What Hal Varian doesn’t get about productivity

http://www.wsj.com/articles/silicon-valley-doesnt-believe-u-s-productivity-is-down-1437100700

Some of you may have caught Timothy Aeppel’s piece in the July 16 WSJ, “Silicon Valley Doesn’t Believe US Productivity is Down.” The centerpiece of Aeppel’s piece is Hal Varian, chief economist at Google and, until he joined Google in 2002, a highly respected economist, specializing in microeconomics, at UC Berkeley, where I now teach.

So, let us say that I am able to attract $2M from investors although I have no product for which I am charging consumers. How productive am I? Well, if productivity measures the returns on capital for some unit of output, then I am, in this case, infinitely productive. Yes?

Here is what Hal is arguing. Google in particular and Silicon Valley as a whole is pumping out efficiency generating devices and applications at a breath-taking rate, and, yet, because these devices and applications are virtually free — no one is raking in the bucks for these free devices and applications — they are not counted in standard measures of productivity.

Screen Shot 2015-07-20 at 12.54.21But, let us say that the buzz I generate from a device or application — and, more importantly, the advertising revenues and the investment capital I am raising ($66B per annum for Google) — is equal to or exceeds the cost for generating that buzz. Do you get my point? Once again, the conceit against which all economists must constantly struggle is that a commodity needs to be a physical thing in order for it to be counted. All of us, however, know that this is not the case; Mr Varian perhaps more than any of us.

Nor is a recent discovery. Indeed, recognition of these so-called intangibles was one of the leading features of the marginal revolution of the 1860s and 1870s, when, beginning with Karl Marx, forward leaning economists abandoned the mechanistic, monocausal analysis of value in favor of a multivariate approach.  Consider, for example, Alfred Marshall’s pages upon pages in Economic Principles (1890) focusing on the advantages producers gain from location or advertising or communication. Yes, it is true, my ability to tell Google maps to give me directions to this or that location, or to find some specific piece of information — both of which save me time and therefore increase my productivity — is not something I can write down. Yet, there is no question but that Google can and that Google does write this down. How?

Well, for one, consider all of the chatter and buzz surrounding Google’s endless innovative lines. Isn’t that what advertising revenue and capital investment is all about, including, of course, Timothy Aeppel’s piece? That too is buzz. (Front page, above the fold, WSJ. You can’t beat that.) And no one knows this better than that master of microeconomics, Hal Varian himself. But this also points up why this way of increasing productivity deserves news print. We, many of us, still want productivity to be about bricks and mortar commodities, not about buzz and information and venture capital. We want to see the product, see its costs, see its price, see its sales. Why?

There’s a clue to the answer to this question buried in Aeppel’s piece. Here it is:

Silicon Valley’s complaints echo earlier eras. The introduction in the last century of indoor plumbing and household appliances drastically increased the efficiency of performing domestic chores. But since domestic labor isn’t counted in GDP either, the time saved hauling water or washing clothes by hand didn’t show up in productivity numbers.

However, these timesaving technologies—among other factors—eventually led to the flood of women into the workforce starting in the 1960s, which, in turn, sent U.S. output soaring.

Get it? Like many economists who focus on the micro- side, Aeppel completely overlooks the social, historical, and political context of investment — in a manner that Alfred Marshall would have found crass and low-brow. So, what were the “among other factors” that Mr Aeppel elides? For one, the huge demand-side pull created by war-time production, that pulled an unprecedented number of women into the work force a lá Rosie the Riveter circa 1934-1945. For another, the complete destruction of the productive capacities of our leading competitors, Germany and Japan (not to mention Great Britain and France). But also like many microeconomics gurus, Mr Aeppel gets the causality all wrong. Investors pumped out labour-saving devices not in order to give women the freedom to liberate themselves from their kitchens. As is the case with any commodity, the household appliance revolution was investor-driven. With piles of underutilized capital circulating following WWII, investors needed to convince consumers to part with their money so that they could maintain the kind of growth to which they had grown accustomed in the 1930s and 1940s, when huge government outlays for industry funded the largest demand side expansion in history. How to maintain those rates of growth in the 1950s was no small problem.

One solution was the Marshall Plan, which had to be sold to a skeptical public by raising the specter of world-wide communism. In fact, US manufacturers desperately needed markets to unload their new labour-saving products. But Europe’s economies lay in shambles. With what would they purchase these goods? Answer? We needed to rebuild these economies, and fast. And the effect on women of these so-called “labour-saving” devices?

They actually saved women not one second. For their effect was to pull women into the workforce, at the bottom, for wages far below the wages corporations would have been expected to pay men. Talk about productivity. If I can pay an equally competent worker half the wage I once paid a man, that is a fifty percent increase in productivity. Yes, this heightened productivity has something to do with toaster ovens, mixers, dishwashers, and automated laundry; but the causal direction is the opposite to what is thought. Producing and consuming more of these devices at lower per unit costs generates a huge boost to productivity. Just as our addiction to eDevices and Google, while it may add to our own personal productivity, is really beside the point. These devices liberate us from our offices so we can work from wherever and whenever we are. But the real product is the unprecedented expansion of  the consumer electronics sector. But what about Google and Mr Varian? Well, you just can’t beat $66B in revenue per annum in advertising revenues.

Now that’s productivity! And not to worry Hal. We won’t blow your cover.

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