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FreeMarkets (96.68)

The Theft of Productivity

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April 19, 2011 – Comments (51)

If there is one thing business leaders know, it is the importance of productivity.  GE knows this well, and their previous CEO Jack Welch commented on productivity often.  According to Welch, "A single percentage point increase in productivity translates into an extra $300 million of pretax income."

It is not just economic theory, but common sense, that productivity increases the over all standard of living.  Even the ancient empires knew this - the more productive their agricultural sector, the more people could be devoted to building roads, buildings, the arts, shipping and commerce, etc.

In fact, without increases in productivity, there is no increase in the standard of living.  But we haven't seen our standard of living increase in the past twenty years.  In fact, our children are most likely facing a decrease in the standard of living.  Has productivity gone NEGATIVE?! No, it has not.

So if productivity is still increasing and the standard of living is going down, the culprit has to be someone is stealing the productivity of workers for their own benefit.  And here I will argue that the theif is the Federal Reserve - and I'll show you EXACTLY how much they have stolen.

In 1914, just one year after the FED was created, an entrepeneur named Henry Ford began paying his workers $5/day.  These weren't college educated workers, they may not have even been high school graduates.  They were what we would call the working class.  Today, a working class UAW worker at GM or Ford starts at $112/day.  Add in benefits that the 1914 worker didn't get, and you are up to approximately $130/day.  Now even the least financially savvy American will say "Things cost more today than back then."  So we do a quick Google search on the web and find out that $5 in 1913 bought the equivalent of $111.70 today. After all, that inflation calculator looks pretty authentic. So the average person says, things are about the same today as they were back then.

Of course, we're not the average person, and we know that productivity should make things cost less, not more.  If productivity pushes price DOWN and monetary devaluation pushes prices UP, then the DIFFERENCE between the two is INFLATION!  For example, if I magically created a method that drops the cost of producing everything by 50%, but someone doubled the monetary supply and prices stayed exactly the same, inflation is not 0%, it is 100%.  If you "Got it" then move on.  If not, re-read.

Now a day laborer in 1800 received $1/day.  About 114 years later, Ford had jumped that wage to $5 day.  That's a 500% increase, but who cares if inflation eats away your earnings.  Now back to another calculator (NOTE: I don't use gov't number after the changes made to the inflation indicators post 1970, but before then, the gov't actually compared item for item) - this one shows that what you bought in 1914 actually cost 40% less than it did in 1800.  Not only were workers making MORE in 1914, but stuff cost a lot less.  This FORD worker had almost 9x the earning power of his great grandfather.  The productivity of the American economy was changing the nation.  A vibrant middle class was emerging even for Americans who lacked formal training and schooling.

100 years after the Federal Reserve, the FED likes to say $20 today buys what $1 did in 1913.  But THEY HAVE CHANGED their inflation calculations (e.g. swapping margarine for butter).  According to ShadowStats.com it takes nearly $50 today to buy the exact same things that $1 bought in 1913.

We remember from earlier that inflation must take into account both the increase in prices AND productivity gains.  According to this source, the American worker can produce 10x more than they did just 100 years ago.  So what cost $1 in 1913, without monetary devaluation, would cost 10¢ today, yet EVEN according to the FED, it costs $20 - according to statistics that match item for item it costs $50.

So we can have two calculations - one, the FED's own inflation numbers which would show they have STOLEN EVERY PENNY of our productivity gains of the last 100 years, or we can use ShadwStats.com which would say they have stolen EVERY PENNY and taken another 60¢ of every dollar earned - thus the REDUCTION of our standard of living even WITH TWO household incomes.

Unfortunately, I can not only blame the FED.  Bureaucratic red tape, the confiscation of money for the welfare/warfare state, has created a gov't that is now 25% of our GDP (in terms of spending).  That should be well UNDER 2% for a Constitutional gov't, and I would argue 40¢ of the 60¢ money stolen from workers is not due to monetary devaluation, but our gov't (remember the FED is a private bank).

CONCLUSION: Workers made 5x more in 1914 than in 1800 and there buying power through productivity and earning power increased 8.6x.  This under a sound monetary system (yes, there were a couple of periods where money was not sound - Civil War, 2nd National Bank).

Today, workers are making the same wage as in 1914 (according to gov't figures), and 60% less according to figures where the EXACT same products are purchased.  Yet our workers are 10x more productive than they once were.

The FED has stolen your PRODUCTIVITY!

51 Comments – Post Your Own

#1) On April 19, 2011 at 10:15 AM, FreeMarkets (96.68) wrote:

Yes, "there buying power" should by "their buying power".  I wanted to get this in before our crew of English teachers pointed it out.  It makes them think they have dispelled your entire thesis if they point out a grammatical error. :-(

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#2) On April 19, 2011 at 10:47 AM, PeteysTired (< 20) wrote:

Wonderful post! +1 rec

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#3) On April 19, 2011 at 11:26 AM, mtf00l (47.57) wrote:

Well written, even with the missspelling!

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#4) On April 19, 2011 at 11:26 AM, eldemonio (98.63) wrote:

Increased productivity doesn't always translate to lower prices.  You assume that productivity increases only come from increases in efficiency - that's not entirely accurate. 

The fact that our economy's productivity is measured in relation to GDP is worth mentioning.  Government spending increases can greatly influence any increase in GDP.  This means that higher government spending leads to increased productivity.

Increases in productivity resulting from goverment spending do not lower prices - if anything, the deficit spending we are experiencing is raising the prices of many goods and services.  EIther way, we're in trouble.

While I appreciate the thought provoking post - it is drastically oversimplified.

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#5) On April 19, 2011 at 11:39 AM, mtf00l (47.57) wrote:

Congratulations on the post of the day!

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#6) On April 19, 2011 at 11:51 AM, whereaminow (30.78) wrote:

Great post!

You've been working on this one for a long time, and I've seen you hit on bits and pieces here and there.  But this post, you brought it all together and explained better than you ever have.  Very well done!

For example, if I magically created a method that drops the cost of producing everything by 50%, but someone doubled the monetary supply and prices stayed exactly the same, inflation is not 0%, it is 100%.  If you "Got it" then move on

And that is exactly why the definition was changed from (monetary) inflation to (price) inflation.  They wanted you to focus on the prices rises so they could continue to rip you off.  And it works. Look at all the very intelligent Fools on this site that deny (monetary) inflation even exists.  They are trapped in a mental cage created by the Fed (many of them independent thinkers otherwise.)  

David in Qatar

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#7) On April 19, 2011 at 12:01 PM, PeteysTired (< 20) wrote:

Increased productivity doesn't always translate to lower prices.  You assume that productivity increases only come from increases in efficiency - that's not entirely accurate.

How does increased productivity increase lead to an increase in prices?

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#8) On April 19, 2011 at 12:35 PM, eldemonio (98.63) wrote:

Petey,

I'm tired too. 

It all comes down to how productivity is measured.  

If we define productivity as output per hour worked, then a company selling a commodity would be more "productive" when that commondity price rises.  In this scenario, their productivity and the price of their product both rise.

I am not trying to argue that increases in productivity lead to increases in prices - I am pointing out that increased productivity does not always push prices down. 

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#9) On April 19, 2011 at 1:09 PM, outoffocus (23.23) wrote:

Congrats on the post of the day. I just made a similar point on Binve's blog.  This was before I read your post.

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#10) On April 19, 2011 at 1:39 PM, kdakota630 (29.84) wrote:

Ditto.  Awesome post! +1 rec.

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#11) On April 19, 2011 at 1:53 PM, FoolsGrad (99.95) wrote:

Thought provoking. Unfortunately...

Fallacy 1. Increase productivity has little bearing on price changes. Increase productivity drives up margins, profits, economic growth, but not price levels. 

One of the biggest reasons why the inflation has been tame is due to Wal-Mart's relentless cost control. Note that the inflatoin is tamed through price control, not through a wider productivity gain across the economy.

 

Fallacy 2:

We remember from earlier that inflation must take into account both the increase in prices AND productivity gains.  According to this source, the American worker can produce 10x more than they did just 100 years ago.  So what cost $1 in 1913, without monetary devaluation, would cost 10¢ today, yet EVEN according to the FED, it costs $20 - according to statistics that match item for item it costs $50.

 

Sad to say, this conclusion is baseless. Producing more doesn't mean the cost of inputs cost less. Therefore, cost per unit of goods will remain the same. Unless the costs of inputs are reduced through technological innovations, increase in industrial productivity will not necessarily reduce prices of goods.

 

Finally, I am at a loss as to how FED is factored into this. So because productivity has increased and real wages haven't, ergo FED is at fault? The argument seems circular to me. You began with the (unproven) thesis that FED is at fault. Then you went on to say because productivity should lead to higher real wages but hasn't, ergo the FED is wrong.

While this is a good visceral argument, I find the content of the argument a bit wanting.

 

 

 

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#12) On April 19, 2011 at 2:24 PM, whereaminow (30.78) wrote:

Fallacy 1. Increase productivity has little bearing on price changes. Increase productivity drives up margins, profits, economic growth, but not price levels. 

One of the biggest reasons why the inflation has been tame is due to Wal-Mart's relentless cost control. Note that the inflatoin is tamed through price control, not through a wider productivity gain across the economy

You are confusing (price) inflation with (monetary) inflation. Walmart's cost control tames (price) inflation. It has nothing to do with (monetary) inflation. (Monetary) inflation is the sole responsibility of the Federal Reserve.

The ultimate source of all price rises in the long run is (monetary) inflation.

Producing more doesn't mean the cost of inputs cost less.

Yes it doesn. What are "inputs"?  They are the products of other producers. As there productivity increase, the inputs for your stage of production will also decrease.

You are teetering on the fallacy of cost-push inflation here. Basically, that the costs of things rise because the costs of other things rise. 

But why did those things rise in price?

This is the standard mainstream line for rising commodity prices. They are going to push price rises in other areas. Therefore, when the CPI starts showing 5%, the intelligentsia can blame it on cost-push inflation.  But why did inputs rise in price?  Are they more scarce?  No. Is there more demand?  No.  (Watch the two sides of their mouth as they tell you that the recession lowered demand but speculators drove up the price. Yeah, ok.)

There are no fallacies here. The fallacy is that printing paper bills makes us wealthy.

David in Qatar

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#13) On April 19, 2011 at 2:25 PM, whereaminow (30.78) wrote:

Correction:

Yes it doesn. What are "inputs"?  They are the products of other producers. As there productivity increase, the inputs for your stage of production will also decrease.

Yes it does. What are "inputs"?  They are the products of other producers. As their productivity increase, the price of the inputs for your stage of production will also decrease.

(So many mistakes I almost couldn't figure out what I said lol)

David in Qatar

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#14) On April 19, 2011 at 3:29 PM, FoolsGrad (99.95) wrote:

You are confusing (price) inflation with (monetary) inflation. Walmart's cost control tames (price) inflation. It has nothing to do with (monetary) inflation. (Monetary) inflation is the sole responsibility of the Federal Reserve.

The ultimate source of all price rises in the long run is (monetary) inflation.

 

This reply is nearly impossible to comprehend. So Wal-Mart can tame price inflation, but FED causes monetary inflation, which leads to price inflation?

So you admit that price inflation hasn't risen, due to Wal-Mart, but FED has caused price inflation through monetary inflation?

I hope you will go back and re-examine your arguments.

 

Yes it doesn. What are "inputs"?  They are the products of other producers. As there productivity increase, the inputs for your stage of production will also decrease.

You are teetering on the fallacy of cost-push inflation here. Basically, that the costs of things rise because the costs of other things rise. 

Again, I am unable to make sense of the rejoinder. The inputs I use will NOT go down as my productivity ramps up. 

The cost per unit will.  Again, the fact that this does not translate into higher real wages has no bearing on FED.

Finally, if cost-push inflation is a real phenomeon, then it's not a fallacy. I have no idea what "fallacy" you are referring t, or if you have just used the word incorrectly.

Anyhow, I am at loss regarding to what you are trying to say so I'll end it here.

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#15) On April 19, 2011 at 3:54 PM, FreeMarkets (96.68) wrote:

#14 This reply is nearly impossible to comprehend. So Wal-Mart can tame price inflation, but FED causes monetary inflation, which leads to price inflation?

So you admit that price inflation hasn't risen, due to Wal-Mart, but FED has caused price inflation through monetary inflation?

If you think about it, it makes perfect sense.  Lets say you figure out a better distribution system and you work for WalMart.  Using this system you can reduce the cost of products by 10% and still make the same profit margin.  Whle implementing this new system your suppliers contact you and say that due to the increasing prices of our inputs, we need to raise prices by 10%. 

As a customer of yours, I walk in the door and the price of the products is the same today as they were yesterday.  So even though you cut the cost by 10%, the FED engineered a 10% increase in prices by increasing the quantity of money.

It goes back to my original post "For example, if I magically created a method that drops the cost of producing everything by 50%, but someone doubled the monetary supply and prices stayed exactly the same, inflation is not 0%, it is 100%.  If you "Got it" then move on.  If not, re-read."

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#16) On April 19, 2011 at 3:59 PM, whereaminow (30.78) wrote:

Anyhow, I am at loss regarding to what you are trying to say

See this comment:  "Look at all the very intelligent Fools on this site that deny (monetary) inflation even exists.  They are trapped in a mental cage created by the Fed (many of them independent thinkers otherwise.)  " - David in Qatar

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#17) On April 19, 2011 at 4:01 PM, FoolsGrad (99.95) wrote:

If you think about it, it makes perfect sense.  Lets say you figure out a better distribution system and you work for WalMart.  Using this system you can reduce the cost of products by 10% and still make the same profit margin.  Whle implementing this new system your suppliers contact you and say that due to the increasing prices of our inputs, we need to raise prices by 10%.

 

Hi FreeMarkets,

As I said, this goes back to your problem with circular logic. Fed is bad->price hasn't changed->well, it should have dropped but Fed is keeping it unchanged->Fed is bad

In nowhere is there any evidence presented to show that Fed's policies are what keeping the prices tamed when prices should have dropped. The only evidence presented thus far is that "Well, because Fed is bad and that's why."

 

If you "Got it" then move on.  If not, re-read."

It's unnecessary to bold anything and presume that readers won't know what you are trying to emphasize. I also find evidence based unsubstantiated and imaginary scenarios to be a unsatisfactory read.

I hope unbiased, objective, and actual analysis that is not based on preconceived notion of FED will be provided in the future to better shed light on this important issue.

Best,

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#18) On April 19, 2011 at 4:03 PM, FoolsGrad (99.95) wrote:

See this comment:  "Look at all the very intelligent Fools on this site that deny (monetary) inflation even exists.  They are trapped in a mental cage created by the Fed (many of them independent thinkers otherwise.)  " - David in Qatar

 

I am uninterested in ad-hominem attacks on other board members.

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#19) On April 19, 2011 at 4:33 PM, whereaminow (30.78) wrote:

In nowhere is there any evidence presented to show that Fed's policies are what keeping the prices tamed when prices should have dropped. The only evidence presented thus far is that "Well, because Fed is bad and that's why."

Wow

In 1900, prices were lower than they were in 1800.  During the Civil War, excess issue of currency resulted in a doubling of prices by 1865. Those prices were halved from 1865-1900.  

Enter the Fed.

CPI 1913-2011

http://www.minneapolisfed.org/community_education/teacher/calc/hist1913.cfm

So, even though the CPI fell 50% without the Fed, and has now risen  27-fold (is my math correct?) since the Fed, there is no evidence that the Fed is responsible?

Did productivity fall by 50% from 1865-1900?  No, in fact, it exploded.  

So why did prices fall so drastically under a gold standard, but explode under the Fed. Clearly productivity is not the reason. Clearly input costs are not the reason. Clearly bad weather is not the reason. Clearly speculators is not the reason. Clearly margins are not the reason.

Are you sure you don't know what evidence means?

As for the fallacy of cost-push inflation, the fallacy is that it explains price rises in general. It only explains why certain prices rise. The ultimate reason for all price rises is an overissue of currency.

Inflation is an "expansion or extension beyond natural or proper limits or so as to exceed normal or just value, spefically overissue of currency." Funk and Wagnalls Standard College Dictionary (1941)

The reason you are so confused right now is that you are working from a faulty economic model.

Here are the basics of inflation using another model (a model that works.) Where do you think we are on the timeline?

David in Qatar

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#20) On April 19, 2011 at 4:40 PM, whereaminow (30.78) wrote:

Btw, according to the World Bank, global food prices rose 36% last year. While inflation deniers were telling CAPS that the big threat is deflation, prices were rising right under their nose and without their knowledge. More on this to come.....

(But I have to run for now. It's been fun.)

David in Qatar

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#21) On April 19, 2011 at 4:40 PM, FoolsGrad (99.95) wrote:

I am once again dumbfounded by your comments.

In 1900, prices were lower than they were in 1800.  During the Civil War, excess issue of currency resulted in a doubling of prices by 1865. Those prices were halved from 1865-1900.  

Enter the Fed.

CPI 1913-2011


So, even though the CPI fell 50% without the Fed, and has now risen  27-fold (is my math correct?) since the Fed, there is no evidence that the Fed is responsible?

 

I have no idea how Fed is immediately responsible for causing price inflation (btw, I thought you said monetary inflation is not the same as price inflation? So are you retracting that claim now?), when you have just told us that prices gone up and down prior to the establishment of the Fed.

 

"As for the fallacy of cost-push inflation, the fallacy is that it explains price rises in general. It only explains why certain prices rise."

So the phenomenon is real? Then it's not a fallacy. Please consult dictionary.

 

I have skipped the rest since it is difficult to understand the numerous self-contradictions you have made.

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#22) On April 19, 2011 at 4:48 PM, whereaminow (30.78) wrote:

In the words of Dean Wormer from Animal House "Fat, dumb, and stupid is no way to go through life." 

Take a deep breath and actually read the basics of inflation post. It will help clear up your immense confusion.

David in Qatar

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#23) On April 19, 2011 at 4:49 PM, ChrisGraley (29.94) wrote:

Wow! I'm not going to hop in the fray here. I'm just going to post a drive-by because I detect one of those threads where I'd have to debate back and forth for a week here and still not get anyone to change their viewpoint but...

1) Increased productivity by itself always translates to lower prices. It lowers your input costs by itself. If productivity increases and prices increase, it's because of an outside force. (like printing money)

2) Our economy's productivity is not measured by GDP. GDP is just a measurement of market value of goods and services sold. That market value is not anything close to a measure of productivity. Our goverment to print and hand out $1 million dollar bills to hand out to every citizen and our GDP would go through the roof while our productivity. would likely decrease. (The first bunch of people to get the money would likely skip a few days work to spend their gains before inflation kicked in.)

3) If we define productivity as output per hour worked, then a company selling a commodity would not be more "productive" when that commodity[sic] price rises. They would have more profit, but that's only if you don't account for inflation. Their productivity has nothing to do with what their product sells for. Their profit does.

4) A company has some control over price inflation. This is supply and demand. You can charge what you want but if it's too expensive for me to make a profit I won't buy it from you, I'll buy it from someone else. If you have monetary inflation everyone's costs go up the same and if you as my supplier have a fair margin I won't find it cheaper anywhere else.

5) Walmart controlling costs is a form of increasing it's productivity.

6) Productivity gives a company a competitive advantage until it's competitors can match it's productivity. If it costs me $3 to make a widget and it cost's you $5 to make a widget, I can sell my widgets at $4.99 all day long and get 100% of the market. You either have to increase your productity enough to compete or go bankrupt. If you do increase your productivity to compete, you still have to sell your product at a competetive price and therefore prices go down. It's that simple. Prices have to drop. Now if the government screws things up by printing more money I can't make my widgets for $3 anymore. I have to either cut my margin or raise prices.

This is not difficult economics here people.

Most people that know enough to invest wisely should know this stuff.

/end rant

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#24) On April 19, 2011 at 5:06 PM, FreeMarkets (96.68) wrote:

#17 - I think this may be a better question.  Has productivity increased in the last 100 years?  If so, by how much.  I cited a source that says a worker today produces 10x as much as a worker 100 years ago, but you can choose any value if you disagree with my source (from original post).

Now the 2nd question, take the value from #1 and determine the cost reduction one might expect.  Lets say you believe every corporation will keep 50% of the excess profits (this would of course assume you don't believe in a free market, but instead in a collusion economy).  If you put in 4x for question # 1, then we could expect prices today to be 50% less today than in 1910.

So why aren't prices lower? Why are they 20x higher? Monetary inflation is the answer.  

If you don't get it, than we will all be better off if we just move on.  

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#25) On April 19, 2011 at 5:24 PM, Slider08 (< 20) wrote:

FoolsGrad,

The the issue with cost-push inflation is a bit more nuanced than David explained. From wikipedia (because I'm lazy):

[T]he cost of goods and services do not lead to inflation without the government and its central bank cooperating in increasing the money supply. The argument is that if the money supply is constant, increases in the cost of a good or service will decrease the money available for other goods and services, and therefore the price of some those goods will fall and offset the rise in price of those goods whose prices have increased.

 

Creating currency out of thin air will eventually necessitate an increase in prices. (If you refuse to believe this and choose to discard the principles of supply and demand, you truly are, as David said, trapped in a mental cage.) Additionally, created currency causes an uneven increase in prices. Created currency isn't evenly distributed to everyone; rather, it's given to those with connections (see some of David's recent blogs). There's a reason why we have a massive finance sector and military-industrial complex; they're the first to get the newly-created currency, benefitting from an artificially higher demand for their services while we are hurt from an artificially lower demand for ours. Additionally, the markets will take time to react to the increased money supply, meaning the first to receive the new currency have the opportunity to spend it before inflation kicks in. This is where our stolen productivity goes; this is why Volcker called inflation the cruelest tax.

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#26) On April 19, 2011 at 5:28 PM, Slider08 (< 20) wrote:

... aaaaaand I missed the last half of the conversation betweens starting and finishing the above post...

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#27) On April 19, 2011 at 5:45 PM, FleaBagger (28.79) wrote:

sophistry, noun - a subtle, tricky, superficially plausible, but generally fallacious method of reasoning.

FoolsGrad, you sound very intelligent, and you seem to be able to take in, remember, and order a great deal of data. But you start from a very flawed premise (or two): that the status quo of economic thought is the best available, and a priori reasoning is useless to economic understanding.

Really, it's not so difficult to understand that what people want from their jobs is to obtain real goods: food, shelter, cars, pool tables, miniature giraffes, etc. That's what people produce when they go to their jobs, and the higher their productivity, the more they can buy of those things from others, because the more of those things they made for others. If everyone (in general) produces more, the more stuff everyone will be able to afford. That is axiomatic. Prices going up despite higher production has to be attributable to monetary inflation, i.e. the Fed, because higher productivity in every sector reduces the price of every input relative to wages. Fed apologists say that wages have gone up more than price increases, so they're doing a good job, but FreeMarkets is pointing out that the difference between wages and prices is less than the increase in productivity, so the Fed is actually doing terrible, and the standard of living should be much higher: 10x higher than in 1913 rather than 3x higher, or whatever the numbers shake out to.  

It's not too difficult to understand, but if you focus on developing intelligent-sounding replies based on sophistry, you might miss it.

Btw, when you say "I am uninterested in ad-hominem attacks on other board members," does that mean you are a member of the Fed board? If not, what do you mean? And do you know what an ad-hominem attack is? 

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#28) On April 19, 2011 at 5:48 PM, mtf00l (47.57) wrote:

For only containing 26 comments, there is a lot of great information here!

If you keep this up, learning might occur.

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#29) On April 19, 2011 at 7:40 PM, eldemonio (98.63) wrote:

I'm still having a hard time with the productivity measure.  It would appear that most people on this blog would conclude that the USA only mass produces goods given their comments regarding the straightforwardness of our productivity measure.  Stupid me, I was under the delusion that manufactured goods only makes up a part of our economy.   

My problem is based on the fact that a large percentage of our "output" can only be inferred from profits because nothing is produced as a result of work hours.   

If I missed someone addressing this issue, again, I apologize for my extreme stupidity.  Please keep you responses simple so I can understand them.

 

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#30) On April 19, 2011 at 8:10 PM, carfun (< 20) wrote:

As I recall back in grade school (yes many years ago) we were taught that one of the things sought by labor unions was to move their membership up the chain of the inflation cycle to help improve their standard of living. As other posts have alluded to, the inflation loop has been pretty much unending and the closer you are to the top of the cycle the more you benefit.

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#31) On April 19, 2011 at 11:50 PM, ChrisGraley (29.94) wrote:

 

I'm still having a hard time with the productivity measure.  It would appear that most people on this blog would conclude that the USA only mass produces goods given their comments regarding the straightforwardness of our productivity measure.  Stupid me, I was under the delusion that manufactured goods only makes up a part of our economy.   

My problem is based on the fact that a large percentage of our "output" can only be inferred from profits because nothing is produced as a result of work hours.   

If I missed someone addressing this issue, again, I apologize for my extreme stupidity.  Please keep you responses simple so I can understand them.

Nobody infers that whatsoever. The US also produces a great many services. (This is not a good thing unless those services can be exported btw)

Both goods and services are sold and we make a profit, but that is not a measure of productivity. I can inherit money from a rich uncle but that influx of cash does not mean I did anything productive.

Let's pick a services scenario...

Let's say I make a living as a barber. The only other barber in town moves away so I decide to raise my prices 50%. I did nothing more productive, but I've boosted my profit by boosting my margins.

Now most likely a few more barbers are going to move into town and open up shop because I am overpriced and my customers are dying to find a better option.

Maybe one of those guys is a little younger than I am and able to cut hair a little quicker and he is able to do 15 haircuts a day vs my 12 haircuts. He is able to charge less than I am and still make more money. He is more productive and will win the competition in the long run. Productivity is more a measure of efficiency than profit. It's because of this that productivity leads to a decline in price. It doesn't matter if it's a car or a haircut.

Something is always produced by work hours. (unless you're loafing) You may not be able to put it into a sack, but something is always produced. If nothing was produced, there would be nothing to profit from.

 

 

 

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#32) On April 19, 2011 at 11:58 PM, FoolsGrad (99.95) wrote:

Hi Fleabagger,

But you start from a very flawed premise (or two): that the status quo of economic thought is the best available, and a priori reasoning is useless to economic understanding.

Incorrect. One can form axiom a prior, one cannot form an opinion a priori. Presumably opinions are formed after evidence is gathered. An a prior conclusion (e.g., Fed is bad) is called bias. It doesn't serve to further anyone's understanding.

 

Prices going up despite higher production has to be attributable to monetary inflation, i.e. the Fed, because higher productivity in every sector reduces the price of every input relative to wages. Fed apologists say that wages have gone up more than price increases, so they're doing a good job, but FreeMarkets is pointing out that the difference between wages and prices is less than the increase in productivity, so the Fed is actually doing terrible, and the standard of living should be much higher: 10x higher than in 1913 rather than 3x higher, or whatever the numbers shake out to.  

Only if one incorrectly assume that it should be an 1:1 relationship. As said before, it's a false assumption.

 

Btw, when you say "I am uninterested in ad-hominem attacks on other board members," does that mean you are a member of the Fed board? If not, what do you mean? And do you know what an ad-hominem attack is? 

Yes, I do know the definition of the term. The board members refer to members HERE, at CAPS. My comment was made in reference to David's ad-hominem on other CAPS members who have previously diagreed with his position.

Hopefully the confusion is now cleared.

 

Hi Slider,

I know what the term means, but thank you for linking the relevant passages nevertheless. The issue is not whether the explanation is true or not; rather it centers on whether it is a fallacy-it is not.

 

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#33) On April 20, 2011 at 12:05 AM, FoolsGrad (99.95) wrote:

Finally, regarding the fallacious claim that productivity must lead to lower prices, ceteris paribus.

 

Basic economic principles state that lower productivity leads to lower aggregate demand, which will reduce price levels. The counteracting force is that per unit costs have decreased (as I have brought up). In fact, whether productivity changes must directly lead to changes in price levels is an empirical question that cannot be singularily attributed to money supply.

 

The person who claims that anyone who "invests wisely" must arrive to his conclusion is making a specious claim.

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#34) On April 20, 2011 at 12:15 AM, tekennedy (75.69) wrote:

How has inflation been on telephones and computers over the last 100 years?  Cars?  TV's?  Honestly, inflation at its very best is a mediocre measurement; it doesn't take into account productivity improvements which actually improve the product.  How could it?  How is an economist to say an iPhone is 76% better than one of those brick cell phones people actually used a decade ago.  Capitalism is massively deflationary but our government has been inflationary.  Consult various measurements of money supply and commodity prices if you doubt the inflationary tendencies of our government.  Consult recent TV and computer pricing developments if you doubt the deflationary nature of our economy.

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#35) On April 20, 2011 at 12:53 AM, ChrisGraley (29.94) wrote:

FoolsGrad, 

A demonstration of vocabulary does not demonstrate an understanding of economics, so if you would, please try to limit the linguistic grandeur just a little.

Now as far as #19. Lower productivity does lead to a lower demand, but that is because you would need to raise prices. (assuming you maintain the same margin)  Lower productivity absolutely does not lead to low prices. It leads to higher prices.

I'm assuming that you typed lower in one of those spots and meant higher. (understandable since you were trying to flip back and forth between this page and your online dictionary) 

Please restate because I'm having a hard time following the rest of your statement in a cohesive way after that.

If you are saying that other decreases in input costs could also lower prices, I agree. It's difficult to follow given what I believe is the misplacement of the word lower, the lack of content and the supercilious lexicon. 

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#36) On April 20, 2011 at 12:54 AM, ChrisGraley (29.94) wrote:

Excuse me FoolsGrad, #33 not #19.

 

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#37) On April 20, 2011 at 12:55 AM, whereaminow (30.78) wrote:

The Keynesian Playbook is consulted and the solemn incantation of aggregate demand is chanted. When we turn the page, the book instructs us to hold the Keynesian Cross aloft to the wide-eyed spectators.

Links take care of theory, now comes fun part - ad hominem:

Scientific apologia for theft as few know that every major Keynesian economist is on the Fed's payroll.

David in Qatar

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#38) On April 20, 2011 at 8:01 AM, FreeMarkets (96.68) wrote:

#32 - Only if one incorrectly assume that it should be an 1:1 relationship. As said before, it's a false assumption.

I want to clarify that the Living Standards are going DOWN.  Are you arguing that it's a false assumption that increased productivity should lead to higher living standards? 

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#39) On April 20, 2011 at 8:07 AM, FreeMarkets (96.68) wrote:

#33 Basic economic principles state that lower productivity leads to lower aggregate demand, which will reduce price levels.

Here is your flawed premise.  Lets say every wheat farmer suddenly finds their machinery unusable and must farm with by hand with a sickle.  Wheat production drops 99% - and YOU say that this will REDUCE price levels?

Increased productivity reduces price levels.  You are starting with a flawed economic principle.  And I know the argument you may respond with - "Supply is reduced so demand is reduced, prices must come down to meet the reduced demand."  But this argument ignores the concept of scarcity - and the fact that less wheat will increase demand for corn and other grain products.  

I really want an answer to this question because if I'm misunderstanding you I want to continue the conversation and hopefully learn what it is you are saying.  If I do not misunderstand you, then I'd like to drop this debate because the wall behind me needs a good talking to.

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#40) On April 20, 2011 at 8:45 AM, ChrisGraley (29.94) wrote:

As am I FreeMarkets.

 

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#41) On April 20, 2011 at 10:59 AM, eldemonio (98.63) wrote:

Chris,

Thanks for the text book explanation of productivity.  If you read my comment, you'll see that my question refers to how it is measured by our government, not what it is.

Both goods and services are sold and we make a profit, but that is not a measure of productivity.

I agree that increased profits do not necessarily mean higher productivity. 

It's entirely possible that I am wrong, but I don't think our government goes around and counts haircuts.  Isn't productivity measured by the BLS in relation to profits?  If not, please explain to me how our government measures productivity.

  

 

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#42) On April 20, 2011 at 12:44 PM, FoolsGrad (99.95) wrote:

A demonstration of vocabulary does not demonstrate an understanding of economics, so if you would, please try to limit the linguistic grandeur just a little.

I see no words in my posts that would prevent conversation from progressing. Do you? If so, please kindly pointed them out and I don't mind rewriting my posts. If not, then I suspect the above para is a juvenille flame. 

 

Now as far as #19. Lower productivity does lead to a lower demand, but that is because you would need to raise prices. (assuming you maintain the same margin)  Lower productivity absolutely does not lead to low prices. It leads to higher prices.

I'm assuming that you typed lower in one of those spots and meant higher. (understandable since you were trying to flip back and forth between this page and your online dictionary) 

I hope you would realize then that the flip side of this is that higher productivity could lead to higher aggregate demand, which would create inflationary pressure?

 

Lower productivity absolutely does not lead to low prices. It leads to higher prices.

Of course this is, as said before, an empirical issue. There is nothing "absolute" about it. I'll just let Janet Yellen do the talking:

 

"In theory, slower growth in trend productivity would have two counteracting effects. First, it likely would raise business costs for a time, because firms would face more rapid growth of unit labor costs. To offset the resulting squeeze on profit margins, firms would need to raise prices more rapidly. Eventually, increases in unit labor costs are likely to fall back toward previous slower rates as workers are forced to accept lower wage growth to compensate for their slower productivity growth. But during the adjustment period—which can last for a considerable period—there is upward pressure on inflation." 

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#43) On April 20, 2011 at 12:46 PM, FoolsGrad (99.95) wrote:

Oops...more below:

"At the same time, slower growth in trend productivity would likely result in slower growth in aggregate demand, which might offset some of the upward pressure on inflation. Growth in consumer spending would probably weaken as lower business profits limit stock market gains, thereby reducing household wealth. More foresighted consumers might also reduce spending, perceiving that the prospects for growth in real wages are not as bright. Further, lower expected rates of productivity growth should restrain business investment by reducing the prospective return to capital."

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#44) On April 20, 2011 at 12:56 PM, FoolsGrad (99.95) wrote:

Here is your flawed premise.  Lets say every wheat farmer suddenly finds their machinery unusable and must farm with by hand with a sickle.  Wheat production drops 99% - and YOU say that this will REDUCE price levels?

Increased productivity reduces price levels.  You are starting with a flawed economic principle.  And I know the argument you may respond with - "Supply is reduced so demand is reduced, prices must come down to meet the reduced demand."  But this argument ignores the concept of scarcity - and the fact that less wheat will increase demand for corn and other grain products.  

 

I am a bit confused by this. Are you saying that reduction in productivity will absolutely make the goods more scarce? This is a major leap of faith you must take. 

There is a slowdown in overall productivity since the 80s. Whatever happened to the inflation?

 

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#45) On April 20, 2011 at 1:49 PM, FreeMarkets (96.68) wrote:

#44 Are you saying that reduction in productivity will absolutely make the goods more scarce?

If the reason for productivity reduction is not specific to one company, then absolutely.  Do you believe that losing productivity INCREASES output?

There is a slowdown in overall productivity since the 80s. Whatever happened to the inflation?

There's been a slowdown in productivity growth, we haven't gone negative since the 1980's.

And you haven't answered my question:  Lets say every wheat farmer suddenly finds their machinery unusable and must farm with by hand with a sickle.  Wheat production drops 99% - and YOU say that this will REDUCE price levels?

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#46) On April 20, 2011 at 5:18 PM, FoolsGrad (99.95) wrote:

There's been a slowdown in productivity growth, we haven't gone negative since the 1980's.

 

So before we go on, there is no question then that a loss in the growth in productivity can lead to null effect on price levels, correct?

Furthermore, I am baffled by your claim.There has been several quarters where we have had a negative productivity growth rate. I won't bother with old history, let's just review the past 10 years worth of data:

http://data.bls.gov/generated_files/graphics/PRS85006092_5048_1303334007114.gif

http://www.tradingeconomics.com/economics/ChartImg.axd?i=chart_2b80b2079b90474881a80b0d2b1f8ae6_46.png&g=5af6f2a8b9cd4137b5409e1249228e6d

 

Does not appear to have a direct inverse relationship.

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#47) On April 20, 2011 at 7:40 PM, rfaramir (29.33) wrote:

“Basic economic principles state that lower productivity leads to lower aggregate demand, which will reduce price levels. The counteracting force is that per unit costs have decreased (as I have brought up). In fact, whether productivity changes must directly lead to changes in price levels is an empirical question that cannot be singularily attributed to money supply.”


Wow, what a load of worthless “basic economic principles”. Wrong on all fronts, must be Keynesianism, since I see “aggregate demand”.


What happens when productivity lowers? Less gets produced. 12 widgets per hour instead of 15, say. (Maybe the workers just unionized, but haven’t gotten wage increases, yet, just harder to fire, so they have less incentive to work hard: less productive.) The firm’s cost per unit goes up (since the fixed costs for the land and capital and costs per hour and material per unit stay constant but are divided by fewer total goods at the end of the day). Either profits go down or selling price has to rise, or the firm finds other ways to cut costs, or the firm goes out of business. Once profits are as low as they can get without going out of business (and they usually are near that level through competition), and all other costs have already been cut (again, it has already happened because of profit motive and competition), the only option is to raise prices.  The reverse is true when productivity rises: more is produced so prices can be lowered (and due to competition, this will happen soon, profits will be temporarily higher then driven back down to normal).


Ceteris paribus is key, here. When all things are held the same, that must include the money supply. If more goods are produced (higher productivity) and the same amount of money is available to buy them, the prices must fall (per unit), as the money is spread out over more goods. If fewer goods are produced (lower productivity), the same amount of money will bid the prices higher.


It makes sense in another way: we produce in order to consume. We pay for what we consume with what we produce. It is indirect (selling our products for money, then buying stuff with that money), but true nonetheless. So if we produce less, we have to consume less, i.e. we are poorer. If we produce more, we can consume more, and are richer as a result. (I was going to add a perception dimension: To the rich, prices seem low, to the poor they seem high; but that is totally unnecessary.)


Basic Keynesian economic principles are wrong. A lower demand for an item happens when too much of it has been produced, not too little (bargain bin anyone?). This typically happens because of high productivity incorrectly applied by an entrepreneur who guessed the public’s appetite wrong. One source of Keynes’ folly is improper aggregation. Whenever you try to add one person’s subjective preferences to another, you are adding unlike things, the equalities do not hold, so the math will be wrong. When you treat demand for consumer goods as equivalent to demand for capital goods you will be wrong in your conclusions. Capital structure matters. Time matters: it takes time to put land, capital, materials, and labor together to make a final product. Interest rates matter, as they are the price of money over time (especially the time it takes from investing in capital while paying employees until the product is finally made and sold in a quantity to pay back the loan), and interfering with them will have terribly consequences. Keynes explicitly wanted to drive interest rates to zero because he knew what he wanted: a socialist, centrally-planned (by himself and elites like him) economy. The Fed does approximately that and is accomplishing it, too, while stealing our purchasing power by legally counterfeiting our currency.

Another problem is method of measuring productivity. It is undoubtably making more and better stuff and providing more and better services. When it is measured by total revenues, though, ceteris paribus is violated, as the money supply is not constant. When the Fed prints money, the money supply goes up instantly, GDP goes up because the money is spent in the economy, but productivity may or may not go up in real terms. So reasoning from GDP will be faulty in this area. Try reasoning (as above) from situations were we can keep things constant.

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#48) On April 21, 2011 at 8:26 AM, FreeMarkets (96.68) wrote:

#46 Furthermore, I am baffled by your claim.There has been several quarters where we have had a negative productivity growth rate.

I never claimed such a thing.

And can I ask for the last time, do you believe DECREASED productivity leads to lower price levels?

Your unwillingness to answer this question can only be for one of three reasons: 1) You don't think I want an answer 2) You don't have an answer 3) You realize you're wrong on this point.

If you choose to respond to this thread again, make sure you answer this question first.  Otherwise, as I said earlier, I'd prefer talking to the wall behind me.

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#49) On April 22, 2011 at 8:37 PM, JaysRage (90.03) wrote:

I would just like to add that increased productivity does need to also be rationalized by the increased cost of that increased productivity.  For instance, robotic manufacturing lines are more productive than human manufacturing lines for many goods.   However, if you can get cheap enough labor, you can build 5 human manufacturing lines that equal robotic manufacturing line for cheaper than the capital cost of one robotic line with the same output.  

Similar with tractors vs sickels.  Tractors are expensive.   Sickles are cheap.    Farmers are 12X more productive in pure output perhaps, but their capital costs are significantly more than their predecessors.  Food for thought.   

I think the productivity gains that are being monetized away are overstated on these grounds.    That said, we are at a peak standard of living as things stand right now.   Our standard of living as a country will necessary go down as the price of our high living as a country comes due.   

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#50) On April 23, 2011 at 11:40 AM, FreeMarkets (96.68) wrote:

#49 - Excellent point about the capital costs.  Determining how much less something should cost based on productivity is not a simple exercise.  While you are correct that capital costs are higher, what is the additional benefit of requiring less input?  For example, lets say 5 human manufacturing lines could equal one robotic line.  However, the society with the one robotic line now has the extra human capital available to create more stuff (food, build infrastructure, etc.).

I sense a nobel prize in economics for someone who creates a formula to modify cost based on productivity.

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#51) On April 25, 2011 at 9:16 AM, JaysRage (90.03) wrote:

There is a balance.   It is obviously a fluid model.   Surpluses and shortages come and go throughout history.   Human capital is a resource that could be applied elsewhere, but the raw materials, such as metals that are used in the robotic line also would have opportunity cost of different application.    What is the rarest resource?   The business environment will quickly capitalize on the most abundant resource and use it for a competitive advantage until it is no longer competitive to do so (see cheap labor...China....). 

Land.....raw materials.....human capital......transportation

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