Economics

The Knight’s thoughts on productivity

Why It’s So Hard to Raise Productivity: A Debate

Here is an interesting read on productivity. I’m currently developing an entrepreneurialism coefficient (which has a significant discussion on productivity) so the thoughts from these two economists are valuable. And any time you get the chance to see a debate between economists, it is worth reading.

The first thought that comes to mind while reading this is too much focus on America and not enough attention to the globe. Specifically, Smith and Cowen are both in favor of high skilled immigration. But by bringing the brightest minds from around the world to the U.S., the U.S. is the beneficiary of their brilliance (on a related note, check out this paper evidencing that an immigrant’s home country matters for success) while the home country misses out on the potential economic development.

More importantly, by bringing in the top talent from other countries, the U.S. would effectively suppress other nations from developing. I think on a global scale, this would be a net negative. Say, for example, India’s most talented individuals immigrate to America. Well, the productivity gains will be muted in America because we are already advanced and it will take a phenomenal change to move the needle. If this person’s ideas were put to use in India then the benefit would be magnified at some higher order and help a lot more people. So, while I can appreciate the need to bring in higher skilled immigrants, having policies that promote this may end up detracting from the global economy.

I also want to make a quick point on urban density.

As for immigration and urban density, the long-term growth boosts would have to come from greater research output — concentrate the smart people, and they’ll start putting out a more rapid stream of innovations. There is evidence from both the past and the present that this works.

While the notion that putting smart people together leads to more rapid innovations has been evidenced before, the reality is that human behavior is not predictable. In other words, we cannot accurately predict what humans will do given the same situations. Remember, I subscribe to radical uncertainty.

For instance, in recent years it is common for the brightest individuals to engage in pure profit seeking opportunities (coming up with clever ways to raise rents on property) as opposed to engaging in productive actions – such as starting a pharma and developing new medicine. One way to solve this is increase the incentives for the brightest people to take on more productive endeavors.

Examples of incentives might be lower taxes or some form of subsidy to get started. In the case of pharma, the cost to the enter the industry is staggering and may be keeping some bright individuals from entering the market and developing their ideas. If these entry costs can be subsidized, we may see a boost come from this industry as the need for new medicine is high.

Categories: Economics, Productivity

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