Why chase productivity improvement?

1. Productivity improvement (PI) at national level has the following aims:

  • To improve the standard of living (SoL) of all in the land, mostly by producing more and better material goods and services at more affordable prices whilst using fewer limited and so costly resources
  • To increase the number, quality and rewards of jobs for all, at least until average hours of work are reduced to zero and ‘unemployed’  becomes the acceptable norm
  • To increase the wealth and tax-take of the nation, enabling it to provide more and better public services for all
  • At the same time, to improve the quality of life (QoL) of all, mostly by increasing contact between individuals, the availability, exchange and use of information and the options open to them for more leisure and pleasure

2. How does PI achieve these aims?

  • A private sector business adds value to raw material and semi-finished-goods (SFGs) using labour and/ or capital inputs to offer goods or services to its customers:
    • For example, a car manufacturer buys in pressed sheet metal, plastic fascias, leather seats, engines and electronics plus many other SFGs
    • It then assembles them all to produce a car that sells for more than the cost of those input parts
    • The more efficiently it does this, the more money it has to pay its employees, plus other variable direct costs, enabling them to buy more and other goods and services
    • The company is then left with a gross profit to:
      • Pay for indirect costs such as fixed overheads – offices, warehouses, factories etc.
      • Invest in new capacity e.g. factories or equipment e.g. robotics and AI
      • Invest in R&D to refresh current offerings and innovate new products or services
      • Build reserves to insure against rainy days
      • Pay local and national taxes to pay for public services
      • Pay dividends to shareholders, including millions of pension fund holders
  • A public sector organisation relies on tax-payers (i.e. companies and individuals) to fund vital services that the public wants and the private sector cannot or will not provide:
  • Managers of all these service units should seek to maximise the volume and quality of their outputs for the money received, and meet overall demand as best they can
  • So the more money the private sector makes, the more taxes are possible to fund better public services for all
  • That way, productivity improvement raises the standard of living of all across the board

3. PI growth pattern to date:

  • Since 1850, according to the ONS, UK productivity (GDP/ head) has risen 20-fold, transforming the standard of living of the population:
    •  First, by better meeting people’s basic needs for food, drink, defence and shelter i.e. the first rungs on Abraham Maslow’s hierarchy of personal needs
    • Then, by achieving quantum leaps in output from both agriculture and manufacturing sectors whilst decimating labour numbers needed – this dramatically reduced unit costs and so prices, making one-time luxuries only the very rich could enjoy (e.g. air travel, car ownership, colour TVs) become affordable for all
    • At the same time, taxes on a burgeoning private sector enabled the state to offer basic health and education services for all, not just a few, free at the point of delivery
    • Now, thanks to technology forever advancing on all fronts, most people in developed nations enjoy considerable leisure and pleasure activities
    • And, with global communications being so good, it will not be long before the rest of the world demand and obtain the same
  • Throughout, inventors, innovators and entrepreneurs have kept coming up with new ideas and ventures, some of which created whole new sectors, to meet man’s insatiable appetite either for more and better versions of what they know exists or for new stuff that has also kept on appearing
  • And, as productivity improved in each sector, so unit costs and prices fell whilst pay levels kept rising enabling more and more people to afford more and more stuff which they liked-to-have on top of basic stuff which they had-to-have
  • The problem now, according to some economists, is that:
    • Unit prices of existing stuff keep on falling, even as quality keeps rising
    • Much new stuff on the market is being offered for free e.g. Google searches, Skype
    • No major new sectors, and associated better jobs, are appearing
    • So outplaced labour from existing sectors has no alternative but to move to low-productivity, low-pay sectors (e.g. retail, hospitality, care-work) where jobs are still plentiful and labour-replacing automation difficult
  • Hence, the media now feed us on a diet of gloomy news about stunted economic and productivity growth – and the historic link between productivity and average wages being broken
  • Sadly, not one economist seems to know where we’re heading
  • As President Harry Truman once said in frustration: “Find me a damned economist with just one hand”

4. What if input resources are running out?

  • Pessimists say: “Surely, if economies keep on growing, we are bound to run out of the input resources needed”
  • Thomas Malthus once thought this way about the global population running out of food – but we kept on inventing new and better ways to produce more food per acre, and with far less labour input
  • Nowadays, few have such fears – we assume we’ll always find ways to meet all our needs and wants by adapting all input resources we have
  • And, whilst costly input raw materials and physical labour may be limited, other vital resource inputs are not:
    • Energy sources are infinite – think nuclear energy, and the billions of years left for the sun to keep shining (after which we humans will no doubt be populating other galaxies and enjoying their sun rays)
    • Money is an artificial construct of man, enabling transactions to take place – governments can print as much of it as they like (e.g. Zimbabwe) or employ QE (Quantitative Easing) to create it out of thin air (e.g. USA and UK)
    • Knowledge is increasingly the most important input resource of all – once known, never forgotten – new knowledge does not replace old knowledge, it stands on its shoulders – hence, global knowledge is growing exponentially and can be shared by all at little if any cost
  • So, given we’re moving from a materialism to mentalism era, where what matters most to us concerns our brains, not bodies, then the infinite supply of the above intangibles surely means our future is bright

5. Worker benefits from PI – Greed is on the loose:

  • Capitalism might be the best economic system around, but it sure has its faults
  • Capitalists invest their pennies to make money – to do this, they often need labour for the work involved
  • At first, most of this work was brawn rather than brainwork demanding, dirty, dull or dangerous – all negatives of work
  • Pay was thus needed to persuade most people to do such work
  • However, capital owners paid them the minimum to maximise profits
  • Labour eventually reacted against such treatment, and gained the whip hand by establishing Trade Unions to counter the unfairness of the capitalists
  • However, over time, this power balance swung too far to the Unions’ side – they abused it and, in the UK, the ‘British disease’ of incessant strikes for more pay brought much of UK industry to its knees, some never to recover
  • Hence, in the 1980’s, UK Prime Minister Maggie Thatcher decided to redress the balance by fighting the powerful unions and introducing new legislation which made strikes much more difficult to hold
  • Bargaining power swung back to the capital owners and their representatives, the senior managers of their businesses – and their greed has now taken over again
  • CEOs, and their board colleagues, all want to be paid at least as much as others in other comparable companies – they also sit on other boards so see what others are paid – a pay spiral upwards has been the result
  • Senior management, in major companies at least, now pay themselves over 150 times the average pay of their workers
  • How can this be?
  • As President Barack Obama said: “Because they can”
  • The fact that such rewards are unjustified, unfair and demotivating to their workers, and unacceptable to society at large is ignored
  • Fairer sharing of the spoils is needed – a company’s results depend on the efforts of all in the team, not just the boss – and never forget the efforts of many who went before them
  • Yet, despite some huffing and puffing by the media, the obscene pay gap between many CEOs and their employees continues to widen, not contract, every year
  • It’s “another unacceptable face of capitalism”
  • It’s also a ticking time bomb at the very heart of developed economies
  • In pathetic justification, these pigs at the trough snort that such rewards are “needed to recruit and retain the best”
  • But most fail on that score too
  • It reminds one of a local flea-pit cafe charging much the same for your steak and chips as a top west-end Michelin-starred restaurant

 6. Conclusions:

  • Homo sapiens has been living on Planet Earth for some 200,000 years, apparently
  • And the current global population clocks around seven billion people
  • However, it’s only in the last 300 years that productivity improvement has been making a big difference to many people’s lives – first by reducing the negatives of their lives – then by increasing the positives
  • As a result, some two billion in developed nations can be said to enjoy a good SoL (Standard of Living) – they already have enough of the basic goods and services they need – for them, productivity improvement should be moving on to address improving their QoL (Quality of Lives) – the important mental more than physical components of their lives so they have more and more disposable time and money to enjoy many of life’s pleasures too
  • G7 leaders thus should continue to focus on productivity gaps with their other competitor nations, albeit where the gaps between them are relatively tiny
  • However, leaders of the well-off two billion also have a moral duty to help the other five billion rapidly catch up, first by passing on their knowledge and experience in how best to climb the SoL ladder
  • PI thus continues to be vital to all nations, whatever stage of development they’re at

Future lives of leisure, not work?

Technological advances mean that many workers will lose their jobs to automation – but billionaires Warren Buffett and Bill Gates say increasing the potential output of every human being is always a good thing

Buffett says: “The idea that more output per capita should be harmful to society is crazy:

  • If one person could push a button and turn out everything we turn out now, is that good or bad for the world?
  • You would free up all kinds of possibilities for everything else

 

In the coming years, an increasing number of jobs are likely to be on the chopping block:

  • Nearly half of US jobs will be replaced by robots and automated technology in the next 10 to 20 years according to Carl Frey and Michael Osborne of Oxford University, with transportation, logistics, office management and production workers likely to lose out first
  • In less developed countries, the World Bank estimates roughly two thirds of all jobs are susceptible to replacement by automation

 

But Buffett notes that the trend towards automation replacing lower-skilled labour is not new:

  • If we were here in 1800 and conducting this, somebody would point out that eventually tractors and better fertilisers would come along and 80% of the people now employed on the farm would fall to 2 or 3% in two hundred years, so what are we going to do with all these people
  • Well, the answer is we release them
  • With fewer people needed to work on farms, more are able to pursue other skills and vocations

 

Automation ‘enables an opportunity‘ says Gates

Buffett says:

  • “Everything should be devoted initially to getting greater productivity
  • But people who fall by the wayside, through no fault of their own, as the goose lays more golden eggs, should still get a chance to participate in that prosperity
  • And that is where the government comes in
  • A problem of excess really forces us to look at the individuals affected and take those extra resources and make sure they are directed to them in terms of re-education and income policies”

 

Another billionaire, Ray Dalio, co-chief investment officer of Bridgewater Associates hedge fund, says AI and automation are improving productivity but also causing such a dramatic wealth gap that a national emergency should be declared

He was addressing concerns that machine intelligence might put enough people out of work that the government would have to pay people to live with a cash handout, a concept known as UBI – Universal Basic Income

“My view is that algorithmic/ automated decision making is a two edged sword that is improving total productivity but is also eliminating jobs, leading to big wealth and opportunity gaps and populism, and creating a national emergency – yet no one is seriously examining what to do about it”

Indeed, an Oxfam report found that 82% of the growth in global wealth in the previous year went to the top 1% of individuals ranked by riches – and the bottom 50% had no increase in their wealth

But Dalio believes a cash handout should be a last resort

“I don’t believe that transferring money to people who are unproductive is good for the people or the economy, unless there are no other good alternatives – I believe that it’s both far better, and it’s possible, to find ways for making most of those people productive – so retraining workers to thrive in the new economy should be a top priority for the country” – albeit he’s not optimistic that the skills gap will be suitably addressed

He concludes with:

  • Productivity is good for everyone
  • Unfortunately, it’s not available to everyone
  • That has to change
  • We need leadership that can bring that about
  • Unfortunately, it is more likely that nothing along these lines will be done

 

Elon Musk, the billionaire founder and owner of Space X and electric car manufacturer Tesla, is more pessimistic:

  • He warns that: “AI poses a vastly bigger threat than North Korea”
  • He believes in the redistribution of all wealth created via a UBI – it’s now ‘inevitable’ – the state will tax technology and handout the spoils to all citizens irrespective of their employment status so all have enough money to be comfortable

 

But what of the social impact – what about personal fulfilment – will we be happy as a society of benefit claimants, doing nothing for ever and ever – will it be enough just to fill the vacuum with leisure?

John Maynard Keynes, prompted by the mass ‘nervous breakdown’ he saw afflicting the idle rich back in the 30s, resolved that: “a life of leisure would instead offer the chance of great flourishing to those who can keep alive, and cultivate into a fuller perfection, the art of life itself”

In other words, ‘the idler of tomorrow will nourish personal relationships with shared experiences and passions’ – for example, learn to play the piano, discover the wealth of literature, appreciate art, acquire knowledge

Ergo, a Keynesian utopia, a life he called a ‘passionate state of contemplation and communion’

But will such a life suit everyone?

In a society where people work, we all have a source of worth – the market values our labour – strip that away and only the cruellest meritocracy is left

Studies show that, overall, the unemployed are far less happy than those with a job – and note that most lottery winners keep working after their success

Much of any happiness we enjoy is derived from ‘our level of earned career success’

So the life of leisure we seem destined for may not be what we want after all

As the Chinese say: “Be careful what you wish for”

Unconventional meetings

Paul Sullivan of the New York Times, writing in The (Central Oregon) Bulletin, reveals surprising examples of new activities to increase productivity and retain employees

Eric Tetuan runs an event and production company called ProductionGlue based in Midtown Manhattan, New York

A few years ago, he saw staff morale was sinking and mistakes rising so he forced them to take walks, ride bikes or just sit by the Hudson River – not for solitary moments to recharge but to accompany colleagues to discuss work outside the office and so increase creativity

“There are a lot of distractions when in the office or a conference room – workers focus half on others and half on their devices – on a walk, we spur more ideas”

Think of Google rewarding employees with massages or Spotify’s lunchtime concerts – unconventional approaches to improve employees’ focus

According to Fractl, a Florida advertising agency, employees seek certain traditional benefits when job-hunting like health care, flexible hours and vacation time

However, Technology Advice, a Nashville marketing agency, say more elaborate perks like games rooms and gym membership are needed to retain workers

Professor Jennifer Chatman from the Haas School of Business at Berkeley says: “Above some level of financial security, people care about being part of a community and belonging at work – these kind of perks bring people together and make work more fun – in this way, they effectively increase motivation and performance”

And meetings outside can not only spur creativity, they can also help end impasses

Larry Newman, COO of Health Media Network, a health education company, credits surfing (sea waves) with helping him close several deals including the sale of his first company

“We had spent countless hours in meetings and with lawyers – I suggested we do this face-to-face – in between rides, we sat there in the water on our boards and talked about the final points – you’re negotiating to a human level, not a business level – it excites people”

So, find fresh places to hash out ideas – ‘they may sound fun and relaxing but they can also be productive’

Remote working

A Northern Ireland finance firm, AKFP Group, closed its HQ for a full month in July for a ‘remote working initiative’

They found it boosted both staff morale and productivity

Staff were allowed to work from locations of their choice – the result was ‘they reaped the benefits of being able to change venues, eradicate long commutes into the office and, above all, increase the happiness of employees’

Potential setbacks to the workflow were minimised due to a cloud-based project management system that aided the effectiveness of remote working as staffers were able to access everything required from the cloud to service clients as normal

Calls into the office were shared or diverted to an allocated mobile and clients were made aware so that face-to-face appointments were scheduled the month prior as part of a planning phase

Group director Roger Kennedy said: “All our clients and the whole team were really supportive of the initiative – all client queries were dealt with efficiently and in line with our service levels – working remotely enabled my team to spend more time with their loved ones and get out on a summer’s day, providing they had completed their task list”

A staff member said: “There is a high level of trust in the office and it’s a great feeling to be given the flexibility to do this – we did have to visit the office occasionally to review post, but that wasn’t a problem”

Hence, the firm is planning to roll out the one-month initiative again next year

 

Tesco’s ‘Steering Wheel’

The blunt truth, according to Terry Leahy in an article he penned for The Times, is that if public services were exposed to more competition, their performance would improve

He strongly believes in competition after spending 33 years at Tesco during which time it rose from being a bit of a joke to the third largest retailer in the world

Leahy says competition makes organisations accountable to those they serve – if a company takes its finger off the customer’s pulse, it will eventually fail

Competition has already been introduced to some extent to the public sector – provision of back-office services, choice between schools

People can also see that more competition there does not mean privatisation of the services – they still remain ‘free at the point of delivery’ which is all most customers are bothered about

However, much more is needed – in particular, the public sector should:

  • Develop a simple means to communicate goals to everyone in the organisation
  • Ensure those goals are met

To do this, Tesco developed a tool they called their “Steering Wheel” – it was divided into four segments:

  • Customers
  • Operations
  • People
  • Finance
  • a fifth segment, ‘Community’, was added later

Each one measured some four or five activities so, in total, the wheel comprised some 20 measures

As you drilled down, each of these measures went into still more detail and eventually link to individual store targets and performances – and then further down to individual teams within each store

Hence, corporate targets were linked to the day-to-day work of thousands – all could see at a glance how well their store or operation was performing – the information was clear and transparent – every team had targets and accountability – initiatives were encouraged, not stifled – and all was driven by what customers wanted

In addition to the wheel, managers were required to experience the problems their customers and troops had to deal with each day

Managers can become bogged down by their workload, whether imagined or real – they learn little from making fleeting visits to the shop floor, say, so they cannot truly understand what challenges teams on the ground face, or how any new initiative might be panning out in practice

Hence senior management, including Leahy himself when CEO, would spend one week every year as a general assistant doing every job in a store – check-outs, shelf-filling, back room work, pricing, customer queries, working on counters etc.

He concludes that, if those who run our public services did the same, they would soon see what needs to be done which would be better for the public, and for them and their staff too