Monday, December 13, 2010

Growth Is Efficiency

An article by Steve Horwitz brought on one of Brad Delong's most prestigious awards: Stupid Economist Alive. Horwitz argues that supply, not demand, is the key behind economic growth.
Starting the analysis with consumption assumes one has already acquired means. Contrary to that analysis, wealth is created through acts of production that rearrange resources in ways people value more than alternative arrangements. These acts are financed with savings that come from households refraining from consumption.
Delong (and Karl Smith and Matthew Yglesias and other Keynesians) argue growth comes from demand (hence the call for stimulus packages). From Smith:
That having been said there is a difference between consumption and investment. Investment – which is perfectly good Keynesian demand by the way – is using the resources of the universe to create tools that will allow me to make even more stuff in the future.

However, I don’t just do this for the hell of it. I hope that one day this investment will lead to a world of even greater consumption. Consumption is still the ultimate goal.
The whole discussion strikes me as silly because it ignores what economic growth is and it's not people buying things or people making things. The Soviet Union learned that when it made a bunch of stuff people didn't want and then bought of bunch of stuff people didn't want. Growth is efficiency. Period.

When we think of efficiency, we think of giant machines doing monotonous tasks but efficiency is much more than that. At its core, it's getting more output with the same amount of input, "output" and "input" broadly defined. So this isn't just technology. It's also new companies, new products, new hobbies, a better division of labor, smarter organization, etc. Anything that enriches our lives in a material or non-material way. If there's a new religion that enriches souls more fully than an older one (holding costs equal), that's growth (maybe not in terms of GDP, but growth in a way that still matters).

Now if you think this sounds like I'm echoing Horwitz's argument, think again because achieving efficiency isn't free. If it was, we'd have invented flying cars and Google a long time ago. Inventing new technology, taking on the new workers for the better division of labor, designing new products...these things are expensive to do. I'll need some kind of incentive to take on these costs, not to mention the costs associated with uncertainty. To achieve efficiency, we need not just the means, but the motive.

Roughly stated, the means are what we hear from the right/libertarians. Reduce capital gains taxes, cut down on regime uncertainty, etc. It's all about reducing the costs of operating a business, which is largely about finding ways to boost efficiency. And roughly stated, the motives are what we hear from the left/Keynesians. Increase unemployment benefits, make stimulus packages, boost aggregate demand. My point is that you need both mindsets.

This doesn't mean I'm behind more stimulus spending or cutting taxes across the board. There are good ways to embolden means and motives and there are not-so-good ways. The key point is that these two sets of policies aren't substitutes...they're complements. If you increase aggregate demand and pair it with a drop in aggregate supply (costs), then you're much more likely to increase efficiency than if you do just two policies from one set of theories.

Growth is efficiency. Understand that basic point and it's clear that the debate about if supply or demand is behind economic growth is foolish debate. You might as well ask which blade of the scissors cuts the paper.

1 comment:

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