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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,
“The Productivity Mirage,” has a lot of useful material about the
debates going on among economists on the subject of computers and
productivity. 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 get-go. 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 cannot find someone with whom
to swap his surplus, 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 that 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 meat. 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 teen-ager, 50 years ago. People living 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 — really is 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 Unabomber to disabuse himself of that
notion. Several years ago, when Greenspan and I still were on speaking
terms, I told him to his face that technology was not the answer to
poverty. What? He looked dumbfounded. I told him that there clearly is
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 affects their own productivity. If Greenspan simply
would 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 of 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 they 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.

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