Paul Krugman, 1994: “Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages.”
Now, this is one of those phrases which is a bit dubious, even on its own terms. “Long run” is doing a lot of work here.
But I’m not interested in that, it’s the embedded assumptions that matter.
Let’s tackle the word “wages” first.
When peasants were forced off the land through enclosures, and went to to work in factories, their wages increased. (Artisans who lost their jobs to factories had their wages drop, but they were a minority compared to the ex-peasants.)
These peasants went from work that they controlled, that was often only a few hours a day, with more days “off” (minus mandatory farm tasks like feeding and mucking) than modern workers, to jobs that often were 6/1/2 days a week, 12 hours a day, except Sundays, where you only worked six hours.
They lived fewer years, they were sick more often, and maimed far more often. They went from jobs with little to no supervision to closely supervised factory labor that was very de-skilled and boring.
Yes, they had more money — because they had to pay for everything (food, housing, etc.), whereas a peasant created much of their daily necessities together with other peasants and were only partially in the “money economy.”
The point is, that an increase in wages does not automatically mean an increase in wages.
After NAFTA, over a million subsistence farmers were pushed into Mexico’s slums. At the same time, the nutritional value of food in Mexico dropped due to deregulation and mergers allowing a few large companies to dominate the processing and sale of various staple grain products, and those companies decreased the quality of their offerings.
These new slum dwellers were pushed further into the money economy: they had to buy everything they needed. If you looked at the numbers, you would say, “Hey, they have more money, therefore they are better off!”
This process happened over and over again in developing countries. Peasants pushed off farms, and into slums, and it often looked like a net win. Usually, it wasn’t. Even in places where it looked like it was, like China, the results were mixed (the happiness data in China shows that those who moved to cities increased their income, but their happiness dropped). In countries that did not effectively develop, it was just a clear, net welfare drop.
This is similar to Western Europeans having lower salaries than Americans, but being healthier, taller (a good proxy for nutrition), and living longer, with higher happiness rates, fewer overweight people, and less illness.
Meanwhile, Americans pay more for worse healthcare, have to have a car, and live in larger houses with more land, farther from their jobs.
Anyway, all of this is a long way of saying wages and welfare are not the same thing.
Now, let’s talk productivity. The economic definition is the ration between output volume and input volume (labor/capital). Perfectly useful definition.
But what it doesn’t include is interesting. If I’m drawing down an aquifer to make bottled water and, in fact, causing that aquifer to be damaged so it will NEVER recover to the same capacity, ever again, but I’m not forced to book that as a negative input, am I measuring productivity correctly?
If I am polluting the air in a way that will cause climate changes that will kill a billion people and ruin tons of property, but I don’t have to book those foreseeable costs as negative input, am I measuring productivity correctly?
If my production is causing general environmental damage which shows that half the world’s species will go extinct, should that be added to the inputs side in negative terms?
If I’m using up dense energy (hydrocarbons) which took billions of years to create and which I cannot replace, should that be a net negative?
In standard accounting, wear and tear for capital equipment is counted as an expense. But the destruction of the environment, people, and entire species is not.
If I’m cold, and I light my house on fire, for a while I will be very warm. No one would think what I’ve done is wise, however — unless the other option was dying. Lighting an entire neighbourhood on fire to save one life wouldn’t be considered acceptable either.
But, in fact, by burning down the world, we are going to kill a lot more people, animals, and plants than by not burning down the world. All of this has left out more standard issues: all the asthma caused by air pollution, all the cancer caused by various chemicals in our food, water, and air, the crash in human fertility, etc, etc.
If you don’t price in externalities, to use the economic term, then you don’t know the actual productivity numbers.
So, what we’re going to find on recalculating productivity properly is that, at some fairly early point, there were no productivity increases from industrialization, and that productivity has been dropping for generations now.
Wages are very often not a good proxy for welfare. Productivity rarely includes all the negative inputs, and thus, is also inaccurate (and we’ve only touched on the issues with both).
When you have embedded assumptions, and you don’t realize what those assumptions are, or think they don’t really matter, you make terrible mistakes. If you create a decision making system (“do it if it makes a profit”) whose numbers don’t include those hidden costs, you can drive yourself very productively, and efficiently, into a hole from which you’ll never be able to dig yourself out.
It’s not that economists don’t acknowledge this. But in practice, they have acted as if it doesn’t matter.
It does. It matters now, for all the people whose lives were made worse over the last couple centuries, and it matters tomorrow, when the full bill will start to come due.
All the content here is free, but subscriptions and donations do help, a lot.