The MFP illusion

Expanding on a post a little while ago, I have a piece in Inside Story arguing that multi-factor productivity, the Holy Grail of microeconomic reform for the last few decades, is a residual that is and should be equal to zero.

From getting the idea to publishing it took me a few weeks. That’s a huge contrast from last century when the best I could have hoped for is an article in a low-prestige journal, taking a year or more and reaching an audience of, at most, a few hundred.

That’s great for me, as I’m more interested in reaching a large intelligent public than in impressing my fellow economists (I have to do that to keep my job, of course, but it’s not my top priority). By contrast, the general direction of the profession has been towards fewer and fewer articles in an ever-narrower range of prestigious journals.

23 thoughts on “The MFP illusion

  1. “I have to do that to keep my job, of course ..” Really? How many tenured professors in Australian universities have been fired in the last 50 years? Deduct possible cases of gross personal or professional misconduct (attempted rape, large-scale falsification of data) or redundancy from the disappearance of students in say Egyptology, I expect you would be left with an empty set. Even though the Gradgrinds have tried to erode it, tenure and academic freedom are still real in most of the developed world. A good thing too.

    The president of my old Oxford college coud only be dismissed for “gross and persistent immorality”, a term inviting lewd speculation in the JCR over a contemporary test case. Goats in the quad, repeatedly? Harold Macmillian reportedly said that he liked being Chancellor of Oxford University because it was the only office from which he could not be ejected for any reason whatever.

    More seriously, the contents page of “Zombie Economics” does not list a chapter investigating why the zombie school succeeded in supplanting the pretty successful Keynesian view for so long in academic economics. Ken Rogoff has some thoughts on this. At all events, it involved a perversion of the professional system for reproduction (in graduate training) and reward (journal publications, Nobel prizes.) This ran counter to the usual rules: old ideas hang on, but eventually the Copernicans or Darwinians or Wegenerites or Einsteinians win, and the defeated ideas don’t come back. But Hawtrey did.

  2. “Tenured” doesn’t actually mean anything in Australia beyond “permanent” and “permanent” just means “not casual or fixed term”. Professors, like other senior employees, tend to be eased or squeezed out rather than sacked,. That’s not uncommon. It nearly happened to me in my sole stint as a tenured professor, but I managed to get a research fellowship rather than “taking the package”.

    To explain, I have been on fixed-term research fellowships for my entire career, with a couple of brief exceptions (including that mentioned above). Not complaining, as these are great jobs. But, if you want to keep getting them, journal articles are a must.

  3. You take the Productivity Commission to task for not caring enough about inequality. They would probably give the Werhner von Braun response, “that’s not my department”.

  4. @John Quiggin

    You could have taken the package and got another equally good job elsewhere. Back in the day when they could get away with it, several astute federal public servants positioned themselves in agencies that were being cut back, took the redundancy pay out, moved into another agency that was being cut back, and on and on it went. Some managed to pay off their mortgages using this strategy.

    Now that was multi-factor productivity.

  5. You are a prominent public intellectual in Australia John and you regularly provide a public service writing critical articles like this – and in fairly plain English. I think you have probably boosted the productivity of the Commission! I wonder if they will, as usual, maintain a Delphic silence.

  6. @John Quiggin
    Even the term ‘permanent’ (as a category of employment) has been widely if not universally replaced by ‘continuing’, which is a more accurate description. There are procedures for terminating continuing employment and they do get invoked when for one reason or another employers can’t or prefer not to use the alternatives of easing or squeezing out.

    Am I showing my age by seeing ‘MFP’ and thinking ‘Multi-Function Polis’?

  7. This struck me: “the average experience of the workforce doesn’t change much over time”.

    If, by experience, you mean “time on the job” then it’s true. But “experience” in the sense of “things learned by doing” really does change over time, and sometimes quite short times too. What you learn on the job as a farm-hand (plants, animals, weather) is very different to what you learn as a factory hand (process, precision, coordination). How many amateur databases wasted time before the knowledge both of how to build them better and the imperative of having them built by semi-professionals sunk in? Education does not capture this. Does the structure of the economy impart the right kind of skills? The public service used to be the training ground, but is no longer, and the historical evidence suggests that the private sector will not do so – if only because it is structured by present circumstance, not by future need.

  8. Its great to see articles like this, but I do think ideas still benefit from being tested and further developed in the academic literature. In particular, I’d like to see the argument properly formalised (something John is, of course, very good at) so it can be not only made logically rigorous (words have shades of meaning that can shift around where maths doesn’t) but also be put into forms where people who know what they’re doing can systematically test its assumptions. The culture of peer-reviewed journals and mathematised analyses has its pathologies, but also its real scientific merits.

    On words allowing slides, it seems to me that the biggest problem with the PC’s discussion of productivity in their report is the way they keep using the single word “productivity” as shorthand for labour productivity in some places and MFP in others, and how this allows dubious arguments.

  9. @Smith

    I always felt a bit miffed that I never managed a multi-earner like this. But my near-redundancy pushed me on to the research fellowship track where I’ve been ever since.

  10. From Inside Story: “… the ABS produces estimates of MFP that take account of changes in labour quality (education and experience). The series begins two decades ago, in 1997–98. On average, labour quality accounts for about 0.3 percentage points of annual productivity growth since then. And, you guessed it, once this improvement is taken into account, the rate of MFP growth over the two decades comes out exactly equal to zero.”

    What series are you using here? “Multifactor productivity – Quality adjusted hours worked” (ABS 5204.0 table 13) starts in 1994-95 and grew nearly 10 per cent over the last two decades.

  11. The fact that an economist of John Q’s quality does not, to my great surprise, hold a tenured professorship reinforced my point about bias inside the professional economics community against Keynesian common sense.

    The reward system for scholars generally should recognize a broader range of work within the teaching mission, including engagement with the general public in newspaper columns and blogs like this. See also Cox, Hansen and Mann.

  12. I am biased, but few characters tonight at David Cay Johnson lecture noted that without Mike West and John Quiggin the Antipodean landscapes would be filled with echo chambers …

    Sydney Ideas
    Our guest tonight @Sydney_Ideas @SydneyDemocracy is @DavidCayJ “We have a serious attack on democracy coming from many places”

    As the say in the old Czechoslovakia, Democracy is like bread – everyday you have to make it fresh – if you don’t make it fresh everyday – you forget it, it goes stale …

  13. @derrida derider

    The “logic” here is pretty simple. It comes down to whether you can measure these things with enough exactitude to verify the hypothesis. Given that “capital” is a heterogeneous category, imperfectly sampled, and labour likewise, and that formal education only roughly matches to economic contribution, the answer is likely negative.

    Aristotle: It is the mark of an educated man to look for precision in each class of things just so far as the nature of the subject admits; it is evidently equally foolish to accept probable reasoning from a mathematician and to demand from a rhetorician scientific proofs.

  14. Anyone for dry, technical economic argument? A counter-view from John Quiggin, that questions assumptions held in this ‘science’ of human economic behaviour – and its measurement.
    Economics is largely ideological and subject to no unchangable laws of nature, though it is a way of analysing the changing world [even if it sometimes misses the resulting changing ‘laws’].
    Dont beleive everything economists say – its all arguable.
    and finally, it is NOT just “the economy, stupid” – the economy is only one way of looking at society, NOT its sacred theory of everything! Thanks JQ for provoking thoughts and questioning the mythology.

  15. @James Wimberley

    Don’t worry about me. Whatever the limitations of the profession in Australia, anti-Keynesian bias isn’t one of them, and I’ve been treated very well.

    The job I currently hold (Australian Laureate Fellow) is the top prize in the Australian academic profession which is why it’s time-limited. Unfortunately for me, the rules don’t allow me to reapply for another one, but I have another fellowship lined up at UQ. After that, I may have to go for a tenured professorship, but it will be a step down, not up.

  16. @hobbes

    I was using 5260, Not sure why it has a different start date.

    Going back to 1994-95 includes the famous “surge”, but excludes the slump in the immediately preceding “cycle” (scare quotes because productivity “cycles” have no basis in theory or economic reality, IMO). So that starting date gives the best best possible number (not suggesting that you cherrypicked it, just that it works out that way).

  17. @John Quiggin

    But that series (Table 1 – Quality adjusted hours worked basis) also starts in 1994-95. Even starting in 1997-98 it grew over 4% to 2015-16 (latest available).

    (My 10% using 5204.0 was 1996-97 to 2016-17.)

    What slump in the cycle before 1994-95? It’s faster than the two previous and 2003-04 to 2007-08 as well (using selected industries since market sector isn’t available back then).

    (Admittedly the latest 5204.0 revised the last cycle to end in 2011-12, so take your point about dates being arbitrary.)

  18. Excessive haste on my part as usual. The productivity cycle runs to 1998-99. I took the cycle averages in ABS 5260 which average to zero. From 5240.0, the number was 99.2 in June 1999 and 101.6 in June 2016, so the average growth rate was a bit under 0.1 per cent.

    On the slump, I was commenting from memory. As you say, it was the cycle before that (well into the micro reform era) that was particularly low. When I first started looking at this they had numbers going back to the 1970s, which showed better MFP growth. They disappeared quite a while ago, but the slump stuck in my mind.

  19. The assumption of limitation and belief in something called the “finite” are in the Zombie category. We humans do not know enough to know what the limits are. How long has it been that we discovered we could make gasoline from algae blooms, or filter salt water to fresh through pressure, or? Humans have done so much with necessity and curiosity that even physics changes from era to era. It is indeed the will and the counter moralistic belief that good people are against growth, eating animals, and that all oil is bad that seems to supply the rationale to those who see only material retreat and the way forward. There are the Peak Oil – “sky is falling” people looking for a following and the many “well off” who think the poor and city dwellers are going to kill us all with CO2. The truth is far different, as you know, and this view, that is both linear and static, blindly ignores the rapid shifts in energy production technologies, storage, driverless cars, high-efficiency electric motors and the parallel movement towards decentralized energy production even in the industrialized world.I think the trick in shifting our sights to the huge capacity we now have, to produce anything we need and to recycle, transmute, and redesign is both in energy becoming cheap, individually owned and also cooperatively financed. We can become a new global body without much government involvement. Renewable energy has given us a vehicle to democratize energy, expand wealth (through its low-cost energy and by pushing the cogs curve, endlessly downward through providing 25-30 yrs of free energy from renewable generation owned by its users), offers us an unplanned path.
    I am happy to know there are more thinkers contributing a practical and fair vision to our future and offset so many well-meaning but darkly minded naysayers. We need a global forum to explore how to take the almost 50 trillion $ held in market investments by working people, around the globe with 28 trillion in the US alone and create the cooperative investment vehicles that expand wealth as they go. Any ideas of how we all start organizing? How about bringing all the energy cooperatives together for a meetup?

  20. “Let us not, however, flatter ourselves overmuch on account of our human victories over nature. For each such victory nature takes its revenge on us. Each victory, it is true, in the first place brings about the results we expected, but in the second and third places it has quite different, unforeseen effects which only too often cancel out the first…. Thus at every step we are reminded that we by no means rule over nature like a conqueror over a foreign people, like someone standing outside nature—but that we, with flesh, blood, and brain, belong to nature, and exist in its midst, and that all our mastery of it consists in the fact that we have the advantage over all other creatures of being able to learn its laws and apply them correctly.” – Engels, “Dialectics of Nature”.

  21. @joe

    Be careful you do not stray in ecomodernism. This will explain:

    “No revolutionary movement exists in a vacuum; it is invariably confronted with counterrevolutionary doctrines designed to defend the status quo. In our era, ecological Marxism or ecosocialism, as the most comprehensive challenge to the structural crisis of our times, is being countered by capitalist ecomodernism—the outgrowth of an earlier ideology of modernism, which from the first opposed the notion that economic growth faced natural limits. If ecosocialism insists that a revolution to restore a sustainable human relation to the earth requires a frontal assault on the system of capital accumulation—and that this can only be accomplished by more egalitarian social relations and more consciously coevolutionary relations to the earth—ecomodernism promises precisely the opposite.9 Ecological contradictions, according to this ideology, can be surmounted by means of technological fixes and continued rapid growth in production, with no fundamental changes to the structure of our economy or society.10 The prevailing liberal approach to ecological problems, including climate change, has long put capital accumulation before people and the planet. It is maintained that through new technologies, demographic shifts (such as population control), and the mechanisms of the global “free market,” the existing system can successfully address the immense ecological challenges before us. In short, the solution to the ecological crises produced by capitalist accumulation is still more capitalist accumulation. All the while, we have been rapidly nearing the “climate cliff” (i.e., the breaking of the carbon budget) represented by the trillionth metric ton of carbon released into the atmosphere, now less than twenty years away if current trends continue.11

    In these dire circumstances, it is dispiriting but not altogether surprising that some self-styled socialists have jumped on the ecomodernist bandwagon, arguing against most ecologists and ecosocialists that what is required to address climate change and environmental problems as a whole is simply technological change, coupled with progressive redistribution of resources. Here again, the Earth System crisis is said not to demand fundamental changes in social relations and in the human metabolism with nature. Rather it is to be approached in instrumentalist terms as a formidable barrier to be overcome by means of extreme technology.” – from “The Long Ecological Revolution” by John Bellamy Foster.

    The whole essay is worth reading.

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