By George, ‘every company is dying’

According to Sir George Buckley, a top quality UK export from the North of England to the USA and now Chairman of Stanley Black & Decker and Smiths Group,  the ‘basic building blocks are the same in all companies’

George says:

  • ‘At the 30,000ft level, every company needs:
    • A dream
    • To know what it wants to be when it grows up
    • Good people
    • Relentless execution’
  • ‘At the 10,000ft level, senior executives have only five levers to pull:
    • Sales growth
    • Margin expansion
    • Working capital for improvement
    • Tax rate
    • P/E multiple’

That said, he claims many executives ‘do not know’ the above

Indeed, ‘the core of every company in the world is dying because of competitive attacks, the end of life of its products and maybe even cannibalisation of its own products’ – the trick is calculating how fast you are dying and then working out how much more stuff you need to put in at the top to counteract what is leaking out at the bottom’

‘If you only focus on short term results and not on replacing that core or expanding your capabilities, then you die’

He then claims there are only three ways to make new money in the Adam Smith sense of the phrase – via Manufacturing, Minerals and Extraction, and Agriculture – Banking does not make new money, nor Insurance, nor Tourism – they take money – they might expand the UK economy but they do not create new wealth

Reference the UK, his diagnosis of our deficiencies is mainly lack of skills:

  • ‘People should be encouraged to study/ work in STEM subjects – Science, Technology, Engineering & Mathematics
  • And charging people to study them – via student loans – is short-sighted’

Overall, the UK government ‘should foster innovation, support manufacturing and ensure that the education system lubricates the flow of skills that the UK needs’

George, despite having a degree and PhD, claims he gained most of his business knowhow in the ‘School of hard knocks’ where he found out ‘what works’

Most managers, and ministers, would do well to heed what he says

 

EU to become USE?

Since the euro-based austerity crises visited on Greece, Spain, Portugal and Italy – followed by the refugee crises causing Schengen alarm bells to ring loudly across most EU states – then Brexit – and now elections in France and Germany raising increasingly important national sovereignty issues there – the likelihood is the EU, as constituted, will not last much longer

Add to this mix the sclerotic performance of most EU economies, their lack of agreement over foreign and defence policies, the niggling irritation with the power and expenses of unelected powerbrokers in Brussels or judges meddling in matters which have nothing to do with ‘level-playing-field’ markets and you have a recipe for widespread disillusion with the EU

Radical EU reform has thus become a ‘must’ for at least 50% of the overall population but no alternative visions have been proposed/ publicised to date – and most of the current top players have too much vested interest to seek major change

Hence, it’s for outsiders to propose a new acceptable-to-all EU format i.e. a USE – a United States of Europe – a federation of independent states which the majority in the UK would also be keen to join – one where each member state might:

  • Regain its national sovereignty
  • Determine its own laws, foreign and defence policies
  • Drop the euro and re-establish its own currency
  • Control its own borders and immigration levels
  • Agree new trading rules for a ‘common market’ whilst not discouraging access for undeveloped nations nor competition from the rest of the world
  • Collaborate in such public service areas as social security, health. education, defence, transport and R&D – to improve lives everywhere

 

It’s surely only a matter of time before such a USE is formed

And if one seems ‘on the cards’ before 2020, Brexit negotiations most probably would be halted and the UK willingly become a member state instead

 

 

Passports to productivity Improvement?

Some say the ‘Productivity Puzzle’ is the result of a storm of problems affecting both supply and demand in G7 developed nations viz:

  • Supply: In the past, major technological advances (aka Schumpeter discontinuities) enabled quantum leaps in productivity levels – G7 nations would all adopt them and improve at about the same rate – now, without more significant advances (as Robert Gordon, US economist, suggests) and much of what does add value being offered for free, GDP and so national productivity levels have flattened out – most goods and services have kept on improving in quality but are being offered at the same or less unit prices
  • Demand: G7 populations have stopped growing significantly, some even falling, so demand for most goods and services has also stalled – also, most people in the G7 already have enough of the goods and services they need – they don’t want more cars, TVs or iphones but simply to replace them when better quality and latest versions are on offer – hence consumer demand has apparently stopped growing

 

Overall, therefore, it’s no surprise that G7 GDP and productivity growth are both suffering ‘secular stagnation’ according to Larry Summers, Harvard economics professor and ex US Treasury Secretary – and this is likely to persist for many more years

So, if G7 nations are to increase demand (i.e. GDP) as before, they must export more – sales directors and government ministers must dust down their passports and go find the extra demand needed from outside their home borders i.e. from the two thirds of the world that, so far, has been left trailing far behind

At the same time, their companies must keep the pressure on productivity improvement to ensure their unit costs and prices are at levels the nations abroad can afford

 

IoT to transform many processes

“The IoT (Internet of Things) can help businesses be more productive and efficient” says Phil Goldstein, web editor for BizTech – “but they need a plan to integrate disparate technologies whilst addressing protection needs against malicious actors”

Steve Darrah, Director of National Solutions at Intel, says that “IoT can be used to improve efficiency and profitability, drive safety and increase worker productivity”

For example:.

  • Retailers can use radio frequency identification tags to track inventory
  • Healthcare providers can use wearables to track the vital signs of seniors in long-term care and predict if a person is going to suffer a heart attack

 

Link Simpson of CDW, an international IT company, notes that IoT technologies work in combination with other systems e.g. in the event of a fire, an office with IoT sensors can:

  • Call the fire service
  • Shut down elevators
  • Take control of digital signage in the office
  • Turn on video cameras to find workers and feed the images to the firemen on site
  • And lock or unlock doors to direct traffic out of the building

 

However, Simpson cautioned about one major hurdle to afflict the IT revolution ever since it began mid last century – different technologies running on different protocols and programming languages often cannot talk to each other

But the good news is that this can now be accomplished using ‘modern network gateway technologies’

He concluded: “IoT is really no longer just about the data and the information you can pick up from sensors – it’s about transforming your business processes”

 

Diageo appoints a CPO

Many companies employ inspectors and quality controllers in an effort to minimise waste and boost good output volumes

Very few indeed  have anyone specifically in charge of productivity or widespread employment of best practices, whether from internal or external sources

Now, at long last, a major company has appointed a Chief Productivity Officer (CPO) – at least it’s the first one we’ve read about

Diageo have clearly recognised the importance of productivity improvement to their long term success and elevated their previous CIO, Brian Franz, to this new position

IT is indeed important, but it’s only one of the tools/ skills needed for productivity improvement

In his new role as CPO Franz says he is: “Helping to lead a targeted drive across our entire cost base and plans to save £500m in the next three years, two-thirds of which will be reinvested in growth”

He adds: “Productivity savings are often wrongly associated with cutting costs – we want to put the consumer at the heart of what we’re doing and drive top-line growth through productivity-focused activities”

One can only hope all other FTSE 100 companies, indeed,all UK SMEs, follow suit

Then, at long last, we might see a breakout in the apparent sclerotic UK productivity growth rate

 

Pareto analyses

Pareto, a 19th century Italian economist, spotted that “80% of effects arise from only 20% of possible causes” – apply this rule to national productivity levels and just the top quintile of companies determine whether improvements are made – and it has been ever thus

In other words, the great majority of companies are doing little or nothing to improve their productivity – not only do they lag far behind the vanguard companies but the productivity gap between them could even be widening, especially when patenting and intellectual property rights restrict the spreading of new ideas and better ways of doing things

Andy Haldane, chief economist at the Bank of England, recently supported this view by arguing that, if UK firms in the three least productive quartiles were able to improve at the same rate as companies in the top quartile, overall UK productivity would rise by 13% – whilst we might question the veracity of the data he used, we fully agree with his view that most companies have enormous scope for improvement

So, given such a distribution of companies applies to most nations, not just the UK, a two-pronged national productivity improvement effort is needed by all viz:

  1. Incentivise the 80% of companies/ organisations that lag behind leaders in their sectors to improve productivity levels:
    1. First, offer them good measures that clearly establish their current productivity levels and scope to improve relative to others – otherwise most will assume they’re at least average, have little to worry about and so need do little to change
    2. Also, provide education/ help in how to cut waste and make best use of existing costly resources – most will have the opportunity for at least a 20% improvement from these actions alone
    3. Then, after successfully completing the above, have them consider using latest best practices and major investment in new resources and systems – and so will need advice/ support to do this
  2. At the same time, encourage the vanguard 20% of organisations in each sector to at least continue to improve as before, not least by offering more financial incentives for more ‘open research’ and ‘market creating innovations’

 

For too long, productivity improvement has been ignored by most organisations despite it being more important than just about any other business issue

And, if and when it does appear on the national radar, the focus is usually on progress made by vanguard organisations in the manufacturing sector i.e. the 20% of a sector that comprises only some 15% of any developed nation’s GDP i.e. a mere 3% of its economy!

Is it any wonder most managers and ministers don’t ‘get it’ and national productivity improvement staggers from year to year

They’re all focussed on other ‘key result areas’ i.e. areas of less importance

They need to understand Pareto’s Rule and its relevance to productivity

The capitalist’s dilemma

N.B. The following are extracts from an article published in the Harvard Business Review in June, 2014 – it remains highly relevant today

Professor Clayton Christensen and Derek van Bever of Harvard Business School  have embarked on a fascinating study into what may be holding back growth in the USA and elsewhere given ‘corporations are sitting on mountains of cash but failing to invest in innovations which might foster growth’

They identify three different types of investment in innovation which have quite different impacts on the growth of jobs and prosperity:

  • Performance improving innovations which upgrade old products or services with new and better – these create few extra jobs as customers simply buy the new versions instead of the old
  • Efficiency innovations which help companies make and sell existing offerings at lower prices – they can even reduce jobs – they can also release capital for other more-productive uses
  • Market creating innovations which create whole new classes of customers, even sectors e.g. computers – the moves from mainframes to minis to PCs to smartphones – at the start, only a rich few could afford a computer – 50 years on, just about everyone can – such innovations usually generate many new jobs, both internally to meet the increased demand and externally in supply chains

 

Key features of these market creating innovations are also:

  • They have an enabling technology that drives down costs as volume grows
  • They reach many new customers who were unable to afford the first offerings e.g. Ford’s Model T

 

The problem is that companies invest mostly in efficiency innovations which often eliminate jobs, some invest in performance improving innovations which tend to maintain the status quo, and few invest in market creating innovations which generate most new jobs and so growth

Why so?

Because the financial measures and norms used to determine the attractiveness of investments are seriously flawed – RoCE, RoNA, IRR, DCF etc. all make market creating innovations appear much less attractive because they bear fruit in five to ten years and are risky whereas efficiency and upgrade investments usually pay off in one or two years and shoulder much less risk – and most venture capitalists prefer safe bets, not adventurous punts

Indeed, the average shareholding period for external investors is only about 10 months, which pressurises executives to maximise short-term returns (or else!)

However, one might expect longer-term investors, like Pension Funds, to press for more market creating investments to secure their longer-term returns needed

Not so

Most now suffer from depressed returns, unfunded commitments and longer life expectancies – their funds are not growing fast enough to meet their obligations, so they also look for quick payoffs

Hence the capitalist’s dilemma:

‘Doing the right thing for long term prosperity is the wrong thing for most investors’

The authors put forward some worthy suggestions on changes needed:

  • Tax financial transactions to reduce high frequency trading
  • Introduce rewards for shareholder loyalty
  • Wake up business schools to teach finance and strategy together, not separately as now
  • Establish measures/ tools to analyse innovation pipelines and identify opportunities for long-term growth creating investments

 

They sign off by quoting Peter Drucker: “The point of a business is to create a customer” and ask for contributions to help devise solutions to this dilemma ‘for the long-term prosperity of us all’

Over to you

 

 

Wolf explains UK productivity gap

The great financial journalist Martin Wolf of the FT recently opined about the current state of UK productivity – disappointingly, his words offered no new insights and were simply a regurgitation of current groupthink.

He kicked off with the now well-worn cliche from Paul Krugman about productivity being ‘almost everything’ – and then trotted out a bunch of statistics about population and productivity growth, the two factors which indeed determine national prosperity levels:

  • The working-age population stats could well be reasonably accurate, and show the UK has little potential for significant growth from that quarter
  • But the national productivity stats (GDP/ labour inputs) about the UK’s relative position versus other nations are seriously flawed – nevertheless, like most important commentators, he ignores this widely accepted fact and proceeds to draw conclusions based on them

 

He rightly points out that there are big differences between the performance of ‘the best and the rest’ in all UK sectors, and that such differences appear to be growing – “a slowdown in the diffusion of knowhow and slower elimination of zombie competitors” being the received wisdom – however, this does not explain why the UK is so much worse than most others

So what’s his ‘big aha’?

By simply comparing the UK with its international competitors (using more spurious data) he spots two fundamental UK weaknesses which explain most of the prevailing productivity gaps:

  • Lack of investment in capex – “physical investment in machines, buildings, ICT and R &D, is very low” – but how much more would be needed to close any gaps (£10bn, 100bn, 1000bn?) – and what of Robert Gordon’s claims that the days of major new productivity-improvement inventions are over?
  • Lack of investment in human capital – “skills overall remain highly deficient” – there is indeed a serious mismatch between the skills organisations need and what kids now study but nobody knows the size of these gaps, nor the potential % GDP and productivity benefits if they were closed, nor the amounts to be invested by whom – all we do know is too many kids (50% was the target) sally off for a very-expensive three year stint at university to graduate in subjects many employers don’t want

 

The biggest problem facing all organisations, and nations, is not lack of investment but lack of good performance measures and the knowhow to find and implement solutions to productivity problems and opportunities highlighted

At present:

  • Most have only some 20% of the performance measures they need – and they’re mostly financial
  • Most could improve productivity by at least 20%, some over 50%, either by upping output/ sales and/ or reducing inputs/ costs
  • Most do not need any major investment to get these results – instead, they should first focus on cutting existing waste and then optimising use of their existing resources, both of which could involve only modest extra investment in human capital and new systems
  • Only then should they consider any major investment in best practices and/ or new technology

 

The fact is most UK organisations (80% = ‘the rest’) perform well below their potential – they could make giant productivity improvement strides if only they had the right measures and knowhow – but such a message is the biggest elephant in the productivity room

 

MIRACLE solution to productivity puzzle

The US is worried about the puzzle of their flat output/ GDP and productivity growth following the 2008 financial crisis, yet employment has risen

Likewise the UK and other G7 nations

They had all expected growth to ‘revert to trend’ by now and be at least 2% per annum, not approach zero as seems to be happening

Interestingly, all G7 nations are suffering in much the same way which must offer a clue as to what’s going on

Explanations offered by a variety of experts include:

  • M = Mismeasurement of GDP, a seriously flawed statistic:
    • GDP doesn’t count many of the things we value in life – things that make life worthwhile e.g. free internet services, digital assets (the cloud, IoT), growth in intangibles
    • And it counts incomes realised by financial and oil companies before allowing for associated costs later
  • I = Innovation – Major technological innovations may have peaked:
    • Artificial Intelligence, driverless cars and Twitter are seen as no match for the gains made from electricity, the internal combustion engine and telephones – at least, not yet
    • But productivity can even dip upfront as new innovations are introduced but returns are slow to build – there can be a time lag between invention, trial and error, prototypes and launch through to widespread adoption as people learn how best to use them and acquire new skills e.g. electric motors and light bulbs had little impact over the period 1890 to 1920
  • R = The Rest – Vanguard firms continue to improve, the rest do not
    • Either there’s a lack of diffusion of transformational (digital) technologies from the best to the rest in all/ most sectors – it always takes time, often many years
    • If it’s truly general purpose like electricity or computers, most other organisations need time to be convinced and seek demonstrable proof before they ‘jump on the bandwagon’ – then they take the plunge which can mean re-structuring and re-training of staff
    • The long-tail of poorly performing companies, including zombies, comprise some 80% in all sectors – most do little to try and catch up, not least because current very low interest rates put little pressure on them to become more profitable, even enabling some to stay alive rather than letting creative destruction do its work
  • A = Administration – Government/ EU red-tape regulations have been mushrooming:
    • Some say they’re stifling corporate efforts to improve
    • Others say well-intentioned social welfare programmes are keeping people from moving to better jobs
  • C = Capex – A slowdown in productivity-enhancing investments, much due to the corporate hangover still being suffered following the financial crisis of 2008 as banks restricted lending whilst they shored up their balance sheets and companies were concerned about uncertain economic outlooks, Brexit included
  • L = Labour – An influx of cheap labour has deterred many companies from investing in productivity-enhancing equipment and systems – people are easier to shed – others have indulged in ‘labour hoarding’ to avoid high outplacement costs and in expectation of imminent demand rises – overall, when unemployment is low, even relatively unproductive workers are employed so productivity again declines
  • E = Exports – Outside the EU and G7 there is a huge ‘Rest of World’ market waiting to be developed and itching to catch up rather than fall further behind – but exports still only account for a small percentage of total output

Each of the above probably has some impact on apparent national productivity levels, especially GDP mis-measurement, but none explain why there has been a dramatic slowdown ‘across the board’

As ever, as soon as there’s more than one (credible) explanatory variable for an issue, and no clear understanding about their interactions and effects, then it’s open season for all sorts of forecasts and explanations

Hence we get so many conflicting views from so many learned commentators

Basic steps to big improvements

There are various acronyms on offer for how to go about improvement projects viz:

  • PDCA from TQM – Plan, Do, Check, Amend
  • DMAIC from Six Sigma – Define, Measure, Analyse, Improve, Control
  • SREDIM from Work Study – Setup, Record, Examine, Develop, Implement, Maintain

 

All boil down to much the same process

Managers, whatever their level and team size, need to take just five basic steps to make big productivity improvements viz

1. Produce punchy corporate plans i.e. one page summaries for all employees – if they exist, they’re not seen or understood by most managers, never mind employees – most lie unused, gathering dust on shelves once written

2. Instal a set of performance measures – most managers have lots of measures but lack 80% of the measures they need

3. Analyse the potential to improve – most managers don’t know how to do this, not least because they don’t have good measures to start with

4. Run special improvement projects – again, most managers don’t know how to do this – and, if any projects are started by in-house teams, most run out of stamina to finish the course well before big improvements are achieved

5. Employ CI – Continuous improvement – most in the West ignore the huge benefits possible from seeking to improve any and everywhere, on a daily basis

It’s little wonder productivity improvement is slow at best, whatever the organisation – or nation

 

s

Why do national productivity gaps persist?

Philip Hammond, UK Chancellor of the Exchequer, is forever saying: “It takes a German worker four days to produce what a UK worker makes in five”

Others say much the same about French workers

But such claims are not new, they’ve been made over the last 30 years at least

We already know the ONS data on which such claims are based are seriously flawe:

  • Whole sections of the economy are ignored, such as household activities or the consumer surplus obtained from freebies offered via the likes of iPhones
  • Other sections are difficult to measure such as public sector outputs so assumptions are made that their costs can be thought equivalent
  • And other sections take time to collect and verify all quarterly data so estimates are made which can involve significant errors

 

That said, many economists still think the ONS data is worthy of use, at least to indicate the order of productivity gaps and basic trends

Not so anyone else in the UK or G7 however, particularly managers who together are most responsible for a nation’s collective productivity performance

Hence, big national changes are never made, and apparent 20% productivity gaps are never closed – instead, G7 economies just continue to chug along at the same speed as before whilst their experts mutter about the need for ‘more capital intensity and greater investment in R&D’ to close any gaps

Shame on those managers, unaware and unconcerned about their individual productivity performance, never mind their nation’s

One things is for sure – it’s not their workers who are to blame – given the same working methods and gear, each nation’s workers are about as productive as each other, whatever the sector

It’s the mix of sectors in the different economies and the overall unemployment rate that makes the big difference between the UK and both France and Germany, say:

  • If one nation has more and bigger high-productivity sectors than another then the overall productivity of the former will seem much better than the latter
  • And if one nation has a lower unemployment rate (UK = 4.3%) than another (France = over 10%), if this percentage falls, previously unemployed workers (usually less skilled, less productive) will be mopped up by the market but this will lower the nation’s overall productivity level

 

It’s why Japan apparently has a much worse national productivity level than the UK, despite the many world-class manufacturers in their midst

Conclusions:

  • The apparent big productivity gaps between the UK and some G7 nations can be mostly explained by their different mix of sectors
  • Such mixes cannot be radically changed overnight – that will take decades if such changes are desirable, which might explain the persistence of the apparent UK 20% productivity gap
  • As long as the mix in each nation plays to its strengths, then productivity improvements may well be needed within each of their sectors, particularly in the long tail of companies usually found in each one
  • Huge opportunities to improve productivity would seem to lie everywhere

Low Australia productivity affects all, not just a few

New Reserve Bank governor, Philip Lowe, says boosting productivity is essential if Australia is to maintain the living standards it has enjoyed in recent years

He warns: “Australia’s remarkable boom times are over and the best way to maintain our standard of living is to have a laser-like focus on productivity”.

In his first appearance before the House of Representatives Standing Committee on Economics, he said:

  • The confluence of factors that boosted living standards in recent decades will not happen again
  • Australians enjoyed real income growth per person of three per cent on average for 15 years until the global financial crisis in 2007
  • Incomes and living standards grew solidly because of strong productivity growth, large numbers of young people entering the workforce and the global commodity price boom

 

But he warned that the situation has changed today, with tepid productivity growth, an ageing population and falling terms of trade cutting into standards:

  • “It was a remarkable kind of a period and I think many of us started to think that was the normal state of affairs – it would have been nice if it was”
  • “That period now looks like it’s behind us.”

 

Dr Lowe said as it was hard to control demographics and impossible to control the terms of trade:

  • “The only way we can go back to anything like the previous rate of growth in our living standards is focusing on productivity growth”
  • “That’s not just a concern for the Reserve Bank, it should be a concern for the parliament and the whole 24 million people in our country – what do we do to get the productivity growth up again to get the living standards rising.”

 

He also warned of the limits of monetary policy with the key interest rate at 1.5 per cent, the lowest since Federation.

So he urged “some entity” or government to use low interest rates to invest, using their balance sheets to facilitate infrastructure spending.

It’s the rest, not the best, that’s the problem

The Brooking Institute’s Martin Neil Baily and Nicholas Montalbano considered the causes of the current global productivity puzzle recently

“The most promising sign for future growth is that the most productive firms are growing faster than the rest – the frontier is still moving out – but the diffusion of best practices is not pulling the rest of industry along”

Of the many reasons on offer, this could well be the most likely explanation of the so-called ‘productivity puzzle’ afflicting most developed nations at present

Lack of cash and/ or confidence and knowhow to improve productivity is preventing some 80% of organisations in any sector and 80% of sectors in any economy from doing the needful to keep up with the best

There’s no doubt that huge (> 20%) productivity improvements could be made if laggards per sector upped their game, for the benefit of all their employees and home nations

They just need help to show them the way and the rewards on offer

However, naysayers believe there’s some hidden law of large populations, as per the normal distribution, which says there will always be a 20% vanguard in any sector and the laggard 80% rest will always perform at significant levels below them

It’s a fact of life that some are more talented, motivated and fitter than others

Fortunately, it’s human instinct to want to climb ladders and do better – and global competition keeps most G7/ G20 private sector managers on their toes

So most in the laggard 80% will not be standing still most of the time

It’s just some people are more ambitious than others

Broad action needed post Brexit

In the Guardian, Katie Allen recommended ways Prime Minister Theresa May could ‘lift the UK economy’s post-Brexit’ blues – via:

  • Tax cuts – especially VAT
  • More infrastructure spending – traffic jams and delivery delays waste a huge amount of time, adding to unit costs and reducing national productivity
  • Encouraging huge increases in housebuilding across the nation, prioritising brownfield sites and speeding up planning permission processes – thus increasing labour mobility to skilled workers more inclined to move to where needed
  • Delaying the planned apprenticeship levy
  • Boosting productivity via investment in innovation, education and infrastructure
  • Reducing planned rises to the national living wage
  • Dropping ‘helicopter money’ on all – echoing Ben Bernanke’s thoughts for the USA some years back
  • Firming up many more trade deals

 

But this is mere tinkering at the edges when the whole economy is considered

On the demand side, Brexit may well cause short-term problems with our exports to our current biggest and closest customer, the EU, but the great majority of their member nations’ economies are going nowhere and have been doing so for many a year

Meanwhile, there are over 165 other nations out there, most with huge potential to grow or develop further – most are also keen for many of the more upmarket goods and services we produce

Currently, EU rules restrict what and how we can sell with the latter – worse, they protect EU companies by restricting many third-world nations from exporting what they’re good at to the EU which curtails both their development and productivity improvement within the EU – Brexit should remove such shackles on competition and trade for the UK

On the supply side, Allen ignores the huge one-off opportunity staring the UK in the face i.e. the scope to boost productivity and earnings simply by ensuring all organisations, large or small from public and private sectors, make a concerted effort to cut their waste and optimise their use of existing costly resources

At present, at least 80% of them waste at least 20% – for many, it’s over 50% – yet few realise they suffer this way!

This means the UK alone is wasting some £300 billion each and every year

Conclusion – It’s not sophisticated macro-economics needed to boost the UK economy – it’s good performance measures and then business common sense on both the demand and supply sides of the national productivity ratio

Wage levels versus Productivity

President John F. Kennedy believed that “a rising tide lifts all boats” but many question if that remains true today in the business world

They point to data showing that productivity has risen sharply since the end of WW2 whilst wages have stagnated and conclude that productivity-driven economic growth does not necessarily benefit USA workers on average viz:

  • Productivity in the USA up by 243%
  • Wages up 109%

 

The most productive firms are thriving but the least productive ones are failing to keep up – and as firms grow apart in productivity, they also become more unequal in how much they pay their workers:

  • Economics professor Giuseppe Berlingieri (et alia) says: “Such productivity gaps are growing both within countries, between sectors, but also within sectors in the same country – it’s not just what sector you work in but which company you work for”
  • And increasing income inequality is the result – one that is now becoming a major issue in many G7 nations

 

Nations that attempt to shield workers and firms during tough economic times should experience less inequality, both in terms of wages and firm productivity, but this will make it harder for resources to flow from less to more productive firms

What’s beneficial in the short term may be detrimental over time and slow overall productivity growth, also trapping workers in low-paying firms rather than giving them the opportunity to earn higher wages elsewhere

MIT economist David Autor, when asked about the causes of inequality, said: “There are many moving parts here – one of them has clearly been IT – another has been international trade – but I also think the decline of unionisation has mattered a great deal”

However, James Sherk of the Heritage Organisation has a different slant on this issue: “Inequality claims rest on misinterpreted economic statistics – they juxtapose productivity and pay data that cannot be directly compared, leading to inaccurate conclusions”

In particular, he questions whether pay has actually lagged far behind productivity growth because:

  • Average wage growth is calculated, not total compensation which includes other rapidly growing benefits such as health insurance, tuition fees, pension contributions, holiday entitlements
  • Different price indices are used to adjust pay and productivity for inflation
  • Faster depreciation is omitted yet it reduces net income but not gross productivity
  • Known measurement errors in BLS (Bureau of Labor Statistics) data are ignored

 

More careful comparisons show that measured productivity has increased 100 % and average compensation 77 % over the past 40 years – and issues inflating productivity measurements account for most of the 23% difference

Sherk thus believes an apples-to-apples comparison would show employee compensation continues to follow productivity closely, with workers earning more as they become more productive

If so, this has important implications:

  • Many policy-makers mistakenly believe that employees are no longer destined to enjoy the fruits of their labour, even if the economy attains full employment – such fruits are for capitalist shareholders and their lieutenant CEOs mostly
  • Hence, they’ve turned their attention to redistributive economic policies to compensate
  • Better policies would focus on measures that enable Americans to become more productive and command higher pay, such as reducing the cost of higher education or regulatory costs that slow the economic recovery and labour compensation

 

It’s another example of official statistics generating not only opposing views from ‘experts’ but also flawed policies from those in power

Pin factory productivity

Adam Smith illustrated how the division of labour could improve productivity in the famous small pin factory example he used in his tome ‘Wealth of Nations’, 1776, viz:

  • 10 workers, each specialising in a different aspect of the work , could produce over 48,000 pins a day
  • However, if each of these ten workers had made the entire pin on his own, they might not have made even one pin a day, and certainly not more than 20
  • Hence, one must never focus on the task alone when seeking to improve – always look at the process as a whole

 

Bertrand Russell, the famous mathematician, wrote the following many years later in response:

In praise of idleness

  • Suppose that, at a given moment, a certain number of people are engaged in the manufacture of pins – they make as many pins as the world needs, working eight hours a day
  • Someone then makes an invention by which the same number of men can make twice as many pins as before
  • But the world does not need twice as many pins – pins are already so cheap that hardly any more will be bought at a lower price
  • In a sensible world, everybody concerned in the manufacture of the pins would take to working four hours instead of eight each day, and everything else would go on as before
  • But in the actual world this would be thought demoralising
  • The men still work eight hours, there are thus too many pins, some employers go bankrupt, and half the men previously concerned in making pins are thrown out of work
  • There is, in the end, just as much leisure as on the other plan, but half the men are totally idle while half are still overworked
  • In this way it is ensured that the unavoidable leisure shall cause misery all round instead of being a universal source of happiness
  • Can anything more insane be imagined?

 

Conclusions:

  • When qualified workers are in short supply, or increasingly expensive to employ, it makes sense to seek to automate their work
  • At present, and despite low unemployment, UK firms can exploit cheap foreign workers, either immigrants or via outsourcing to the Far East for cheap labour and land or India for English speaking call-centres
  • Come Brexit, however, the former cheap labour source may well dry up whilst, already, the weaknesses of the latter outsourcing route have curtailed much demand
  • So the inevitable pressures on UK management will be to invest in new and better processes and technology
  • Thus a significant uptick in UK productivity growth can be expected in the next year or so

Full AI impact may take time

Erik Brynjolfson, an MIT economics professor, says:

  • “We are optimistic about the ultimate productivity growth fuelled by AI and complementary technologies
  • The real issue is that it takes time to implement changes in processes, skills and organisational structures to fully harness AI’s potential as a GPT (General Purpose Technology)”

 

Benefits from specific applications are already being realised but broader economic effects from widespread adoption have yet to gain momentum so we await many more applications, steady improvements and the spawning of complementary innovations

And this could take years, even decades

Professor Rodney Brooks, MIT emeritus professor of robotics, says:

  • “Having the ideas about AI is easy
  • Turning them into reality is hard
  • Deploying them at scale is even harder
  • Realising the benefits of AI is not automatic, nor is it fast
  • It will require great effort and entrepreneurship to develop the needed complements and adaptability at individual organisational and social levels
  • Major adjustments to business processes, capital infrastructure and job design will be needed to realise their full economic value”

 

Conclusion: The coming economic resurgence due to AI could be as big or bigger than any of the others seen in the past

GE announces ‘Big Data’ productivity gains

A new report from GE – General Electric, USA – found that the Industrial Internet  could add €2.2 trn to European GDP by 2030, boost productivity and spur economic expansion.

The report, called The Industrial Internet – Pushing the Boundaries of Minds and Machines: A European Perspective, says that a mere 1 % increase in efficiency in healthcare, aviation, transportation and energy could yield savings close to €40 billion.

By adopting the technologies of Big Data and intelligent machines, the report’s authors claim Europe could “recover the productivity gains missed in the first round of the internet revolution and compound them with new ones, catching and moving ahead of the curve”

Good examples include:

  • AI to aid doctors and lawyers
  • Big Data analytics for retail and drug discoveries
  • Wearable sensors to monitor blood pressure and health conditions
  • Robots for surgery and eldercare
  • 3D printing for complex manufacturing such as bespoke hip joints or gas turbine blades

 

But such claims are NOT new

‘Expert systems’ to help diagnose faults and maintain human bodies or machines were being built back in the 60s – but they were too simplistic and didn’t catch on

However, with AI, IoT technology and enormous modern computer power, GE’s expectations may well be realised

Myths about productivity?

An interesting set of views and counter claims about productivity were found on Google:

  • It leads to higher wages:
    • It doesn’t
    • It needs collective bargaining, but unions have mostly lost their influence
  • It doesn’t result in fewer jobs:
    • In an ideal world, it would lead to increased output, increased market share and even increased number of jobs
    • It rarely works out that way
    • Most improvements are justified by labour-saving which is much easier and faster than penetrating new markets
  • It leads to better quality jobs:
    • The opposite is true
    • The staff that remain have to do the work of those laid off, and for the same pay
  • It stifles competition:
    • The UK, for instance, needs large capital expenditure to set up new productivity-competitive businesses
    • China does not, able to use cheap labour instead
  • It stifles innovation:
    • Retooling production lines can be very expensive
  • It freezes capital:
    • Capital which could be used for vital infrastructure say

 

You might ask which side of the fence you’re on with each claim

UK public sector wastes £120bn – every year!

A new report from the Taxpayers’ Alliance claims that the UK public sector wastes £120 billion each and every year

And this is despite claims of tightening belts and being forced to close libraries or fire lollipop ladies.

It’s equivalent to a cost of some £4,500 for every British family.

They say: “A relentless war on public sector waste is needed”

But what do those in charge, our political leaders, do?

They can’t be seen to be cutting public services – it loses them many votes

On the other hand, it’s a vote-winner if they’re seen clamouring for more resources to be poured into such cherished national assets as the NHS – National Health Service – or schools or police forces

Few question what percentage of existing resources allocated to the public sector services are being wasted or whether operating methods they use are as good as they could be – staff are all seen to be working hard, resources fully utilised, so the obvious conclusion is ‘more is needed’

And none dare admit that, on a like-for-like basis, public sector staff are better paid, have longer holidays and receive better pensions than their private sector counterparts

But, if they would only dig a little deeper, they might well find the waste of time and resources is at least 30% across the board – with much more waste on top due to the inefficiency of methods being used

Sadly, no such numbers exist

If they did, one might well find that no extra funding is needed to remove most queues in the NHS, say, or and make a huge improvement to the current poor police record in clearing-up crimes of all types, especially serious crime

Some public sector review body is needed to conduct a regular, two-pronged study of all public services:

  • Prong 1 should review the specific services each public sector should offer ‘free at the point of delivery’ having regard to what the public is willing to fund – the nation must cut its cloth to what it can afford
  • Prong 2 should review the efficiency levels of each public service unit, compare them with best practice, make changes needed and continuously improve

 

At present, neither seems to be happening other than on an occasional, piecemeal basis

Hence Amber Rudd, UK Home Secretary, said:

  • “Police chief constables need to concentrate on cutting crime – the public do not want to hear about disappointments over funding”
  • To bleats that police forces cannot sustain further substantial cuts: “Greater efficiencies have been shown to be available”

 

But who was then charged with doing what?

Chief constables were unlikely to change their tune

Meanwhile, Sara Thornton, Chair of the National Police Chiefs’ Council, pointed out that: “Offences involving knives, guns and serious violence have increased significantly”