Productivity

Productivity.  Even a cursory look in the business pages of any newspaper (whether in print or online) makes it clear that it is everywhere. Or, rather, concerns about it are everywhere.  Productivity has declined (significantly) in recent years from its ‘normal’ long run average annual growth rate of some 2% or so per annum.  The concern is that if we cannot get back up to these levels then we are facing a bleak future of only very slowly increasing average (or probably mean) living standards.  Of course, we could consider how we divi up the existing economic cake between all members of society and those who point to the seemingly mushrooming levels of inequality in our society and others, do exactly this.   However, wealth re-distribution across society is not likely to be a key priority of the current UK Government –  rightly or wrongly.

 

But what do we mean by ‘increasing productivity’?  Well, simply put, it is the ability to get greater outputs with the same, or reduced, level of inputs.  Sounds a bit like magic –  achieving more with less.  But humanity has been quite good at this.  Production and service delivery processes can be re-designed to make them more efficient (and so produce more with the same level of inputs); but the biggest changes usually are driven by mechanisation.  Ie inventing machine processes to carry out tasks which humans used to do.  What can be achieved here can sometimes seem utterly surprising.  I am aware of a business which is onshoring production of an extremely low value, everyday commodity product back to the UK from China.  Why?  Because mechanisation means that, once account is taken of transportation times, costs and quality issues, these items can now be  manufactured at least as cheaply as they can be in China.

 

However, this example does also highlight another (and possibly ‘darker’) aspect of increasing productivity –  that is that the greater the mechanisation, the fewer the jobs required to achieve the outputs.  This manufacturer employs far fewer people than the Chinese supplier and far fewer than was the norm many years ago when the product used to be made in the UK.  However, that is to miss the point somewhat in this example –  jobs are being cerated in the UK where none existed before; because they were all abroad.

 
And, elegantly perhaps, this illustrates the counter argument to the ‘pessimistic’ view that mechanisation always reduces jobs growth –  mechanisation can actually generate new job opportunities.  Although perhaps not as many new jobs are generated as those which are removed from the production process.

 
Now, you are right, that this is not really a concern for us where we are effectively taking jobs from foreign workers; but it is a greater issue where domestic jobs are being replaced by mechanisation.  Particularly if you are persuaded by the arguments of John Maynard Keynes the great British economist of the 1930s and 1940s.  His view was that employment levels were vitally important to a healthy political economy –  indeed so important was work to society that, so the anecdote goes,  in a thought experiment he advocated that government should, in a severe depression, even pay people to dig holes and fill them back in again.

 
So whilst increasing productivity is a good thing it may have somewhat less desirable knock on effects or ‘externalities’.  The optimistic view is that these should be relatively short term as now surplus labour can either re-train to work in jobs which the economy does need and / or there will be new innovations and developments in the wider economy which generate hitherto un thought of job opportunities.  The data supporting such a view is mixed.

 
But again, as we mentioned last time, perhaps in the realms of productivity we are focussing upon and measuring the wrong thing.The internet is constantly reducing the price of information goods.  indeed in a very real sense it has rendered some it little more than £nil.  For example, think of a book you may buy and download onto your e-reader.  Where are the production costs? what is actually being produced?

 

And this is where things get interesting for as Robert Solow the American Economist (and Nobel winner –  not the Peace Prize, the Swiss Bank economics one) said in 1987 “We can see computers everywhere except in the productivity statistics.”

 
Perhaps what we need is to widen our horizons regarding what we should be monitoring  and measuring when it comes to economic activity and vigour in the UK.  And, interestingly enough, this is precisely what the UK Government has been doing for several months.  We will take a look at this next time.

 

For more information on the topic, please contact Stephen Gregson on 01772 821021.

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www.agroxy.com