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An Economics Paradox and a Preview


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February 02, 2006

An Economics Paradox and a Preview

Michael Mandel

Here's a question for you all:

Company A has an R&D staff of 1000 engineers designing innovative new products for the future. In a fit of cost-cutting fervor, the management of company A lays off 500 of those engineers, who then find new work building homes (5 bedroom McMansions, mostly).

Question: Does U.S. labor productivity go up or down?

Answer: See my story in the new issue of BW, on the website tonight.

(Think of this as a movie trailer).

07:55 AM

Labor Market

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After the discussion (admittedly limited) in the "Good Word for Greenspan" thread, I'm really looking forward to this article... even if it proves my hypothesis wrong. ;-) One of these days I'm going to figure out how to describe, in words and evidence, the severe problem I'm sensing in the world economy.

In the meantime, here's a chart to chew on:

http://www.legend-financial.com/content/ourviews_legend2.asp?SPID=19061&LinkID=35757&Title=Articles%20Online%20-%20Med

Posted by: Brandon at February 2, 2006 08:55 AM

Why not add the following:

Those 500 jobs are off-shore to China where a subsidiary has been established?

Posted by: Stormy at February 2, 2006 11:26 AM

In the short term, productivity goes up, because output goes up. In the longer term, productivity goes down, or is at least lower than it could have been, because whatever these engineers were working on (which presumably would improve productivity) doesn't get done.

This phenomenon isn't specific to R&D. Say we have a group of people in a manufacturing plant whose job it is to grease the machine tools...each machine needs greasing every 6 months. When the group is layed off and takes jobs in the housing industry, productivity goes up initially. However, when the machines begin to fail, it then goes down.

Posted by: David Foster at February 2, 2006 11:33 AM

If they fire the CEO, does productivity rise? If they replace him with a more expensive one, does productivity fall? Is there a shortage of CEOs?

Is there a shortage of math and science? Is there ever a shortage of anything beyond a supply below market demand?

Posted by: Lord at February 2, 2006 02:23 PM

Goes us. David is spot on.

Posted by: Eric at February 2, 2006 05:00 PM

Having read the article, I'm pretty sympathetic to how the stats are currently done. Who says the engineers would have accomplished anything that would ever translate into revenue generating products? Perhaps they would have made great designs but got soundly drubbed by the competition. They may in fact not be satisfying any demand or delivering any utility.

But by building a house they're definitely satisfying a real consumer demand, with numbers to show for it (assuming the house sells, and if not the #s don't count towards GDP and productivity).

Think of all the wasted research so many extinct dot-coms must have done. It's like a revealed preference issue. You can say McDonald's should sell Tofu all you want, but what matters is that you actually buy their french fries.

And, if the engineers remained in research, and developed something people needed, then the future sales will count towards GDP and productivity, and will show up in the stats at that time.

This whole issue seems to be a beef that it's hard to predict the future based on current information. Well no kidding Jack! Economists never will be able to predict the future.

Posted by: Kevin at February 3, 2006 05:28 PM

Innovation Metrics Are Obselete.

National measurement of innovation today is based on an old paradigm of an industrial economy and for the most part measuring inputs to innovation (R&D expenditures, education expenditures, capital investment) and intermediate outputs (publications, patents, workforce size and experience, innovative products). For a long time, innovation has been perceived an activity involving almost entirely individual actors, including inventors and firms. Innovation was viewed linearly, starting with fundamental research and proceeding successively to applied research, development, prototyping, pilot production, market entry, and continuing through the diffusion of new products and production processes. Services were conspicuously absent in traditional approaches. Accordingly, innovation measurement tended to be focused on products and related production systems.

More recently there has been significant progress in delineating the multiplicity of resources required for innovation, the non-linearity of the innovation process, the quite different and variegated meaning of innovation in service sectors, and the innovators’ connection to and dependence on the global competitive market forces and their immediate socio-economic and institutional environment.

An expanded series of “real-time” metrics is needed reflecting the new paradigm of a knowledge based networked economy to guide innovation policies and illuminate the uncertainties, choices and outcomes of government policy and business decisions. We need to push hard towards doing a better job in measuring knowledge inputs and flows, the process of innovation, the demand for innovation, services innovation, and the intersection of manufacturing and services that are increasingly integrated in advanced economies. You can download a more detailed issue paper on how innovation metrics have evolved over time and what we need to do www.innovate.typepad.com

Posted by: Egils Milbergs at February 5, 2006 04:01 PM


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