The problem is not productivity growth it's resource allocation.
Markets only optimize for good market performance. Since we do nothing to stop all the non-market game playing (mainly regulatory capture, monopolies & advertising), our markets have been optimizing for firms best able to corrupt the process.
Why make an ISP that delivers good speeds at a low cost when you can bribe local government to make you the only supplier?
Why make good smartphone hardware when you can bundle a package of hardware, software and BRANDING! And charge vastly more?
Why sell access to information people want when you can sell access to marketing information on peoples searches helping pervert the information people use for their decisions?
The people in charge are too busy enriching themselves inside the existing system and as a result some huge fraction of the population is working to directly harm the interests of everyone else.
When used to allocate production, markets maximize efficiency. But when used to allocate consumption, markets often minimize happiness. For example, if you sell a glass of water to the highest bidder, then Poor Alice who's dying of thirst will be outbid by Rich Bob who wants to water his potted plant. That's not just a theoretical example, you can name ten such situations in the real world without stopping for breath. In other words, diminishing marginal utility of money means that markets are only half of the solution, not the whole solution. It's a pretty simple idea and I'm not sure why it isn't well known.
If your anecdote were accurate, rich people would not have most of the things; they would have all the things. Your model is so incomplete that it is misleading you.
Mind you, I'm not saying you'll love everything about the market when you understand it, but that anecdote is not a useful way of thinking about the world, because the model that it implies clearly fails to accurately model the world. Which is probably why it is not "well known".
"The rich don't have everything because they don't bid for everything,"
No, they can't bid for everything. It's a critical distinction to understanding how the economy works. It is impossible to create a single entity that buys everything, or a single entity that has all the money, permanently. It's literally nonsensical; the result is a form of "money" that may have the name on it, but no longer has any of the properties we associate with money.
You appear to be proposing a model where the rich are voluntarily not buying everything up for some reason. Which is probably just an element of your model that you haven't examined, because my guess is that as soon as you consciously examine that, you'll experience some cognitive dissonance because I bet you also model rich people as intrinsically greedy, and thus having no reason to voluntarily not grab resources.
People are really bad at following through the implications of models. They make a model, figure that the model touches reality in one or two places, then decide the model must be correct. But reality is pretty darned big, and it's really, really hard to fit "reality" into a simple model. Correct models must match reality everywhere, not just a few points. Useful models must match reality in more than just a couple of places.
Follow the model's implications through.... if Rich Bob really can outbid Poor Alice for a glass of water, then why isn't the world actually full of dehydrated poor people? (Not that some people do occasionally dehydrate to death, often for reasons only loosely related to wealth issues... all the poor people should be dehydrated because the rich people are, after all, constantly outbidding them for water, apparently.)
The very act of answering that question must, with mathematical force, also demonstrate why the model that produced the question in the first place is irredeemably broken. If the model is that irredeemably broken, then the question is also broken, and what it is trying to imply is also false.
(Which, again, is why this result is not "well known". It's, well, not true. The fact that markets are not perfect does not mean that all criticisms of the market are automatically true.)
I think you misunderstood my comment. Yes, the rich don't bid for everything, and yes it's because they can't. But that's still consistent with what cousin_it said.
The main flaw with your argument is that "if Rich Bob really can outbid Poor Alice for a glass of water, then why isn't the world actually full of dehydrated poor people?" is 1) a non-sequitur, and 2) doesn't make any sense because the if condition is false.
> No, they can't bid for everything. It's a critical distinction to understanding how the economy works. It is impossible to create a single entity that buys everything, or a single entity that has all the money, permanently.
So, because there cannot be faster than light cars, all transit laws are essentially pointless?
Maybe every pedestrian ran over by a car ever had it comming for daring to set foot outside of their homes too...
An example I can think of is healthcare. I’ve seen plenty of dogs in Silicon Valley with better healthcare than many people on the planet. The market is allocating resources to train vets to take care of animals better than people because that’s what people with money want. It’s easily justified as a sacrifice, “I’m spending $8k on Fido’s surgery instead of putting it toward a Tesla like my neighbor.” But this really still hides the ridiculousness of the fact that an animal is receiving better care then many people. The only way to deal with this in my opinion is to enact policies that strengthen the middle class, so more people have enough money for the things that really matter and fewer people have enough money for the things that don’t.
> Why make an ISP that delivers good speeds at a low cost when you can bribe local government to make you the only supplier?
Because Google Fiber will come along and eat your lunch. Hopefully anyway.
> Why make good smartphone hardware when you can bundle a package of hardware, software and BRANDING! And charge vastly more?
Apple does that, and they make a fine business out of it. But Android, who doesn't, is overwhelmingly the market leader.
> Why sell access to information people want when you can sell access to marketing information on peoples searches helping pervert the information people use for their decisions?
Are you implying that all advertising necessarily perverts decision making? Indeed, 'brand' advertising arguably does. But a lot of advertising is just about making people who want it aware of your product. If you have a need and I make a product that meets that need, and you see an ad for my product, we are both better off now, aren't we?
Ya, ISP's are definitely the best argument on the other side. But Google Fiber is slowly expanding. So, I think their monopoly will ultimately be eroded.
I think SuperJambo is referring to companies who use advertising to skew facts relating to their brand or others. In the US, for example, I understand that companies are allowed to practically slander each other publicly in advertising. It seems very hostile from an outsiders perspective.
Most of the US population is out of buying power. The savings rate is near zero. More than half the population couldn't come up with $400 in an emergency. The US economy is demand-limited, not production-limited
They've been doing that since 2009 (and arguably before).
The problem is that the money is distributed through the broken financial system which isn't distributing the money through the entire economy efficiently. This is why we currently have local inflation in San Fransisco and New York, and local deflation in Mississippi and Nebraska.
To use a hydraulic analogy, the central bankers have two things: control of a spigot, and an average water pressure gauge. The gauge shows decent water pressure throughout the pipes. But some parts of the system have very high water pressure, and in other parts the pipes are almost dry. Someone needs to solve the real problem, which is that the pipes are blocked.
Personally, I think the issue has been caused at least in part by the confluence of two factors: consolidation in the retail banking industry, and the growth of venture capital (which tends to predominantly fund ventures in geographically limited areas). This is why people with just an app idea could get plenty of funding in certain regions, but getting a small business loan in fly-over country requires showing 5 years of profitability. The risk profile of funding is very geographically distorted, with most of the country dealing with risk-averse funding and too many risk-takers concentrated in certain cities.
Your analogy of the pipes seems spot on. I’m currently selling an underwater condo in Norfolk, VA for 40% less than I bought it ten yours ago while I was in the military. Now, I’m working in Silicon Valley where no one can afford a house, where friends and family’s houses have doubled in price over the same period. It is two different worlds. One has Trump bumper stickers, the other Hillary. One never recovered from 2008, the other is doing great.
More than broken pipes though, I feel this is the natural tendency of easy money. As the central banks hand out money, they hand it to the well connected. This money is then misallocated since it wasn’t distributed by the market but by fiat and this is the underlying cause of the decline in productivity. Raising rates, paying off debt, and less government micromanaging, while painful in the short term, is required in the long term for stable, efficient markets.
A land value tax would help to start fixing the high house prices in Silicon Valley.
(Directly, it would decrease the capitalized price of land that the house sits on. More indirectly, it would decrease incentives for NIMBYs, thus helping with more supply of housing in the longer run.)
As long as CPI (or similar measure of inflation that consumers see) doesn't shoot up too much, they can crank up aggregate demand by printing more money without annoying consumers.
What do you mean by `the problem'? If the problem is not enough aggregate demand (like the original comment suggested), printing money is exactly what they should be doing.
I suppose this discussion would depend upon our economic ideology differences. Yes, there are differences in ideology and we can each prove our ideology is right mathematically, which is why economics is the dismal science.
The central bank is printing tons of money and continuously pumping it into the economy. Americans don't feel the effects of that as everyone uses American dollars. So it's almost as if the central bank is creating gold, which is suppose to be a finite quantity. It does nothing.
At the end of the day corporations must borrow that money and corporations are sitting on tons of their own money, they don't want more money to hire employees. They don't know what to do with the money they have. They can make goods, but no one will buy them at the levels of profit they need. So they just sit on the money.
When the fact is the economy is efficient and they should be making goods even if they are not profitable, i.e. at cost... just to create employment, give people money, with which they can buy things. But that's not how the profit motive works. The management consultants and management theory have pushed this idea in their heads, and they are sticking to it, that they need to create profit always. Shareholders demand it! But profit is hard to come buy these days. So they sit around and do nothing instead. Jobs don't get created, people are starved for money and that vicious cycle ensues and consumption goes down.
The Central Banks are simply not creating enough inflation, if demand is a problem.
In the most extreme case, the central bank can either just buy any assets under the sun, or start dropping cash from helicopters (slightly more realistically: give every citizen a bunch of money).
In any case, have you heard of nominal income level targeting?
Ie the central bank instead of targeting inflation, targets what's more important: the aggregate income of all workers. (Targeting Gross Domestic Income instead of just the wage share is also possible.)
They set a target of eg 5% nominal growth a year, and announce it. Then do everything necessary to make it happen.
If the post-2008 world isn't proof enough that printing money does not automatically increase aggregate demand, I don't know what would count as proof in Econ.
By the way, I'm not saying it can increase AD, just that it does not automatically does so, for some reason that is widespread now.
The central bank can always inflate. If printing lots of money isn't enough, they just need to print some more money.
And, if they manage to buy all of government debt without creating any inflation, that's awesome on some level as well: they just managed to monetize all the public debt without any adverse side effects. (And for sovereign debt, monetization is about as good as eliminating it.)
Well the point of that is to affect NPV of money right and force investment. And corporations go meh, too much risk. I think that's what's happening. I think even the negative interest rate isn't going to make them budge because the profit margins are razor thin, and even if you make something doesn't mean it will all not be wasted. The economy is saturated and the corps don't know how to make profit in it so they rather sit around and do nothing, and let China and other countries produce everything and then try to be the middle man or something as such with minimal risk and investment.
> When the fact is the economy is efficient and they should be making goods even if they are not profitable, i.e. at cost... just to create employment, give people money, with which they can buy things.
People already have jobs, they have low-paying jobs. When someone is already spending every dollar they get, there is no way to make them spend more. All this talk of investment, inflation, job creation, it's missing the basic point that to get businesses to make more goods you first need someone able to buy them, and that in turn means getting them out of low-paying jobs and into high-paying jobs.
The way I see it, the problem is a skills gap. To get someone in a higher-paying job, they need skills that are more in demand. If you want to understand why people are stuck in low-paying jobs, look no further than a failed education system.
And yet in the market for skills provision, we see high prices, nondischargeable debt ... and low return for those supposedly enskilled.
I'm talking of higher education, of course.
My thought for some time has been that we cannot educate ourselves out of this mess. Robert Gordon's The Rise and Fall of American Growth both discounts education as a positive factor and sees debt and access as negatives.
The central bank is printing tons of money and continuously pumping it into the economy.
The Federal Reserve stopped its quantitative easing back in late 2014. It's true the additional money supply is still out there, but it hasn't added any more in the last 1.5+ years.
So basically you have money, you build a plant and you an produce goods with a marginal cost of 0 and just get rich because you had access to capital mostly by birth.
Hug, it will not help most citizens to access the production sphere.
It will not help fair competition, hence innovations. It is just about who has the most capital. Are we back in XVIIth century were lords owns the lands and the production?
Does it strikes no one that most of western so called democracy were built to fight exactly this situation and the social inequalities raising from this case?
Especially when all countries are trying to make it impossible for citizens to produce on their own in their private habitation.
Regulations are creating an economy where the poorest cannot neither sell their workforce by lack of demande, nor produce by themselves, nor offer services.
> Does it strikes no one that most of western so called democracy were built to fight exactly this situation and the social inequalities raising from this case?
The problem has been identified many times. What is left is to find a solution ...
> the poorest cannot neither sell their workforce by lack of demande, nor produce by themselves, nor offer services
Not the poorest, just the most uneducated.
My parents had basically nothing when they immigrated (they sold their paid-off home representing years of savings for a sum a US worker could earn in a couple months at McDonalds) but they were both skilled engineers and were able to secure middle-class white-collar jobs in the west relatively quickly. Jobs they still have to this day.
> New services cannibalize time from old services. If I come up with a new way to use worker’s time, by necessity it must subtract from the time they spend doing something else
This is not universally true. It is possible for technology to allow one service worker to service more people simultaneously. Consider the increased productivity of tech. support workers due to the introduction of asynchronous communication like chat as opposed to voice.
The model assumes that time spent on services is perfectly efficient, or rolls this into the service quality measure.
In reality, a potential service period can be divided into utilized and unutilized segments. The model of a CPU's run queue and time slots may be useful here.
If you're under-provisioning services, you'll stack up customers (processes) in the run queue. If yo're overprovisioning services, you'll have high idle times. Most likely you'll see a bit of both. If you have a perfect allocation system, the queue length is always one (the job running) and there's no idle time.
Technology allows you to approach that ideal. Waiting customers can be paired with idle servers. But it's not perfect, especially with services that have a physical component and travel. And you're left with the hard limit of there being only one hour per hour.
Scheduling and dispatch systems are also already aggressively persued. See Lyft.
What their present model shows, though, is the increased efficiency of high-bandwidth signalling between customer (rider) and provider (driver).
Taxis had previously relied on radio dispatch, which was better than on-street hailing, but essentially had a single blocking communications stream between drivers and central dispatch, with high wait times for channel space, relatively high error rates in transmission, and (compared to digital dispatch) low total bandwidth and precision.
The Uber/Lyft model is famous for bypassing medallions (though I suspect those will re-emerge). But it also replaced an obsolete dispatch channel which incumbents had failed to innovate on (reasons for which might be worth investigating).
I don't know whether the dispatch was the bottleneck. How would we figure that out?
(But having to talk to a human dispatcher over the phone would eg put me off a bit. More than checking how much the uber is on my smartphone. And once I'm in the app to compare prices to my other options, ordering is only a tap away.)
Absolutely. The model is far too simplified to have any real explanatory power. The most basic premise is flawed. Goods and services aren't perfectly complementary. I might want a burger from a restaurant, but it's too expensive so I cook one at home. I might want to take a taxi, but it's too expensive so I buy a bike. I might want a lawyer, but it's too expensive so instead I buy a self-help law book. And software increasingly blurs the line between goods and services for a grower percentage of the overall economy.
There's lots of little and big reforms possible to help the productivity of the economy. Of course, most of them are politically infeasible in most countries.
I wonder about the long term effect of these reforms. I am afraid there will be mostly one-off linear factors, and not contributing much to higher future growth.
(My argument rests on the observation that eg the poster child Singapore is rich, but not pulling ahead more-and-more.)
There are so many potential places to find more productivity in our society, automation, AI, self-driving cars, and that's just the big, obvious stuff.
Reading this post is like walking into the middle of an old family dispute and thinking you've heard all of it. This is just one wrinkle of a much larger and older discussion that's been ongoing in various forms for at least the past 240 years, going back to Adam Smith, though the modern concern with economic growth dates largely to the Great Depression and post-World War II period.
The model here is looking at the question of economic growth (which is distinct from the question of distribution, though not unrelated), and of a simplified economy in which only mutually exclusive goods and services can be offered.
The conclusion (under artificially but not un-usefully simplified terms) is that even with continued growth in efficiency of goods provision, services are ultimately constrained by the requirement of time as the ultimate input.
It's possible to quibble in various ways about the model, but it's essentially correct. A services-based economy is limited by the element of time in both production and consumption. Media already has the problem of there being only so many consumption-hours per day, and people are already consuming more than 24 hours of media per day through the mode of multitasking.
A key problem, of course, being that multi-tasking reduces the total capability to incorporate any given media stream.
Going more broadly:
There's the question of what accounts for economic growth. The traditional economic answer is "technology", though that answer itself is flawed and raises the question of what technology is, and more specifically, how different types of technology operate and act, as well as what kinds of production or services they enable, and how.
Robert J. Gordon's book, The Rise and Fall of American Growth looks at this, in detail, though imperfectly.
One of the book's better points is that the innovations of 1870 - 1950, generally, addressed very fundamental human needs: food, housing, clothing, transportation, and safety. With tremendous impacts on these: food and diet (both quantity and quality), health, work and productivity, communications, and transport.
The innovations of 1950-2015 have been far less fundamental. They've been concentrated in information and communications, which yes, have changed and improved tremendously, but they don't address needs and capabilities at the base of human wants. A term not used anywhere in Gordon's book is Maslow's Hierarchy of Needs, among several disappointing deficiencies. The 1870-1950 innovations largely addressed the base of the pyramid. The 1950-2015 innovations have largely addressed the higher elements. This isn't entirely useless, but it's not foundational. And Maslow's Hierarchy cannot be built from the top down.
The discussion's been going on for a long time. Adam Smith, Thomas Malthus, John Stuart Mill, Thorstein Veblen, Joseph Shumpeter, John Maynard Keynes, John Kenneth Galbraith, Robert Solow, and more. My sense is that mainstream economics has rather lost the thread, though it does some work of interest. Gordon's book stumbles over the truth then picks itself up and walks on. It does however point to several factors, including education, which don't account for growth. In that, it's useful.
Markets only optimize for good market performance. Since we do nothing to stop all the non-market game playing (mainly regulatory capture, monopolies & advertising), our markets have been optimizing for firms best able to corrupt the process.
Why make an ISP that delivers good speeds at a low cost when you can bribe local government to make you the only supplier?
Why make good smartphone hardware when you can bundle a package of hardware, software and BRANDING! And charge vastly more?
Why sell access to information people want when you can sell access to marketing information on peoples searches helping pervert the information people use for their decisions?
The people in charge are too busy enriching themselves inside the existing system and as a result some huge fraction of the population is working to directly harm the interests of everyone else.