Total Factor Production
Cobb-Douglas

Total Factor Production

TFP includes technological advances, e.g. robotics on assembly lines, however some countries are by international standards very badly run/governed. One only has to look at roads and transport, health, education and so on, as well as the insidious levels of corruption.

So mess those up, and it does not matter if you are up to speed on Digital Business Transformation, smart workers etc - your economy will suck.

Economists think in terms of the transformation process, such as the drivers of productivity:

  1. Human capital;
  2. Physical capital;
  3. technological efficiency and now
  4. Digital Business Transformation. (Of paramount importance).

It seems to me that people want progress, but not change.

The question of course is - can one really measure these things - yes we have valence and equity models (Vroom and Adams), advancements in AI and so on. You cannot really directly measure TFP, which has been called "a measure of our ignorance". Partly inspired by the World Bank, a measure was created called the "Ease of Doing Business". This measure attempts to capture levels of bureaucracy and corruption.

Organisations can in fact change, although that is not easy, but this "positive change" should give us hope that economic failure is in fact not necessarily set in stone. Unemployment is another huge problem. There are 3 types on unemployment:

  1. Frictional - moving from job to job (not easy in today's economic arena);
  2. Cyclical - due to a downturn; and
  3. Structural - a serious mismatch between what organisations need and what workers can in fact offer. This is really bad news for the organisations as well as the country's GDP.

If one looks at History, the Tiananmen Square protests in China were triggered in part by spiralling prices. This was caused by an inflation rate of 18%, so Stagflation was a major issue (Sluggish economic growth coupled with a high rate of inflation and unemployment.)

A shock to the Economy could be caused by a steep increase in fuel prices, a stock market crash, or perhaps a bubble that bursts.

In a developing country (or as it is now called an emerging economy) - this might be due to a sudden fall in the price of some commodity that the country relies on. Or of course, a nasty little virus.

If people get nervous about the economy for some reason, they may start saving their money instead of spending it. So factories cut production, and of course retailers cut staff. So unemployment rises, and there is a lot of fear regarding the future. It's a self-fulfilling prophecy, because if we all believe that the economy is going to get a lot worse, then it will. Of course the "Modern Monetary Theory" (MMT) results in the Government first deciding what it is they want to spend, and then start printing as much money as is needed. (disastrous effects).

Prof Rory Dunn.

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