“Does anyone even understand productivity?” – The Critic

A new magazine ‘The Critic’ has just been launched – it includes an article on official measures of national productivity which, in its own way, makes many salient points about how seriously flawed they are, yet on which most of our political leaders and expert economists base their policies – readers will know we made much the same criticisms of labour productivity measurement in our book ‘Productivity Knowhow Revisited’ – in addition, we also criticised official measures of public sector productivity – hopefully, Tim Worstall’s article, mostly reproduced below, will gain widespread publicity and readership – the UK, and others, clearly need far better stars for its wise men and women to follow


British politics is waking up to the problem of flatlining productivity. Effectively we’re trying to ask how much value has been added to the inputs. What everyone looks at is labour productivity. Divide GDP by the number of hours of work; that’s labour productivity. The reason it’s pretty much everything is because this is what determines the standard of living. How much do we get, gross and collectively, from an hour of work? That’s the general standard of living per hour of work.

The usual diagnosis about this number flatlining the past 15 years is that economic policy has been wrong. There are claims of austerity of underinvestment, of Tories simply being b——s. Given that I used to work for Nigel Farage, I’m willing to believe the last of whatever it was that “Call Me Dave” thought he was doing.

However, this might not be exactly true. In fact, it’s certainly not absolutely true. There are two other things that have been going on here.

Let’s start again with that definition of productivity, by which everyone means labour productivity: GDP/Labour hours. That’s it — that’s all it is. It’s a very simple calculation. We know, or at least the ONS – Office for National Statistics – knows, how many hours of work there were last year. HMRC can tell them. ONS also calculates GDP. That measure has its own many problems, but it is what it is.

Now add in all those lovely green policies — windmills, solar, recycling and so on, even cycling and walking. The entire environmental problem to be solved is that there are many things which are not included in markets and prices: CO2 emissions and the broiling of Flipper in the fumes of the last ice floe, for example. As they’re not included in markets and prices, free market capitalism doesn’t take account of them.

The next leap to “we must have socialism instead” can be cured by a visit to where the Aral Sea isn’t. It is still a valid complaint, though — markets don’t deal with things that aren’t in markets. It’s just and righteous that we either shoehorn them into markets  – a carbon tax, a landfill tax, perhaps – or we deal with them in other ways. True, a commissar class who insist on how we kulaks must do things might not be the best solution, but that’s not relevant to the point here.

Preventing Lowestoft sinking is recorded as a decline in UK productivity

We are, by dealing with those externalities, devoting economic energy — and other economic resources, but think just of the human effort here — to solving things which are not included in markets, in prices, in GDP. It’s that last factor that should cause the dawning realisation. It’s entirely true that solar power creates more jobs than nuclear per GWh of ‘leccie’ produced. The GWh is worth the same from either source, though, and solar requires more human labour — that’s the same statement as “creates more jobs” — so therefore solar power lowers measured productivity.

Sure, sure, we can say that not melting Greenland is important — human utility maximising even — and that’s almost certainly true as well. That’s not in our economic measures, though, which means that, yes, preventing Lowestoft sinking beneath the waves is actually recorded as a decline in UK productivity.

This is then true of all green policies. We are always trying to deal with things external to markets. They are not accounted for in that measure of the economy at market prices, GDP. Therefore going green reduces productivity. This doesn’t have to be sensible; it just has to be what it is, which is true.

Then things get worse. This is economic statistics, so of course things get worse. Living standards are not, in fact, GDP divided by effort. There’s something called the consumer surplus as well. That’s the benefit we get without having to pay for it. We might be happy enough to pay £10 for a pint. I’ve worked in journalism so that has been true for me. The existence of Wetherspoons limits what people can charge me for a cool and refreshing drink. The difference between what I would pay and what I do (£3 at ‘Spoons maybe, £5 elsewhere) is that consumer surplus. The usual guess is that the consumer surplus is about equal to GDP. If GDP is £2 trillion (around about right), then so is that surplus. The actual living standard of us the people is £4 trillion.

Well, OK, but now think of this modern stuff. Google is recorded in GDP at the value of the advertising it sells — or, the other way around and clearly equal, the amount it spends on wages and stuff plus its profits. That’s about $300 billion (say, £200 billion) a year. Over two billion users, say? Free email and a search engine is worth £100 per head? Don’t be ridiculous. It’s also not £200. One set of research (valid, but possibly overcooked a bit) puts the willingness to pay at $18,000 a year, £12,000. That’s a lot more consumer surplus than normal. Note, Benny, that this is not a 100 per cent consumer surplus over the more normally recorded numbers in GDP.

We can therefore say that we are under-measuring the real value of output and so under-measuring productivity. As Google’s own economist, Hal Varian, has put it, “GDP doesn’t deal well with free.”

The ultimate example of this is WhatsApp. When I checked it all a few years back Facebook told me it had a “couple of hundred” engineers working on it. That’s a cost; that’s labour hours on one side of our productivity calculation. At that time there was no fee to use WhatsApp, nor did it carry advertising. There was no recorded output, at all, in GDP. WhatsApp appeared in the economic numbers as a decline in productivity — labour in, no measured output; that’s a loss, a decline. This is, of course, insane for something one billion people get free telecoms from — but that is the way these economic statistics work.

The difficulty we’ve got about political management of the economy is that absolutely no one involved in it grasps the above points, let alone understands them. Whether it’s those moving from TV talking head to opinion column, or Parliamentary aide to Cabinet (of any party), there’s no one grasping the subtlety of the numbers they’re pontificating upon. They’ve reified this idea of productivity without understanding the problems with even measuring it, let alone what they’re doing to it.

It really is true that going green reduces productivity. The reason the technological revolution isn’t increasing productivity is because we simply don’t include it in our measure. Yet, everyone is now convinced that this is the target we should be using to determine our policies on green and technology?


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