The problem with productivity

Many measures in economics require close scrutiny to assess their efficacy. Of course, no measure is a problem in itself. But they are usually attached to popular metaphors that can be very much a problem. Productivity is one such measure/metaphor. Whether it is labour productivity or multi-factor productivity, productivity is an industrial-era measure that tracks output relative to input. In the industrial era, it was reasonably effective at showing how hard and how smart people worked. The metaphor, accordingly, is that productivity = working hard, putting your head down, getting on with the job, setting your nose to the grindstone, wanting a good day’s work for a good day’s pay and just being a decent member of society (having a beer after work before going home to the family). Images of salt of the earth types shifting heavy machinery spring to mind. Conversely, falling productivity immediately connotes laziness, bums living off welfare, workers pretending to be sick when they are really betting on the horses, unions trying to get undeserved free kicks and ruining things for everyone.

Such nonsense suits the political environment, but in the real world, productivity is so flimsy an indicator it should be approached with extreme scepticism. Productivity in America, for instance, “improved” sharply after the GFC, when the American economy was ailing. It has “worsened” in Australia even as Australia’s economy has proven the most resilient in the developed world. True, it is not just about the present state of the economy. The claim is that changes in productivity indicate future problems, that Australia is making a difficulty for itself because of bad industrial relations, a lack of “reform”, lazy workers. The metaphor rolls on. It is a distorted picture. There may be problems, and they may be of the type described (since when haven’t there been problems in the work force?). But for the most part they are of a different kind. A paper by the Reserve Bank has indicated that Australia’s poor productivity figures are principally a capital accumulation problem:

“The productivity figures are being skewed by a sharp rise in investment and capital accumulation last decade in the capital-intensive mining and utilities industries. In the case of the mining industry, the fall in productivity is partly a natural consequence of the rapid run-up in commodity prices, which has increased the profitability of more marginal deposits. In the case of the mining industry, the fall in productivity is partly a natural consequence of the rapid run-up in commodity prices, which has increased the profitability of more marginal deposits.[3] Higher commodity prices justify more difficult and costly extraction of previously undeveloped resources, which becomes necessary over time as developed deposits are depleted. The very rapid pick-up in commodity prices has also justified an unprecedented increase in capital investment in the industry. This growth in measured capital inputs has detracted from measured productivity owing to the lag (of some years) between the initial investments, the completion of projects and the utilisation of all the new capacity. In effect, the productivity developments in the mining industry are best characterised as a movement up the industry’s supply curve, rather than an exogenous shift in the supply curve related to some fundamental change in underlying productivity.
The fall in the level of productivity in the utilities industry is also related to large investments, which have been necessary to deal with some of the fundamental structural challenges facing the industry, but these investments have not necessarily resulted in higher quantities of measured output. Part of the surge in investment over recent years reflects a significant catch-up that has required rapid growth in utilities’ workforces after a period in the 1990s when investment and employment in the industry were falling.”

The reality, in other words, does not fit the metaphor of lazy workers, unions screwing everything up, etc. Heavy capital accumulation in mining because of the boom and what is probably over investment in infrastructure, especially in energy, has resulted in lower output per dollar allocated.

What is needed, with such a flimsy indicator as productivity, is a number of other analyses to be run parallel with its use. For one thing, about two thirds of productivity gains come from capital investment, not improved work patterns. This is to some extent a false dichotomy (workers have to use the new technology well), but it does indicate an obvious fact. There are limits to how much harder workers can work. But there are no limits to how much technology can be improved or how much smarter workers can work. So what is needed is not so much a quantitative measure of input-output but a qualitative measure of brains-output. What Peter Drucker called the knowledge economy. Of course, qualitative measures are not the strong suit of economists, but that is what is needed. It is especially important in areas of the economy that are not simple consumer products, such as health and education. Input-output analyses work well enough when you are talking cars or shoes or plasma TVs. Same in mining. But in many of the more complex service sectors, that is far too simplistic.And what the Reserve Bank is showing is that in Australia there are big questions about the validity of the capital investment.

Second, the really big improvements, productivity or otherwise, come from advances in systems. This is a perennial problem in the atomistic approach to economic activity. The assumption that the only way forward is each firm improving their activity individually because competition is fierce. That is only part of the story. If the individual firms persist with the same practices, then you often do not get system wide advances. And in the utilities sector, in particular, what is needed is system wide advances, a new way of configuring things that is more distributive and adaptable.

I note that Ceramic Fuel Cells, an Australian firm that produced energy from gas, with low emissions and potentially very cheaply, has just decamped for overseas because it got no help from the Australian government or the utilities. The Labor government refused to allow a rebate for the cells because it used fossil fuels, although emissions were extremely low — a classic piece of fundamentalist stupidity, Penny Wong being the minister at the time. If the rebate for feeding electricity back into the grid had been at the going rate to customers, the units would pay for themselves in about four years and then give an energy price indefinitely at about half the current rate. And because the units could be localised — they are about the size of washing machine — a system could be developed that could be more adaptive to peak demand than the current centralised, inefficient system. So why no support from the Federal government and utilities (who stood to gain the most)? There may be a smell of corruption, but what we can say for sure is that there is no interest from existing players to change because they might lose their revenues. They want to sell as much energy as they can, not deliver the best result for consumers. And the government, despite having one answer to the problem staring it in the face (whcih was invented by the CSIRO) showed zero vision. And now what do we get from the energy white paper? Admonitions for privatisation and more fierce atomistic competition. We are a long way from the visionary leadership that was shown at the start of the Industrial Revolution in areas like roads, rail, dams and power, when brilliant engineers imagined a new world and created it.

Productivity completely falls down as a measure in the finance sector. The reason is that you cannot measure money with itself. How is productivity measured? Output per dollar of capital invested. What is the output of the finance sector? Capital. Capital cannot measure capital. Put another way, if “productivity” in the finance sector rises, that means more money is being produced. That is very different to producing more cars. In fact, the productivity of the sector in the run up to the GFC was fantastic — and that was why we had a GFC. The sector “produced” massive amounts of leverage very efficiently and as a consequence the excessive debt nearly brought the world’s financial system to its knees. Financial productivity, in other words, was a curse.

Once again, the finance sector should be seen as a special case, not like the rest of the economy.

Like many economic indicators, productivity is an old fashioned measure for an old fashioned world view. What is needed for the future is just as much “receptivity” as productivity; an understanding of what value is to the user, not just what value is to the producer. I doubt that this will emerge any time soon.

 

 

 

 

 

 

 

31 Responses to “ “The problem with productivity”

  1. Alex Heyworth says:

    Excellent article, dismal outlook. “The Clever Country” my arse. The Exceptionally Stupid Country might be more like it.

    • T says:

      the Lucky country doesn’t need to be Clever… She’ll be right, mate!

      for a long time labor had no intensive to be productive. smart ones could draw equity from his house, stupid ones have no chance anyway.

      try to be productive or creative after you commuted 1:20 from the place where you can afford to live to the place where jobs are! add to this shops, banks and post closing at 17:00 so you shop when you’re supposed to work (and so your peers do!). child care is closing at 18:00, if you have only one child you probably can afford it, otherwise your educated spouse can improve her productivity at the kitchen. and they call it Lucky country, gee :/

  2. dumpling says:

    “And the government, despite having one answer to the problem staring it in the face (whcih was invented by the CSIRO) showed zero vision.”

    Like the Henry tax review before it, this government commissions a task force for an answer (and pays for it), and receives a good one, and then becomes disinterested in it.

    One wonders why the government bothered in the first place (that is, except to find an excuse to spend for the sake of spending)…

    • GSM says:

      “One wonders why the government bothered in the first place”

      The tendency these days, and it’s not just confined to the realms of politics and Govt, is to SEEM to be doing something and WANTING to be seen to be doing something- rather than the quality, functionality or efficiency of the outcome. Grand sweeping reviews and ideas , great for attention getting yet end up as expensive unproductive wastes of time and resources. A sign of the times.

    • littleguy says:

      “And the government, despite having one answer to the problem staring it in the face (whcih was invented by the CSIRO) showed zero vision.”

      And the business leaders who are paid a lot more are just as bad.

  3. [email protected] says:

    “when brilliant engineers imagined a new world and created it”

    No shortage of quality engineers today.

    So WTF?

    • Sell on News says:

      Quite agree. The problem is mainly political, I suspect. Can’t have governments “picking winners” now can we? Which makes us all losers.

      • [email protected] says:

        Spot on

  4. Crocodile Chuck says:

    Good post with much to commend it.

    “If the rebate for feeding electricity back into the grid had been at the going rate to customers, the units would pay for themselves in about four years and then give an energy price indefinitely at about half the current rate. And because the units could be localised — they are about the size of washing machine — a system could be developed that could be more adaptive to peak demand than the current centralised, inefficient system”

    But, our electric grid was built out with a ‘top down’ centralised model. One problem with feeding back electricity into the grid is that at the household level the grid voltage is too low. Why is this important? Because the current levels are high-and losses of this vary as the square of the current.

    Agree with the importance of developing a more decentralised model for electricity-Sydney City Council’s trigeneration scheme is a good example of this.

    btw, one never reads about one of the most logical responses to our purported ‘productivity problem’: paying CEO’s, CXO’s and Directors less money. I don’t believe I’ve ever seen this discussed in ‘The Australian’!

    • Alex Heyworth says:

      If CEOs etc should be getting less money, let’s extend this principle. Judging by their current performance, politicians should be paying us for the privilege of stuffing up the country.

      • GSM says:

        Don’t leave the Unions out of that equation Alex.

      • [email protected] says:

        Union CEO’s you mean??

  5. PhilBest says:

    There is plenty of research now, particularly by UK academics, that demonstrates a negative effect of urban growth constraint policies on productivity.

    Anyone with an interest in this subject should read Alan W. Evans’ 2 books published in 2004. “Economics, Real Estate and the Supply of Land”, and “Economics and Land Use Planning”.

    Evans cites a paper from 1998, “Driving Productivity and Growth in the UK Economy”, by the McKinsey Institute, which is well worth a read.

    Another excellent one is the recent “What We Know (And Don’t Know) About the Links Between Planning and Economic Performance” by Max Nathan and Henry Overman of the LSE. The LSE has been doing research for years into this issue.

    Thatchernomics involved productivity-boosting reforms of the UK economy in virtually all areas except urban planning. This is now the focus of academic scrutiny, because the UK needs to work out why its productivity still lags that of other comparable OECD nations by 20% or more. The above research suggests that most of this continued underperformance is due to the urban planning system.

    Productivity is reduced by growth-containment urban planning firstly, by increased congestion; secondly, by businesses inability to afford “space” for efficient processes (eg workers crowding each other, stock on shelves being less accessible, aisles narrower, production lines too cramped); and thirdly, by “anti-competitive” effects: including that most potential participants in “agglomerations” of the Silicon Valley type are excluded very soon after such an agglomeration has even started; there is either no spare land at the location, or it is far too expensive.

    I understand from the McKinsey people that they are soon to release a paper which includes the suggestion that Australia’s urban economy is showing similar signs of over-planning reducing productivity in most sectors of the urban economy.

  6. Janet says:

    Swap ‘the Arabs’ for ‘the Chinese’ and how have thing changed? “You have meddled with the primary forces of nature, Mr Beale, and I won’t have it! Is that clear?”
    http://www.youtube.com/watch?v=zI5hrcwU7Dk

  7. Explorer says:

    Thanks for a thought provoking article.

    One criticism, if I may, re “And what the Reserve Bank is showing is that in Australia there are big questions about the validity of the capital investment.” I don’t think this is the case at all. I think they are pointing out that when you invest billions in multi year projects it dilutes productivity until the returns start and flow. They are highlighting a timing issue that is particulalry relevant over the last few years in the resource extraction and processing industries.

    In the finance industry there are plenty of measures of productivity that show dramatic increases like the number of hands a payroll goes through before hitting an employee’s account. In one major English bank and one of its major corporate customers it fell from about 16 to 3 over a period of about 10 years (ending about 15 years ago).

    Sometimes the problem is in the methodology of measurement or in management rather than lower level worker productivity. EG introduction of tasks that don’t add value/protect against loss.

    I like your point about systems and I would add/include infrastructure effects, which I think are touched on in the comments on urban consolidation. What does it do to truck and driver productivity when they are stuck in congestion for an extra hour a day?

    And I would add personal productivity in a semi-social context as well. When a million people spend an extra 10 minutes a day in a car going to work burning more fossil fuels than they otherwise would GDP goes up, traditional productivity is unchanged in their employer but their family and social life suffers. How does productivity take that into account.

    Overall it is like GDP as a measure. Better than nothing but nowhere near good enough and needs supplementing by a suite of measures always considered together. Sort of like the “triple bottom line” concept.

  8. genX says:

    Cost-basis or dollar-value-product measures of productivity are a pet hate of mine.
    Take shoe making, in the West a highly technological endeavour, in the developing world, labour intensive. If a USian working in a US Nike factory can produce, with the aid of technology, 1 pair of shoes every 30 minutes, and a sweatshop in Indonesia takes 10 people to achieve the same, which factory is more productive?
    On a labour-productivity basis, the US factory is 10 times as productive. On a capital-productivity basis, it is certainly the Indonesian factory, but on a pure cost-basis, if the US worker is paid 18 dollars per hour and the Indonesian workers are paid 18c per hour, the Indonesian factory is 10 times as productive as the US factory.
    Much of the ‘productivity gains’ in the US in the past two decades have been exactly this nonsense. Because the Indonesians don’t want to work for 18c per hour indefinitely, inevitably they will organise for higher wages. How do we keep our ‘high productivity’ going then? Simple, simple sell rifles, batons and tear gas to the Indonesian government so they can crush or murder any labour organisers. Seems a pretty crap outcome, but one that economists seem to be proud of.

    • glen5875 says:

      genX,

      And that’s only the start of the problem.

      When the US factory closed and the US factoryworker lost his $18/hr job making shoes and he got a $7.25/hr job flipping hamburgers, his earning power was replaced with borrowing power, at least until he got borrowed up. That’s where we are now.

      Of course that Indonesian or Chineese worker making 18c/hour doesn’t have any purchasing power, as he has neither earning power nor borrowing power. So where is future demand to come from?

      And it is a mistake to think that the state violence and oppression necessary to keep this system in place occurs only in the Indonesias amd Chinas of the world. Here’s a very graphic, but anecdotal, example of what the state violence and oppression of dissent necessary to keep this system in place looks like in the United States:

      http://www.youtube.com/watch?v=etv8YEqaWgA&feature=player_embedded

      For a more statistical, but equally as stark, look at the level of state violence necessary to keep this system in place in the US, try taking a look at this graph:

      http://www.prisonersofthecensus.org/news/2004/11/01/state-officials/

      • glen5875 says:

        And of course the massive police, criminal justice and prison industry in the US is all marked up as “productivity.”

    • tonydd says:

      This is and always was the aim of ‘globalisation’ a working class, busting execise, a race to the bottom and a return to a feudal era relationship between Labour and Capital.

      Globalisation was a con job on a Soviet scale, its almost time to clean up the mess.

      Not looking forward to it. :(

  9. Lori says:

    Thanks a lot for the Saturday brain teaser.

    1. Regarding the energy utilities, it is well known by the theory and practice that they are usually natural monopolies. As such, being in private hands/companies as suppliers, it is well known that their efficiency (profits) can go only down when the consumers are saving energy or when there are more energy distributors on the market, e.g. there is more competition. The private enterprise fails in this maybe one of the most important sectors of the economy. Looking for productivity there is delusional, because there is no other way of “increase productivity” unless the prices go up and up as the consumers are saving energy and lowering their consumption.

    2. “Capital cannot measure capital” or itself, but this is exactly what the capital does in its most developed stage. The MMT misses the most important part of the money analysis, e.g. what plays the role of the universal equivalent of commodities world and accumulated wealth in our time today. If one says that this is the national currency (fiat money) or the rules of currency emission and exchange by the government, one doesn’t answer the question about the real substance of modern money. Because behind the regulations and the law, there is a real economic phenomena and this phenomena determines the real substance of modern money. The money issued by the government and the banks under seemingly different rules and purposes, at the end have the same nature – credit (or debt) – says everything. The government may seem to have some kind of sovereignty about money, but actually doesn’t.

    The money sovereign is the financial capital, e.g. FED (or RBA etc.) If the rules are not set by the free exchange among people on the free market, but by the owner (subject) of the financial capital (the bank of the banks), it is obvious that the financial capital (which is always debt/credit) sets the rules for itself, e.g. the financial capital measures itself and by doing so it measures everything else in the real economy. What does that mean?

    Measuring itself means that financial capital determines the rules (also conditions) of its own accumulation and growth. By doing so, it determines where it stays relative to the real capital and all its productive forces. It determines how much of economic growth and wealth can be appropriated to the productive forces in the economy and how much it goes to its own growing sovereign power (which is not the government, but the its owners).

    Financial capital is the sovereign of its own and it measures itself by determining the rules and the law, which MMT calls money. The government is only its servant or agent – the still necessary executor of its free will.

    • Junkyard says:

      So governments roll is the efficient delivery of it’s constituents to financial capital (debt).

      • Lori says:

        Sorry, my English is simple, not sophisticated, and I don’t understand what you want to say or ask.

      • Junkyard says:

        You’re mocking me of course. That’s okay, my English is appalling and most of the time I have no idea what I’m trying say or ask either.

        I think I was trying to ask if government is the servant of financial capital and not the people, then what is the government’s roll in relation to its people?

      • Lori says:

        Exactly, “government is the servant of financial capital and not the people”, because if the governments were serving the people, they would have taken very strong position towards the financial crimes during GFC. Instead, they are doing everything to reward the banksters, not the people who elected them.

        By the way, as I am not a native English speaker, I realized much later, that maybe you wanted to write the following, if correctly written:

        “So government’s role is the efficient delivery of its constituents to the financial capital (debt).” If you meant that, it is right.

  10. aiecquest says:

    Much productivity is not simply a quantitative measurement of what, but how, especially when without any irony people call Australia the “lucky country”. In the international education sector there have been few if any productivity improvements by university and TAFE management (lesser extent private colleges who run tightly anyway). Glaring anomoly that gets talked about more and more, especially when observed by Australians travelling offshore, is how marketing has been defined (by the ESOS Act no doubt informed by same people) and carried out. To this day universities and TAFEs persist with “international travel plans” to consult and/or attend one off physical events to distribute brochures at a cost of half a billion anually….. meanwhile research has shown that 99% of candidates are found by word of mouth, internet/social media and agents/consultants (in Oz I am known as just an “agent”, in Europe a qualified education consultant). Any performance measures which could be used to assess productivity are outsourced to agents and others, while international education managers, from DVCs down have a sense of entitlement to international travel while feigning ignorance of digital marketing, Skype etc. How can Australia keep up with productivity improvements when better know how is ignored?

  11. [email protected] says:

    Whose productivity is this gunna affect?

    http://au.news.yahoo.com/thewest/a/-/breaking/15347600/chinese-giant-to-break-wa-grain-grip/

  12. Hewell says:

    My friend’s working in one of the largest US firms here in Syd. Her boss from HK gave her a BlackBerry, then sent her an email at 10pm one night. She ignored it. The next morning…

    There’re lots of room for improvements I guess.

  13. V says:

    For a start productivity needs to be a valid measure of output per worker per unit time.

  14. Jumping jack flash says:

    A very good article.

    ” the finance sector should be seen as a special case, not like the rest of the economy.”

    This is the most important point in my opinion.

    In my opinion the problems began when banks started treating everyone like mini-banks, and in turn, everyone started behaving like mini-banks.

    Equitymate was the implementation of this for the average schmoe. Debt begets more debt. Debt was wealth. Debt was profit.

    It could explain why large manufacturers started offering bank-like services – an easy way to spoof productivity gains without actually producing more products for less cost.