Debate Magazine
There was a fine debunkage of this concept in City AM Forum recently, concluding with this real life: A powerful blow against the concept of potential output was published in the latest edition of the American Economic Association’s journal Applied Economics. Igal Hendel and Yossi Spiegel document the evolution of productivity over a 12 year period in a steel mini-mill, producing an unchanged product, working 24/7. The steel melt shop is almost the Platonic ideal from a national accounts perspective of output measurement. The product – steel billets – is simple, homogenous, and internationally-traded. There was virtually no turnover in the labor force, very little new investment, and the mill worked every hour of the year. Yet despite production conditions which were almost unchanged, output doubled over the 12 year period. As the authors note, rather drily, “the findings suggest that capacity is not well defined, even in batch-oriented manufacturing”. It’s time to put the concept of potential output into the rubbish bin.
