Productivity In America Now On Par With Agrarian Slave Economy

Tyler Durden's picture

Submitted by Eugen Bohm-Bawerk

In the first episode we showed how the US became an unsustainable service sector based economy from the 1970s onward when service sector employment diverged from manufacturing without a corresponding boost in productivity. In the second episode we laid out the consequences that transition has had on labour in terms of lower wages and benefits. In addition, we reiterated our argument that monetary policy has become slave to the service sector as it has become linked to the much touted wealth effect (capital consumption) that is now an integral part of the American business cycle.

Now it is time to take a closer look at productivity measured in terms of GDP per capita. While this is not an entirely correct way to measure productivity, it does adhere to new classical growth model theories which posit that in a developed economy, reached steady state, the only way to increase GDP per capita is through increased total factor productivity. In plain English, growth in GDP per capita equals productivity growth. The reason we use this concept instead of more advanced productivity measures is to get a long enough time series to properly understand the underlying fundamental forces driving society forward.

In our main chart we have tried to see through all the underlying noise in the annual data by looking at a 10-year rolling average and a polynomial trend line.

In the period prior to the War of 1812 US productivity growth was lacklustre as the economy was mainly driven by agriculture and slaves (slaves have no incentive to work hard or innovate, only to work just hard enough to avoid being beaten). From 1790 to 1840 annual growth averaged only 0.7 per cent.

As the first industrial revolution started to take hold in the north-east, productivity growth rose rapidly, and even more during the second industrial revolution which propelled the US economy to become the world largest and eventually the global hegemon (see bonus chart at the end).

As a side note, it is worth noting that while the US became the world largest economy already by 1871, Britain held onto the role as a world hegemon until 1945. Applied to today’s situation in light of the fact that China is, by some measures, already the largest economy on the planet, it does not mean it will rule the seven seas anytime soon. In our view, they probably never will, but that is a story for another time.

Adjusting for the WWII anomaly (which tells us that GDP is not a good measure of a country’s prosperity) US productivity growth peaked in 1972 – incidentally the year after Nixon took the US off gold. The productivity decline witnessed ever since is unprecedented. Despite the short lived boom of the 1990s US productivity growth only average 1.2 per cent from 1975 up to today. If we isolate the last 15 years US productivity growth is on par with what an agrarian slave economy was able to achieve 200 years ago.

In addition, the last 15 years also saw an outsized contribution to GDP from finance. If we look at the US GDP by contribution from value added by industry we clearly see how finance stands out in what would otherwise have been an impressively diversified economy.

With hindsight we know that finance did more harm than good so we can conservatively deduct finance from the GDP calculations and by doing so we essentially end up with no growth per capita at all over a timespan of more than 15 years! US real GDP per capita less contribution from finance increased by an annual average of 0.3 per cent from 2000 to 2015. From 2008 the annual average has been negative 0.5 per cent!

In other words, we have seen a progressive (pun intended) weakening of the US economy from the 1970s and the reason is simple enough when we know that monetary policy broken down to its most basic is a transaction of nothing (fiat money) for something (real production of goods and services). Modern monetary policy thereby violates the most sacred principle in a market based economy; namely that production creates its own demand. Only through previous production, either your own or borrowed, can one express true purchasing power on the market place.

The central bank does not need to worry about such trivial things. They can manufacture the medium of exchange at zero cost and express purchasing power on the same level as the producer. However, consumption of real goods and services paid for with zero cost money must by definition be pure capital consumption.

Do this on a grand scale, over a long period of time, even a capital rich economy as the US will eventually be depleted. Capital per worker falls relative to competitors abroad, cost goes up and competitiveness falls (think rust-belt). Productive structures cannot be properly funded and the economy must regress to align funding with its level of specialization.

In its final stage, investment give way for speculation, and suddenly finance is the most important industry, pulling the best and brightest away from every corner of the globe, just to find more ingenious ways to maximise capital consumption.

As the slave economy got perverted by incentives not to work, so does the speculative fiat based economy, which consequently create debt serfs on a grand scale.

Bonus chart:

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ebworthen's picture

And unlike at any time in the past most people today couldn't grow a potato to save their lives.

knukles's picture

Do I plant it head or feet down?

0b1knob's picture

Time to plant a few bankers.   Face down.

kaiserhoff's picture

So when government is half of GDP, productivity goes to hell in a hand basket.

Where did I put my surprise mask?

drendebe10's picture

Gubmint:  ctrl-alt-del

Elected politician miedras & gubmint bureaucrats:  sandpaper their skin off & bury em in salt.  Fukem all

schatzi's picture

BTW, title is wrong and misleading.

 

Productivity is much higher than it ever was. The only thing similar today to 19th century, is productivity GROWTH.

 

pls change

Buckaroo Banzai's picture

Not sure what you're driving at. Look at the chart that defines productivity as GDP per person. By that definition, productivity has indeed fallen since 1970.

bonin006's picture

Shatzi is correct. The units of GDP per capita should be dollars, not %. GDP per capita will not start to decrease until the % growth goes negative (which looks to be pretty soon unless the trend changes). Of course, paying people to not work is not going to help turn the trend around.

The9thDoctor's picture

401k contributions, health insurance, state income tax, Social Security, Medicare, IRS, student loans, wage garnishments caused by unpaid medical bills, child support garnishments, how much of the paycheck is left???  Then the rent is due, so what little is netted goes right to the landlord.

Yeah, I don't blame people for not caring about their jawb.

Meanwhile, business owners can write off business expenses, whereas employees are on the hook for everything.

SilverRhino's picture

When your nation has 50+ MILLION leaches on food stamps and welfare and 40+ illegal aliens of course your GDP per capita rating is going to fall.  Admittedly there overlap in those groups but no nation can survive with many million monkeys on its back.  

Vlad the Inhaler's picture

Or when companies spend 99% of their ZIRP windfall on buybacks or M&A.

Anopheles's picture

Half the US population is receiveing some form of government benefit. 

kaiserhoff's picture

Hmmm.

Look at China on that bottom graph.

Fyuh cracker go boom!

q99x2's picture

WWIII the war to end banking and put the world on a global open source financial system--publicly owned and operated bitchez.

Let's get back to work building a better future: longer lifespans and fewer children; improved quality of life for everyone.

SWRichmond's picture

It's been estimated there were more than 10,000 political murders in Germany during the interwar period (population at the time about 60 million). 

We will have the war, then we will have some fun.

Anopheles's picture

Except that WWIII will depend heavily on banking.   That and a dictatorship and slavery.   War needs money and people. 

Pickleton's picture

financial system--publicly owned and operated bitchez.

 

I'm inferring from the tone of your comment that you may be one of those imbeciles that has the low-info temerity to utter complete bullshit like 'it failed because it's unregulated'. 

 

So you're saying that to solve the problems we have now with 'a publicly owned and operated finance system', we should send our children off to die in a war to distract from the failure of that system and lynching the people responsible (aka progressives), and then whatever the outcome, we should incorporate 'a publicly owned and operated finance system' to solve all our problems. 

If you're in doubt about how we already live under a 'a publicly owned and operated finance system', then you're going to need to research progressives and what they believe/do.  In oher words, this failure that's all around us is the result of the policies you support and more of the same isn't going to fix them.

max2205's picture

Peak workers drones who want to work.....less FSA 

debtor of last resort's picture

Wages are also on par with agrarian slave 'economy'

So give me one fucking sane reason why productivity should not be

Sharkalchemy's picture

If we were an actual agraian society at present,  that'd be an improvement.   

kaiserhoff's picture

Hear, hear.

At least we would have a few pots to piss in.

Stormtrooper's picture

And a homegrown source of food for the coming Mad Max era.

perchprism's picture

And maybe a window to throw it out of.

falak pema's picture

Thats exaclty what Piketty says : the bigger the inequality the lower the productivity; feudals are slothful to the nth degree.

When the productive pay 70% income tax on marginal income its hits them like Indiana J's whip; very stimulating.

The rule has always been  : spread it out like manure it grows the corn, stack it in a bank it stinks to hell.

Geometric growth kills the cat. No civilization can maintain geometric; thats MATH.

Capitalism has to change to something else or its dies in the financialized sands of Pharaohs.

Normalcy Bias's picture

What we have now isn't Capitalism. It's a shit stew of the worst features of Fascism, Corporatism, Socialism, Cronyism, Feudalism,...

Question Reality's picture

I'm not sure when or if we ever had capitalism. Even in the 19th century it was fascism when the military was killing natives for corporate interests such as the railroads.

Of course when the country was founded so corporate interests didn't have to pay taxes and the people fought to defend those corporate interests, it was fascism from the get go.

Pickleton's picture

Capitalism has to change to something else

 

 

IMBECILE!  This system has nothing to do with capitalism.  It's interesting that the first part of your comment is coherent and rational and then you completely fucking fail by referring to this failing system as capitalism.

consider me gone's picture

Which only proves what I've been saying all along which is that we need to go back to the good 'ol days of slave labor. You must give the Fed &  the Federales  their due in this regard as we are almost there now due to their tireless work. 

Jack Burton's picture

wealth effect (capital consumption) that is now an integral part of the American business cycle.

finance did more harm than good

I listened to a neoliberal economist who was on NPR for an hour long program on robots and the end of work. He showed clearly the range of jobs now subject to robot replacement of people. Even in a hospital operating room they have a computer robot that puts you under for operations, better than a doctor can do. Cost $200 an operation. A trained doctor would charge at least 2K to 15K depending on operation length. Computers are writing basic news stories and doing the weather forecasts. He said the biggest places for replacement should be Education, Health Care and Government. And he is right! You can see what modern computing can do, why have all these paper pushers. Why all these teachers, when in higher education they are not needed, even High School. Who needs a Spanish teacher with the internet?

He figures, as this takes hold, the top 10% who invent and program the machines and keep control of society, like in law enforcement, military, spies etc. will gain more and more income. Becoming a rich elite. The other 90% will sink into the lowest forms of service work. Wiping asses, cleaning toilets, taking out the trash, paving the roads, etc.

He said, that this is how it WILL be, there is no room for debate. The 90% will simply have to learn to live with tiny incomes, and entertain themselves on social media. That simple!

rejected's picture

"Becoming a rich elite. The other 90% will sink into the lowest forms of service work. Wiping asses, cleaning toilets, taking out the trash, paving the roads, etc."

At least there's something machines can't do!   oh,,, wait....

Stormtrooper's picture

Gee, I thought the Japanese had already designed a machine to wipe their asses so scratch one more career opportunity.

Bad Attitude's picture

The Japanese are perfecting sexbots, which will even put practitioners of the world's oldest profession out of work/business.

Forward (over the cliff)!

SofaPapa's picture

"He said, that this is how it WILL be, there is no room for debate. The 90% will simply have to learn to live with tiny incomes, and entertain themselves on social media. That simple!"

There is absolutely room for debate.  Robotization is the endpoint of a century-long trend toward increased societal complexity.  The level of complexity in our current state is beyond anything ever witnessed before.  His statement follows the classic premise of <follow the trend to its conclusion>.  Trends never reverse?  We all know better than that.  We are near a social breaking point, documented here daily.  The social anger bubbling under the surface?  Just like an earthquake zone, we are building tension in a fault, and when that fault ruptures, look out!

This system is too fragile to reach the endpoint this NPR egghead so confidently predicts.  Personally, I will welcome chaos, even if (as I think probable) I may not survive the effects.  I want to see the global system rebalance itself in a more robust and naturally balanced configuration than we are currently living.  The bizarreness of our current society is just too creepy, and the concept of robot-doctors or robot-teachers sounds like an even worse version of what is already plenty bad enough, thank you very much!

layman_please's picture

when the AI arrives, the part of economy already not replaced by the robots, will become obsolete as well. for example, can anyone imagine a justice system where a lawyer is trying to build a case against an AI attorney? there wouldn't be a single job left for humans.

we can all live happily ever after on well-fare while our only job will be to consume. 

PoasterToaster's picture

As long as people describe problems in the current world in terms of "GDP" and "productivity", we have a ways to go to get past the slavery paradigm.

Authority = slavery.

Mutual Consent = Freedom.

The problem is not the lack of a good top down, iron-fisted command of the so-called economy.

Jim in MN's picture

Interest rate manipulation + corruption/legal immunity for elites = no rational capital/small business formation

Ergo, end of USA as we knew it.  The rest is all dominos, including the values, urban blight, etc. etc. etc.

Manipuflation's picture

Ya, but the staaate faaaair is right around da corner ya know.

I should get the fuck out of this state before another lightrail line that no one pays to ride gets the green light by the state legislature.  Run Forest Run.

Thorny Xi's picture

Productivity is sooooo twentieth century.

Angry Plant's picture

So the male recession has crushed productivity growth you say?

Who would have thought firing men while at the same time the first large wave of female workers were hitting there mid fortys would cause productivity issues.

Men always work harder then women on average and older women also lose there motivation to work faster as they age when compared to older men.

azusgm's picture

I'm an adult female and I approve that message. It is a broad generalization, but it is pretty close. I am an old registered nurse who outworked plenty of males when I was younger. After a certain age the physical demands were too much.

Truth can be tough but it is not hate speech.

kchrisc's picture

Zion is a fifth-column plundering and exploiting colonizer of the American country, so this should not be a surprise to anyone.

The colonizers need to "return."

Zion is a scheme, not an ethnicity.

earleflorida's picture

RE: Mr E B-B

this is very well thought-out and researched article. precise and to the point!

quite surprised that you picked-up on the Brirtish Empire. excellent!

http://en.wikipedia.org/wiki/Presidencies_and_provinces_of_British_India

Ps. note that for empires to function it is imperitive to export [beggard thy neighbor] slavery?

Ps2. regarding the 90's and finance-- again excellent!!!

bush #41 [1988-1992] & clinton [1992-2000] were miraculous?    'Finance'        berlin wall  11/9/89 'germany's 'marshall-plan' redux $$$$ 

USSR dissolution 12/26/91! WOW! Exporting Capital, capital, and moar capital actually working hard.

finally,... you mentioned in the end-- which was also stunning and brilliant! 

GATT[1948-1994]-- ITO/WTO [1995-present]-- NAFTA/CAFTA[?] [1994-present], and China becoming a member of of the WTO under Bush #43 exactly 90 days after '911' !!! 

thank you, sir

NoWayJose's picture

When you failed in the agrarian economy you starved (and rid the world of surplus population). Today when you fail (or are just lazy), you get free food, free housing, free Obamaphones, and free Medical care. It takes a lot of productive workers to offset one non productive worker.

You cannot look at robots and computers and say we are less productive today. But you do have a much larger denominator today.

LibertarianMenace's picture

Like Burton says above, tech is making the final attempt at an economically practical socialism. Aldous, I believe I will have some that Crome Yellow now.

mijev's picture

1972 was the year the first wave of modern MBA graduates were let loose on Wall Street. Their focus on micro economics instead of macro meant that it's ok to ignore the impact of moving jobs off-shore because an "X" industry is always coming along. Except that there is no positive X industry impact in the modern era because there are just too many potential workers. Which is exacerbated by technology which is designed to replace humans.

tarabel's picture

 

 

I'd be interested in seeing that graph of financial industry contributions to the GDP extended back to the agrarian slave period and on forwards from there. Even his own limited time frame shows that its influence has receded since 2000.

azusgm's picture

I'd like to see some adjustment made for the effect of prisons.