Lets think of the three engines of stagnation: Education, Medicine and Finance.
A couple of points
- All high human capital areas. Higher Ed and Medicine are obvious to the man on the street. There are a lot of “Drs” on Wall Street as well but in addition finance has developed a set of human capital markers all its own. Investment Bank interviews for example, do sometimes offer IQ tests of a sort – they ask brain teaser type interview questions.
- TFP growth depends on the returns to innovation not being captured by the innovator. Otherwise it becomes a return to the factor of production rather than total factor productivity
- Returns to human capital are rising.
Immiseration of physical capital side note. Suppose there are two types of assets: Easy to understand, lets call them stocks and government bonds; and hard to understand, lets call them debt instruments and venture capital.
A low level of global savings implies makes it easier for the return between these two classes of assets to be close. Rapidly increase the global supply of savings without increasing the number of savvy investors and the return to easy to understand assets will collapse, but not hard to understand.
This could result in meager returns to capital generally, but very high returns to specific forms of capital.
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Wednesday ~ April 13th, 2011 at 11:33 am
Andy Harless
“TFP growth depends on the returns to innovation not being captured by the innovator. Otherwise it becomes a return to the factor of production rather than total factor productivity”
That doesn’t sound right to me. TFP is the residual after you’ve accounted for the quantities of the factors of production. If, due to some innovation, there is an increase in total output for the same quantity of all inputs, even if that increase is paid entirely to one factor, then TFP goes up. In terms of distribution, capital has captured a disproportionate share of recent increases in TFP, but the increases are still there. Labor compensation has stagnated not because TFP has stagnated (though it has arguably slowed) but because labor’s share has declined as TFP continued to grow. You can complain that TFP is not rising fast enough, but that is not the result of how the returns to innovation are distributed. The distribution is reflected in the wedge between TFP and compensation growth.
(For the record, I don’t buy Tyler Cowen’s characterization of the data. He would say that TFP has grown more slowly since the early 70′s. I would say that TFP grew slowly from 1970 to 1995 and then quickly from 1995 to 2005, and then there was a weird business cycle event from which the dust has yet to settle. Wait until the economy recovers, and then we’ll decide whether TFP is growing slowly or quickly. John Fernald does try to do a capacity utilization correction, but I still think a highly disruptive business cycle event makes it impossible to ascertain the trend.)
Wednesday ~ April 13th, 2011 at 11:46 am
Karl Smith
Yeah – I have to look through the calculations more carefully. I remember this coming up in the debate over Asian TFP and whether or not it was really capital deepening in disguise because the returns to capital were surprisingly low.
Wednesday ~ April 13th, 2011 at 3:23 pm
Barry
Why is finance an Agent of stagnation in the way I’m guessing it was meant?
Agent of Destruction and Looting, causing us to stagnate, yes. In terms of the ability to move and manipulate money/risk, how would the tools and people of 1980 fare in the 21st century?