Wednesday, April 22, 2020

What are the implications of declining productivity growth in high-income countries?

The graph shown above indicates that productivity growth rates in high-income countries have declined. That decline seems evident even if we disregard the low productivity growth in the years immediately following the global financial crisis. (Selection of high-income countries for inclusion in the graph was based largely on aggregate GDP.)

The productivity indicator used in the graph - multifactor productivity (MFP) – is that part of GDP growth that cannot be explained by changes in labour and capital inputs. It reflects the influence of technological progress and production efficiency.

The most obvious implication of a decline in MFP growth rates is a lower rate of growth in per capita incomes. Declines in MFP growth are sometimes offset by more rapid growth of employment, through higher immigration, or more rapid growth of capital stock, through higher investment levels. However, such offsetting factors are not sustainable over the longer term.

In most instances, and in the longer term, it seems reasonable to expect a ½ percent lower rate of growth in MPF to be reflected in a ½ percent lower rate of growth in average incomes. Over 10 years, a decline in average income growth from, say, 2 percent per annum to 1.5 percent per annum would amount to the difference between a 22 percent and 16 percent increase in income.

That is not negligible, but it doesn’t cause me a great deal of angst. As noted previously on this blog (in a post written when I was more sceptical about the number of countries experiencing a decline in productivity growth) the slow-down in measured productivity growth in the U.S. and some other countries may be attributable, in part, to difficulty in measuring the outputs of the information and communications technologies (ICT) industries. When consumers can download more stuff that they do not have to pay for, the quality of their lives improves, even though that isn’t reflected in average income and consumption measurements.

It is also likely that some part of the decline in measured productivity growth may be attributable to environmental and social regulation. I am sceptical about the merits of much of that regulation, but I acknowledge that some of it provides benefits to humans that should be offset against associated income losses.

However, there is an implication of declining productivity growth that governments and their dependents should be thinking more seriously about. That is the potential for revenue growth to decline. Unless the revenue to GDP ratio is raised, a lower rate of growth of MFP is likely to translate to lower growth of government revenue. (Note that the same difficulty in measuring the outputs of the ITC industries for productivity estimation also applies to measuring income, sales and value added for tax purposes.)

Lower revenue growth has interesting implications in the context of expected ongoing increases in government spending. As previously discussed on this blog, under existing programs, substantial increases in government spending seem likely to occur as the proportion of elderly people in the populations of many countries continues to rise.

So, why not raise the revenue to GDP ratio by changing the tax mix in favour of more efficient taxes that have less adverse effects on economic incentives? The political obstacles to tax reforms have not always been insuperable, but revenue-raising reform proposals are less likely to be supported than revenue-neutral proposals.

Another option is to raise the revenue to GDP ratio by raising tax rates. That is also likely to encounter political obstacles but, more importantly, the adverse effects on incentives seem likely to further reduce productivity growth. The marginal excess burden of taxes tends to rise as the tax rate is increased (see discussion here).

Yet another option is to let public debt continue to rise and hope debt servicing doesn’t become too much of a problem. We may actually see some problems emerging with that strategy over the next few years with increased public debt incurred in response to COVID-19. Perhaps central banks will succumb to government urging to over-stimulate economies to allow the “inflation tax” to reduce debt to GDP ratios. However, that would make ongoing debt accumulation a more costly strategy because it would result in high interest rates and thus higher costs of debt servicing over the longer term.

We haven’t considered debt default, but you have to be desperate to consider that!

My point is that governments and their dependents do not have any easy options available to adjust to an ongoing decline in productivity growth.

Economists advising governments will likely suggest that the best way forward is adoption of a package of reforms (including tax reforms) to raise productivity growth, combined with action to prune government spending. What governments will do, however, will depend to a large extent on the relative political power of different interest groups. In most countries, that seems to me likely to point more toward spending cuts than toward productivity-increasing reforms.

So, it seems reasonable to speculate that declining growth in productivity will be ongoing and result in cuts in government spending in policy areas where political resistance is likely to be weakest. Which policy areas are likely to be most affected?

Tuesday, April 7, 2020

What are innovation commons?

“An innovation commons is a system of rules for cooperation to facilitate pooling of information in order to maximize the likelihood of opportunity discovery”. That is how Jason Potts defines innovation commons in his book of that name.

Hopefully, that brings to mind hobbyists meeting in coffee shops, somewhere on the internet, or at backyard barbecues where they are tasting home brews and exchanging information about recipes. If so, you are on the track toward an understanding of innovation commons. If you have heard stories of successful entrepreneurs who obtained their most valuable ideas by interacting in similar ways, you might sense that innovative commons can be very important.

It might surprise you to learn that until recently few economists understandood the importance of innovation commons. Of course, those with an interest in technology would have read at some stage that Steve Jobs was once a member of the Homebrew Computer Club, and know of similar stories about other entrepreneurs who started as hobbyists or enthusiasts exchanging information freely with people with similar interests. However, it is one thing to know such stories and something quite different to realize that your professional understanding of the innovation process needs an overhaul.

Economists have thought of innovation in several different ways that view a single organization or individual as a prime mover. Innovative firms allocate resources to research and development, which leads to the launching of new products or adoption of cost-reducing technologies. Joseph Schumpeter’s bold entrepreneurs play the central role in innovation, leading to a dynamic process of creative destruction. Israel Kirzner’s innovative entrepreneurs are alert to profit opportunities. Edmund Phelps’ grassroots innovators are struck by new ideas, and then become investigators, experimenters and managers of innovation.

You might think that economists should be excused for overlooking the importance of innovative commons because they are a relatively new phenomenon. Jason Potts makes the point that common-pool innovation has existed since the beginning of market capitalism. He cites discussion of the Republic of Letters by Joel Mokyr, an economic historian. The Republic of Letters set up norms and incentives that supported a market place of ideas among the educated elite in Europe in the latter part of the 17th and early part of the 18th centuries (for a brief summary see my review of The Culture of Growth). In The Enlighted Economy, Mokyr makes a strong case that in Britain during the 18th century the ‘legitimization of systematic experiment carried over to the realm of technology’. He suggests that the proliferation of provincial ‘philosophical’ societies discussing practical and technical issues often served as clearing houses for useful knowledge between natural philosophers, engineers and entrepreneurs (p 48).

Recent examples of areas of technology where innovation commons are important include blockchain, civilian drone technology, AI and gene editing.

Jason Potts’ own innovative contribution has been to develop an economic framework to explore the collaborative processes through which information comes to be available in a form that a potential entrepreneur can discern as a profit opportunity, if sufficiently alert. The framework Jason has developed contributes to understanding of the knowledge, coordination and governance problems associated with innovation commons. In developing that framework, he draws heavily on insights of Friedrich Hayek about the importance of distributed knowledge, and insights of Elinor Ostrom about governance of commons.

Innovation involves a knowledge problem because relevant information is distributed so that each person with relevant expertise can only know part of the picture, and there is great uncertainty about how that information might be useful. Innovation commons enable individuals with expertise to cooperate to pool information and discover opportunities. The formation of such commons is ad hoc and rules for governance develop spontaneously to promote cooperation.

Innovation commons tend to be temporary. Once they have created information about entrepreneurial opportunities, that valuable resource is likely to be exploited by some member who can effectively capitalize on it. At that point the conventional model of entrepreneurship comes into its own, and the commons collapses to some other institutional or organizational form.

Much of the book is taken up by discussion of rules of innovation commons, institutions such as industry organisations and a critique of conventional approaches to innovation policy (public investment in innovation and building infrastructure for innovation).

There is also an interesting discussion of ways to combat an increasing tendency for enemies of innovation to prevent it, thus contributing to a slowdown in productivity growth, particularly at the technology frontier. The enemies of innovation present themselves as having concerns with safety, sustainability, tradition, fairness, justice etc. even when their intention is to avoid the losses they are likely to incur from disruption of existing technology.

Who will engage those enemies? This is a collective action problem: the costs are borne individually, but the benefits are an industry-specific public good that accrue to all who follow.
In some instances, the first mover can capture sufficient benefits to make it worthwhile to engage the enemies of innovation. Uber may have done that with its ride-sharing technology.

Jason suggests that governments may also help. One role he suggests is promoting collective learning to demystify a new technology. He mentions public broadcasting in that context, but public broadcasters seem to have been more comfortable helping the enemies of innovation. At a more ambitious level, he suggests that governments should work toward “a social contract, culture and institutional system that are tolerant of innovation and prepared to engage with its enemies”. Good luck with that!

Jason also suggests that innovative commons can play a role in creating a large pool of participatory stakeholders, each with a vested interest in developing the technology and its institutional (regulatory) framework. Examples include open-source software and technologies that have emerged from hackerspaces, such as 3D printing and cryptocurrencies.

Are innovative commons likely to result in a fundamental change in society?
Jason Potts’ answer:
“The innovation commons—including the adaptive behaviors and the institutions that compose it—are … a natural part of an open, evolving, market economy. They are not prima facie evidence of an emerging turn to a new type of more cooperative economic society.”

That is probably right! Nevertheless, as previously discussed here, it is possible to conceive of circumstances in which new technologies that are evolving in innovation commons - blockchain technology and decentralized collaborative organizations – could result in some quite fundamental changes in society.

Monday, April 6, 2020

What did Yeats mean by "Horseman, pass by"?

In one of the most popular articles on my blog I speculated about the meaning of the epitaph on W B Yeats tombstone:
“Cast a cold Eye
On Life, on Death
Horseman, pass by”.

The article was posted in October 2013 and has attracted many comments since then.
A few hours ago, Beth Prescott sent me a comment by email, which I am reproducing below, with her permission.

However, before reading Beth’s comment, it would be helpful for you to read an anonymous comment that she refers to:
“In ancient China, there is a phrase said "Human life is just like a white horse pass by a tiny crevice, it's only a blink of time." This phrase comes from the philosopher Zhuangzi's book, "Zhuangzi: Knowledge travel to the North". And the story in the book is that, when Confucius asking Laozi what is "Zhi Dao(至道,the basic reason of everything)", and Laozi answered with this phrase, and told Confucius that either life or death is inevitable and common in life, it is just a change of matter, there's no need to happy or mourn. But "Dao" is the only eternity through a man's spirit. If Yeats did take this story in his mind, then perhaps he agreed Laozi by writing these lines.
This is just my thought, and sorry for my grammar mistakes, I'm not an English speaker.”  

I think the ancient saying referred to by my correspondent can be sourced to Chuangtse. I found something very similar in The Wisdom of Laotse, and have reproduced it above.

Beth Prescott writes: 
"Horseman, pass by”
I've been hearing this phrase in my head for several days - entirely without knowing where it came from or whom it came from. So, of course, I Googled it and quickly came upon your blog post about it from several years ago. I don't know Yeats well. I've always been intrigued and curious, but life has so far never permitted a long perusal of him and his life.

In fact, I am so distracted by current events I couldn't even make myself read the entire poem. Usually I can settle to a task better than this, but not now.

I did read through all the comments to your blog and was arrested by the anonymous comment from, presumably, a Chinese person. His (or her) use of English was very familiar to me, since I have worked with and for Chinese American researchers here at the University of Oregon.

It was the image he evoked of a white horse striding past a crevice in a rock and that that tiny crevice was the whole of a human life, even perhaps, the whole of human history. It reminded me of something an older brother told me 60+ years ago: ‘maybe the entire universe and all of its seeming eternity of time is really nothing more than the air in somebody's tire, and someday the tire may have a flat’. I think my brother added in that last bit.

This image has stuck with me all of my life: that we are necessarily constrained by our worldview and cannot easily - or at all - look outside of it. The idea that even our vast universe is really part of something else, something unknowable, something much vaster and more sweeping, something with a different purpose, possibly utterly different.

That what we think is important is, yes, important to us and we must live our lives as if these things are important. They are important. To us. Workmen must continue to work. Cradles must continue to be filled.

But we should also live our lives with the understanding that there is ‘something else going on’ and that the forces that gave rise to us and to our universe are probably beyond our understanding. Our entire universe, our entire history of life is perhaps no more than the instant in time it takes for a white horse to stride past a small crack in a wall.

If Yeats absorbed the philosophies of other cultures and times, as it appears that he did, then I think in this poem he was striving to arrive at a different perspective, a different view of himself, of his own place in the grand scheme of things, of his entire life.

I think he is saying in those final lines, that he realizes that all of the Sturm und Drang of his own life is in reality nothing more than a sliver of an insignificant moment in some much larger scheme. I think he is affirming that teaching of Lao Tze. That when he says ‘Horseman, pass by’ I think he is affirming - in a very positive way - this view of life.  He is even content with it. A quite remarkable final thing to say to the world."

Thanks Beth!