Total Factor Productivity

"...a money supply based on nothing other than faith in government is a productivity killer."

John Aziz is a young British blogger on matters economic, publishing at azizonomics: economics for the jilted generation.  In a recent entry he addresses the predicament that during the post-war gold-exchange standard "average family income increased at a greater rate than that of the top 1%. From 1979-2007 (years without a gold standard) the top 1% did much, much better than the average family."  The stagnation of family income, and the growing disparity between the middle class and the wealthy is, of course, one of the fundamental complaints underlying the former Occupy Wall Street movement and its more structured successor, the 99% Spring.  Of course, economic growth rates are a combination of labor force growth plus productivity growth.  Without productivity growth wages stagnate.  So ... consider the correlation between monetary policy and productivity growth (and the absence thereof).

Aziz writes, with exceptional lucidity:

I have long suspected that a money supply based on nothing other than faith in government is a productivity killer.

Last November I wrote:

...

As we have seen with the quantitative easing program, the newly-printed money is directed to the rich. The Keynesian response to that might be that income growth inequality can be solved (or at least remedied) by making sure that helicopter drops of new money are done over the entire economy rather than directed solely to Wall Street megabanks.

But I think there is a deeper problem here. My hypothesis is that leaving the gold exchange standard was a free lunch: GDP growth could be achieved without any real gains in productivity, or efficiency, or in infrastructure, but instead by just pumping money into the system.

And now I have empirical evidence that my hypothesis has been true — total factor productivity.

In 2009 the Economist explained TFP as follows:

Productivity growth is perhaps the single most important gauge of an economy’s health. Nothing matters more for long-term living standards than improvements in the efficiency with which an economy combines capital and labour. Unfortunately, productivity growth is itself often inefficiently measured. Most analysts focus on labour productivity, which is usually calculated by dividing total output by the number of workers, or the number of hours worked.

A better gauge of an economy’s use of resources is “total factor productivity” (TFP), which tries to assess the efficiency with which both capital and labour are used.

Total factor productivity is calculated as the percentage increase in output that is not accounted for by changes in the volume of inputs of capital and labour. So if the capital stock and the workforce both rise by 2% and output rises by 3%, TFP goes up by 1%.

Here’s US total factor productivity:

Only a wilful and ideological Keynesian could ignore the salient detail: as soon as the USA left the gold exchange standard,  total factor productivity began to dramatically stagnate.

Coincidence? I don’t think so — a fundamental change in the nature of the money supply coincided almost exactly with a fundamental change to the shape of the nation’s economy. Is the simultaneous outgrowth in income inequality a coincidence too?

...

And it’s not just total factor productivity that has been lower than in the years when America was on the gold exchange standard — as a Bank of England report recently found, GDP growth has averaged lower in the pure fiat money era (2.8% vs 1.8%), and financial crises have been more frequent in the non-gold-standard years.

The authors of the report noted:

Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives.

Still think it’s a barbarous relic?

Full marks, Mr. Aziz

 


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Since then we’ve been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.

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Publisher's Note: Originally released in June/July of 1991, this detailed report discusses Jacques Rueff's economic theories and applies them to modern economic events.

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Who Was Jacques Rueff?

... Trained in science and mathematics at the Ecole Polytechnique, Rueff devoted his first theoretical work to showing that the same scientific method applies to “moral” or “social” sciences like economics as to the physical sciences (Des Sciences Physiques aux Sciences Morales, 1922). In both cases, he pointed out, individual acts can be “indeterminate,” but the pattern of large numbers of individual acts can be predicted as a matter of probability. And so in economics no less than physics, as he later wrote, “A scientific theory is considered correct only if it makes forecasting possible.”

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"Forerunners of man lived upon the planet several million years ago. But the unique, modern, social order of man – civilization – emerged only four to five thousand years ago. Historical and archaeological evidence suggests that the institution of money evolved coterminously with civilization. From the standpoint of the 100,000-year history of Homo sapiens, civilization and money are but young and fragile reeds. Today their very existence is threatened by financial disorder."

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