MGI assess productivity puzzle

The MGI (McKinsey Global Institute), the in-house think tank of the consulting giant McKinsey & Co, opened a recent ‘discussion paper’ on the productivity puzzle afflicting the USA and other developed economies by stating: “Now, as low birth rates slow the expansion of the labour force, increasing productivity, the output we get from every hour worked, is more crucial than ever to promote GDP growth”

One might ask about the impact of labour-saving gear which could produce more output per hour whilst labour relaxed on a beach watching their productivity rise at the same time – but not here!

The MGI lists several possible reasons for the apparent decline in labour productivity growth over the last few years viz:

  • Significant under-measurement of productivity growth – many services which customers value highly are not even counted – some are offered free, such as mobile GPS, Google searches, Skype, smart-phone apps, cloud-based services – the same applies to a broad range of household activities – and the true value of many other services such as improvements in the quality of health care are not fully captured – this demonstrates the significant amount of actual GDP that is uncounted, uncountable or mis-measured
  • A shortage of demand and investment opportunities, plus weak investment – aka secular stagnation – weak demand, especially after 2008, is due to a propensity for consumers to save rather than spend or invest in a slow-growth economic environment plus an increasing share of total income going to high-income and/ or older households that are less likely to spend that extra income – weak investment due to businesses being hesitant, despite low interest rates, in the slow-growth climate:
    • Take the US auto industry – production fell 50% from 2007 to 2009 meaning the sector had tremendous excess capacity in the ensuing years even as the sector recovered
    • “Companies could fulfil a lot higher demand without having to make any new investments – typically the newest technology is implemented in the latest factories – people don’t upgrade a factory that can fulfil demand perfectly well” said Jaana Remes, a McKinsey partner
    • And when unemployment rates were at post crisis highs, employers could have their pick of good workers at relatively low prices – now, with jobless down to 4.1% in the US, good workers are harder to find
  • Today’s innovations are not as transformational as in the past – technological opportunities remain strong, especially in advanced manufacturing, energy and transportation plus large sectors such as education, health care, construction and government – nevertheless, a lack of incentives for change and institutional rigidity mean productivity has lagged in many sectors – or maybe it’s the Robert Solow paradox: “You can see the computer age everywhere but in the productivity statistics” where productivity gains from IT were not automatic and did not occur in all industries – big wins required significant changes to business processes – it was only when relatively large sectors in the economy, such as retail, made such changes that national productivity numbers ticked up noticeably
  • A shift in employment from high-productivity sectors like manufacturing to lower productivity sectors such as health care and administrative and support services
  • A lack of productivity-igniting sectors – different sectors have different productivity levels and growth patterns – sadly, nowadays, there is a distinct lack of accelerating sectors which are large employers too
  • Digitisation rates are uneven across sectors – digitisation includes hard/ soft/ firmware, data and data platforms, customer and supply chain interactions, business models, digitally-skilled workers and jobs:
    • The media, financial and professional services have been rapidly digitising – not so other sectors such as education and health care
    • The digitisation gap is thus widening
    • Overall, diffusion of new technology such as digitisation into everyday use is slow
    • “The time from commercial availability of new technology to 90% adoption ranges from about eight to 28 years – and most sectors in G7 nations have been slumbering for seven years at least
  • A lack of ‘best practice’ diffusion – the productivity gaps between high and low performing companies are widening – the OECD has found a growing divergence between the productivity levels of global frontier firms and the rest since 2001 – they interpret this as a symptom of slower productivity diffusion – frontier firms have continued to raise their productivity levels but the rest have not followed them

 

MGI Conclusions:

  • As the economies return to full employment, an outburst of faster growth in productivity, and hence economic growth, is a real possibility
  • For the past several years, a lack of demand and plenty of spare capacity of both workers and equipment made businesses complacent and unwilling to invest in new equipment, software or new ways of doing things that might allow more output per hour of labour
  • Now, with companies having a harder time finding qualified workers and with demand for their products rising, they’ll have no choice but to re-engineer how they work to try to increase productivity
  • Higher productivity will in turn make it easier to justify higher wages, creating a self-reinforcing cycle of higher economic growth

 

Our Conclusions:

  • The overriding need of all G7 nations, and others, remains – hard-nosed practical solutions to the current, apparent, productivity puzzle
  • The MGI’s start point when researching ‘what drives productivity’ appears to be that ‘more output and GDP growth is good’ and that, in this context, ageing populations are bad – we disagree:
    • In the G7, GDP is a seriously flawed measure and should be dumped – and it doesn’t measure output anyway
    • Again, in the G7, more output is no longer the main aim – better standards of living and quality of lives will, in future, derive from better mental factors, not more material goods and services
    • And, in the new mental world we are now entering, ageing populations are a massive positive, not negative – they bring additional, currently untapped riches to the party, all of which can be bracketed under the heading ‘wisdom’

 

 

National productivity – Current measures

But all these experts base their thinking on available national measures of output and productivity viz:

  • Outputs = GDP = a measure prone to considerable error, full of dubious assumptions and estimates, and becoming increasingly flawed given much output value now goes uncounted as we move from an era of materialism to mentalism – Charlie Bean, economist and ex deputy governor of the BoE (Bank of England) even believes the UK economy may be growing 0.75% per annum faster than official figures say
  • Productivity = Outputs/ Inputs = GDP/ Labour hours or numbers input – hence labour quality/ skill levels are ignored – ditto other costly inputs such as physical and intellectual capital

 

There’s also a growing gap between the prices paid for goods and services clocked by GDP and the value of extra benefits obtained from those same goods or services – aka consumer surplus – e.g. freebies like Google searches, unlimited social contacts via Facebook or  worldwide communications from Skype

Add a value for this extra and maybe, just maybe, GDP and so (labour) productivity has been growing just as fast, if not faster, than it did in apparent better years before the 2008 financial crisis

Indeed, one estimate has it that some 30% of actual GDP now goes unmeasured/ uncounted – if so, this would make a mockery of the credibility attached to the quarterly national GDP and productivity statistics issued by the ONS (Office for National Statistics)

The media and opposition MPs love them, of course, especially when it’s bad news which is good news for sales or votes – headlines of doom announce ‘GDP has fallen by 0.1%’

But just who is prompted to do what when they read or hear such stuff?

The problem is we don’t know what extra value to add to current GDP level

At the same time, there’s significant labour substitution ongoing with the use of more IT, automation, robotics and Artificial Intelligence – this is surely having a big impact on national productivity by increasing output volumes, improving quality levels and enabling things to be done much faster and more accurately than before

As a result, labour productivity simply has to have been getting significantly better, year on year – but the statistics deny this

Worse still, it seems all the experts have their suspicions about official stats, add a few caveat ‘maybes’ to their thinking, but then shower us with theories and conclusions for why productivity growth has stalled plus remedies for corrective action

We prefer the other tack, believe what we see happening at the coal-face and hear what front-line managers say, and conclude it is better to ignore current official performance stats and  seek other measures by which to fix the current position of the UK economy and the direction it is following

Conclusions:

  • Nations might well be better off ignoring current national productivity measures and looking to others to build a credible national economic picture – otherwise, govt ministers and top managers might take wrong actions in some areas and overlook right actions in others
  • The Times leader says: “Good public policy needs evidence more than dogma – policymakers operate with partial information and imperfect foresight, and it has been so for a sustained period”
  • We say: “Without facts, expert opinions inevitably multiply”

 

 

Inequality is on the move

The proportion of rich to relatively poor keeps changing as more and more of any nation’s people benefit from the huge productivity gains made since the Agricultural and then Industrial Revolutions which started in the 1700s

Clearly, most of the poor in most developed G20 nations are a lot better off than their counterparts in the undeveloped RoW (Rest and World) nations but the same order of changes occurs once those nations start to climb the productivity improvement ladder viz:

  • 1% Rich: 99% Poor – Before 1700, all nations – For some 200,000 years, homo sapiens lived a poor life – a select few leaders (the aristocracy/ landowners) ruled over their follower flocks, the serfs, who mostly toiled in the fields to survive
  • 20% R : 80% P – 1700 on – Agricultural & Industrial Revolutions 1, 2, 3 & 4 – the rise of factory owners, managers and pay levels for some, and thus the creation of the middle classes via:
    • IR1 = Water/ steam power to mechanise production
    • IR2 = Electric power to create mass production
    • IR3 = Electronics/ IT to automate production
    • IR4 = Digital revolution to transform all industries
  • 40% R : 60% P – 1945 on – Service Revolution – the rise of professional classes, discretionary incomes to afford ‘extras’ and welfare states to provide minimum standards of living – initially, the manufacturing sector comprised over 80% of developed economies, now the services sector dominates, also at over 80%
  • 60% R : 40% P – 1990 on – Digital/ Knowledge Revolution – the rise of computers, internet and tertiary education – the replacement of materialism with mentalism and a redefinition of riches/ wealth that society values and admires most
  • 80% R : 20% P – 2030 on – Altruism Revolution? – the rise of leisure as a right and social responsibility made possible and affordable by AI meeting most basic human needs – the replacement of cash because all basic human needs will be met free
  • 99% R: 1% P – 2050 on – ‘Known Unknown’ Revolution? – the rise of ways of living and climbing ladders which are completely different to now – an age of hedonism where pleasure and hobbies dominate all lives?

 

It seems there is an inexorable march ongoing in the rise of the ‘relatively rich’ proportion of all nations, whether developed or not – there will be inequality between all those in that category but the better-off there will be defined only by the luxuries they can afford, at least until mental richness eventually takes over

But this should come as no surprise

All economies grow by better meeting man’s needs – the result has been that, in developed nations at least, most generations expect a better standard of living than their predecessors

Indeed, back in 1943, Abraham Maslow put forward his famous ‘hierarchy of personal needs‘ where, once one level is reached and satisfied, humans seek to climb to the next rung up viz:

  • POSITIVES of living:
    • Rung 5 = Potential = Better than before, fulfilment
    • Rung 4 = Ego = Feel good, status, respect
    • Rung 3 = Social = Belonging, giving, receiving
  • NEGATIVES of living:
    • Rung 2 = Safety = Defence, shelter
    • Rung 1 = Body = Hunger, thirst, sex

 

My guess is that, overall, the UK is somewhere between Rungs 3 & 4 whilst it focuses on closing gaps with its rich fellow G7 competitors

Meanwhile, far too many RoW nations remain struggling on Rungs 1 & 2 which has to be to the everlasting shame of the rich G7/ G20 whose foreign aid programmes amount to little more than crumbs from their tables – most of them have ‘enough’ already but ‘enough’ is not enough and most want more – much more – regardless of all others

Productivity sure aint ‘dull’

The following is a letter sent to the Sunday Times on 17 July, 2017 following an article by Andrew Marr, the broadcaster and journalist, which concludes that ‘productivity is dull’

Productivity has transformed the lives of most people in the UK

What were luxuries for a select few a mere 100 years ago, if they even existed, are now considered essentials by the many – cars, TVs, supermarkets, wine, iphones, computers, hip joints, universities, foreign holidays

Over this relatively short period, the agriculture, manufacturing and then service sectors all made giant productivity improvements offering increasing benefits to more and more of their customers, the general public – unit prices were decimated whilst innovations, supply, quality and service levels rose by quantum leaps

And, in the last 25 years, the IT revolution has taken hold – most of us are now able to afford, work and/ or play with computers and the internet which have radically improved office, professional and home work and also enhanced the quality of our social lives

On top of this, the digital revolution is already building up speed as Artificial Intelligence, Big Data analytics and the Internet of Things find applications in just about every corner of our lives – ergo, civilisation is embarking on yet another massive productivity improvement adventure

Overall, therefore, productivity improvement has enabled recent generations to enjoy far better standards of living than their predecessors and there is much more to come – productivity has both an exciting history and an exciting future

So Marr finishes his leading article yesterday with a plea for higher productivity – bravo him – but then ruins his message by adding: “What a dull thought to end on”

This throwaway line reflects an attitude widespread amongst too many of our leading lights

At a recent Tory conference, Philip Hammond, Chancellor of the Exchequer, started his speech with: “Before you switch off, I know that productivity doesn’t necessarily set pulses racing”

It’s a major reason for the UK not doing much better

 

AI becoming mainstream in Retail

Expert systems to aid human and plant maintenance and clever OR (Operations Research) computer models (aka apps) to find optimum solutions to complex business problems have been around for over 50 years now

AI (Artificial Intelligence) is just the latest moniker for much the same, albeit more powerful

Retail Week recently published an article about ‘helpful robots’ – in it, IBM’s retail industry director, Danny Bagge, claims really exciting opportunities lie in areas like merchandising where Watson, IBM’s supercomputer, is “opening up new horizons by allowing retailers to have a hyper-local view of what they should be stocking – we can now get down to the level of a store in, let’s say, Reading, and say this is exactly your profile of consumer, what’s going to happen with the weather and the footfall from your CCTV camera last week”

The aim, according to Bagge, is “not to replace the role of humans but to augment the intelligence of a human merchandiser or buyer – humans could do it, but it takes a long time – Watson can do it in the blink of an eye”

Bagge says “currently, we are only scratching the surface of the potential for AI to transform the way retailers work”

James Donkin, General Manager at Ocado Technology, is looking to use AI to solve their vehicle routing problems – “we have hundreds of delivery vehicles and tens of thousands of drop locations, so we need the optimal solution to deliver the most groceries in the shortest time using the least vans”

In the old days, we used OR and mathematical programming to do the same for  Bejam (now Iceland) – however, ‘AI driverless’ vans will achieve even further gains

Overall, Donkin says: “AI is about enhancing the productivity of the individual and freeing him up to do more of the interesting work and less of the grind work”