Arnold Kling

Competitive Economy

Arnold Kling, Great Questions of Economics
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Kevin Hassett describes a surprising disconnect between productivity and profits.

Productivity, which normally tanks in a recession because firms hold on to workers when demand falls, has increased substantially over an entire recession. How remarkable is that? In the last seven recessions, productivity tanked. Not this time...

But along with productivity increase comes a profound puzzle. While firms have deftly avoided carrying ridiculously high overhead costs and have improved the efficiency of each worker, they have, nonetheless, lost tons of money. Indeed, profits have dropped even more in this recession than they do in a typical recession.

The "late" economist Edward Yardeni (he changed jobs and now his web site is gone--it's like he died or something--email me if you know where he is) used to talk about the Internet economy as the competitive economy. He predicted that it would lead to firms having to compete so fiercely on price that improvements in productivity would not enhance profits.

Discussion Question. If increased productivity does not go into profits, what must be happening to real wages?

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