Economics Essay 31: Actual and Potential Growth

 Explain the difference between actual growth and potential growth.

Actual growth refers to the observed increase in the real Gross Domestic Product (GDP) over a specific period. It represents the actual expansion of an economy's output of goods and services. Actual growth is measured by comparing the current level of GDP with the past level, usually expressed as a percentage change.

Potential growth, on the other hand, represents the maximum sustainable rate at which an economy can grow without causing inflationary pressures or straining its resources. It reflects the economy's long-term capacity to produce goods and services. Potential growth is determined by various factors, including labor force growth, capital accumulation, technological progress, and efficiency gains.

The key differences between actual and potential growth are as follows:

1. Output Gap: Actual growth can deviate from potential growth, resulting in an output gap. If actual growth exceeds potential growth, the economy is operating above its capacity, and inflationary pressures may emerge. Conversely, if actual growth falls below potential growth, the economy may experience a recession or underutilization of resources.

2. Economic Fluctuations: Actual growth is subject to short-term fluctuations due to changes in aggregate demand, business cycles, and external shocks. These fluctuations can cause periods of expansion or contraction in the economy. In contrast, potential growth represents the underlying trend or average rate of long-term growth.

3. Constraints and Limitations: Potential growth is constrained by factors such as the availability of productive resources (labor, capital, natural resources), technological advancements, institutional frameworks, and government policies. Actual growth may be influenced by factors like changes in consumer spending, investment levels, government spending, and international trade.

4. Sustainable Growth: Potential growth focuses on the sustainable capacity of an economy to grow over the long term. It aims to strike a balance between economic expansion and maintaining price stability. Achieving sustainable actual growth that aligns with potential growth is an important objective for policymakers.

5. Policy Implications: Recognizing the difference between actual and potential growth is crucial for policymakers. If actual growth surpasses potential growth, it may signal overheating and the need for contractionary policies to control inflation. Conversely, if actual growth falls below potential growth, expansionary policies may be employed to stimulate economic activity.

In summary, actual growth represents the observed changes in an economy's output, while potential growth represents the sustainable long-term capacity for growth. Understanding the difference between the two helps policymakers gauge the health of the economy, identify inflationary or recessionary pressures, and make informed decisions regarding monetary and fiscal policies.

Why some companies will survive this crisis and others will die

Andrew Hill in The Financial Times 

The first written document about a Stora operation, a Swedish copper mine, dates back to 1288. Since then, the company — now Finland-based paper, pulp and biomaterials group Stora Enso — has endured through attempts to end its independence, the turmoil of the Reformation and industrial revolution, wars, regional and global, and now a pandemic. 

“It would have been catastrophic for [Stora] to concentrate on its business in an introverted fashion, oblivious to politics. Instead the company reshaped its goals and methods to match the demands of the world outside,” writes Arie de Geus, describing one particularly turbulent era in the 15th century in his 1997 book The Living Company, shaped round a study of the world’s oldest companies he conducted for Royal Dutch Shell. 

This is wisdom that companies today, wondering how to survive, let alone thrive, could use. Alas, de Geus himself is not around to help them: he died in November last year. 

Part of his work lives on through the scenario-planning exercises that I identified last week as one way of advancing through the uncertainty ahead. The multilingual thinker was Shell’s director of scenario planning, where he developed the distinction between potential futures (in French, “les futurs”) and what was inevitably to come (“l’avenir”). 

He also lived through the aftermath of the second world war, which destroyed Rotterdam, the city of his birth, and encouraged him and his friends to seek jobs within the safe havens of great corporate institutions, such as Shell, Unilever and Philips. 

It is not a given that all the oldest or largest companies will outlive this crisis. Those that do, however, should take a leaf out of de Geus’s book. 

Longtime collaborator and friend Göran Carstedt, a former Volvo and Ikea executive, says he discussed with de Geus last year how near-death experiences enhance the appreciation of being alive. “Things come to the fore that we took for granted. You start to see the world through the lens of the living,” he told me. “Arie liked to say, ‘people change and when they do, they change the society in which they live’.” That went for companies as much as for societies. Long-lived groups such as Stora owed their survival to their adaptability as human communities and their tolerance for ideas, as much as to their financial prudence. 

These are big ideas for business leaders to ponder at a time when most are desperately trying to keep their heads above the flood or, at best, concentrating on the practicalities of how to restart after lockdown. In her latest update last month, Stora Enso’s chief executive sounded as preoccupied by pressing questions of temporary lay-offs, travel bans and capital expenditure reductions as her peers at companies with a shorter pedigree. 

Some groups that meet de Geus’s common attributes for longevity are still likely to go under, simply because they find themselves exposed to the wrong sector at the wrong time. 

Others, though, will find they are ill-equipped for the aftermath. What he called “intolerant” companies, which “go for maximum results with minimum resources”, can live for a long time in stable conditions. “Profound disruptions like this will simply reveal the underlying schisms that were already there,” the veteran management thinker Peter Senge, who worked with de Geus, told me via email. “Those who were on a path toward deep change will find ways to use the forces now at play to carry on, and even expand. Those who weren’t, won't.” For him the core question is whether those who interpret the pandemic as a signal that humans need to change how they live will grow to form a critical mass. 

For decades after the war, big companies did not change the way they operated. They took advantage of young people who believed material security was “worth the price of submitting to strong central leadership vested in relatively few people”, de Geus wrote. Faced with this crisis, though, de Geus would have placed his confidence in those companies that had evolved a commitment to organisational learning and shared decision-making, according to another close collaborator, Irène Dupoux-Couturier. 

The pressure of this crisis is already flattening decision-making hierarchies. Progress out of the pandemic will be founded on technology that reinforces the human community by encouraging rapid cross-company collaboration. 

De Geus was adamant that a true “living company” would divest assets and change its activity before sacrificing its people, if its survival was at stake. That optimism is bound to be tested in the coming months but it is worth clinging to. 

“Who knows if the characteristics of Arie’s long-lived companies . . . boost resilience in such situations as this?” Mr Senge told me. “But it is hard to see them lessening it.”

Why job interviews are pointless

Richard Nisbett in The Guardian


 

Hard taskmaster: Ricky Gervais as David Brent in The Office. Photograph: Adrian Rogers/BBC



Statistics often sounds like a dry subject, but many judgments and decisions in everyday life would be improved by an application of statistical principles. Take the following scenario: a football scout hears of a player who has powered his team to a good win-loss record. His coaches think he’s one of the most talented players they’ve seen. But the scout is unimpressed by the one practice game he sees him in; he tells his manager it’s not worth trying to recruit the player. 

Most sports fans would think that was a pretty foolish call, right? Athletic performance is much too variable to base an important judgment on such a small sample. It’s not necessary to take a statistics course to get the correct answer to this problem.

But consider this problem: an employer gets an application from a junior executive with an excellent college record and strong references from his current employer. The employer interviews the applicant and is unimpressed. The employer tells his colleagues that it’s not worthwhile recruiting him.

Most people regard this as a reasonable sort of decision. But it isn’t. Countless studies show that the unstructured 30-minute interview is virtually worthless as a predictor of long-term performance by any criteria that have been examined. You have only slightly more chance of choosing the better of two employees after a half-hour interview as you would by flipping a coin.

In both of these cases, predictions based on references – school reports, prior performance, letters of recommendation – give a 65-75% chance of choosing the better of the two.

Why do we get the athletic problem right and the employment problem wrong? Because in the case of the job, unlike for athletic performance, we haven’t seen hundreds of candidates in interviews of a particular type and seen how well performance in the interview corresponds to ultimate performance in the setting we’re concerned about. We haven’t seen that the guy who looks like a dunce in the interview turns out to be a whiz on the job and the guy who aced the interview turns out to be a dud. The only way to see that the interview isn’t going to be worth much is to be able to apply the “law of large numbers”, which prompts the recognition that an interview represents a very small sample of behaviour, whereas the references summarise a lot of behaviour.

The bottom line: there’s safety in numbers. The more recommendations a person has, the more positive the outcome is likely to be for the employer. Consider the job interview: it’s not only a tiny sample, it’s not even a sample of job behaviour but of something else entirely. Extroverts in general do better in interviews than introverts, but for many if not most jobs, extroversion is not what we’re looking for. Psychological theory and data show that we are incapable of treating the interview data as little more than unreliable gossip. It’s just too compelling that we’ve learned a lot from those 30 minutes.

My recommendation is not to interview at all unless you’re going to develop an interview protocol, with the help of a professional, which is based on careful analysis of what you are looking for in a job candidate. And then ask exactly the same questions of every candidate. It’s harder to develop such a protocol than you might guess. But it can really pay off.

Predicting how a player is going to perform has always been a tricky business

Who'd have thunk it?

Ed Smith

April 25, 2012

Did you pick them first time? Did you recognise how good they were at first glance? Or did you conveniently revise your opinion much later, when the results started to come in? 

I've been asking myself that question as I've followed the career of Vernon Philander. He now has 51 wickets in just seven Tests. Only the Australian seamer CBT Turner, who reached the milestone in 1888, has reached 50 wickets faster than South Africa's new bowling sensation. I don't mean any disrespect to the legends of the past, but I think it's safe to say that Test cricket has moved on a bit since the days of Turner. So Philander has had statistically the best start to any Test bowling career in modern history.

Who saw that coming? I can claim only half-prescience, and I sadly lacked the courage to go on the record. I first encountered Philander when I was captain of Middlesex in 2008 and he joined the club as our overseas pro. I didn't know much about him beyond what I'd been told - "Allrounder, hard-hitting batter, maybe a bit more of a bowler." Armed with no more information than that, I found myself batting in the nets against our new signing just a couple of minutes after I'd met him.

After the usual pleasantries, it was down to the serious business of Philander bowling at me on a green net surface with a new ball in his hand. So what did I think? Honestly? I thought: "Hmm, I thought they said he was a 'useful allrounder'? Looks more like a genuine opening bowler to me. But I'd better keep it to myself - maybe I've just lost it a bit?"

Philander was just as impressive in matches as he was in the nets. He quickly went from bowling first-change to opening the bowling, then to being our strike bowler. Was he just having a great run of form or was he always this good? Looking back on it, I wish I'd said to everyone - "Forget the fact he can also bat, this bloke is a serious bowler."

When we form judgments of players, we tend to be conditioned by the labels that are already attached to them - "bowling allrounder", "wicketkeeper-batsman", "promising youngster". Once a player has been put in the wrong box, our opinions tend to be conditioned by what everyone else has said. We are clouded by the conventional wisdom that surrounds us.

Look at Andrew Flintoff. It took years for everyone to realise that he was one of the best fast bowlers in the world in the mid-2000s. That was partly because we were distracted by his swashbuckling batting. We were so busy judging him as an allrounder that we failed to notice that he was holding his own against the best in the world, purely as a bowler.

When I played against Matt Prior in his early days at Sussex I thought he was among their best batsmen. The fact that he also kept wicket led him to be underrated as a pure batsman. He could completely change a game in one session and was the often the player I was most happy to see dismissed.

The dressing room is often too slow to acknowledge that a young player is already a serious performer. It cuts against the overstated notion of "He's still got a lot to learn." I have a strange sense of satisfaction at having helped propel the then little-known fast bowler Graham Onions into the England team. Other players weren't convinced he was the genuine article. But he knocked me over so often in 2006 that I had no choice but to become his greatest advocate. I haven't changed my mind: when he is fit, he is one of the best bowlers around.

I played against Tim Bresnan in one of his first matches for Yorkshire. He thudded a short ball into my chest in his first over. "Can't believe that hurt," one of my team-mates scoffed, "it was only bowled by that debutant bloke." True enough. But every top player has to start out as a debutant.

	The dressing room is often too slow to acknowledge that a young player is already a serious performer. It cuts against the overstated notion of "He's still got a lot to learn"

The gravest errors of judgement, of course, make for the really good stories. When Aravinda de Silva played for Kent in 1995, he brought along a young Sri Lankan to have a bowl in the nets at Canterbury. What did the Kent players think of the young lad, Aravinda wondered? The general view was that he was promising but not worth a contract.

It was Muttiah Muralitharan.

Sometimes, of course, everyone fails to predict the trajectory of a career. Earlier this month, Alan Richardson was named one of the Wisden cricketers of the year. That is exalted company to keep: Kumar Sangakkara and Alastair Cook were among the other winners.

Richardson is a 36-year-old county professional who has played for Derbyshire, Warwickshire, Middlesex and now Worcestershire. For much of his career, Richardson has had to fight for every game he has played. He started out as a trialist, travelling around the country looking for 2nd team opportunities. It wasn't until he turned 30 that he became an automatic selection in first-class cricket.

Richardson was a captain's dream at Middlesex: honest, loyal, honourable, hard-working and warm-hearted. By their early 30s, most seamers are in decline and have to suffer the indignity of watching batsmen they once bullied smash them around the ground. Not Richardson. Aged 34, he taught himself the away-swinger - typical of his relentless hunger for self-improvement. In 2011, Richardson clocked up more first-class wickets than anyone.

About to turn 37, he says his chances of playing for England have gone. I hope he's wrong. No one could more richly deserve the right to play for his country. Watching Richardson pull on an England cap would be one of the finest sights in cricket - the perfect example of character rewarded. And it would be further proof that some cricketers will always be quiet achievers, inching towards excellence without vanity or fanfare. They deserve the limelight more than anyone.

Former England, Kent and Middlesex batsman Ed Smith's new book, Luck - What It Means and Why It Matters, is out now.