Tuesday, October 12, 2010

Work Smarter, Not Harder...Or Else

Bucktown and I had been going back and forth about just how much a threat foreign labor (locally here, illegal or not, or labor located overseas) was to US workers. Good intentioned and concerned as he should be, the point I tried to convey to Bucktown (and as I do all aspiring economists), was that competition from foreign labor really doesn’t matter in that the VAST majority of wealth that has been created over human history doesn’t come from working harder, but smarter. ie – Jose may be willing to work 25% longer and for 40% less than John, but what will really make John richer is when John CREATES or INNOVATES a new way of working or building widgets or replacing widgets all together with a new invention.

It is creation and innovation that is the true producers of wealth and it is what America has specialized in since its existence which has given us our (soon-to-be-lost I predict) preeminent position in this world. That and we work more than most people didn’t hurt either.

But to prove the importance of working smarter and not harder, allow me to introduce the concept of “multi-factor productivity” or MFP.

GDP growth is chalked up to increases in the use of capital and labor. When you use more labor and more capital, you’ll get more GDP.

However, when disseminated, changes in labor and capital doesn’t fully explain all the economic growth that occurs. The residual is chalked up to “MFP.”

MFP is basically any efficiencies gained BEYOND using more labor and capital. A smart young operations manager could find a way to reorganize the conveyer belts to produce 10% more widgets without an increased use of labor or capital. A new chemical that costs only $20/ton may replace the need for two chemicals that cost $50/ton. Or a technological invention could completely replace an industry and fundamentally change how it does business; NAPSTER, the assembly line, Windows come to mind. Even The Economist had an article recently showing how e-mail broadband, and PDF files are eliminating the need for bike couriers.

These cumulative increases in efficiency arising from either smarter use of current resources or a completely new innovation/technology is the true engine of economic growth and is why we should be focusing on working smarter…and why we should be pushing engineering and the sciences and funding less sociology, philosophy and hyphenated-studies majors…or at least severely mocking them.

When GDP growth rates are correlated with MFP growth rates, the correlations are impressive thus proving working smarter is an excellent predictor of producing wealth.

(note, I took out Ireland as it was the "outlier," but contest it should stay inbecause of the sophisticated economic argument that the Irish kick ass)

Thus, foreign labor and outsourcing is not a threat to anything but low skilled workers as labor truly is a commodity at the low skilled levels. And while it may be regrettable that some slothful union types are out of a job or are forced to compete, it is the economic reality that if America is to ensure its preeminent position in the world we better get back to doing what we do best; being the inventor of the world.


Bucktowndusty said...

Hey Capt. (thanks for plug)

Check out this page http://www.zazona.com/ShameH1B/ .This site lists the uphill battle of doing that what you've suggested. For those people who do get the specialized training they need, or already have it, there is a trend towards going abroad or hiring the high tech H1-B visa holders.

I also believe that working smarter is better (I've bought and read all of Rich Dad Poor Dad book series. I have a business degree, too)

But, even when all factors exist locally (highly skilled workforce, dedicated hard working people, local production resources, modest income expectations, etc, etc, hiring abroad or H1-b's wins the day.

As I said, though, I'm fine making what the foreigner make overseas, if the rest of our society adjusts its prices accordingly. Do you think that this can ever happen in America - earning $4/hour at high tech positions, while paying say $10,000 for a 1500sf house, etc?


Captain Capitalism said...

If we shrink the money supply that could happen.

Baron Metzengerstein said...

Somehow I find that it only has 40% correlation over the 10 year period (with the removal of Ireland) pondersome. Are there mfp statistics out there over a longer period of time?