ago
In terms of complexity the two projects are not comparable. Modern buildings have more bits and more of those bits need to work with other bits. And, for the two projects to be comparable, you have to compare them at the time of completion. (Empire state building has enjoyed 86 years of upgrades and retrofits). And that is before we look at things like worker safety, bureaucratic demands etc. We do harder things now.

tedsanders 10y ago

Potentially, but my take is that this is unlikely to explain the productivity puzzle. I think your question is asking whether we are mismeasuring the value of dollars over time. And certainly there are worthy criticisms of inflation measurement, and good reasons to think that they overstate inflation as a result of undermeasuring quality improvements. But these flaws are not unique to recent history, so by themselves, they cannot explain why productivity growth has ostensibly slowed. One way to sidestep the issue of statistical dollar measurement is to just read direct history of past time periods. Doing so has given me a much richer appreciation for the radical transformations caused by industrialization, urbanization, electrification, etc. A terrific article on this subject was published last year in the New York Times, comparing the years 1870, 1920, and 1970: https://www.nytimes.com/2016/05/15/upshot/what-was-the-greatest-era-for-american-innovation-a-brief-guided-tour.html https://www.nytimes.com/2016/05/15/upshot/what-was-the-great... The article was inspired by Robert Gordon's lengthier book, The Rise and Fall of American Growth, which followed a somewhat similar structure: http://amzn.to/2jc6zkF http://amzn.to/2jc6zkF His descriptions of 1870 really made me appreciate how truly impoverished the average person was in those days. The rise in quality of life as electricity and automobiles and running water percolated through society over the next 50 years was radical, far more radical (in my view) than getting computers and the internet and phones, as monumental as those achievements have been. Ultimately, it's impossible to objectively compare value across different situations. But my own semi-informed take is that productivity growth is indeed slowing.

philipkglass 10y ago
I have read a lot of history about chemical process industries, energy, and allied sectors. I'm trying to compare inputs and outputs of processes without invoking dollars: number of laborers, tons of sulfuric acid, megawatt hours of electricity... My impression is that many commoditized products continue to see decent year-over-year improvements in the ratio of inputs to outputs. But if economists don't care about material input:output ratios, only currency-values, then improvements-plus-fierce-competition could look like stagnant productivity. You would need process improvements plus GDP growth to recognize productivity gains; flat GDP per capita and simultaneous shrinking inputs of matter and energy wouldn't count.