Monday, April 19, 2010

More Productivity Sense

A manager, when faced with a reduction in demand, responds with a reduction in supply. He takes his input prices as market driven and by setting the productivity of some to zero, allows the productivity of the rest to stay at or return to their previous level. This frees resources for else where while maintaining competitiveness. This is normally the correct response. The manager knows his demand is falling; he cannot be expected to know most everyone's demand is falling. To expect different behavior under different conditions which are unclear may be to much to ask. Moreover, maximizing employment and work is not the main goal of society; maximizing living standards is. While reducing wages, work sharing, or tax redistribution can increase equality, it is just redistribution and doesn't increase living standards.

In a downturn, the economy itself has become less productive. The engine of the economy has failed and the train is coasting and slowing down. Most of it was only boxcars being pulled along by it and redirecting fuel to the boxcars won't accomplish anything. Only another engine will power the economy. The problem was not that the engine ran into trouble; all engines run into trouble. The problem was there were no other engines to reduce the load on that engine and prevent it from failing and take up the slack from it. About the best that can be done is support and sustain those laid off until the economy can reabsorb them and allow low rates and inflation to promote economic adjustment and growth of small but profitable businesses.

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