National productivity measurement

Question: What is any manager at any level prompted to do when bombarded with the following:

  • From the ONS (Office for National Statistics): “UK productivity has grown by just 0.5% – it has taken a decade to deliver as much productivity growth as was previously achievable in a single year”
  • A media headline: “Britain has maintained its dismal productivity record since the financial crisis in 2008 compared with an average growth rate of 2% before”
  • (N.B. – In both cases, no ifs, no buts, no caveats – the basic data is the proof)

 

Answer: Absolutely nothing

Even if the above claims were accurate – and they’re not – they wouldn’t prompt where and when any action should be taken, nor by whom

All that happens is:

  • If the news is good and GDP and/ or national productivity rise, then the government of the day claims the success is down to them – conversely, if the news is bad, opposition political parties claim this is solely down to government failures
  • And, given bad news is always good news for the media, they invariably follow suit – the gloomier the headline the more readers, listeners or watchers they attract

 

Sadly, whilst government ministers and media editors might be excused for trusting official data, the same cannot apply to the expert economists who sing from the same hymn sheet viz:

  • Goldman Sachs announce: “Rich nation productivity has grown at an average pace of just 3/4% since 2008, down from 2% in the three decades before”
  • Dominic Konstam of Deutsche Bank claims: “All we know is that national productivity is really bad – nothing is clear – bad productivity might be due to over-employing versus too little investment taking place – and that might be due to employers expecting demand to improve, but it hasn’t

 

Most of such experts are aware that GDP and so national productivity measures are seriously flawed – nevertheless, they still cannot resist offering their weighty conclusions based solely on them – it’s as if they trot out their theories knowing full well they cannot be rubbished because there are no facts available to prove them wrong

But this is simply not good enough – every nation and every government needs much better information to navigate their economies safely – indeed, The Times leader was right to say: “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”

What’s needed at national level is a set of performance measures – a balanced scorecard – which shows how well the overall economy is working – how well the private sector is generating wealth for jobs, dividends, R&D, reserves and taxes to fund public services – how well tax-payers’ money is being spent on public services, to what effect – and how well national assets are being used for the benefit of all – then government ministers would know how well their customers, the taxpaying and voting public, rated their efforts and how well they were using the nation’s resources – and be prompted to take appropriate action when needed

Having just one figure for national output and one for national productivity, both assembled once a quarter and both seriously flawed, means they cannot do that – indeed, we have already shown that just one productivity measure for one organisation would be meaningless given the variety of outputs and inputs usually involved – so aggregating all outputs and inputs at national level would be even more meaningless

Instead:

  • At organisation level, a set of partial productivity ratios is needed – with revenue broken down by type of output and then compared with the cost of each type of input used
  • At national level, GDP should be broken down by sector and compared with the cost of each main input resource used (e.g. employee costs, not employee numbers which ignores the quality of human capital employed)

 

At present, national labour productivity (i.e. GDP/ labour numbers) is taken to be a proxy for overall national productivity, enabling the ONS to claim: “We, the UK, lag France, Germany and the USA in both GDP and productivity levels”

Even if the base data for this claim was not flawed, some economists argue that the ONS’s method of calculation is also flawed – they say:

  • The government’s own contribution to GDP must be excluded from any productivity calculations as they are a drain on genuine production – the focus should be on wealth creators, not wealth consumers i.e. the private, not public, sectors
  • One must also exclude the unemployed to get the number employed in the private sector
  • Then, a calculation of GDP per private sector employee would show that the UK beats France but not Italy and Germany
  • And if, instead of private sector labour hours, one input total employment cost including all social security, employment costs and other employment benefits, the UK would come out top on an added value return per employee basis

 

But, again, how useful would knowing this be – and to whom?

Conclusions:

  • It’s absurd for the ONS to assume that one bald and flawed statistic for GDP and another for labour productivity, produced using disputed formulae just once every quarter, can accurately represent the productivity of the entire UK nation – yet these are the stars by which our leaders steer the economy, decide tax-take levels and formulate their national industrial strategies
  • Nations would be better off ignoring current GDP and national productivity measures and trends, which could induce false pessimism or optimism, and looking elsewhere to build a comprehensive set of credible national economic measures:
    • A set which establishes the population’s current standard of living and quality of lives
    • A set which shows where significant performance gaps lie and improvement is needed
  • Then, at last, we might be spared all the doom and gloom we have been getting recently and understand how lucky most of us are

 

 

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”

The Fourth Industrial Revolution

The following sweeping pearls of wisdom are 100% from Klaus Schwab, founder and executive chairman of the World Economic Forum

I could not, indeed would not dare, try to improve on them but they surely deserve to be widely read

We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before. We do not yet know just how it will unfold, but one thing is clear: the response to it must be integrated and comprehensive, involving all stakeholders of the global polity, from the public and private sectors to academia and civil society.

The First Industrial Revolution used water and steam power to mechanise production.

The Second used electric power to create mass production.

The Third used electronics and information technology to automate production.

Now a Fourth Industrial Revolution is building on the Third, the digital revolution that has been occurring since the middle of the last century. It is characterised by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.

There are three reasons why today’s transformations represent not merely a prolongation of the Third Industrial Revolution but rather the arrival of a Fourth and distinct one: velocity, scope, and systems impact. The speed of current breakthroughs has no historical precedent. When compared with previous industrial revolutions, the Fourth is evolving at an exponential rather than a linear pace. Moreover, it is disrupting almost every industry in every country. And the breadth and depth of these changes herald the transformation of entire systems of production, management, and governance.

The possibilities of billions of people connected by mobile devices, with unprecedented processing power, storage capacity, and access to knowledge, are unlimited. And these possibilities will be multiplied by emerging technology breakthroughs in fields such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing.

Already, artificial intelligence is all around us, from self-driving cars and drones to virtual assistants and software that translate or invest. Impressive progress has been made in AI in recent years, driven by exponential increases in computing power and by the availability of vast amounts of data, from software used to discover new drugs to algorithms used to predict our cultural interests. Digital fabrication technologies, meanwhile, are interacting with the biological world on a daily basis. Engineers, designers, and architects are combining computational design, additive manufacturing, materials engineering, and synthetic biology to pioneer a symbiosis between micro-organisms, our bodies, the products we consume, and even the buildings we inhabit.

Challenges and opportunities

Like the revolutions that preceded it, the Fourth Industrial Revolution has the potential to raise global income levels and improve the quality of life for populations around the world. To date, those who have gained the most from it have been consumers able to afford and access the digital world; technology has made possible new products and services that increase the efficiency and pleasure of our personal lives. Ordering a cab, booking a flight, buying a product, making a payment, listening to music, watching a film, or playing a game—any of these can now be done remotely.

In the future, technological innovation will also lead to a supply-side miracle, with long-term gains in efficiency and productivity. Transportation and communication costs will drop, logistics and global supply chains will become more effective, and the cost of trade will diminish, all of which will open new markets and drive economic growth.

At the same time, as the economists Erik Brynjolfsson and Andrew McAfee have pointed out, the revolution could yield greater inequality, particularly in its potential to disrupt labour markets. As automation substitutes for labour across the entire economy, the net displacement of workers by machines might exacerbate the gap between returns to capital and returns to labour. On the other hand, it is also possible that the displacement of workers by technology will, in aggregate, result in a net increase in safe and rewarding jobs.

We cannot foresee at this point which scenario is likely to emerge, and history suggests that the outcome is likely to be some combination of the two. However, I am convinced of one thing—that in the future, talent, more than capital, will represent the critical factor of production. This will give rise to a job market increasingly segregated into “low-skill/low-pay” and “high-skill/high-pay” segments, which in turn will lead to an increase in social tensions.

In addition to being a key economic concern, inequality represents the greatest societal concern associated with the Fourth Industrial Revolution. The largest beneficiaries of innovation tend to be the providers of intellectual and physical capital—the innovators, shareholders, and investors—which explains the rising gap in wealth between those dependent on capital versus labour. Technology is therefore one of the main reasons why incomes have stagnated, or even decreased, for a majority of the population in high-income countries: the demand for highly skilled workers has increased while the demand for workers with less education and lower skills has decreased. The result is a job market with a strong demand at the high and low ends, but a hollowing out of the middle.

This helps explain why so many workers are disillusioned and fearful that their own real incomes and those of their children will continue to stagnate. It also helps explain why middle classes around the world are increasingly experiencing a pervasive sense of dissatisfaction and unfairness. A winner-takes-all economy that offers only limited access to the middle class is a recipe for democratic malaise and dereliction.

Discontent can also be fuelled by the pervasiveness of digital technologies and the dynamics of information sharing typified by social media. More than 30 percent of the global population now uses social media platforms to connect, learn, and share information. In an ideal world, these interactions would provide an opportunity for cross-cultural understanding and cohesion. However, they can also create and propagate unrealistic expectations as to what constitutes success for an individual or a group, as well as offer opportunities for extreme ideas and ideologies to spread.

The impact on business

An underlying theme in my conversations with global CEOs and senior business executives is that the acceleration of innovation and the velocity of disruption are hard to comprehend or anticipate and that these drivers constitute a source of constant surprise, even for the best connected and most well informed. Indeed, across all industries, there is clear evidence that the technologies that underpin the Fourth Industrial Revolution are having a major impact on businesses.

On the supply side, many industries are seeing the introduction of new technologies that create entirely new ways of serving existing needs and significantly disrupt existing industry value chains. Disruption is also flowing from agile, innovative competitors who, thanks to access to global digital platforms for research, development, marketing, sales, and distribution, can oust well-established incumbents faster than ever by improving the quality, speed, or price at which value is delivered.

Major shifts on the demand side are also occurring, as growing transparency, consumer engagement, and new patterns of consumer behaviour (increasingly built upon access to mobile networks and data) force companies to adapt the way they design, market, and deliver products and services.

A key trend is the development of technology-enabled platforms that combine both demand and supply to disrupt existing industry structures, such as those we see within the “sharing” or “on demand” economy. These technology platforms, rendered easy to use by the smartphone, convene people, assets, and data—thus creating entirely new ways of consuming goods and services in the process. In addition, they lower the barriers for businesses and individuals to create wealth, altering the personal and professional environments of workers. These new platform businesses are rapidly multiplying into many new services, ranging from laundry to shopping, from chores to parking, from massages to travel.

On the whole, there are four main effects that the Fourth Industrial Revolution has on business—on customer expectations, on product enhancement, on collaborative innovation, and on organisational forms. Whether consumers or businesses, customers are increasingly at the epicentre of the economy, which is all about improving how customers are served. Physical products and services, moreover, can now be enhanced with digital capabilities that increase their value. New technologies make assets more durable and resilient, while data and analytics are transforming how they are maintained. A world of customer experiences, data-based services, and asset performance through analytics, meanwhile, requires new forms of collaboration, particularly given the speed at which innovation and disruption are taking place. And the emergence of global platforms and other new business models, finally, means that talent, culture, and organisational forms will have to be rethought.

Overall, the inexorable shift from simple digitisation (the Third Industrial Revolution) to innovation based on combinations of technologies (the Fourth Industrial Revolution) is forcing companies to re-examine the way they do business. The bottom line, however, is the same: business leaders and senior executives need to understand their changing environment, challenge the assumptions of their operating teams, and relentlessly and continuously innovate.

The impact on government

As the physical, digital, and biological worlds continue to converge, new technologies and platforms will increasingly enable citizens to engage with governments, voice their opinions, coordinate their efforts, and even circumvent the supervision of public authorities. Simultaneously, governments will gain new technological powers to increase their control over populations, based on pervasive surveillance systems and the ability to control digital infrastructure. On the whole, however, governments will increasingly face pressure to change their current approach to public engagement and policy-making, as their central role of conducting policy diminishes owing to new sources of competition and the redistribution and decentralisation of power that new technologies make possible.

Ultimately, the ability of government systems and public authorities to adapt will determine their survival. If they prove capable of embracing a world of disruptive change, subjecting their structures to the levels of transparency and efficiency that will enable them to maintain their competitive edge, they will endure. If they cannot evolve, they will face increasing trouble.

This will be particularly true in the realm of regulation. Current systems of public policy and decision-making evolved alongside the Second Industrial Revolution, when decision-makers had time to study a specific issue and develop the necessary response or appropriate regulatory framework. The whole process was designed to be linear and mechanistic, following a strict “top down” approach.

But such an approach is no longer feasible. Given the Fourth Industrial Revolution’s rapid pace of change and broad impacts, legislators and regulators are being challenged to an unprecedented degree and for the most part are proving unable to cope.

How, then, can they preserve the interest of the consumers and the public at large while continuing to support innovation and technological development? By embracing “agile” governance, just as the private sector has increasingly adopted agile responses to software development and business operations more generally. This means regulators must continuously adapt to a new, fast-changing environment, reinventing themselves so they can truly understand what it is they are regulating. To do so, governments and regulatory agencies will need to collaborate closely with business and civil society.

The Fourth Industrial Revolution will also profoundly impact the nature of national and international security, affecting both the probability and the nature of conflict. The history of warfare and international security is the history of technological innovation, and today is no exception. Modern conflicts involving states are increasingly “hybrid” in nature, combining traditional battlefield techniques with elements previously associated with non-state actors. The distinction between war and peace, combatant and non-combatant, and even violence and non-violence (think cyberwarfare) is becoming uncomfortably blurry.

As this process takes place and new technologies such as autonomous or biological weapons become easier to use, individuals and small groups will increasingly join states in being capable of causing mass harm. This new vulnerability will lead to new fears. But at the same time, advances in technology will create the potential to reduce the scale or impact of violence, through the development of new modes of protection, for example, or greater precision in targeting.

The impact on people

The Fourth Industrial Revolution, finally, will change not only what we do but also who we are. It will affect our identity and all the issues associated with it: our sense of privacy, our notions of ownership, our consumption patterns, the time we devote to work and leisure, and how we develop our careers, cultivate our skills, meet people, and nurture relationships. It is already changing our health and leading to a “quantified” self, and sooner than we think it may lead to human augmentation. The list is endless because it is bound only by our imagination.

I am a great enthusiast and early adopter of technology, but sometimes I wonder whether the inexorable integration of technology in our lives could diminish some of our quintessential human capacities, such as compassion and cooperation. Our relationship with our smartphones is a case in point. Constant connection may deprive us of one of life’s most important assets: the time to pause, reflect, and engage in meaningful conversation.

One of the greatest individual challenges posed by new information technologies is privacy. We instinctively understand why it is so essential, yet the tracking and sharing of information about us is a crucial part of the new connectivity. Debates about fundamental issues such as the impact on our inner lives of the loss of control over our data will only intensify in the years ahead. Similarly, the revolutions occurring in biotechnology and AI, which are redefining what it means to be human by pushing back the current thresholds of life span, health, cognition, and capabilities, will compel us to redefine our moral and ethical boundaries.

Shaping the future

Neither technology nor the disruption that comes with it is an exogenous force over which humans have no control. All of us are responsible for guiding its evolution, in the decisions we make on a daily basis as citizens, consumers, and investors. We should thus grasp the opportunity and power we have to shape the Fourth Industrial Revolution and direct it toward a future that reflects our common objectives and values.

To do this, however, we must develop a comprehensive and globally shared view of how technology is affecting our lives and reshaping our economic, social, cultural, and human environments. There has never been a time of greater promise, or one of greater potential peril. Today’s decision-makers, however, are too often trapped in traditional, linear thinking, or too absorbed by the multiple crises demanding their attention, to think strategically about the forces of disruption and innovation shaping our future.

In the end, it all comes down to people and values. We need to shape a future that works for all of us by putting people first and empowering them. In its most pessimistic, dehumanised form, the Fourth Industrial Revolution may indeed have the potential to “robotise” humanity and thus to deprive us of our heart and soul. But as a complement to the best parts of human nature—creativity, empathy, stewardship—it can also lift humanity into a new collective and moral consciousness based on a shared sense of destiny. It is incumbent on us all to make sure the latter prevails.

This article was first published in Foreign Affairs