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[00:00:34] No, there's there's lots of different things that go into increasing our productivity. Our plan
[00:00:39] for growth that we've set out involves investing in infrastructure, innovation, and skills. I think
[00:00:46] of it like that. So infrastructure we've talked a little bit about actually earlier on in the
[00:00:49] program, that's going to help drive up our productivity, not to get technical about it.
[00:00:53] There's something called agglomeration economics making sure that our cities can perform at
[00:00:57] their highest potential. So those investments will help us do that. We know that they would
[00:01:01] provide that. So you cluster all the clever people and all the productive people in one place,
[00:01:04] you get your own images. No, it's not so much about the clever people, but for a given city,
[00:01:07] for it to maximise its potential, we need to make it easy for people to move around it.
[00:01:11] So that's what those investments will do, and we know that economically that will make
[00:01:14] a difference. So that's the infrastructure piece, for example. Skills we've just
[00:01:17] talked about and giving people the tools they need to get better jobs, and we've got a
[00:01:21] range of things that we're doing there that we haven't done before actually.
[00:01:24] This is the Debunking Economics podcast with Steve Keane and Phil Dobby.
[00:01:31] So some great ideas there about improving productivity, at least in theory,
[00:01:35] maybe he should talk more about that as he prepares for the next election. But hang on,
[00:01:40] he said all that stuff, that recording was 2021. Here we are, three years later and
[00:01:44] productivity is going nowhere. So what went wrong? How can the man with the big ideas,
[00:01:49] soon to be Britain's former prime minister, have had so little impact on improving productivity?
[00:01:54] But isn't it one of those things that everyone talks about, everyone has ideas about,
[00:01:58] and nobody ever seems quite able to solve? As we ask, productivity. Has anybody actually
[00:02:05] got a clue on how to fix it? Well, productivity is clearly important for any economy. It's all
[00:02:16] about getting the most out of what you put in. And there's lots of ideas about how you do
[00:02:21] that. We just heard some of them from Rishi Sunak. But there's also the question
[00:02:24] about how you assess whether you're actually doing the job well enough. Are we measuring it in
[00:02:28] the right way? And if so, why has productivity fallen so much since the pandemic? And are we ever
[00:02:35] going to get it back to the same extent? It wasn't great before the pandemic, but it's even worse
[00:02:39] now. So Steve, first of all, let's look at that question about how it's measured. I mean, we often
[00:02:43] do use GDP as a measure of output, which is a monetary value, isn't it? It's the turnover
[00:02:50] of everything that we've produced. And I guess that's fair enough, isn't it? How else can
[00:02:53] we measure output other than the aggregate income, looking at GDP and then looking at that for
[00:02:59] each hour work to get our labor productivity? I mean, it seems like a simple way of doing it.
[00:03:05] Yeah, well, what you're starting off with is a number of units produced per worker. And the
[00:03:11] trouble is that's where the distortion starts because, and this all evening, the classical
[00:03:16] economic theory amplifies this because the conventional way that economists think which
[00:03:20] starts from Robert Solow back in the 1950s is that they thought, well, you've got to have
[00:03:25] technology as a separate input into their production functions. So they have technology
[00:03:31] times labor times capital raised to different powers, but that's the basic formula. Those
[00:03:36] three things model applied together. And then when they measure labor productivity,
[00:03:41] they often put it in the sense that output is determined by the workers.
[00:03:45] Now, if we were living back in ancient Mesopotamia or in feudal England, maybe the quality of the
[00:03:55] labor is a major determinant. But what's the major determinant these days of productivity
[00:04:00] is the machinery. And look, the number of workers you have reflects how many workers
[00:04:03] you need to operate a particular machine most efficiently. And instead, because we've sort
[00:04:09] of separated technology out and talk in terms of labor productivity, we talk as
[00:04:13] if it's making each worker produce more output as the soul input to the system when it fundamentally
[00:04:20] comes down to the machinery you use and how many workers are needed to develop that to
[00:04:28] manage that machine. So we're looking at the wrong thing, basically right from the very outset. We
[00:04:34] just thought ourselves by focusing on individual humans rather than the system in which they're
[00:04:39] working. Well, a company obviously measures it slightly differently, don't they? So if
[00:04:42] you're looking at, is our company more productive than it was five years ago, you'd be looking and
[00:04:46] saying, well, are we making bigger profits? Because that's the, as far as a company is concerned,
[00:04:51] that's the real measure of productivity. How much money are we getting for all the investment
[00:04:55] that we've made? It's hard for, how many people you've got employed in that company
[00:05:01] is a bit irrespective to that number. In fact, you would probably find that you could
[00:05:04] mechanize more and employ people less and improve your productivity. But you don't really care
[00:05:09] about labor productivity, you just care about profit. Yeah. Well, and again, that harder for do
[00:05:15] harder to do that for a country, of course, you can't, you've got to do it at some aggregate level.
[00:05:19] So we'll use GDP as the measure, but it's not so much the way we measure as the way we try to
[00:05:22] understand. And by focusing on, by being misled by the measure and saying output per worker
[00:05:29] implies that we can get more output per worker, the GDP will rise because of measuring GDP.
[00:05:36] And when you talk in terms of labor productivity, you're talking how many units of GDP and monetary
[00:05:40] measure divided by how many workers you have. And it implies that if you can boost that ratio,
[00:05:46] then you're going to have more of the numerator, the GDP as a result of it. But it's putting
[00:05:51] the emphasis upon the skills of the individual worker rather than saying, look, we live in an
[00:05:56] incredibly complicated industrial production system in the modern world and energy,
[00:06:03] the harnessing of energy and using energy more effectively and using more energy period,
[00:06:09] the major things which determine how many units you produce, not the workers themselves and
[00:06:14] setting up the skill levels of the individual workers. People have got to be trained for
[00:06:17] particular machinery. And you need particular skilled workers to be able to both create
[00:06:23] that machinery and to manage it as a machine tool workers and things of that nature.
[00:06:31] But we've got the wrong focus by putting the emphasis on making the workers work harder
[00:06:36] when it's really a case of making machinery that uses, unfortunately, more energy and does
[00:06:41] more with that energy. That's where the real boost in productivity has come from in the past.
[00:06:45] Is also the factor how much we're paying people? I've mentioned this before on the podcast.
[00:06:49] If you pay people more than their wages add to the GDP for the nation so that they have
[00:06:54] more to spend, so they're spending more. So for example, I put at prices for a client
[00:06:58] a few years back. So there's actually more export earnings because the client was overseas,
[00:07:03] so more export earnings for the UK. But I wasn't actually doing any more work. So I wasn't
[00:07:07] any more productive. I was still outputting the same amount of work but I actually had
[00:07:12] more money so I was able to spend in the country. So I had contributed more to GDP by
[00:07:18] doing that. So I wonder if I was adding to productivity just by asking for more money
[00:07:23] even though my output was the same? I mean it's a quandary, isn't it?
[00:07:26] Yes. And this is the real problem that we've made this thing about productivity per worker
[00:07:31] under a struggle of the distribution of income between labor and capital. And labor doesn't
[00:07:35] have anything like the bargaining tools it used to have. Back in the days when they actually
[00:07:39] had trade unions with some muscle, these days workers are easily sacked and the emphasis seems
[00:07:46] to be upon getting as much of the surplus generated by a particular production system
[00:07:50] in the hands of the capitalists rather than the hands of the workers. But I mean
[00:07:55] we see what happens with things like the with Boeing for example. And I'm sure if you measure the
[00:08:00] per worker productivity before all the floors started to make the plane start falling out of the sky
[00:08:05] then you know where they would have been getting improved metrics per worker in their internal
[00:08:09] measurements. But they destroyed the engineering foundations of the company and doing it.
[00:08:15] And ultimately it's the engineering that gives you that sustainability over time.
[00:08:19] Right. And then that top line measure for that company is how
[00:08:21] profitable they are. And they're seeing their profits nosedive because they are less
[00:08:26] efficient as the measure as a whole. But I'm interested in this relationship between
[00:08:31] productivity and inflation because that seems to be affecting quite a bit now in that central banks
[00:08:36] are saying well you know if we're going to bring inflation down and we're going to bring
[00:08:39] interest rates down we need to see productivity improve. So I would have thought actually
[00:08:47] you know inflation would help productivity because you're working the same hours.
[00:08:51] I know now the productivity is ultimately mentioned in deflated terms so they go through and
[00:08:55] they'll deflate the monetary value using various indices that are used to try to distinguish how
[00:09:03] much of an increase in nominal GDP is due to a change in prices and how much is due to a change
[00:09:09] in output per head. So that's irrelevant to the productivity question. The inflation issue
[00:09:15] is cancelled out to some extent. Because central banks are making a big point out of you know the
[00:09:18] role of inflation and productivity and how we need to see productivity improvements
[00:09:23] before they can lower interest rates. So if inflation is going at 10% say for example just
[00:09:27] to keep numbers straight and so I am asking for 10% more in wages to try and keep up
[00:09:37] my output is the same as it was before. That's what the indices were trying to work out.
[00:09:41] Yeah GDP goes I guess it doesn't make it shouldn't make any difference. It increases by 10%
[00:09:48] therefore you know its output per worker stays the same once it's linked to inflation.
[00:09:54] But you've got I mean you've triggered a couple of important issues here
[00:09:59] which is you're focusing on how the bank even was trying to control inflation and
[00:10:04] believing they're putting up interest rates they are going to reduce the rate of inflation
[00:10:08] and the argument really comes back to saying money wages rising faster than the increase in
[00:10:14] productivity which is what causes rising prices. And when you take a look at the data and that's
[00:10:18] a terrible thing that economists really shouldn't do this but anyway when I took
[00:10:22] a look at the data for my most recent book the one I'm serializing on on Substack and Patreon
[00:10:29] the change the increase in inflation had there was a small period early in the pandemic
[00:10:34] when wages were rising faster than the rate of inflation but for most of the whole period
[00:10:39] in pandemic particularly once the government subsidies kicked in which were essential otherwise
[00:10:43] we would have had a financial crisis back then. So when the government subsidies for workers who
[00:10:48] couldn't do an over a furloughed and so on started flowing into the workplace there was
[00:10:53] enormous monetary demand and this is MMT makes the argument yes you can have you know if you
[00:11:00] you're a level of government spending too much then you might have inflation as a consequence
[00:11:04] and in that sense yes that did occur but the inflation was in margins it wasn't a case of
[00:11:09] workers putting up their demanding wage rises greater than the rate of inflation courtesy of
[00:11:13] a level of monetary demand it was firms putting up markups and when I looked at it I was like
[00:11:18] the you know of about this over 20 quarters that we went through that were you could regard
[00:11:23] as being the pandemic period three or four of them had had money wages rising faster than
[00:11:29] productivity all of them had a slowdown in output per head which is the you know that's the labor
[00:11:35] oriented metric for productivity but about 15 of them had markups rising faster than the rate
[00:11:41] of inflation and we had you know I do that Steve Keenan thing friends talk on a Saturday
[00:11:46] Denise Hearn and we had on last week did an empirical study which I've loved I want to
[00:11:50] get the results from it she said that markups have risen look at the look in the change in
[00:11:55] markups and the change in markups over time has been greater than the change during the rate of
[00:12:00] inflation for most of the period since not the 1970s so markups have been rising but she made a
[00:12:06] comment about average markups have risen that's the rate of change of markups she said that
[00:12:10] average markup has risen from something like 25 to 60 percent over the last 40 years now I want
[00:12:16] to see that data because you don't actually get those calculations of markups done by
[00:12:22] statistical agencies they ignore that issue but per research implied that markups are now
[00:12:28] such that your cost of production might be one and your price ends up being three
[00:12:32] because of the markup put on by corporations so that's where inflation is coming from and if
[00:12:37] anything's seeing a decline in productivity it's too much going to the owners.
[00:12:41] Actually I think central banks might be onto it a little bit in that they are now saying well
[00:12:44] we want to see less you know we want to see increases in wages being absorbed by companies more
[00:12:49] because they recognize that if it just gets passed on then it's a it's a losing battle against
[00:12:53] inflation isn't it but during during the pandemic here's the interesting thing because
[00:12:57] productivity shot up of course I mean massive spike when we were furloughing and of course it would
[00:13:03] because hardly anyone was working and those who were working were obviously being very productive
[00:13:08] but also there was a slug of government money as well so that was all adding to
[00:13:12] GDP so the country's output wasn't hit as hard as it might have been because of the pandemic
[00:13:18] and very few people were working so if you look at GDP per hour has worked of course it spiked
[00:13:23] which means a factor in this equation has to be how much government money is being pumped into
[00:13:27] the economy. Not so much in the in the in the measuring of productivity but but it's
[00:13:32] it's one of many measures. Output if you if you measure productivity as GDP per hour worked then
[00:13:37] it would be a government this is one of the paradoxes in working with monetary morons otherwise
[00:13:43] known as neoclassical economists who try to pretend the system's a barter a barter economy rather
[00:13:49] than a monetary one so they try to find every reason not to include money in their analysis
[00:13:53] and you know at the same time they're telling us how much money should be created by the
[00:13:56] government blah blah blah but there's no no country has achieved growth in physical output
[00:14:02] per head which hasn't also had a growing money supply and there are two sources for the growth in
[00:14:07] the money supply government spending more than they get back in taxation and banks lending up more
[00:14:11] than they get back in repayments now when you are quarterizing the government all the time
[00:14:17] and meaning you don't have government money in it created by by by the act of spending more
[00:14:23] than you bring back getting back in taxation you're stifling the monetary facilities that
[00:14:29] enable people to you know consider buying a new product or consider investing and said they've
[00:14:35] got to borrow to the investment and banks won't finance money by firms that are borrowing
[00:14:39] they'll find it's money by people are borrowing borrowing to buy financial assets but you try
[00:14:45] getting a loan for working capital or a new investment and it's much much harder these
[00:14:49] days so you don't have to you don't you can't include it in your analysis of
[00:14:56] productivity but you've got to include it as one of the factors that determines whether
[00:14:59] productivity rises or falls over time and an excessive emphasis which has been the last 40 years or
[00:15:04] more near 50 years since the 1970s of restraining government money creation has restrained the
[00:15:11] capacity of people to finance the type of investments and innovations that lead
[00:15:16] to productivity growth yeah now accepting that GDP is not a monetary measure it's really
[00:15:21] combinations of the turnover of money and the supply of money that's measuring our
[00:15:25] productive output our total output for the country but if the government is putting more
[00:15:29] money into that money supply then that is obviously going to expand output and assuming
[00:15:35] we've got the same number of workers then that should add to productivity shouldn't
[00:15:40] well it's the I mean that's why I like syntax emphasis upon the infrastructure is something
[00:15:46] that implies a bit of intelligence in government policy for a change I'm a bit shocked actually
[00:15:51] but that that I argue me is that you you need what causes innovation is often the confluence
[00:15:59] of different people from different industries in the same region and innovation is really often
[00:16:04] not a case of doing something more efficiently producing the same widget you know more rapidly
[00:16:08] it's producing an entirely different type of widget by combining combining ideas from two
[00:16:13] different industries so my favorite example there is which I think I think it probably
[00:16:17] originated in California but it may have been Australia sailboards um sail sailboards were
[00:16:23] something you combine surfboards with with with sales and bang you've got a whole new industry
[00:16:28] and a whole new sport it helps to have people in those two industries in the same town because
[00:16:34] then if the thought of the idle thought occurs to one or the other they can carry that idle
[00:16:38] thought to a finished product but if you have the idle thought and the country only produces
[00:16:42] one or the other you're not about to you're not likely to be able to do the the other
[00:16:47] combine the other element you need so that the idea of infrastructure to enable the
[00:16:52] glomerations to occur is actually quite sensible well that that clip that we played right at
[00:16:57] the very beginning before you and I started talking was really took the soon act the
[00:17:02] I think at the time actually he was the the chancellor of the Exchequer or the treasurer
[00:17:06] not the not the prime minister of the UK he was talking about yeah infrastructure investment
[00:17:14] innovation and investing in skills the three things that he said was going to increase
[00:17:19] productivity in the UK he was saying that in 2021 we're in 2024 now uh productivity has gone
[00:17:25] down productivity was flatlining before the pandemic and it's you know it's it's struggling to get
[00:17:30] back to anywhere near where it was before the pandemic in fact labour productivity within the
[00:17:35] UK fell if we look at it measured the exact put power where it fell 0.3% in the in the first
[00:17:41] quarter of 2024 that's on top of a 0.9% decrease in the previous period so year on year it's just
[00:17:47] up 0.1% so whatever for all the fine words and we hear this all around the place and it makes
[00:17:55] sense yes investing invest in infrastructure make cities work harder skill people up so that
[00:18:02] they can be more productive power work I feel like we've been hearing that for decades and it's
[00:18:07] not working so there's something we're missing isn't there well the thing we're missing is
[00:18:10] not the obsession about reducing the government's deficit the idea that that's the most important
[00:18:16] fact factor in setting a budget is is to make sure you tax more than you spend
[00:18:20] that's but putting that in in the way that I I look at MMT that's saying destroying a
[00:18:26] fiat money improves the economy because fundamentally the source of fiat money
[00:18:30] creation there's a government spending more than it gets back in taxation it doesn't borrow it's it
[00:18:35] converts some of the reserves that it's created by that process into income earning bonds for the banks
[00:18:40] was actually a favourite of the financial system and not something which is which is taking money
[00:18:46] away from the private sector either but by obsessing about that by making that the sole
[00:18:53] the main the main input and everything else is secondary including productivity
[00:18:57] we've seen a fallen productivity it says there's the level of innovation so you can't
[00:19:00] see can't grow productivity or see innovation coming if you're starving the country of cash
[00:19:05] that's what exactly and that's what they're doing the whole idea of trying to avoid a government
[00:19:10] deficit is avoiding government money creation avoiding fiat injections into a mixed fiat credit
[00:19:15] economy and wondering why you don't get innovation at the same time you've let the
[00:19:19] finance secretary do what the bloody world likes the finance section our rules politics I talk
[00:19:23] about a finance rather than a political military industrial complex is now a political financial
[00:19:28] complex but with with that emphasis upon finance as well the banks no longer lend don't lend anything
[00:19:37] like what they used to lend for working capital and for innovation so you haven't you're not getting
[00:19:42] the supply for innovation out of credit based money the government starving fiat based money
[00:19:47] and they're wondering why you know why no why no innovation is apparent well very quickly
[00:19:51] before you go to the break I mean it is a it is a fine line isn't it though so if you if you put a
[00:19:55] lot of government money into the economy and put it into big infrastructure projects for example
[00:20:01] which might have some payback long term and even short term because you're employing people and
[00:20:05] they're working hard but if you're given too much money perhaps they work less hard so for
[00:20:09] example I don't know what the figure was for the HS2 in the UK but you can't help feeling
[00:20:15] if they're given half the amount they might have worked twice as hard on getting it done
[00:20:18] I don't know about that but I think you've also got to have decent planning for these types of projects
[00:20:23] and it's obvious that China is doing a dam site better on planning those sorts of things than
[00:20:28] is happening in the UK or the USA. Yeah all right look when we come back I want to talk about
[00:20:36] resources versus money and the importance of capacity utilization as well I've got a
[00:20:41] Dobby family example which I think is quite interesting so we'll look at that when we come
[00:20:44] back it's the debunking economics podcast back in the second. Do you remember what it's like
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[00:21:52] professional post your free job on linkedin.com slash achieve today this is the debunking
[00:22:01] economics podcast with Steve Keane and Phil Dobby so we're looking at productivity this week how
[00:22:11] despite it being talked about ad nauseam around the world everywhere seems to be struggling
[00:22:17] with getting productivity up for whatever reason is it because as we said in the before the break
[00:22:23] was starving economies of cash is it because lost that ability to plan are we just not
[00:22:29] innovative anymore but see if I also wonder whether I mean because it's we're measuring
[00:22:35] money and hours worked rather than the and the output per hour has worked whether you know we
[00:22:42] are ignoring ignoring resources and those areas where there is a lot of capacity so there is no
[00:22:49] one to talk about that is I'll give an example I've successfully managed it's not working
[00:22:54] anymore but a few years back and I successfully got the kids to wash the car in in exchange
[00:23:00] for giving them extra data on their mobile phones so I mean I could have given them money
[00:23:06] but then that would be money that I didn't have to spend but I had all this excess capacity of
[00:23:11] data which I knew I'd never use but they wanted to use they would they were desperate for it
[00:23:17] so I could in effect give them something that I had a great deal of excess capacity in
[00:23:22] to produce an output that wouldn't have happened otherwise so my kids were being more productive
[00:23:28] not by using cash but by me taking something for which I had a lot of spare capacity and passing
[00:23:34] it on to them pretty neat by the way if anyone else is thinking of going down the same road
[00:23:39] but I mean that's an interesting example isn't it the reason why they were more productive is
[00:23:43] because there was a resource there for which there was a lot of spare capacity now we
[00:23:47] don't factor anything anywhere anything that complicated into when how we're measuring
[00:23:51] productivity in in an economy but perhaps we should well this is I mean that that's the
[00:23:55] essential point that really it's often the measures that distort how you think about a concept
[00:23:59] and by reducing adjusted to you know effectively scale in numbers you know per per time period GDP
[00:24:05] and labor you implies you've got to get more out of the labor to get more GDP but it's actually
[00:24:10] quite a complex in the ultimate case of a complex system the whole manufacturing
[00:24:16] in their minerals extraction energy extraction processing of those goods in industrial
[00:24:23] systems distribution of the output and so on it's an incredibly complex system if you look at it
[00:24:30] with the stylized way that mainstream economics encourages with its simplistic you know white
[00:24:35] board and GDP and labor and capital symbols and you don't look at the actual entire
[00:24:43] complex system that is the manufacturing systems through things like sankey diagrams or
[00:24:47] the work of the Harvard economic complexity laboratory then you do end up with having
[00:24:53] incredibly simplistic ideas about how you're going to improve something that you're measuring badly
[00:24:58] so it is a case that most most corporations have excess capacity for very good reason
[00:25:04] that again that's that contradicts mainstream economic theory so economists aren't even trained
[00:25:08] to look at the issue of capacity utilization pardon me and you don't look at the role of energy
[00:25:15] the ultimate resource of that energy you can't do anything so it's the availability of energy
[00:25:20] the transformation of energy into useful work the machinery that enables that to happen
[00:25:26] and then the extent to which you have other industrial sectors that enable you to do that
[00:25:30] production in one country rather than having to import or or you know rely upon third part
[00:25:37] you know third country so that's that's importing so pardon me I'm waffling but
[00:25:42] but it's it's you have to have a systemic view to be able to answer this question properly
[00:25:46] yeah all that but they would but they would say wouldn't they well you know yes but you
[00:25:50] but however you do it you you're going to get down to the same simple process that
[00:25:55] the energy is an input it's an input cost how is that energy efficiently used or
[00:26:03] accumulated or acquired well that gets down to the profitability of the energy company they're
[00:26:09] going to do whatever they can to produce it the most efficient way because they want to maximize
[00:26:13] their profits if we're buying it into it into the country then that's that's an import so that
[00:26:18] affects our GDP because the the balance of trade is a factor in that GDP calculation
[00:26:24] so it's say you know all of that you know forget your complex model Steve
[00:26:28] look at the profit of it you know the the market the market is going to efficiently
[00:26:32] produce this this energy that's the magic ingredient of course sorry I feel like I'm
[00:26:36] throwing the magic ingredient they might wave the magic wand of the market system competition
[00:26:40] Steve exactly the market exactly and so all of that's going to be affecting the GDP of the country
[00:26:45] so energy is factored into into all of that so all we're left with is how many people are being
[00:26:51] employed and you know and and because that's all we can influence you explain it are you
[00:26:56] actually running as the Tory candidate for your or your Mr. Devils advocate is standing here
[00:27:05] indeed and that's that's the unfortunate I mean I don't say that would be the argument though wouldn't
[00:27:09] it that however you whittle it down you get down to this this simple equation and it does it is
[00:27:14] the markets do the work yeah and that's the problem and we have people who believe there's
[00:27:17] nonsense being in in charge of whether you decide to have industrial policy or not and that's one
[00:27:22] of the intriguing elements of recent times because the countries which have focused upon
[00:27:28] this you know neoclassical ideas of efficiency and and you know reducing the power of workers
[00:27:37] etc etc and busting up those terrible monopoly sellers of labor they're the ones which have
[00:27:43] suffered the last 15 to 40 50 years of pathetic levels of economic growth while they focus upon
[00:27:50] economic growth is the only way they're going to measure whether their society is as successful
[00:27:54] or not whereas China in particular has had a much more holistic attitude to how it puts an entire
[00:28:02] global economy together and have creamed the West in terms of the quality of the technology and
[00:28:09] ultimately also the cost competitiveness of what they produce so it should be a wake-up call
[00:28:14] to anybody who thinks you can reduce things to these simplistic measures but we've had simplistic
[00:28:18] people in charge for the last 50 years following whiteboard economics in the West and look
[00:28:23] and the result is the West is losing out dramatically to China while also ignoring what
[00:28:28] it's doing to the ecology etc etc well is it okay to use that as the top line measure though to say
[00:28:33] well okay let's look at ours per word as a proportion of GDP in relation to GDP as our
[00:28:38] measure of productivity let's use that that's almost like our you know the one stat we're
[00:28:43] going to follow but it's how you get there that is the question or is that just a meaning
[00:28:47] meaningless measure so for example for Rishi Sunak saying yeah we want to invest in infrastructure
[00:28:52] we want more innovation within the country and we are going to grow skills which has been in for
[00:28:58] quite a long time now so there's a lot of people all over the world if you do all of that would you
[00:29:02] see GDP power our worked improve if it was working would that be an okay measure or is
[00:29:08] there something else we should be using as a top line measure it's always something it's always
[00:29:13] something else because again this this is ignoring the complexity of the system and summarizing
[00:29:19] it in a few numbers and then and then having your decision making driven by those few numbers
[00:29:24] rather than looking at the overall complexity that's why I've got a great deal of time for the Harvard
[00:29:29] economic complexity study which I recommend if people haven't taken a look at search for it and
[00:29:34] you'll find it done by mainly by computer scientists there are some economists involved
[00:29:38] unfortunately but mainly computer scientists so it's intelligent and what they do is they
[00:29:42] take a look at the pattern of interdependency between different industries and then work
[00:29:47] out a metric by which they can say how far one industry is distant from another industry
[00:29:53] so and you'll find combinations occurring people would normally expect so art obviously depends
[00:29:58] upon the chemistry industry for example because you're using chemicals and a huge amount of art
[00:30:02] so those are two industries which are close together whereas others can be an enormous distance
[00:30:06] from each other now once you do that chemicals you smoke you talk about I mean what's the
[00:30:11] connection that helps you what's the chemistry are connections so you lost me on that
[00:30:17] oh you see everything you do without virtually much involves putting a chemical on another surface
[00:30:23] right okay okay not obviously acting or then again one wonders but but but the fundamentally
[00:30:29] what you get they have this overall pattern for industries in general and then they look
[00:30:34] at how much of a particular national economy has those different divisions together and what
[00:30:41] what areas are potential areas for expansion and technological development because if you have two
[00:30:48] industries which happen to be close together and that's that's the example I gave before the
[00:30:51] break the surfboards and the and the sails they're close together you can innovate and come
[00:30:55] up with something new so that that's the prime but also I can see that so the more complex
[00:31:01] the greater complexity within the economy and the more opportunity there is for companies to
[00:31:06] work together and therefore you know you you get closer supply chains as well so all of that creates
[00:31:11] efficiency for companies so therefore you'd expect companies to be more productive individually
[00:31:16] but that top line so I can see that you could say well okay if you've got a more complex economy
[00:31:21] then you're going to have greater economic output greater economic growth so you'd still
[00:31:25] be going back and saying well that's just an important contributing factor you'd still
[00:31:30] be looking at something like GDP for the top line measure wouldn't you though so you can see whether
[00:31:33] you're you do but you use the top line measure as your metric you don't use it as your guide as
[00:31:38] to what to do yeah you work out whether you're doing this working on that basis and that's
[00:31:43] where the economic complexity lab comes up being against comparative advantage for example and
[00:31:47] saying if you look at countries that focus in their so-called comparative advantage they end
[00:31:51] up growing more slowly than ones which have a diversified industrial structure because the
[00:31:56] diversification gives you capacity to consider bringing together industries
[00:32:00] which don't currently exist and if you have a totally specialized industry system you don't
[00:32:06] actually have those potential synergies out of creating new combinations to create new industries
[00:32:11] so this is the it ends up with a farmer you have to reflect the underlying complexity
[00:32:19] of the production system uh till you're able to even talk about how you're going to improve
[00:32:25] over time and what comes out of the Atlas of Economic Complexity is advice which is totally
[00:32:30] contrary to neoclassical thought and if I had to think of anything which dominates any ideology
[00:32:35] apart from give as much as I can to my mates dominating the Tory party and for that matter
[00:32:40] but the republicans and democrats back in the usa as well it's it's you know compared
[00:32:45] it's conventional economics comparative advantage specialization blah blah blah
[00:32:49] they are anti they are anti the wrong thing yeah and equally focusing on the government deficit
[00:32:55] that's that's if we're desiring it to be zero or negative and there's the current obsession
[00:33:01] that's destroying part of what's necessary to enable that system to grow in the first place
[00:33:06] it's with sucking cash out of the economy so how can you grow if there's no money exactly so
[00:33:10] so um this preoccupation with GDP per hour worked has another problem as well one is this
[00:33:16] a tendency for you to look and say well how do we do compared to the rest of the world so
[00:33:22] countries with the deal in money rather than producing stuff like island for example
[00:33:27] in 2019 before the pandemic in us dollars sort of allowing for purchasing parity it was 125
[00:33:34] dollars per hour work compared to the uk which was 54 which is way less but there's no comparison
[00:33:42] because they're not producing stuff they're just moving money around so if you look at gdp per hour
[00:33:47] worked well that you know that that's form-filling and working on spreadsheets isn't it i mean the
[00:33:54] island is such an unusual example they've managed to get away with exploiting
[00:33:57] differences in tax regimes between the other members of the european union but they the
[00:34:02] gap between uh there's so much of the money goes to the hands of national and the transnational
[00:34:08] corporations taking advantage of their low tax rates that you have to distinguish gdp
[00:34:13] gross national product from gross national income um because the the gdp figure greatly
[00:34:18] overstates the standard living in in in island uh so your islands are island and luxeburg are two
[00:34:24] countries when i when i put together collective statistics the best thing you can do is leave
[00:34:30] their numbers out of the whole damn system because they distort things too much because
[00:34:33] of the balance of trade because they've got some yeah because they've got so much in the way of
[00:34:37] exports but i mean even if you just look at uh the uk versus the united states we're on 54 in the
[00:34:42] uk 73 for the united states do they just work harder they've got bigger companies no they've
[00:34:48] got better technology they've degraded it dramatically but again it comes down to better
[00:34:51] quality technology and this is something i when i when i wrote the most recent book one that
[00:34:56] i'm serializing uh the on patreon and sub stack um i looked at the way in which economic
[00:35:04] theory developed its model of output and production and the initial uh there's a huge huge errors and
[00:35:11] even using those concepts in the very first instance but cob and douglas who gave us the
[00:35:16] production function neoclassicals love these days the cob douglas production function
[00:35:20] when they first did their numbers they looked at uh they they fit an equation where output was
[00:35:26] a constant multiplied by labor raised to one power to capital times capital raised to one minus
[00:35:32] that power and they then got the coefficients which can which confirm we which corresponded to
[00:35:39] neoclassical theory about income distribution which is why the neoclassicals lashed onto the model
[00:35:44] so much but they didn't have it they didn't have a separate role for technology and then in the
[00:35:49] 1950s robert soler said well we should actually include technology as a separate factor of
[00:35:53] production and then when he put that in and then regressed that against the current data he
[00:35:57] simply assumed that the income distribution figures were correct so labor's coefficient
[00:36:02] remained at i think 0.75 at that time and 0.25 for capital and they then regressed the equation
[00:36:09] against change in to change an output regressed in change in technology plus change in labor plus
[00:36:14] change in capital and they found that between 70 and 85 percent of the increased output had nothing
[00:36:20] to do with labor and capital that all came out of the technology component yeah and that's
[00:36:24] actually that's a but that's actually a mistake of the reason being that technology is not an
[00:36:29] independent factor technologies embodied in the machinery that you put together for a production
[00:36:34] process so cob and douglas were quite right not to separate out technology and by doing by doing
[00:36:39] a putting technology in a separate box this is where we've had this obsession about productivity
[00:36:44] per worker coming from which has distorted our capacity to actually create higher productivity
[00:36:49] per worker but but also i mean if you i mean the end the end result of all of that which
[00:36:54] we're seeing isn't it that companies will mechanize more use technology more they'll employ
[00:37:01] people less because those people will be working more efficiently so for example the number of
[00:37:05] people who work in microsoft for the output for that three trillion for companies worth three
[00:37:10] trillion is very small compared to for example a chain of retail stores so you get a great
[00:37:17] you know output per hour worked so hugely productive companies but a disaster when it comes for
[00:37:24] you know spending the income around yeah and this is the other thing what we actually had
[00:37:28] by focusing by saying don't worry about the distribution of money in the cake let's just
[00:37:32] get to grow the cake we've had economists and politicians putting up policies that fail to
[00:37:37] grow the cake but increase the the distortion of income distribution so the income and that's
[00:37:42] where the markup issue comes in if you've got markup which have gone from say roughly 25
[00:37:46] percent above cost of production to determine the prices to where it's 65 percent then you've
[00:37:53] got a massive increase in inequality and then that feeds back in terms of your demand in your economy
[00:37:58] again because it's only the wealthy who are buying relatively to what it was say 50 years ago so you
[00:38:04] have a much more narrow demand base and guess what you're going to get lower growth because the
[00:38:09] rich don't spend as much on goods and services per capita and per dollar as the poor do and
[00:38:16] and the cake's not growing because it gets back to this issue about well you're sucking if you're
[00:38:20] sucking money out of the economy how can the cake grow so it's been a it's been a shadow game
[00:38:25] these shadow discussions are all predicated without people being conscious of it on an economic
[00:38:30] theory which is wrong yeah all right very quickly before we go there's an argument that from some
[00:38:37] I've heard this a bit recently the reason why the US is doing better with productivity
[00:38:43] so they've productivity in the US however you measure it but you know in terms of hours work
[00:38:46] by GDP but the economy anyways is strong people are employed the reason is because people were laid
[00:38:55] off in the United States and they found new jobs which were more productive so basically it sorted
[00:39:02] the economy out whereas furlough very important at the time in Europe the UK and Australia
[00:39:08] people's jobs were kept open for them and so you know many jobs weren't really needed
[00:39:13] but we had government money propping them in supporting them which wasn't particularly productive
[00:39:18] so sometimes perhaps you do need a bit of it really are unequivocally being a choreocamper
[00:39:23] well this is the argument given I mean I can half see that argument that in fact if you
[00:39:28] you know if you do prop up jobs and they're not jobs that are needed no one's going to say
[00:39:32] anything are they they're just going to keep on working less and less which yeah I am
[00:39:37] sound like a Tory candidate now because I'm going to say it's not good for them they would feel much
[00:39:41] more satisfied if they had a job which actually had a more productive output oh yeah I think you're
[00:39:46] actually most likely win that campaign so congratulations well so there you are you're
[00:39:51] going to join me you're going to come over to the dark side Steve join us in the in the
[00:39:55] Tory party there you go well it's the only thing it's growing in town after all but it looks
[00:40:00] like its faces are fairly severe shrinkage but it is but it is a point isn't it about
[00:40:05] productive jobs so and you know in some of you we've talked about in the past about bullshit
[00:40:09] jobs as well which can be in large companies so this guy called David Olvitch who's a partner at
[00:40:14] a Silicon Silicon Valley venture capital company called Anderson Horowitz who he reckons you could
[00:40:20] get rid of half of the white collar staff at Google because they don't do any real work he said
[00:40:24] the company spent billions and billions of dollars per year on projects that go nowhere for over
[00:40:27] a decade and all that money could have been returned to shareholders who've got retirement
[00:40:32] accounts but instead they they're paying people I remember my dad and I'm don't know so question is
[00:40:40] is that necessarily a bad thing I remember my dad saying my dad worked for ICI for years
[00:40:44] and he said there are a few people in his office who did absolutely nothing at all but nobody said
[00:40:48] anything he said you know they just looked a bit bored and they kept they kept their jobs
[00:40:52] so they were hugely unproductive but I guess if they weren't there they'd be claiming the
[00:40:55] doll somewhere so does it actually make too much difference no I think we're focused far too much
[00:41:00] on thrashing the workforce and not enough on thrashing the people setting the markups
[00:41:05] and you know we ended up with a very distorted income distribution that's partly why you have such
[00:41:10] low levels of growth because the money is going to people who don't spend they buy assets instead
[00:41:15] and you know again this is we can actually make a judgment on the whole neoliberal period now
[00:41:21] because we've had neoliberal policies in charge for pretty much 50 years so I date
[00:41:25] the start of the neoliberal period to 1974 which was both when there was a
[00:41:31] actually was a credit-based crunch or globally a collapsing credit-based demand but also the
[00:41:37] growth of inflation at that time that led to the takeover of government policy by the freedmen
[00:41:42] ites and and the whole now neoclassical resurgence occurred at that stage when you look
[00:41:47] at economic growth from 1955 to 1975 so 20 years there and compare that to the last 50 years now
[00:41:55] the average rate of growth in the 50s and 60s and early 70s was about twice what's been achieved
[00:42:01] under neoliberalism so on its own merit on its own metrics it's failed so but you know the
[00:42:08] ultimate in neoliberalists Rishi Sunak saying invest in infrastructure invest in innovation
[00:42:15] skill up the workforce we don't see anything wrong with that he's just got to actually spend
[00:42:21] the money to make that happen which is the bit he struggles with that's the hard part because again
[00:42:25] it's come back to the budget restraints and bang you don't do it you don't provide the money
[00:42:28] that's necessary so it's all words do you think anyone's ever going to get productivity beat
[00:42:32] because we've been talking about this for decades and no one ever seems to quite get get a
[00:42:36] handle on well and we're seeing individual examples of what actually gives gives a rise to that
[00:42:40] and often it's you know producing everything in house that's one thing which which SpaceX is
[00:42:45] extremely good at and and the comparison of their success rate versus the farming everything out
[00:42:50] and and and you know the what do they they call it when you distribute the production amongst
[00:42:57] outsourcing it's obvious in sourcing works better because you've got a whole bunch of engineers
[00:43:02] working together and ultimately what gives us rising productivity is engineers working out
[00:43:06] ways to more to get more energy into a process to enable that process to be done
[00:43:13] you know exploiting more energy now that's that's been the focus and that's one we can't
[00:43:17] sustain because hey we live on a planet hard to how to realize that but we do actually live on
[00:43:21] a planet with physical boundaries and we're destroying the capability that's just and by
[00:43:26] the amount of energy we're using so I don't think the only solution for the energy for
[00:43:30] the productivity dilemma in the long term is to get us off planet but that's
[00:43:35] obviously into the area of science fiction at the moment and there we go again yeah absolutely
[00:43:40] all right well I mean but that idea of of insourcing for a company I mean that's a bit like
[00:43:46] on shoring for a country as well isn't it and maybe the tide has turned a bit because we are
[00:43:50] starting to see post-covid the long supply chains don't work and as you say that the
[00:43:55] economic complexity argument is that you got to do more within your country if you're going to
[00:44:00] get productivity gains as a whole yeah so yeah so maybe we are heading in the right direction
[00:44:05] it's just taking time and you've got to spend money on it all right good to talk Steve
[00:44:09] some positive stuff see you soon see you next time okay my the debunking economics podcast
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