That’s the title of my latest post at The Drum (over the fold). It’s the latest round in my long dispute with the Productivity Commission on this issue, which flared up most recently here.
This is not an issue on which I’ve been impressed with the performance of either the PC or other economists who’ve weighed in to this debate (mostly associated with the business sector). As I point out below, my analysis is mainstream textbook orthodoxy, and led me to predict the productivity “slowdown” at a time when the PC and the others were proclaiming a miracle. But my arguments get even less attention now than they did fifteen years ago, when the PC was at least willing to reply.
If you are working harder, making more money, but enjoying life less, are you better off? More productive?
For one way of using these words, reflecting a market-driven society, the answer is ‘yes’ to both questions. To be ‘better off’ means to have more money, and to be more productive means to produce more goods and services, as valued by the market.
Surprisingly, perhaps, an economics textbook will answer ‘no’. If the extra stuff you can buy from working harder and longer isn’t enough to compensate you for the extra effort, standard economics says you are worse off (in the textbook jargon, your utility has declined).
As for productivity, it’s not the amount you produce, but the amount you produce per unit of effort. If you are putting in more hours, or increasing your pace along with your hours, to produce that last unit of output, your productivity is declining, not increasing.
The ideal is to work just long and hard enough that the extra money you could make by working more would not compensate you for any additional effort.
Genuine productivity growth, on the textbook view, doesn’t come from working harder or faster. Rather, the main sources of productivity growth are technological progress and the improved education needed to take advantage of that progress.
We are more productive than our grandparents not because we work harder, or do a better job of managing our business, but because we have better technological tools to work with.
This isn’t just a question about economic theory. Much of the policy debate in Australia today concerns our supposed need to improve our productivity performance. We have an entire body, the Productivity Commission, which is at least nominally devoted to the task. The commission has recently been engaged in vigorous debate over whether Australia’s productivity has indeed declined in recent years, as data produced by the Australian Bureau of Statistics would suggest.
So, it’s important to understand what the Productivity Commission means by ‘productivity’. Does it follow the textbook view, or is ‘productivity’, as so many Australians have come to suspect, just a codeword for ‘working harder’? The answer, unfortunately, is the latter.
The measures of productivity used by the Productivity Commission report the ratio of the market value of output to hours worked (inputs of capital services are also taken into account). But the commission is clearly of the view that productivity can and should be increased by making workers work harder.
Back in 1996, the commission asserted that productivity gains could be achieved not only through resource reallocations but through people “working harder and working smarter”. Fourteen years later, the chairman of the commission repeated an almost identical formulation:
Whether productivity growth comes from working harder or working ‘smarter’, people in workplaces are central to it.
The appearance of scare quotes around ‘smarter’ is revealing. Whereas in the 1990s this phrase was used in all seriousness, ‘working smarter’ is now more likely to be the punchline in a Dilbert cartoon. It is universally understood as a piece of management jargon, typically decoded as ‘we’re giving you more work to do with less resources, and it’s up to you to figure out how to do it’.
The commission’s leading expert on productivity measurement, Dean Parham, presented the position in more detail in a paper published in 2004. Responding to my objections that much of the apparent improvement in productivity in the mid-1990s reflected shorter breaks and a faster pace of work, Parham asserted:
Increases in work intensity through reductions in slack on work time or increases in pace of work would be genuine sources of productivity improvement.
The speedup in the pace of work in the 1990s, famously described by John Howard as a ‘barbecue-stopper’, appeared unsustainable to ordinary workers. Parham responded that while surveys showed an increase in workplace stress, “this does not establish that the stress has in general reached unsustainable levels”.
In reality, once the labour market improved in the late 1990s, it proved impossible to maintain the high stress needed to keep workers going at full pace and more, for long hours. Both the proportion of workers putting in more than 50 hours a week, and the pace of work employers could demand, started falling around 2000, and continued to decline at least until the Global Financial Crisis raised perceptions of insecurity.
The result has been a reduction in official measures of productivity. In reality, though, productivity has continued to improve. The decline simply reflects the reversal of the illusory and unsustainable increase in work intensity during the 1990s.
But the pressure to increase the pace of work never lets up for long. John Howard had a go with WorkChoices, but was resisted with some success by the ACTU’s Your Rights at Work campaign. Now the chorus of complaint about inadequate productivity, from employers and opinion-makers, is once again getting louder.
There is no reason to think Australians need to work harder and longer. On the contrary, we ought take some of the benefits of higher productivity in the form of more leisure and more civilised working conditions.
John Quiggin 
This is the key point:
The market value is determined in practice by actual retail sales data. This is a completely corrupted measure.
Making workers toil longer, for the same wage, does not improve market conditions and will never flow through to a productivity gain. Where the market once returned $100, after a ‘work-harder’ change, it still returns $100 over more units. You just have more wear-and-tear and stressed workers.
A capitalist sees this from the other side. Where once they paid $100 to get 10 widgets, they assume they will get $110 if they get 11 wigets from the same factory (ie for $100). On this point – all economists are expected to fall-in-line and not bother to ask – where does the extra $10 come from?
The change at the factory – a move from 10 widgets to 11 widgets for $100, is the official productivity measure.
It is nothing but increased exploitation.
Very nice article and thinking, JQ. Very much to the point, and demonstrating a highly advanced level of global understanding, IMO.
In 1990 the NZ Pacific Party sought to find a better method for determining the true economic impact of policy with a method to encompass all considerations. What they came up with was this:
________________________________________________________________________________
The Fuels of any economy are
IDEAS…………..OPPORTUNITIES………..WHAT YOU GET FROM NATURE FOR FREE
The engine of an economy is made up from
PEOPLE….HUMAN ENERGY…HUMAN IMAGINATION…..COMMUNICATION….ESTABLISHMENT…..COMMERCE….PLANNING….MACHINERY
Economic accelerators include
POPULATION SIZE…ENTHUSIASM/QUALITY of LIFE…DEPTH of PHILOSOPHY….STANDARD of EDUCATION….PERTINENCE of KNOWLEDGE BASE…COOPERATIVE STRUCTURE…CONNECTIONS…..FLUID WEALTH…FORESIGHT…TANGIBLE GOODS AND SERVICES PROVIDED BY TAXATION….APPLIED NEW TECHNOLOGY….QUALITY of ENVIRONMENT….RETURNS on EXPORTS
Economic declerators include
AGE and HEALTH…LEVEL of UNEMPLOYMENT…STANDARD of LIVING…RACIAL INTOLERANCE/RELIGIOUS ZEAL…TAXATION…NATURE of GOVERNMENT…DEFENCE SPENDING (degree of national paranoia)…COST of CRIME…INDEBTEDNESS…No. of HIERACHAIL TIERS in ORGANISATIONS…AGE of TECHNOLOGY…COST of R&D…ENVIRONMENTAL PROTECTION COST…COST of IMPORTS
______________________________________________________________________________
The strength of any new policy would be determined by its ECONOMIC POWER FACTOR which was determined by applying it to the above analytical process for its function sum.
Obviously this is a very juvenile economic device, but it did go a long way futher towards understanding the productive reality between a ship unloading conatiner crane operator…..and a casino croupier.
There used to be an occaisionally quoted national comparative performance factor called the National Degree of Automation. This is a factor that fell out of favour once the US lost the lead position as their economy shifted from mass manufacturing to a housing industry and services industry dominated economy.
The challenge for the future, and the Productivity Commission is to find an economic formula that can reconcile in some meaningful way the productivity level of the Mark Zukergurgs of the world.
You’re banned, remember.
All a matter of perspective. Depends whether you are the slave or the slave owner.
Adam Smith understood what those at the Productivity Commission apparently do not. Indeed, he introduced the idea of compensating differences. That is, that if a job is more disagreeable for whatever reason,a person has to be paid a compensating difference to be as well off.
What a damning indictment of economic neoliberalism (often mislabeled the ‘free market’)!
Back in the 1970’s and early 1980’s before Hawke and Keating imposed economic neoliberalism on Australia, unions were campaigning for a 35 hour week.
But unionists were persuaded by the supposed realists running the ACTU to instead seek a 38 hour week.
Now, in 2012, even the 40 hour week, let alone the 38 hour week or 35 hour week, is a pipe dream for many workers with two and sometimes more wage-earners in each
household working 50 hours a week and longer to pay mortgages, rent and other expenses. On top of that many are forced to drive 2, 3 or more hours a day to aand from work along often gridlocked roads. Barely more than a generation ago one income earner working a 40 hour week was sufficient to meet the needs of a typical household.
So where has all the value of that additional labour gone?
Into the pockets of the wealthy elite?
Or wasted by the obvious inefficiency of economic neoliberalism?
I suspect a combination of both.
Hi John,
Although I like your conclusion, I disagree with your evidence.
In terms of the 12 industry measure, labour productivity has risen from the mid 1980s with the exception of four years.# So the argument that intensity of work or lack thereof has done something is a non-starter. If labour productivity has consistently risen, then there is only a slowdown since 2000 because output has not risen sufficiently to offset the rise in capital services
Here’s an idea. Create your own index of capital services by taking ICT out or at least using realistic rental prices and create your own MFP. You might be surprised.
# Two of these are the first and last years, but this is could be a measurement issue. The only two other periods when labour productivity was flat are the Asian financial crisis and the GFC and so this probably reflects labour hoarding and that’s arguably a positive.
Perhaps it’s called the “Productivity Commission” rather than the “Production Commission” because the latter name, although more accurate in this context, has Communist overtones.
I have some old stats from a small company I used to run showing increased software develoment from a combination of forcing shorter work hours, implementing reviews and shortening the feedback cycle from testing. The improvement was dramatic, a factor of near 3X.
It is a rather blockheaded myth that working longer hours means increased productivity. There are sound biological reasons for that. High cortisol/adrenalin/stress levels result in short term sharpening of concentration. But sustained over time (particularly over years) it results in literal brain damage, shrinkage of the hippocampus (where information is correlated) and probably frontal lobe shrinkage is related.
I have termed this syndrome in executives “executive disease” because in corporations, one sees this phenomenon quite a bit – in hard-charging young men who finally get to the top. When they get there, they are later middle aged, and they have trouble correlating information intelligently. They try to wind themselves up with the stress that when they were young made them sharp, but it no longer works.
In the modern world it in particular it is not intelligent to think of productivity in such simplistic terms. There is nothing close to a linear correlation between spending time and getting useful things done.
Another way to look at it is that lack of sleep and long-term stress are as intellectually debilitating as alcohol. This has been shown in simple things like driving tests, etc.
I think that there is something else going on here though. It is no secret that those in marketing and sales (the professions of convincing and motivating – which disproportionately wind up in executive positions) do a lot of drinking. The fact is that the functions of the brain that motivate us are the most ancient ones- meeting and greeting. Those map into the lizard and mammalian brains. And executives spend the majority of their time using those functions.
Heaven forbid, life should be about living rather than a villein’s mindless lot.
I must find this book, “Road to Serfdom” and see if the author condemns capitalism’s assault on civilisation, as indicated in the title.
Thanks for this, John. I now understand what you are on about with the word ‘intensity’ and its relationship to productivity. The textbooks I have read emphasised time as the denominator of the ratio so I have been wondering.
Intensity is rushing through your email inbox, looking at each email and dealing with it. Productivity is setting up filters to delete the offers of drugs or money, and to arrange the remaining emails into categories/folders according to priority. Intensity is using your mouse and Word’s ribbon to – quickly, quickly, I need it now! – go through a Word document and adjust the formatting. Productivity is using Styles effectively, so that only one change need be made in one place.
In essence, productivity lies in increasing work *not* done (to produce the same results as before), rather than in increasing work done.
(Perhaps this is a little bit subtle for the members of the Productivity Commission and your colleagues… no, that’s too snarky. But the textbooks could be clearer about this.)
Excellent post. It could be added that working harder and longer also tends to produce negative externalities in the form of impacts on friendships and relationships, reduced opportunities to form and care for families, the Dad in the Your Rights At Work ad not being able to coach the Under-12s on the weekend, poorer public health due to reduced opportunities for exercise, increased rates of mental illness and substance misuse, etc. These negative externalities need to be costed and factored in when making claims about the supposed merits of “working harder”.
Prof. J.Q. says; “… But my arguments get even less attention now than they did fifteen years ago, when the PC was at least willing to reply.”
This seems to be a common feature of late stage capitalism under neoconservative ideology. The people who are right, demonstrably and empirically right, get ignored. Meanwhile, the closer we get to disaster, economic and environmental, the more delusionalism and denial of empirical realities grip our society, dominate its discourse and remain the currency and common language of success at the top. But this can only continue for so long. What happens to a civilization which attempts to ignore empirical reality indefinitely? Sooner or later it is in for a profound, painful and prolonged lesson about practical reality.
The denialist discourse will not fail until the unfolding disaster (economic and environmental) is widespread, manifest and undeniable. At that time we can expect rapid changes in views at many levels and a push for change from at least the bottom 95%, who of course will collide with painful reality first. The top 5% will become even more reactionary and repressive seeking to institute ever more brutal levels of oppression and a suffocating anti-science, anti-rational culture of ideology and denial. But reality ultimately will out.
In relation to the PC finding no need to respond to JQ’s arguments nowadays, remember in the early days when neoliberalist ideas were being sold with various good for the 99 percent stories like ‘trickle-down’? Who bothers with claims of trickle-down nowadays? Nowadays there is no real attempt to suggest that neoliberalism ‘raises all ships’. Now the line is simply that neoliberalism’s redistribution upwards is simply the way things ought to be.
@Ikonoclast
“What happens to a civilization which attempts to ignore empirical reality indefinitely?”
To a degree that this statement is true is very depressing. I have my personal experience trying to engage in a honest discussion with quite a few people whom believe the usual things in the media (e.g. Obama is a big spender, social democracy is not sustainable etc) using real statstics. http://economistsview.typepad.com/economistsview/2012/05/government-spending-sometimes-things-are-not-what-we-think-they-are.html
The conversion most of the times runs like this:
Person X: “These European government and the US have got to stop their spending spree and pay back their debt”
Me: “Do you know what the media said is not always true? At least in these situtations, the statistics saids otherwise”
Person X: “So, you’re saying that the media is wrong and you’re right? You’re crazy.”
Me: “I have statistics and evidence to prove what I’m saying”
(Showed X the evidence)
Person X: “These statistics are wrong”
Me: “And did the media provide their evidence and source?”
Person X: “Just because they didn’t gave statistics doesn’t mean they’re wrong”
…
The sad thing in this, is that they are not some rich capitalists nor neo-conservatives. I have countless times generated the thought that I’m choosing to live the most stupidiest way to live in this world; which is to actually know the reality. But I couldn’t change myself to live as happy as they are.
I personally think high productivity as the way it’s generally interpreted and measured is a good thing. One of the major issues that got Greece’s economy into trouble was low productivity.
Intuitively (on 1st glance), we should expect productivity of most advanced economies to progressively increase over (peace) time as technology, processes, methodologies evolve to more efficiency. However, there are also forces working against this tide too:
Compliance – in many industries has increased substantially eg. a manager at a local hot water system manufacturer recently stated half their production costs are compliance costs.
General Regulation – has also increased over time, and industry in general has been calling for streamlining of some degree to achieve the right balance.
Economic rationalists trade policies introduced in the early 80s – has steadily been killing the most productive contributors as these are the most exposed to overseas imports, thereby promoting an economy of less efficient and productive niche industries within the measurable economy.
Of course, workplace relation policies also can have a contribution, but it’s debatable of how much that contribution is. I do believe we suffer (generally) a shortage of quality management in this economy.
[off soapbox]
@Troy Prideaux
But what is this “way”?
If Australian workers sell less, simply because overseas cheap labour has captured our markets – this will appear as a falling productivity by Australia.
On the other hand, any extra sales achieved through cutting Australian wages will appear as a productivity increase.
Or how do you negate this distortion?
You can be especially worse off if marginal rates of tax (or your EMTR due to means testing) gobble up much of the associated marginal income. The tax rates remain an insult to people who want to work hard and get ahead.
It sounds like the main function of the productivity commission is to normalise the idea that “productivity” gains through increased “flexibility” is the main goal. As long as opinion leaders nod along then it’s job is done.
I imagine true productivity would be a pretty difficult thing to measure over time since new technology creates goods and services that didn’t exist before. Even though they may replace an existing service or good the new capabilities go far beyond what it replaces. For example Wikipedia has created a way for information to be stored and accessed, but it’s not really comparable to an encyclopedia since readers could not contribute information themselves and it couldn’t be updated easily and wasn’t accessible in as many places. It is vastly superior to it’s predeccesor in so many ways, yet how would that value be measured as it effects how work is done?
Wikipedia is free. We pay nothing to use it, therefore it is valueless. Moreover it’s made with free labour also without value.. Hence no contribution to productivity and of no interest to the PC.
@Greg
Well, that didn’t come out quite right. In future I’ll have to use a previewing service to see how my HTML looks.
I certainly think that society should generally move towards offering more leisure and part time work options – particularly for those on higher incomes. JQ’s point is that leisure is an argument in consumer utilities and should be pursued as an individual objective.
I’d put this preference for leisure alongside a whole set of quasi-leisure activities such as further education, appreciation of the arts and generally a preference for services.
An important aspect of such preferences is that they often (not always) divert claims away from claims on the physical environment. They are often ecologically sustainable activities. Fostering them enables the uncoupling of economic growth from resource-intensive production and environmental destruction.
‘Productivity’ is a notion I find relatively easy to accept on the level of micro-economics, including that of running a household, a cornershop, a supermarket, a manufacturing enterprise, .. I am not convinced measuring ‘productivity’ from national accounts data is meaningful at all.
Since JQ’s earlier post on Dean Parham’s more recent paper, I’ve been trying to figure out how MFP (multi-factor productivity) is measured over time. I read the ABS material on their website and I tried to phone relevant ABS staff to get an answer to my question (specified below). No luck. The ABS’ switchboard is outsorced to organisations staffed by people who may have all sorts of productive skills but none that was of any use to me. So, I am now asking my question in the hope that JQ or a reader can help me.
Background: Dean Parham’s paper, if I recall correctly, is concerned with the spike in MFP’ and the subsequent and recent ‘negative MFP’. The spike in MFP belongs to the glory days of economic rationalism – roughly speaking – and the ‘negative MFP’ belongs to the current ‘reform fatigue’ period.
I understand, MFP is based on national accounts data of reporting enterprises.
Question: I am unclear on how public services (eg waterboard, telecommunication, aviation, …) prior to the privatisation and corporatisation period and since corporatisation.
Assuming public services prior to privatisation and corporatisation were not treated as reporting enterprises (ie not private market) then the apparent spike in the MFP data would measure the rate of ‘privatisation’ and ‘corporatisation’ of previously government owned and operated enterprises. Furthermore, if this assumption turns out to be the fact, then the ‘negative’ MFP, absolute and in particular relative to the period prior to the ‘spike’, would suggest that privatisation and corporatisation has achieved the opposite to what it was claimed to achieve.
Can anybody help in clarifying this issue, please.
Oops, I forgot to finish my question:
Question: I am unclear on how public services (eg waterboard, telecommunication, aviation, …) prior to the privatisation and corporatisation period and since corporatisation are treated in the MFP calculations.
Go to the ABS website. Type into the search box MFP. Find a recent publication. And there could be the email and contact details of someone to talk to about how the ABS does MFP.
This person seems current for MFP . paul.roberts@abs.gov.au
I have had long concerns over this multifactor productivity concept. In 1989, the ABS cautioned that MFP growth measures changes in a small “residual”, subject to large change from small errors in input data. It also noted that the usefulness of year-to-year estimates is probably severely limited. [ABS to EPAC; April 1989]
If there is this residual – how do we know this is not because some production is not properly allocated to other factors?
Specific labour productivity (eg rail freight and passengers per employee) is a solid concept, and properly specified capital productivity (ie as, nett tonnage X kilometres per locomotive) is a useful measure. It is also true that workers with tools will produce more physical output than workers without.
But (as Marx noted), all sustainable market earnings are wages. Capital productivity is zero. Any apparent extra earnings due to capital are only due to a competitive advantage during adjustment, or political interference. They are matched by losses elsewhere.
During the Accord years, there was much hand-wringing over productivity particularly surfacing through EPAC mechanisms (eg Council Paper 39 – Productivity in Australia: results of recent studies. 1989).
People need to go back to basics.
Thank you, Freelander.
Ernestine,
Marx can be forgiven for not foreseeing a time when entire productive cycles could be performed, invoiced and banked completley autonomously. Work is performed goods and services are performed, charged to a recipient, payed forby the recipient and the funds credited to an account. Capital produced cannot be determined to be zero in this environment. The question then becomes a political one. Is the owner of the capital…..or………software driven process a worker to whom the productive performance can be applied?
What is your judgement on that?
HC – those on high wages are notionally there because they have skills that are scarce in the market. If they rationed what they had to offer in the way of hours one would expect that the premium they command would rise further. We would also miss out on the services they have to offer. I’m thinking in particular of a heart surgeon I take my kid to once a year for a check up. His time is very expensive and as a result I’m sure he makes a healthy annual income. However there are plenty of other examples. People should work less and enjoy leisure more if they wish to but it should not be a public policy objective. In particular we should not tax people out of work incentives or subsidise sitting around.
Productivity at work is only part of the puzzle. If a tax cut means I work more hours at my job and now outsource child care, cooking, cleaning, financial management, gardening, entertainment or any number of other activities which I could notionally do myself then my at work productivity may be no higher, it could just be more intensity, but my overall lifestyle might be more productive. When I had a broken shoulder and a bloke mowed our lawns for us I noted that he was much quicker at it than me. If I buy take away food from the local Asian restaurant I expect they cook far more efficiently in terms of labour and energy than I do. Taxes are at the end of the day just another form of trade barrier obstructing the benefits of specialisation and trade.
John the story you tell might be quite true, but how can we know? As anyone who’s read up on the productivity debates knows it is actually surprisingly hard to reliably measure productivity as “output per hour worked”, at least at an economy-wide level. So how on earth are you going to measure it as “output per arbitrary-but-constant-over-time unit of effort”?
So, no, I don’t really blame Dean for ignoring this because he is expected to provide hard evidence.
Terje,
That is a desperate argument. You want to be taxed less so that you can afford more take out food? The flaw in your postulation is obvious, lower taxes deliver less public service. In your case you want to be able to pick and choose which public services you would like to do without, but that brings you into conflict with other members of the public with differing needs. You loose, as ususal, on the show of “hands”.
@Chris Warren
Marx was completely wrong about capital having zero productivity. if this were so, why would there be any temporary advantage to investing? If capital has no productivity, then the optimal capital stock is zero.
Consider the following thought experiment. Say it takes X million hours of labour to build and operate a coal fired power station and mine the coal it needs over its economic life. Are you seriously suggesting that putting X million hours of labour into building little dynamos and cranking them by hand would generate as many megawats of power over the same time period? Or passing buckets of water hand to hand vs an aqueduct?
@DD If the PC were saying (as they do, wrt the post-2000 slump), something like “this stuff is really hard to measure, and we shouldn’t place too much weight on it, but the figures for the mid-90s look encouraging”, I wouldn’t be complaining.
In fact, they treat the mid-90s figures as absolute truth, even though there is lots of evidence to suggest they were inflated by work intensification. Most obviously, predictions based on the work intensification hypothesis have been proved correct, while those of the PC have been consistently wrong.
Marx was completely correct about capital having zero productivity (in a sustainable economy). But it takes a lot of analysis to get to this conclusion and most of our experiences appear to contradict.
There are simple ways to probe this. Robinson Crusoe could divert some time from producing consumption goods, to producing tools (ie investment) in the expectation that this will make his income greater. The only funds (or resources) Robinson needs to allocate to his tools is depreciation (wear and tear). This only equals the value of the tool. Consequnetly, investment is a natural economic phenonema that simply increases workers incomes. You need politics to slice some of it as a return on capital.
Capital stock improves and expands production by producers, and not otherwise. A worker using a scythe may cut 10 bushels p.d. while, with a mower, he may cut 100. Provided there is free entry for mowers, (ie the mower producer cannot get a rent), the workers new income is 100 bushells (less actual cost of mower).
The bottom line is that: where there is economic freedom – all returns to capital are competed away. At equilibrium, capital only gets a return if there is some degree of monopoly.
If it takes X hours to undertake any economic activity, then any other mode of production of the same commodity will be extinguished. Marx covered this in his chapters on machinery.
While you can certainly put millions of hours into building little dynamos and cranking them by hand to produce megawatts, these megawatts can only be sold on the market at the same unit price as those being sold by your coal-fired power station.
Running an economy to provide returns on capital, must end in a GFC, once various countervailing tendencies are exhausted.
John, yourself and Dean are replaying a debate started by Harberger (1954) on the costs on monopoly, extended by Leibenstein (1966) with X-inefficiency and finished off by Tullock (1967) in his response about the social costs of rent-seeking. It is all in an essay Tullock wrote in 2003 on the origin of the rent-seeking concept.
Harberger (1954) was the first of many in the 1950s to find that the welfare loss from monopoly was almost impossibly small. The estimates were .01 and .07 per cent of GNP! Does this sound familiar for our present discontents? Is John being a bit soft on Dean?
Robert Mundell (1962) worried that if these distortions were so small “someone inevitably will draw the conclusion that economics has ceased to be important”!
Leibenstein rode the rescue in 1966 with stories of ILO productivity demonstration missions to developing countries where certain technical advice could increase productivity by 20-25% compared to the factory down the road:
• The low productivity was due to managerial slack and a lack of profit maximising motivation because of no import and/or domestic competition.
Tullock drafted a comment on Leibenstein saying the low observed profits were due to incorrect accounting. Once the costs of establishing the monopoly were included, these could be shown to have eaten up the monopoly profit.
Tullock’s comment, redrafted as a stand-alone paper, was thrice turned down because it was wrong and by George Stigler at JPE because instead its findings were well-known.
Tullock extended his comment to discuss the social costs of theft and theft prevention – a key issue between you and Dean: is the increase in work intensity a curbing of employee shirking or is it post-contractual opportunism?
Mark Perelman did a wonderful review of x-inefficiency in JEP last year pointing to studies of events other than deregulation that reduced X-inefficiency: the ramping up of internal efficiency by management when new competitors entered a market; and oil industry cost-costing in the wake of the 1986 oil price crash.
Schumpeter’s perennial gale of creative destruction has the same welfare effects as economic reform. Schumpeterian innovation is a disruptive force that sustained growth even as it destroyed established companies and displaces workers. “lost jobs, ruined companies, and vanishing industries are inherent parts of the growth system”
John’s analysis will be standard if he adds the rent-seeking insight:
1. the standard analysis of deregulation too easily treats reform as a return to the status quo ante. Fred McChesney observed “The airline industry of 1999 is not the airline industry of 1978 minus the Civil Aeronautics Board”!
2. The wealth lost in rent seeking is not recovered, or even recoverable by deregulation. Production possibilities have been irretrievably diminished.
3. The social gains from deregulation are overstated; the losses from monopoly and regulation are under-stated, but the social gains since the 1980s of avoiding further economic distortions were large.
Dean’s analysis is measurement without theory until he explains why the gains from deregulation were so large. The initial hypothesis is they should be small. The Harberger hypothesis should be disclosed at the start.
I don’t agree TerjeP there are reasons to foster more leisure as a policy. There are ‘rat-race’ externalities that derive from ‘other-regarding’ behaviour that traps people into working too hard. If one’s utility is based partly on relative income compared to others then all will work too hard. Prof. Kwang Ng at Monash Uni has used this as an argument for hefty income taxes that could be welfare-improving. But directly encouraging more rational self-interest serves the same purpose.
Simpler lives that draw less on resource-intensive consumption and which involve more leisure, education make good environmental sense, increase private utilities and also reduce the rat race externalities of needing the latest flat screen TV simply because our neighbour has one.
To look at this from another perspective, perhaps the real purpose of the Productivity Commission is to test the sustainability of government policy at the human interface of policy and economy. A responsible government evaluates the impacts of policies that influence the balance of people’s living standard. Treasury examines policy from the Public point of view, and the Productivity Commission does the same from the Business operational frame work.
Where the government determines, for instance, that there is insufficient retirement saving in the economy and applies a compulsory retirement savings level funded by a directly proportional to wages tax on business, then a responsible governmen will evaluate the impact of that upon business and offer guidence on how the cost can be recovered through improved worker performance. Further, where the government determines that there will be a retirement affordability lag due to a top heavy aged population, then a Productivity Commission might see the solution as being that the workforce work …..longer ….before retiring.
So is it worth it working longer and or harder?
Conventionally we have our lives back the front. The best time in life to be be free and adventurous is in our twenties. This is when adventure means so much more, and it is when we round off our maturity to become strongly performing adults ready to become family makers and business builders. A fullfilled third decade of life is an ideal preface for a forty year working life.
How hard do we work? That is entirely up to the individual. People work hard happily when they are engaged with their work. Women work as much for self fulfilment as they do for revenue. Return on effort is such a broad field it is to great to drw any conclusions. I simply suggest it is not so much about how hard or long one works, optimal performance comes from through being self motivated, interested and engaged with ones activity.
Beyond that there are so many other improvements to aid ones work throughput, and the most obvious is in miserble city planning that forces people to spend an average three hours a day in cars driving to and from their work on crowded roadways.
Harry @38, Kwang Ng is far from the first to argue that the zero-sum nature of competitive tournaments for income rents makes heavy taxation of high incomes welfare-improving on balance. IIRC Robert Frank wrote a whole book arguing just this in the late 90s.
It has always semed quite a strong argument to me. It flows through to Emmanuel Saez’ argument that estimated marginal utility in income diminishes so strongly (presumably because of this effect) that we can effectively ignore the utility effects of taxation on the well-off and just set the top marginal rate at the Laffer revenue-maximising rate (about 70 cents in the dollar in the US).
Something that has always annoyed me about “productivity” measures is that they only measure the productivity per capita of the employed workforce, rather than that of the potential workforce or whole working age population. Since low-skilled and marginal workers are the first to be laid off in a recession, and our reserve bank maintains an unemployment rate of 5%+ to either keep inflation down or maintain a reserve army of the unemployed (depending upon your political interpretation), any rise in unemployment is usually accompanied by a rise in productivity as “unproductive” workers get scrapped, and vice versa. Of course, significant amounts of the high productivity of the employed then have to be taxed away to provide unemployment benefits, medical services and prison cells for the unemployed. I feel confident that if average productivity were measured across the whole potential workforce, with the unemployed given a productivity of zero or negative, the economic history of Australia since the abandonment of full employment in the 1970s would look very different.
I really must get me one of those flat screen TVs.
You’re not allowed to buy a flat screen TV unless you get it with your baby bonus.