Thursday, December 29, 2005

Productivity and policy 

Students in principles macro learn -- or at least they should -- that per capita GDP rises either by increasing the amount of capital invested in each worker or by increasing the productivity of each worker with the capital they have. When we look at productivity data, we don't necessarily know which of those has happened. Paul Mirengoff agrees with Arnold Kling that we cannot tell whose policies increase or decrease capital.

But we can point to a couple of items. First, the 'capital' I'm using should be described as broadly as possible -- it includes human and physical capital. For example those policies that make education more efficient, insofar as they increase human capital for the same years in school, increase our living standards. would help, for example.

Second, agreeing with Kling, productivity changes take time but we know what matters most are institutions and incentives. Consider Mahalanobis' dismay over how Austrians view their own future. Austria and the US are rich countries, have been for quite some time and are likely to continue to be so. But look at his graph and see Argentina, a country that at the end of World War II had per capita GDP (adjusted for purchasing power parity) at European standards. How did the European productivity gains elude them, so that their per capita GDP is now less than 40% of the USA? They aren't any less smart, and they have access to the same technology.

It is a matter of policy. It's just that it takes a damn long time for the differences to become as stark as modern day Argentina. A good read that my students get is Mauricio Rojas' The Sorrows of Carmencita (available as a pdf from this link, though I hope you'll thank Timbro and buy a copy.)