July 08, 2004

Writing About Writing About Productivity

Virginia Postrel writes about writing about productivity:

Dynamist Blog: THE BIG (ECONOMIC) STORY: I look at one piece of that very big story: the spreading use of operations research techniques once confined to theory. (What's operations research? The story explains that too, or tries to without using any math, graphs, or jargon about optimizing subject to constraints or finding interior solutions. For more on the field, see the INFORMS site.) Of course, very few general-interest publications would let a writer spend nearly 2,000 words writing about operations research--or, for that matter, rising productivity. Brad is exactly right that journalists aren't covering this story, but he doesn't offer any reasons why. As a journalist, let me suggest a few:

1) The productivity story is boring. It isn't really, but editors think it is. There's no obvious conflict, no scandal, no little guy getting hurt (unless you portray rising productivity as throwing people out of work, which is the most common angle). The improvements that drive productivity increases are incremental--hence, not dramatic--and often technical.

2) The productivity story isn't political. Neither George Bush nor Bill Clinton deserves any credit, except for not getting in the way. Not getting in the way is actually a big accomplishment, one many politicians around the world can't claim, but it's bipartisan, hence boring. (See above.)

3) The productivity story is too big. It's less a story than a beat, requiring many different stories to tell. Business beats aren't organized to tell stories like this. They're organized by industry or, occasionally, by field (e.g., marketing). The rare writers who cover economics, including me, reflect the limits of economic scholarship, which mostly deals in aggregates and tends to lag what's going on at the moment. On this score, major props go to USA Today, which recently published its fourth annual report on producivity gains at large companies, with some anecdotal info about smaller enterprises as well.

4) The productivity story is hard to report. If you really want to understand what's going on, you have to spend lots of time with mid-level managers at companies that don't want to talk about their operational secrets. You need to understand operational details that are unfamiliar to most journalists, or, for that matter, economists. Once you've invested all this time, you may or may not have a story that fits accepted journalistic formats--formats that, for all their flaws, do reflect experiential wisdom about what readers will read. As long as David Brooks can go for laughs by invoking "Six Sigma" as a mere buzzword, the productivity story will continue to strike editors as a nonstarter.

Since I am a stubborn freelancer, however, I intend to do what I can to tell this story anyway. Indeed, as many of my NYT columns illustrate, I think there's an even larger story to be told, one that includes not just the measured productivity gains of the past few years but enormous unmeasured gains in (to use the econ jargon) consumer surplus going back further.

My one quibble would be that big federal budget deficits are a pretty effective way of getting in the way of investment...

Dan Froomkin reminds me that "her article, Operation everything, appeared in the June 27 Boston Globe."

Posted by DeLong at July 8, 2004 08:02 PM | TrackBack | | Other weblogs commenting on this post
Comments

Mostly because the productivity story is so damn depressing. Everybody doing more work for less money. Yahoo!!!

Posted by: SW on July 8, 2004 08:37 PM

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What is this usage "...major props go to USA Today..."? "props"? I could understand it if it said, say, "... a major kudos to USA today..". But "props"? What's that? I've started to see it elsewhere, as well.

Posted by: BayMike on July 8, 2004 08:46 PM

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I wonder how much OR is used in designing fun packaging and pricing combos to design price discrimination strategies? So marketers can suck up as much of that additional consumer surplus as fast as it is created.

Or are cell phone contracts HMO benefit packages facts of nature?

Posted by: jml on July 8, 2004 10:05 PM

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BayMike: "Props" is slang. It means respect. (I think it's an abbreviation of something, but I can't remember what.)

I have trouble believing that operations research is the major source of current productivity gains. The field has been around for a while, and applied in industry for a while.

Posted by: Walt Pohl on July 8, 2004 10:40 PM

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I already posted these question on EconLog in the thread there on the productivity increase, but though I'd increase my odds of getting some answers by posting them here too.

disclaimer: I am neither an economist, nor do I play one on TV (IANAENDIPOOT), so please help me if I'm missing some deeper understanding.

Some questions:

- Calculations? I would like to know the basic formula used to determine this 'productivity.'

- 'Value Added' -- does Increased foreign environmental and labour exploitation 'increase American productivity' by inflating the percentage of state-side value added? Perhaps foreign child and slave labour makes Americans more 'productive'

- Same question regarding local exploitation as asked by others, does //increased work hours// explain part of the productivity increase.

- Also as asked by others, since the marginal productivity of labour faces a disefficiency of scale, does a shirking labour force increase productivity?

- AND MOST IMPORTANTLY: Is this 'increased productivity' translating into greater average wealth, or simply greater economic rents? I would be interested in the answer both on a national level (in the US) and an answer that includes the welfare of foreign workers.

- Finally, with since war spending has an income effect and yet produces no consumer goods, it should have an inflationary effect. Could it be that there was simply //suboptimal exploitation of existing productive capacity// which is being maximized by war-income created demand.

- Finally (part II) Would more productive social spending have achieved the same thing?)

- And finally (part III), can any part of the //suboptimal exploitation of existing productive capacity// be that we where not exploiting local and foreign slave labour as much and destroying the environment as quickly before?

So many questions I would like to have answered before I start celebrating this new productivity!

And just for fun: Didn't Stalin's Russia have productivity growth of over 20% on a regular basis?

Posted by: Dmytri Kleiner on July 9, 2004 02:45 AM

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productivity = output/ labor input
- use GDP for private business for output
so this excluses foreign inputs
- and hours worked for labor input
-the hours worked is slightly different from the
number in the monthly labor report
because that is only of production workers

War & inflation -- no comment

Social spending & productivity -- would not have a direct impact on productivity because only measure business productivity but indirectly and with lag would increase productivity.

exploitaton and productivity -- do not know what you mean by these terms so can not response.
Technically what is exploitation -- economists would call it paying less than marginal product
but doubt that is what you mean

Posted by: spencerS on July 9, 2004 05:40 AM

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"so this excluses foreign inputs"

So when IBM replaces an American worker with an Indian worker doing the same job does that mean US productivity increased because the Indian labor is excluded?

Posted by: me on July 9, 2004 06:37 AM

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'Props' is a shortening of 'propers', which is an idiom for 'proper respect[s]' and dates back in popular usage to Aretha Franklin's 'R.E.S.P.E.C.T.' from several decades ago (and probably was in use before that).

The shortened version has been in use for many years in many different demographics and contexts.

Posted by: V from VJ on July 9, 2004 07:48 AM

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Thanks Spencer!

> productivity = output/ labor input
> - use GDP for private business for output
> so this excluses foreign inputs

Hmm, put if total output _is_ included and output is increased by foreign input, while only local labour input is calculated then foreign input increases the left side of your equation but not the right side, wouldn't this increase the derived 'productivity' then?

For example, if a US shoe company produces $1B output and spends $500M on domestic labour the output to productivity ratio would be 2:1 right? Now, say a portion of the other $500 million was spent on foreign inputs, wouldn't any an increase from those foreign inputs show up as increased productivity?

What am I missing?

Or simply:

Year 1

Total Shoes Produced: 1000
Final Price of a Shoe: $100
Cost of importing the shoe: $20
Cost of domestic labour: $50

Year 2 (40% of labour outsourced)

Total Shoes Produced: 1000
Final Price of a Shoe: $100
Cost of importing the shoe: $25
Cost of domestic labour: $30

According to the math proposed (assuming all shoes are sold), has productivity gone up?

> - and hours worked for labor input
> -the hours worked is slightly different from
> the number in the monthly labor report
> because that is only of production workers

I don't quite understand, would an increase in average hours worked (at same pay) per worker show up as an 'increase in productivity' or not?

> exploitaton and productivity -- do not know
> what you mean by these terms so can not
> response.

Well, a technical definition is difficult to define, so let's take the easy way out and say exploitation is employing labour under terms that would be illegal domesticly, including working conditions and wages after adjusting for cost of living for labour. And for natural resources lets use the same definition, exploiting foreign natural resources in a way that would be illegal domesticly.

Can exploiting foreign labour and natural resources in this fashion make US labour appear more productive in these calculations?

Posted by: Dmytri Kleiner on July 9, 2004 08:03 AM

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Dmytri, GDP is DOMESTIC output.

Posted by: Patrick R. Sullivan on July 9, 2004 08:17 AM

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> Dmytri, GDP is DOMESTIC output

Sorry if I'm just not getting it, but I still don't.

GDP is domestic output (thus the 'D') but this output has both domestic and foreign INPUT.

So, if by altering the production chain by increasing the employment of foreign labour, perhaps in a way that would be illegal domesticly, you can achieve THE SAME DOMESTIC OUTPUT while DECREASING LABOUR COST, thereby increasing 'productivity.'

Also, if by altering the production chain by increasing the employment of foreign natural resources, perhaps in a way that would be illegal domesticly, you can achieve INCREASED DOMESTIC OUTPUT relative to DOMESTIC LABOUR COST, thereby increasing 'productivity' too.

What am I missing?

Posted by: Dmytri Kleiner on July 9, 2004 08:35 AM

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I'm not convinced that O.R. is *really* the big story of how computers have recently enhanced productivity. As an algorithms person (not O.R. but CS) I'd love to believe it is. But I have learned not to trust my own judgment. I'm so out of touch that I had no idea "the effective use of scarce resources under dynamic and uncertain conditions" sounded "arcane" http://www.boston.com/news/globe/ideas/articles/2004/06/27/operation_everything?pg=full. I thought that was a description of what we were all trying to do most of the time--get along as best we can after our banishment from Eden.

But using computers for optimization problems is as old as computers themselves. Before computers became warm and fuzzy pals (which we know happened in 1984 after the Apple Big Brother ad), people thought of the machines as giant number crunchers that worked out airline schedules, telephone routing, and nuclear strategy. Even if people did not know the term "O.R." if you asked them what they thought computers did, they'd probably come up with some classic O.R. problems. So is O.R. really the new ingredient?

Sure, the computers have become so much cheaper and faster that all of a sudden intractable problems are tractable. But I think that interoperability, ubiquity, and networking are the new ingredients. That is, computers are compatible with each other, everyone has one, and they talk to each other over long distances. This does add a piece to the O.R. puzzle because you can gather the input to your optimization problem as never before. But that doesn't mean O.R. is the big story.

For example, with a computer on the Internet, I can get all my financial records together in one place in seconds from various banks and brokerages. That's not because computers are solving sophisticated optimization problems; it's because my computer can talk to a bunch of other computers. The alternative of keeping up to date paper records involves hours of work over the course of a year. Multiply this over the record keeping needs of a business, and you have a big productivity bump. And that's just one example.

I believe that the big story is not O.R. but the automation of a lot of terribly boring white-collar jobs. The O.R. problems were jobs that people could never do. But the other problems--gathering records, checking balances, tracking inventory--were things that people could do, but just very slowly and not unless you paid them to do it.

So my hunch is that computers are improving productivity mainly by doing the same old clerical jobs that we already knew were useful for hundreds if not thousands of years, but just a lot better.

The new idea of optimization is very cool stuff, and can give a business a competitive edge. But I expect that most optimizations worked out heuristically by a human are not going to be more than 10 or 20 percent worse than those found exhaustively by a supercomputer running the latest optimization software. There are probably exceptions to this rule, but I think the fact that the computer solves your problem for free and does it fast is more significant than whether it gives you a high quality solution.

BTW, where does computer aided design fit into all this? That must also be part of the productivity story, isn't it?

Posted by: Paul Callahan on July 9, 2004 09:45 AM

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But there are important aspects of this story that aren't being told that need to be told, regardless of how "boring" productivity is. IE, the various things that can/should be done to see that US productivity growth is maintained or accelerated...like educating our people especially in the sciences, engineering, technology...like investing in infrastructure and security...like investing in R&D.

Why do we care? Given the massive loss of the large productive work force that's coming when the baby boom retires, coupled with the huge demands they'll place on entitlements, on top of rapidly shrinking national savings thanks in part to ballooning deficits, enhancing productivty growth is the ONLY way out of this mess.

Instead both parties have been guilty of harmful policies around protectionism and outsourcing and both parties have missed the genuine opportunity to use the rapid growth in globalization and trade as an excuse to invest even more in those things that we know generate growth, income and wealth.

How foolish.

Posted by: xyzzy on July 9, 2004 10:39 AM

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Count me in the herd that says that OR is NOT the primary explanation for improved productivity. OR can potentially tell you much IF you can completely describe and quantify the problem. But that is often not possible. Rather look to incremental advances made possible and at random from technology advances that seem to continually wash over us like waves.

Re war: "Finally, since war spending has an income effect and yet produces no consumer goods, it should have an inflationary effect..."

While war spending may not directly produce consumer goods, it will many times (more and more frequently in my estimation) lead to the development of technology that WILL be incorporated into consumer goods just as quickly as the developer can get the reliability high enough and the cost low enough. Ever hear of the radar magnetron? You'll probably heat something up tonight with one (i.e., microwave oven)

Posted by: Lawrence on July 9, 2004 12:12 PM

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I've explained this several time on this site.

If a shoe or part of a shoe is imported it is not counted in output or production.

Output s only of domestic production. If a firm
produces a product worth $100 but it imports components worth $50 that $50 is subtracted from output so final production is output ($100)
less imports ($50) so output in the Gdp numbers is only $50. Imports do not enter the numerator in calculating productivity.

Posted by: spencer on July 9, 2004 05:39 PM

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Lawrence,

As I understand it the fact that new technology is invented would not in anyway prevent the inflationary effect, an increase in income without and increase in consumer goods contributes to the //inflationary gap//.

Investments, such as developing new technology, building capital goods, etc, all have also have inflationary effect, but increase productive capacity too.

And of course, it goes without saying that war is not the only way (or even a good way) of developing new technology.

---

Spencer,

thanks for your patience, I don't mean to be annoying but I still don't get it.

According to the math you are proposing the formula would be this:

Domestic Productivity = Gross Output - Foreign Input / Domestic Labour Input.

So, from my examples.

Example 1: 80 / 50 = 1.6
Example 2: 75 / 30 = 2.5

Therefor by reducing domestic inputs and increasing the use of foreign inputs, potentially cheaper in ways that would be illegal domesticly, productivity is increased!

It seems to me, in order to get an 'exploitation neural' productivity statistic one can not simply ignore foreign inputs, but rather should inflate them (or deflate them where applicable) to convert them to domesticly legal figures.

I bet if this where done the productivity of the US would look much lower than the productivity of China.

Has anybody bothered to do something like this?

Posted by: Dmytri Kleiner on July 10, 2004 02:14 AM

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Whoops. Order of Operations!

Make that:

Domestic Productivity = (Gross Output - Foreign Input) / Domestic Labour Input.

That's better.

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