Thursday, September 28, 2006

Is Productivity good or bad? (Part 2)

Ultimately, the consequence of a productivity bubble would be unemployment. In a piece published by David Tice’s, Donald Perry used a story to make the point.

“Basically, productivity in the coop increases when chickens lay more eggs per day,” “Early on farmers noted that hens could produce more eggs when confined to a cage, instead of running around searching for food, being chased by cocks or having to evade predators. To understand productivity as it relates to the economy substitute the word ‘chicken’ for ‘worker.’”

However when more eggs are produced, eventually the price of eggs will fall. The egg business at best will tread water. Too many eggs, like too many cell phones or computers, leave the chicken farmer with little power to raise prices. The solution for the farmer is “to send some of the chickens to Campbell’s.” – ending up literally in their soup. The farmer then has fewer chickens to feed, gets the highest average output per chicken, and makes a little extra money in the process.

In the real world, however “human chickens are not sent to Campbell’s,” Perry pointed out, “they get unemployed and buy fewer goods.” And when there are fewer buyers, the excess of eggs becomes even greater. Now obviously, the market corrects itself by “wringing out the excesses.” Ultimately, many egg farmers are going to go out of business. So when you someone touts productivity gains you should be think logically if productivity is after-all a good thing. It could mean “Who will be going out of business next?”

A boon in anything may or may not be due to logical reasons one needs to always ask why. Rising productivity “makes economic sense when production rises faster than ‘hours worked’, but it makes little or no sense when – as in recent years – hours worked fall faster than rising productivity.”

When productivity gains are linked to jobs vanishing, we see no miracle.

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