…From John in Los Altos, California

1. Productivity appears to be still on the increase. What will be the impact on the US and world economies?

Increased productivity is good thing in general, wouldn't you say?   The question you ask is how shall this productivity increase be felt in the economy?

The answer is simply this, if productivity translates into lower overall prices then the consumer surplus will rise and result will be that consumers will be able to purchase more goods.  In a competitive industry this is readily apparent as we are now experiencing considerable amounts of deflation in various sectors.  The net result is that the consumer wins.

The following is an excerpt from Dr. Byrne's book, The New Paradigm in Economics - it illustrates and expands upon my answer above…

When markets are very competitive, the conditions of economic efficiency and economic equity are closely approximated.  Competition has put downward pressure on prices and the ideal conditions of maximum consumer surplus and no economic rent to the productive resources are close to occurring.  As consumer surplus rises and economic rent falls, the share of total output going to the consumer increases relative to the productive resources.  Everyone is a consumer.  With the surplus going to the consumer, the poor can benefit where they could not if it went to resources in the form of economic rent.  Further, as the productivity raises total real output, most of the increase goes to the consumer in the form of consumer surplus, whether the consumer is poor or rich.  It occurs through downward pressure on prices.

When markets are not competitive, much of the dividend goes to productive resources in the form of economic rent.  In this case, the poor receive little of the productivity dividend of society.  This is the broad view of the income distribution where the concentration is on who benefits from the production of goods and services.  A narrower and more traditional view of the income distribution is to array the deciles by income medians or thresholds and to use cumulative figures as the share of each decile or quintile.  This can be somewhat misleading.

As shown in the analysis above, when markets are not competitive, resource rewards in the form of profits, compensation to employees, and managerial or entrepreneurial income can include varying amounts of economic rent.  This means that rewards to productive resources exceed the resources' opportunity cost.  This is a result of power and the true value of the contribution of the resource to the production process.  In effect, by the use of power to restrict supply and raise the price, the firm expropriates part of the consumer surplus that in term can be expropriated by labor and entrepreneurs from the surplus profits.  In this manner, the surplus expropriated from the consumers is usually shared by all the resources in the form of surplus compensation to employees, excess managerial compensation, as well as surplus profits.

In recent years, with the rise in the importance of human capital, the increased number of two working spouse households, and the increased average number of hours per week worked by each individual, concentration of income in the upper 20% of households is less and less a result of expropriated consumer surplus and more and more a result of greater opportunity costs, or employed resources.  As increasingly competitive markets reduce the power of firms to reduce output, raise output, and increase revenue, economic surplus is decreasing.  The income distribution by deciles or quintiles is more and more reflecting opportunity costs and less and less economic rent.

At the end of this chapter, Census Bureau data is shown indicating that as educational attainment increases, income increases for every age bracket. Also, unemployment rates fall as educational attainment increases.  The greater rewards result from increased human capital, not merely expropriated consumer surplus.

2. The computer/web industry has been a major source of increase in value for the US market for the last 15 years. Has the ability of the computer industry to create value declined? If so, is there another industry or a facet of the computer industry that is likely to be a major driver for US economic recovery?

Actually, the computer/techy areas of the economy have been fighting a very difficult battle since the Fed put the clamps on the economy a few years back.  Since that time, they have had to weather through a very difficult stretch, but it appears that the stronger components of the industry have managed to come through very well.  Since the beginning of the year, the hi-tech sector has done extremely well, John.  The truth is that the computer/web industry is at the heart of productivity gains and shall continue to be the point of the spear for years to come.  In short, I only see good things for the computer/web industry in the foreseeable future.

3.    What is the impact of increased US military involvement and the war on terror on the US economy?

This is a good point.  Since the US has embarked on "military adventures," going back to at least WWI, we as a people have benefited from what many refer to as the "peace dividend."  Some may scoff at this, citing that there has been very little peace over that period of time, but the fact remains that via projection of US military force, or at least the ability to do so, we have secured a relatively stable economic environment - on our shores and elsewhere. 

More recently, the ongoing war on terror is just the last incarnation of US foreign policy, taking the form of military intervention.  While some might criticize the methods, the objective of our policy has been and will be to continue to serve to secure our financial system.  In the near-term, there will certainly be fluctuations, the result of war news and the like.  We've been through this before and our financial markets have weathered the storms.  By the way, I've been hearing rumblings about guns and butter - the cry associated with our making choices between the two.  Critics cite the Bush Administration for trying to do this terror stuff on the cheap, for running deficits and passing legislation for tax-cuts.  The American economy is complex and I would like to refrain from going into this - save it for discussion in the newsletter.  We prosecuted a much more costly cold war (relatively speaking) while growing our economy, so I see no problem with us doing the same for the war on terror.

4.    What is the impact of the increased shift to third party payers and the potential drug reimbursement programs on the economy?

In short, third party payers never worked.  The result has always been decreased efficiency and more costly programs/drugs.  The problem is that third party payers have very little control over the pricing mechanism - the further the consumer/payer is from the market, the less control they exercise over prices.  We can cite various examples of failed policies from the British National Health Service (NHS) to the Canadian version.  Their programs are grossly inefficient, very costly and always on the verge of bankruptcy.  Increased taxes remedy the short-term problems but in the long run they only serve to further burden taxpayers and put a drag on their respective economies.  This is not a political commentary merely a statement of fact.

5. The US and Europe have subsidized farming in their respective states. This is precluding a meaningful development of farming in the third world. Will the new round of GATT talks change the current subsidy pattern? If not, is there another way to develop economies in poorer countries, particularly Africa?

Subsidies, in whatever form, only serve to increase profits for the recipients and transfer costs to the consumer in the form of higher taxes and higher prices.  Farming subsidies, educational subsidies, copyright laws (that are renewed), steel subsidies, etc., only serve to reward winners for no other reason than their ability to exercise political power.  What is happening in the context of the ongoing GATT talks is that the various winners are sniping at one another and taking exception to their own respective policies.  The beauty of it is that GATT often rescinds/nullifies the tariff/subsidies, thus mitigating their effects. 

With regard to the African issue, much of the debate centers on genetically altered crops.  This widens and furthers the debate between Europe and the US.  Something of note is that I have seen plenty of imported foodstuffs in the form of fruits and vegetables from places I have never seen before.  This will only continue and will certainly help the Third World as prices continue to decline.

The greater question of poverty and hunger are ones that will continue to be at the forefront of discussions in the coming years but it is interesting to note that increased competition, productivity and efficiency will lead the way toward solving those problems. 

I apologize if this doesn't adequately answer your question, but rest-assured that it will be discussed in greater detail in the newsletter. Dr.  Byrne and I will be serializing his publications in the newsletter (al a Charles Dickens) and this subject will be covered.


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