Had the economy become somewhat more
efficient[2]?
Was it a boost in productivity or was it something that our standard measuring
tools were just failing to capture? It cannot be productivity, the numbers just
don’t add up. For one, over the past couple of years returns on capital have
been increasing at a markedly faster pace than those on labor.
It means that the owners of capital have
become somewhat wealthier, whilst salaries have either stagnated or, in some
instances, even dropped[3].
This condition is creating a wealth disparity that is becoming ever so apparent
over time. Productivity gains are no longer being derived from a combination of
capital and labor efficiency gains (which is how productivity gains have been
acquired in the past), but more a result of capital efficiencies at the expense
of labor.
Some pundits attributed the sluggish growth
figures to a so-called “new normal” economic environment, one in which larger
swaths of capital (brought about through broader investor participation and
government stimulus) chase diminishing investment opportunities, compressing
their return potential along the way. Economic figures do corroborate with this
but it doesn’t explain the paradox between growth, productivity and employment.
The culprit seems to be in our
statistics, or, more specifically, in the way that Gross Domestic Product is
measured. The GDP statistic was designed to give a feel of the economic welfare
of a country. In its most basic form,
GDP is derived by multiplying total output by the price of that output. Dividing
this figure with the total population of the country being measured will yield
the “GDP per capita”.
This is meant to be a rough measure of
the wealth of the country (industrialized nations typically have higher per
capita GDP rates than poorer ones) and herein lies the problem. It works
beautifully for manufacturing-centric economies, where lots of tangible goods[4]
are being produced, but fares poorly in the “digital” economy that produces far
fewer of those tangible goods.
The transition from analog to digital
has had a profound impact on almost all facets of the economy, not to mention our
general welfare. From manufacturing to distribution and consumption, unparalleled
efficiencies have been gained as a result of the “digitization of things”. The
music industry is a case in point. It has been moving out of the “physical”
realm of compact discs to those of streaming and high storage capacity mediums[5].
For the manufacturer, this transition is
lowering their cost of getting the music to the customers, but there is a catch
to this. More users are moving to a subscription-based model of streaming, and
with the ease of duplicating and transferring digital audio, sharing and piracy
are thriving activities. All this means that revenues to the music industry
have been dropping steadily, especially over the last decade. This is a trend that
is being observed in many other industries impacted by digitization[6].
The end result is a negative contribution
to GDP, but this is a misleading indicator because the general welfare of the public
has actually been improving. Surely being able to instantaneously access vast
libraries of music and books at lower prices, or being able to consult the
equivalent of the Encyclopedia Britannica or make a high quality video call
across the globe at almost no cost are good things that have enhanced our
welfare.
Certainly part of the tepid growth is indicative
of deep-seated structural problems in the economy, but one also needs to consider
distortions arising from the growing share of the “digitization of things”. Failing
to adjust to this will only raise the risk of overshooting policy objectives.
[1] Economic expansion, measured by GDP and the
growth in corporate earnings typically go hand in hand in a business cycle.
Subpar economic growth combined with record earnings, as seen in the U.S. and
European economies add to the paradox.
[2] Ironically,
it would mean that a large chunk of those employed prior to
the crisis were just “deadweight” and that the great recession acted like a
powerful cleansing agent, trimming the extra “fat”.
[3] By definition, productivity gains occur when
more output is produced from the same or similar amount of inputs. The question
to ask is where exactly those productivity gains are coming from. If they are a
result of labor with enhanced skills, salaries should also rise. If, on the
other hand the gains are due to efficiencies is capital used for production,
the situation is drastically different.
[4] GDP as a measure of economic activity was
created back in 1934 for a U.S. Congress report. The calculation methodology
was designed to measure the output of industries of that period and, although
it has been revised to reflect the evolution of industries, the new economy poses numerous
significant measuring challenges that have not yet been resolved.
[5] For
transportation in the physical world you need to consider both the
transportation from manufacturer to retailer and from retailer to the consumer.
[6] Publishing is another industry that has been
profoundly affected by the digitization of content. From the advent of
electronic books to Wikipedia, the traditional publishing houses and retail
stores have had to reinvent themselves and revamp their business models in
order to stay relevant.
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