Productivity leaps?

Unemployment is soaring – yet supposedly total production has increased.

Normally a big rise in productivity leads immediately and directly to a big rise in prosperity.  Are you feeling prosperous?

Another common cause of statistics showing a big rise in productivity is, as in Argentina, the government lying to itself and the public about inflation.

Another common cause of statistics showing a big rise in productivity is government spending.  The problem is that in calculating GDP, government expenditures are valued at cost.  Thus for a private individual to raise GDP,  he has to find a way to make more money, whereas for the government to raise GDP, it merely has to find a way to spend more money.

To illustrate the problem, let us imagine a little kingdom, where all production is valued in sacks of wheat, and sacks of wheat are used as money.  The peasants produce in actual sacks, plus chickens and goats valued in sacks at the market exchange rate. The kingdom has one thousand peasants, each of whom produce two hundred sacks of wheat a year, one lord, and ten lord’s retainers.  Each peasant pays the lord a tax of twenty sacks, so we value the work done by the lord and his retainers at twenty thousand sacks.  So even though the peasants only produce two hundred thousand sacks of wheat, the kingdom’s GDP is somehow two hundred and twenty thousand sacks.

The Lord decides to stimulate the economy of the kingdom, by hiring two hundred and fifty peasants at one thousand sacks per year to dig holes, and another  two hundred and fifty peasants at two thousand sacks per year to fill the holes in.  He raises taxes on all peasants to pay for this, from ten percent of production to ninety percent of production.   Despite this tax rise, the remaining peasants not digging holes or filling them in continue to produce two hundred sacks a year.  So now that we only have five hundred peasants left doing anything useful, so you might suspect that GDP has now fallen from twenty thousand sacks of wheat, to ten thousand sacks of wheat, but no, this is not the way to get a Nobel prize in economics.

Since the holes are valued at cost, and filling them in also valued at cost, and since the peasants working in the Lord sector are well paid, better paid than ordinary peasants, though not quite as well paid as the lord and his retainers, and since the Lord and his retainers also took a modest pay rise for arranging all this prosperity, total value produced, total GDP is now a whopping eight hundred and fifty thousand sacks of wheat, a fourfold rise in GDP.

One of the Lord’s retainers is an economist, who gets a Nobel prize for explaining that the Lord has done such a good job.

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