By Fred Bienefeld (reprinted from the CCPA Monitor)

The productivity debate now raging in Canada is particularly intense because it reveals some of the most fundamental problems with economic analysis.

Economic analysis has to begin with a clear and concrete definition of efficiency, but for all the implication in mainstream economics that there is such a definition, the truth is that there isn't. The definition most analysts are using, often implicitly, sometimes explicitly, is one that is rooted in competitive equilibrium theory, which is basically indefensible, as most economists will admit.

Economists have tried to escape that dilemma by moving into something they call "positive economics," which allegedly stands or falls on its ability to test hypotheses against empirical facts. At that point, the fact that the theory that generated those hypotheses may include some rather unrealistic assumptions is no longer relevant. The issue is: can we test hypotheses in a falsifiable manner against the facts? That, in theory, is an escape from the problem, but in practice, unfortunately, it only works if such falsifiable testing is possible.

As we look more closely, we find that the measurement problems are enormous. The kinds of problems associated with the measurement of productivity, the enormous differences in the ways in which we can measure the inputs and the outputs, the fact that we have to take into account the prices of the outputs--all these factors are themselves in need of interpretation.

Take prices, for example. Prices fluctuate. During the real estate boom in Canada in the 1980s, price distortions in this economy were enormous, and that affected our measures.

We're constantly dealing with quantities that we are measuring in ways that are deeply problematic--so much so that, in the end, we must accept that the issue cannot be resolved at this level. There is no correct solution, and opinions will differ markedly and often intensely.

Richard Harris, one of our prominent neo-classical economists, recently described a particular measure of productivity that came from the OECD as "a complete pile of crap," which gives some indication of the extent of the disagreement we're dealing with here.

In a wonderful book on public policy called The Policy Paradox, Deborah Stone tells us that numbers in public policy are like poetry. She has a wonderful phrase in which she says, "No number is innocent," and in the productivity debate we come to realize this lack of innocence clearly.

If the answer is not going to be found by improving our detailed measurements of productivity, and if we realize in the end that statements like "productivity is the basis of our living standards" are in fact mere tautologies that really don't tell us anything, then we have to look a bit more closely at this process.

As economists would say, we have to move on to different methodological terrains. These are highly respectable: Douglass North, Oliver Williamson, the new institutional economists, the Austrian school. They've always made their debates on the basis of historical comparisons, looking at social and economic systems as a whole, not at individual numbers to which we attach totally unreal weight, only to find they're not reliable and that other numbers tell a completely different story.

When we look at the way in which economies have actually been performing, it's simply impossible to describe, for example, the United States as a wonderful success story just forging ahead and showing the lead to the world. The United States in the last 30 years, for the first time in its history, has gone through a period when substantial growth in GDP has been associated with a steady decline in real wages and average family incomes for the great majority of the population. The quality of most people's lives has clearly worsened, the economic insecurity they suffer has clearly increased, and the conditions under which they work have clearly deteriorated.

So the real definition of "efficiency" that we as public policy makers need to think about is a definition that asks: how can human effort be translated in the economy into improved standards of living? How can that transformation occur more efficiently? It has not been occurring very efficiently, either in the United States or in Canada.

That leads us into a different methodological terrain, where history counts for more and where we start making comparisons between different kinds of economies and the kinds of trajectories they've experienced over significant periods.

A recent paper written for the World Bank by Paul Romer, a leading new growth theorist in the United States, compares two development models, using Mauritius and Taiwan as examples. He says that, in one model, you basically create conditions that make it attractive for capital to come, and such a model can yield a certain kind of success, as it has done in Mauritius.

Unfortunately, as he argues very persuasively, this success is very limited. Mauritius comes to be trapped in what is effectively a low-wage situation. Its economic success and its economic future depend on its ability to make labour available more cheaply than its competitors. Romer concludes that this not only means its real wages are likely to be low, but also that they are likely to decline from an already very low level.

The Taiwan model, on the other hand, is based on the creation of ideas: developing the capability to generate and appropriate technology rents. That means domestic factors of production must be in a position to reap the benefits of that higher productivity.

Here it's very instructive to look at the world economy over the last 40 years and to discover that what's most interesting and important about those East Asian economies that now are in such serious difficulty is that they achieved a transformation that is virtually unprecedented in history. But its real significance lies not in the fact that they achieved relatively rapid growth, but in the fact that they achieved that transformation and growth even though real wages rose dramatically over the entire period--and their competitiveness was maintained despite those wage increases.

If we really want to study the question of productivity in this broader sense, we need to absorb and learn the lessons of those societies. Our economies in the recent past have performed in a way that raises very serious questions about the meaning of efficiency, and even of growth, in our North American context.

(Fred Bienefeld is a professor of economics at Carleton University's School of Public Administration and Research, and a research associate of the CCPA. This article is based on his presentation to the Commons Finance Committee's hearings on Canadian productivity.)