'Are Computers Really That Important?' Jude Wanniski November 22, 2000

Memo To: John Cassidy, The New Yorker
From: Jude Wanniski
Re: Yes and No

Your regular “World of Business” column in the Nov. 27 New Yorker magazine, “The Productivity Mirage,” has a lot of useful material about the debates going on among economists on this subject. Because it takes place in your Keynesian framework, though, your readers are no doubt as confused now as they were before they slogged their way through your exercise. Here is where you go wrong, in describing productivity:

Productivity growth may sound like an arcane economic concept, but it is actually quite simple to grasp. If a baker works an eight-hour day and makes four hundred loaves of bread, which he sells to the public for a dollar each, his productivity is fifty dollars an hour. If he somehow manages to bake eight hundred loaves in the same workday, his productivity will double to a hundred dollars an hour.

In the Keynesian demand model, “demand creates its own supply,” a concept which supply-siders reject from the gitgo. That is, the only actor in your money economy is a baker who is trying to satisfy the demands of customers who have eight hundred dollars to spend on eight hundred loaves of bread. In a supply model, there are always at least two producers, who exchange the goods they produce with each other. In other words, there are really no “customers,” only a marketplace where producers come together to exchange their surplus production with each other. The baker makes more bread than he needs and the butcher has more meat than he needs. If the baker can’t find someone to swap his surplus with, he produces less because it will spoil. The same for the butcher. They both become less “productive.”

In a modern economy, John, to facilitate the productivity of baker and butcher, people who really produce nothing we basically need are found so useful that the butcher and baker are willing to give them part of what they produce for their service. These are intermediaries. They could be bankers or they could be wholesalers or retailers. Or they could be lawyers or accountants. Or they could be government officials who actually take some bread and meat from the producers in order to fulfill public needs, as specified by the political representatives of the producers of bread and meet. They must pay the soldiers and sailors and the munitions makers who keep the country safe and the policemen and lawyers and judges and jailers who maintain domestic order.

You see where I am going, John? An economy can become more productive because computers are transmitting information about the entire political economy at a greater clip, so that there are more loaves of bread and more sides of beef available to the entire economy. But if at the same time the representatives of the people in the government are making horrendous mistakes in their basic mission of taxing and spending and managing the national coinage, then computers are only more efficient when it comes to sharing the national scarcity. There may be more loaves of bread and more pounds of hamburger, but if they have to be divided among millions of lawyers and accountants and judges and jailers and financial intermediaries who work night and day to try to figure out what Alan Greenspan will do next week with the national coinage, then you see individual standards of living are not helped much at all.

Standards of living have increased to some degree from the days when I was a teenage, fifty years ago. People live longer is the best evidence of that. The nation, though, does have to spend more of its production of bread and meat to keep their parents and grandparents alive longer, and they work harder and harder so they can enjoy as much of their youth while taking care of the elderly. To the degree computers help produce better medicines and better training of physicians and dentists, they certainly help people live longer lives at the same time they make it easier for the healthy among us to live better lives while they are still healthy.

Your example that when you write an essay for The New Yorker your computer helps you correct errors easier than you did when you worked with a typewriter -- and that you waste more time fooling around with the Internet than you did when you didn’t have it -- is really not worthy of either Keynesian or supply-side analysis. You are on the right track when you criticize Fed Chairman Alan Greenspan for identifying high-tech as the ultimate savior of all of us. He should read the writings of the Unibomber to disabuse himself of that notion. Several years ago, when Greenspan and I were still on speaking terms, I told him to his face that technology was not the answer to poverty. What? He looked dumfounded. I told him that there is clearly more technology now than there ever has been in the history of mankind, yet there is more poverty now than ever before. A sixth of the population lives well. Five-sixths live either at the edge, or in real poverty.

Greenspan refused to talk to me anymore when I suggested, in as friendly a fashion as I could, that he has contributed to that poverty . He is one of the most powerful men in the world, in charge of the U.S. dollar that is central to all the production of everyone in the world -- because it is the basic unit of account for all transactions. Every baker and butcher in the world must take note of what the dollar is doing, because it effects their own productivity. If Greenspan would simply tell the President of the United States that the market could do a better job of managing the world’s money than he can, the risks to all producers everywhere would sharply decline and their productivity would soar. By allowing the market to signal the Fed when it produces too much money or too little, our central bank would not make such mistakes. The market could do this, as Greenspan well knows, by bidding up the price of gold when there are too many dollars inflating the economy, or bidding down the price of gold when there are too few dollars, thus deflating the economy. Of course, there would be fewer intermediaries needed. There would be more bread and meat and all the things that are basic to mankind available, and the world’s standard of living would grow beautifully. Why does this not happen? Well, inasmuch as there are so many people in positions of political power who produce nothing useful and make lots of money doing so, they do not want Greenspan to tell the President the solution and threaten to ridicule Greenspan if he does. Understand? If you wish to learn more about supply-side economics, John, you should register at our Supply Side University. Keynesians are welcome.