The end of the cash nexus

Tyler Cowen has a short post which covers a number of themes I’ve been going on about for ages, though never with a fully satisfactory analysis. He starts by pointing to work by Michael Mandel suggesting that much of the measured productivity growth in the US has been bogus (see also Matt Yglesias on this). I agree, particularly as regards the financial sector.

More interestingly, Cowen goes on to note that

there was some productivity growth but much of it fell outside of the usual cash and revenue-generating nexus. Maybe you will live until 83 rather than 81.5 and your pain reliever will work better. In the meantime you will read blogs and gaze upon beautiful people using your Facebook account. Those are gains to consumer surplus, but they don’t prop up the revenue-generating sectors of the economy as one might have expected.

I agree and I think the implications are profound, if still hard to predict with any accuracy. There has been a huge shift in the location of innovation, with much of it either deriving from, or dependent on, public goods produced outside the market and government sectors, which may be referred to as social production.

Some suggestions, not fully argued, over the fold

*If monetary returns are weakly, or even negatively correlated with the value of social production, there’s no reason to expect capital markets to do a good job in allocating resources to supporting innovation. (This point seems rather less controversial than when I made it in 2006.)

* As a corollary, it seems unlikely that large inequalities in income are beneficial to anyone except the recipients of high incomes (this issue is being discussed, in a much more abstract setting, at Crooked Timber)

* If improvements in welfare are increasingly independent of the market, it would make sense to shift resources out of market production, for example by reducing working hours. The financial crisis seems certain to produce at least a temporary drop in average hours, but the experience of the Depression and the Japanese slowdown of the 1990s suggest that the effect may be permanent

* Creativity, broadly defined, seems likely to become more important, while markets, particularly financial markets, become less so. Firms that want to survive and prosper will have to behave quite differently from the way the did in the past. Google is an obvious example of a firm that is trying to do this, if not always succeeding.