The universal ‘S curve’

A splendid ‘big picture’ article by Eben Bayer, published by Forbes Business magazine and entitled ‘Get Ready For An Explosion Of Productivity In Biotechnology’ – it clearly shows how the ‘S curve’ applies to the life and times of just about everything – think humans, empires, computers, products, fads, services, machines, companies, economies – so it’s useful to know where your specific interest lies – foothills, slopes or peaks?

If biotech follows the same arc of growth as agriculture or computer technology, it could transform the world.


For all of our shortcomings, humans are very good at getting better. The ability to refine and improve our methods and technologies is a defining feature of our species. For thousands of years, we found more effective and efficient ways of working with raw resources like wood and metal, turning them into tools and technologies that get ever more advanced. Now that we’re learning to innovate with the complex biological machinery invented by Nature, recent history in other industries suggests the rate of growth could be transformational for everything from manufacturing to medicine to food.

During the millennia when humans first stewarded landscapes and livestock, it was in part by way of observation and selection. Seeds from a crop that grows plentifully and reliably are saved; an animal that produces and behaves well is favored. Over time, we domesticated the species and strains that worked best for our needs, and operating in this way we reached the limits of growth based on the knowledge and tools available at the time. For centuries, yields for crops like corn remained relatively steady.

Everything changed in the middle of the 20th century. Advances in synthetic fertilizers and strain selection and other tools of modern agriculture kicked off an ongoing period of immense growth in the output of agriculture. ​​Worldwide gross output increased by 60 percent from 1938 to the late 1950s — since then, it has more than doubled again. Today, on average, the world produces nearly three times as much cereal grains as we could get from the same area of land in 1961. Since 1950, there has been a more than five-fold increase in overall corn yields in the United States alone.

Things really got cooking in the 1970s, during the first period of skyrocketing agricultural output, called the “Green Revolution”. Advances in chemical fertilizers, strain selection, pesticides and other technologies were plugged into an increasingly globalized crops and commodities market, which led to improving crop yields around the globe, and the ability to feed growing populations. More recent improvements have come about through new technologies like robotics and genetic editing, but the returns these provide are diminishing. From 2011 to 2019, the overall amount of global agricultural output was 6% less than it would have been if we had kept the same growth rate of the decade prior.

This could be described as the top of an ‘S curve’, which typifies the growth of new technologies that proliferate explosively during a period of innovation and discovery, then level off as adoption slows and a new ‘normal’ is established.

A very basic illustration of the S curve.

The speed of innovation around personal computing has seemingly tapered a bit after years of boom and bust cycles. This is in part because of the limitations of physics — for many years, computer chips got exponentially smaller and faster, roughly doubling in speed and halving in size every two years, known as Moore’s Law. But scientists and engineers can only squeeze so much performance out of finite materials, and may be approaching their limits (at least for now). But that is not the end of innovation — in areas like VR, social media, AI, and other applications and sub fields are enjoying their own smaller S curves, perhaps smaller than the arc of the microchip or personal computer, but then again, maybe not.

There is a rough analogy to agriculture, too, where slowing technological advancements also effect the rate of growth, which means higher prices and other knock on effects. Growth is crucial, so every effort is made to sustain it. Companies like Monsanto edit the genes of crops to create resistance to pests and to add efficiencies, as minute as the thickness of a cell wall, to eke out small gains in growth. Even that small amount can be crucial at large-scales in food and commodities like corn or soy, but the overall pace of innovation and growth in output have not been seeing quite the gains they did in the middle of last century. The next development that can spur growth to meet food demands may come from a lab striving to squeeze more yield from the standbys like corn, or it may come from somewhere totally unexpected.Innovation is often what sparks the growth, along with the formation of infrastructure and supply chains to support it. New fertilizers enable commodity-scale markets for crops like corn; smaller, faster computer chips enable a nearly complete worldwide distribution of computers; a newly studied organism creates the ability to produce novel enzymes, materials or chemicals that serve mass market needs far more sustainably than the status quo.

Indeed, biotechnology seems to be at the beginning of its own S Curve. Biotech is all about studying and working with living systems, in some cases even treating them a bit like computers. Maybe it’s shouldn’t be a surprise if it follows a similar growth trajectory.

In this arena, liquid fermentation — which traditionally uses yeast for everything from citric acid to alcohol at industrial scales — might be roughly analogous to corn or the personal computer, a ‘slowing’ technology that is crawling to the top of its S curve. Meanwhile, advances in precision fermentation, new and more sophisticated gene editing techniques, and the growing diversity of organisms that science and industry can now learn from and work with are combining to open up new landscape of innovation for bio-based materials, products, and manufacturing methods. We’re just at the beginning of a period of discovery with biotech, and there’s no telling what that could mean for the ways we make what we need and use.

Working with biology means building products and processes that can be compatible with nature. But it is important to note that there have historically been consequences to the massive periods of growth since the industrial revolution. In agriculture, increased yields have come at the cost of crop diversity, and a switch to monoculture as well as enclosure by companies that copyright seeds or code their eventual obsolescence into their very DNA. You can also see this in the explosion of computer technologies has created the fastest growing waste streams in the world. Many of us take inspiration from the vision of industry innovators like those who saw computers from an idea to a world-shaping technology that transformed the way we interact with one another, or who managed to develop and distribute the means of feeding our growing world. Biotech can set an example too, not just by transforming the way we make the things we need and consume, but to do it equitably and in harmony with Nature.

If biotechnology is about to grow exponentially, can it change this aspect of the innovation cycle? If so, we may soon look back on a big bang moment, when a diverse range of new products and applications, based in biology, marked a shift of global consumer culture into better alignment with the planet.

The ticking time bomb at work

Top executives and capitalists might support ‘levelling up’ but should hang their heads in shame after reading the following important article by Economic Justice Editor at Nonprofit Quarterly, entitled ‘Owning Our Labor: Productivity, Profits, and Power’

If you performed a task at four times the rate of productivity, shouldn’t you receive four times the pay?

In his 1911 book The Principles of Scientific Management, mechanical engineer and management consultant Frederick Winslow Taylor tells the story of how he convinced a worker at the Bethlehem Steel company, whom he named “Schmidt,” to increase the amount of crude iron he was able to load onto a railroad car. Taylor did this by promising him a raise, to be determined by management. Schmidt was eager to accept, as he had worked hard to own a small plot of land, and hoped to build a house on it. Taylor told Schmidt that he should walk, rest, and load when/as he was instructed by a manager, minimizing any inefficiencies or inconsistencies in the process of carrying the crude iron onto the train. Schmidt went from loading around 12 tons of iron to almost 48 tons per day—an increase of 400 percent. For this, his pay rose from $1.15 to $1.85—an increase of 60 percent.

Taylor’s method turned into an entire system of management focused on minimizing waste and maximizing profits, which became known as “Taylorism.” By breaking down every task into its smallest components, Taylorism took control away from the worker executing the task and gave it to another person, a manager, who decided the “one best way” for it to be done. As workers lost more and more control over how their work was done, management was able to streamline the labor process, squeezing every last drop of efficiency out of it without paying in kind. From 1979 to 2020, according to a study by the Economic Policy Institute, net productivity rose 61.8 percent, while the hourly rate of pay for the average worker increased by only 17.5 percent. In other words, even though today’s worker is more productive than ever before, she has seen wages stagnate, prices increase, profits disappear into deep pockets, politics favor the wealthy, and working conditions worsen.

 

The Fruits of Our Labor

In Taylor’s story about Schmidt, everyone made more money than the steel loader himself, whose increased productivity was met with disproportionate compensation. A century later, this has stayed true: as workers struggle to make ends meet, pay for top-level executives and profit for the ownership class have grown exponentially. The Economic Policy Institute found last year that in 2020, CEOs made 351 times as much as the average worker. And even as those in the C-suite are being paid at such asymmetric rates, the owners of the companies they manage are making away with even more. Over the course of the last two years alone, wealth inequality has soared: American billionaires, many of whom are owners of the largest corporations in the world, have grown their assets by over $2 trillion since 2020—totaling over $5 trillion in October 2021, as one report shows. This kind of mind-boggling math is proof that the numbers don’t lie: the scales of the American economy are tipped in favor of those who already have the most. And that ownership relies on a system that funnels wealth away from workers and toward owners and the management class.

Giving workers back the fruits of their labor would completely alter the distribution of wealth in our economy and reverse economic inequality. At a very minimum, ownership over labor would be constituted by a fair wage. The federal minimum wage, which is at $7.25 per hour, has not been raised in over a decade, and fails to be sufficient pay as inflation steadily increases and prices soar. Lowering the value of the minimum wage hurts workers in the economy who often have the least bargaining power in the workplace—Black, Brown, immigrant, and women in low-wage jobs. Better wages are only one aspect of ownership in the workplace, but they are the main site of struggle for labor, because they are the most concrete illustration of one group’s efforts being controlled by another for profit. Tackling this disproportion in profit head on is the first step toward taking back control of how work is done.

 

Struggle For Power

The political terrain on which the struggle for ownership over work is taking place does not exactly favor workers. Over the second half of the twentieth century, management responded to worker struggles for power with brutal techniques to inspire fear and tamp down resistance, such as delaying negotiations, firing strikers, and even threatening or terminating union activists. While companies consolidated political power, federal labor law was not up to the task of defending workers and unions from political assault. As deindustrialization led to U.S. production being moved abroad, unions had less leverage to protect workers from closures and cuts. The American economy changed in its composition, turning to precarious work schedules and lean production to increase productivity, while giving U.S. workers less power and fewer protections than ever before.

Federal agencies and laws that support labor have been political targets since the middle of the twentieth century, when the labor movement was at its heyday. For example, the nation’s fundamental law protecting workplace rights, labor’s most effective weapons: solidarity strikes (striking in support of other unions), secondary boycotts (calling for boycotts of companies that do business with a company engaged in a labor dispute), and closed shops (an agreement that employees will require membership as a condition of employment). This led to the decline of union victories nationwide by limiting what unions could do, whilst other political efforts attempted to limit what the nation knew about the labor movement altogether. For example, the Reagan administration cut funding for the U.S. Bureau of Labor Statistics in 1982, forcing it to limit documentation of work stoppages to those involving only one thousand or more workers who complete at least one entire shift. Because more than 80 percent of businesses have fewer than one thousand employees, the majority of work stoppage activity, from slowdowns to walkouts, goes undocumented. The consequences of this exclusion are vast, but the major loss is that workers all over the country have no way of knowing about workplace activity of various kinds—making it harder to inspire organizing efforts and learn from other fights.

As of now, it seems that many workers are seizing the moment to insist that they deserve better. In what has come to be called “The Great Resignation,” almost 47 million American workers quit their jobs in 2021, an overwhelming if unorganized response to the increased pressures of low-wage jobs. Workers— predominantly in the areas of retail, hospitality, and food services—quitting in the tens of millions is part of a larger trend of pushing back against the way we work now. This unprecedented wave of individual resistance—significant expression of a larger collective dissatisfaction—has sparked a national conversation about the nature of work. As Ophelia Akanjo wrote in a recent article for NPQ, employees are “treated as one- dimensional expendable beings with very little care for their three-dimensional complex lives outside of work.” Whether workers are fed up with low wages, despotic management, or limited flexibility, their mass quits suggest that work as we know it—wages, working conditions, and workplace power—is in desperate need of transformation.

As the widespread sentiment that “work sucks” became reflected in various spheres of media coverage, worker activity began to pick up steam. Last October, over 100,000 workers in the private sector were ready to walk off the job or were already walking picket lines—a phenomenon the media has called “Striketober.” But as Luis Feliz Leon and Maximillian Alvarez wrote in Labor Notes during this flurry of work stoppage activity, the labor movement—unions, worker centers, journalists, and other allies—has to both stoke the fires that fuel worker activity and clearly assess its obstacles: “We need to identify and cultivate the passions among America’s rank and file that have made this a special moment, but we also need to be clear-eyed about the deep challenges preventing this moment from becoming a movement.”

Amazon is the most prominent example of a company that has restructured the economy and, by extension, the labor process. Employing over one million people in the United States, the company has set unprecedented productivity standards and reshaped consumer expectations—all at the expense of worker health and safety. Insider accounts of working at an Amazon fulfillment center, like the one by journalist Emily Guendelsberger, detail the brutal expectations of this low-wage work. “Working in an Amazon warehouse outside Louisville, Kentucky,” Guendelsberger recounts, “I walked up to 16 miles a day to keep up with the rate at which I was supposed to pick orders. A GPS-enabled scanner tracked my movements and constantly informed me how many seconds I had left to complete my task.” Amazon has consistently been in the press for ignoring health and safety protections and imposing efficiency requirements that force workers to relieve themselves in plastic water bottles, miscarry pregnancies due to overexertion, or even die on the shop floor of a heart attack. As workers at Amazon have pointed out, this production pace is set, as at other low-wage jobs, by technology: algorithms and trackers that count a bathroom break as a “TOT” (time off task). Subverting the safety and dignity of workers to Amazon’s two-day delivery model via various modes of technological surveillance is not just a feature of the logistics sector. Technological surveillance for productivity purposes has become a near ubiquitous feature of the modern workplace, ranging across sectors from food service to healthcare, and prioritizing output above all.

***

The famous slogan of the labor movement—“eight hours for work, eight hours for rest, eight hours for what we will”—articulates the spirit of many worker struggles we are seeing today. Workers, from manufacturing to higher education, understand that power in the workplace is the first step toward living whole and healthy lives. Without control over the eight hours of the workday, the remaining sixteen, for rest and what we will, are bound to suffer.

This control looks like many things. Beyond demanding good, high-paying jobs for all, the labor movement also struggles for other kinds of equality in the workplace: freedom from discrimination and harassment, transparency around working conditions and wages, and decision-making power—all aspirational features of a worker-owned economy. Ownership over work is the right to be safe, the right to have a say over our time, and the right to a life of dignity. To realize a world beyond our capitalist present, to leave behind staggering inequality and crushing productivity, we need workers to take the wheel and steer society into these fairer waters.

It’s time for business to end its Faustian pact with autocrats

A worthy article in Fortune.com Commentary says ‘the risks of doing business with autocrats should be front of mind for every multinational in the wake of Russia’s invasion of Ukraine’ – written by David Kamenetzky, a past member of the executive committee of Mars and a former chairman of JAB Investors, and Leopoldo López, a Venezuelan political leader who was imprisoned and confined by the Maduro regime for seven years and is currently a fellow at the Wilson Center in Washington, D.C.

 

Russian President Vladimir Putin (L) and Chinese President Xi Jinping pose during their meeting in Beijing, on February 4, 2022. (Photo by Alexei Druzhinin / Sputnik / AFP) (Photo by ALEXEI DRUZHININ/Sputnik/AFP via Getty Images)

Hasty divestments are costing companies billions of dollars. The reputational costs are likely to be significant for those that stay in Russia—food and pharma groups, as well as the likes of HSBC, which has been reportedly removing the word “war” from its analysts’ reports.

While reports of war crimes are horrifying, the temptation for multinationals will be to treat Russia’s unprovoked aggression as an isolated case and to hope that after the end of military action, memories will fade.

This would be a colossal mistake. China’s expansionist ambitions are well documented. Other autocratic regimes are waiting to see how Russia’s war pans out. Companies must understand two things: their own role in propping up undemocratic regimes, and how this will come back to bite them.

Since the end of the Cold War, Western governments and businesses have been all too willing to trade with and invest in countries where the rule of law is absent or tenuous at best. We have taken their oil and gas, copper and cobalt, rare earths and silicon, foodstuffs, and manufactured goods in the name of expediency. After all, these goods are essential to the global economy. The China growth story, in particular, has proved irresistible to foreign investors. For years, China has been the second-largest recipient of foreign direct investment (FDI) flows after the U.S.

Some of us even believed that globalization would lead to a convergence in values: that trade and investment in China and countries of the former Soviet Union would bring us closer together. Our societies would become more similar, and Western values and liberties would prevail.

How naive we were. Open trade has not brought about regime change. Democracy has been on the retreat for decades, with 16 consecutive years of decline in global freedom. Some 38% of the world’s population now live under autocracies, and only 20% of the world’s population lives in a free country.

Instead, our trade and business activities have conferred legitimacy, export revenues, tax and investment dollars, employment, and access to technology on autocratic regimes. This collaboration has given rise to some uncomfortable truths. As Volodymyr Zelensky, Ukraine’s president, keeps reminding us, it is Europeans who are financing Russia’s war by continuing to buy its oil and gas, rewarding an illegitimate act of aggression and barbaric war crimes with sky-high oil and gas prices.

The second uncomfortable truth is that Western governments and companies are allowing autocrats to destabilize our societies. Freedom of information in the West has allowed the Kremlin to meddle in elections. Social media platforms have benefited from an unwillingness to regulate in the name of boosting entrepreneurship and wealth creation. They are a godsend for autocrats who want to spread fake news and inflame social tensions.

Until public pressure forced Google to shut down Russian state-funded media from its apps, Kremlin-funded propaganda outlet RT had more than 4.5 million subscribers on YouTube. We cannot think of any other time in history in which the leaders of some of the world’s most valuable companies have actively facilitated attacks on their own societies. This would have been unthinkable during the Cold War.

In this new scenario, corporations must urgently reexamine their responsibilities. They should not be complicit in the destabilization of Western societies to which they owe their existence. This Faustian bargain with autocrats must end.

Western governments and corporations must squarely face the fact that the commodities we buy, the investments we make, the taxes we pay, and the deals we make all help to prop up undemocratic regimes. Our presence in these countries lends legitimacy to bad governments. In many cases, investors are forced to be in close collaboration with kleptocratic networks.

If bad governments veer into committing war crimes and genocide, then the Western companies who work with these regimes risk the same opprobrium that befell Swiss banksFord, and IBM for their collaboration with Nazi Germany.

Only the consequences will be felt much faster this time. Geopolitics played a huge role in delaying scrutiny of the actions of companies and their executives during World War II. With the advent of the consumer economy and the swift rise in stakeholder advocacy, similar abetment or the turning of a blind eye would not escape accountability so easily today.

Businesses benefit from the rule of law, free and fair elections and representative government, freedom of association and of information, and all the other freedoms we take for granted. These rights and guarantees have allowed liberal democracies to prosper. We all have an obligation to defend them globally.

What this means in practice is that we must add a new dimension to ESG (Environment, Social and Governance) – where the Environment has become critical, Social accountability is at an all-time high and people continue to demand greater transparency and improved standards in Governance — call it Freedom, or Democracy—to reflect the fact that democratic freedoms are essential to sustain the long-term success and stability of corporations. This requirement goes beyond the standard practice of assessing political risk and other geopolitical threats to profitability.

Adding an F to ESG would oblige companies to examine their impact on politics and society beyond the principle of doing no harm. It would compel companies to spell out what they are doing to actively promote democratic values. What counts as good corporate governance today—abiding by a code of ethics, and having anti-corruption, human rights, and similar policies in place—rings hollow when companies continue to do business with autocrats who persecute minorities, attack neighbors, and flout international law.

Just as investors have started to focus hard on corporate viability in light of sustainability policies, so they will assuredly recognize the long-term risks of companies doing business in undemocratic places. Adding an F would reinforce the ESG investment lens and protect the long-term stability and profitability of investments. Companies that are already sustaining billions of dollars in losses after investing in Russia should work on a plan B for China–or face the likelihood of seeing those losses compounded in the future.

Yet the opposite is happening. In the race to find replacements for Russian oil and gas, the U.S. administration is putting pressure on Saudi Arabia to pump more oil, exploring alternatives with Iran to ease restrictions, and has opened channels of communication with Venezuela, a violent, corrupt, and authoritarian failed state that has forced more than 6 million people, 20% of the population, to flee abroad, and where 94% of the population lives in poverty.

It is true that energy security is a critical challenge for any country, but it should not be an excuse to give in to the pressure of oil and gas corporations that work under autocrats who violate human rights, crush the freedom of their people, and attack liberal democracy outside their territories.

Unlike the 1970s, today there are technological and geographic alternatives to mitigate dependency on oil coming from authoritarian regimes and accelerate energy reliance on renewables, nuclear, and LNG.

If the only consequence of Russian aggression is that Western governments and companies switch their allegiance from one autocrat to another, then we will have learned nothing. The world will remain unsafe. We will continue to depend on unstable regimes.

 

Wealth of nations via TFP?

Why are some nations rich, others poor – and what does it mean for future prosperity?

Amitrajeet Batabyal, Professor of Economics at Rochester Institute of Technology, and writing for ‘The Conversation US‘, argues that TFP is not an academic construct comprising ‘magic fairy dust’, as the Bank of England once claimed, but highly significant for understanding national productivity growth patterns

Economic growth matters to a country because it can raise living standards and provide fiscal stability to its people. But getting the recipe consistently right has eluded both nations and economists for hundreds of years.

As an economist who studies regional, national and international economics, I believe that understanding an economic term called total factor productivity can provide insight into how nations become wealthy.

Growth theory

It is important to understand what helps a country grow its wealth. In 1956, Massachusetts Institute of Technology economist Robert Solow wrote a paper analyzing how labor – otherwise known as workers – and capital – otherwise known as physical items such as tools, machinery and equipment – can be combined to produce goods and services that ultimately determine people’s standard of living. Solow later went on to win a Nobel Prize for his work.

One way to increase a nation’s overall quantity of goods or services is to increase labor, capital or both. But that doesn’t continue growth indefinitely. At some point, adding more labor only means that the goods and services these workers produce is divided between more workers. Hence, the output per worker – which is one way of looking at a nation’s wealth – will tend to go down.

Similarly, adding more capital such as machinery or other equipment endlessly is also unhelpful, because those physical items tend to wear out or depreciate. A company would need frequent financial investment to counteract the negative effect of this wear and tear.

In a later paper in 1957, Solow used U.S. data to show that ingredients in addition to labor and capital were needed to make a nation wealthier.

He found that only 12.5% of the observed increase in American output per worker – the quantity of what each worker produced – from 1909 to 1949 could be attributed to workers becoming more productive during this time period. This implies that 87.5% of the observed increase in output per worker was explained by something else.

TFP – Total Factor Productivity

Solow called this something else “technical change,” and today it is best known as TFP.

Total factor productivity is the portion of goods and services produced that is not explained by the capital and labor used in production. For example, it could be technological advancements that make it easier to produce goods.

Another way to understand total factor productivity.

It’s best to think of total factor productivity as a recipe that shows how to combine capital and labor to obtain output. Specifically, growing it is akin to creating a cookie recipe to ensure that the largest number of cookies – that also taste great – are produced. Sometimes this recipe gets better over time because, for example, the cookies can bake faster in a new type of oven or workers become more knowledgeable about how to mix ingredients more efficiently.

Will total factor productivity continue to grow in the future?

Given how important total factor productivity is to economic growth, asking about the future of economic growth is basically the same as asking whether total factor productivity will continue to grow – whether the recipes will always get better – over time.

Solow assumed that TFP would grow exponentially over time, a dynamic explained by the economist Paul Romer, who also won a Nobel Prize for his research in this field.

Romer argued in a prominent 1986 paper that investments in research and development that result in the creation of new knowledge can be a key driver of economic growth.

This means that each earlier bit of knowledge makes the next bit of knowledge more useful. Put differently, knowledge has a spillover effect that creates more knowledge as it spills out.

Despite Romer’s efforts to provide a basis for the assumed exponential growth of TFP, research shows that productivity growth in the world’s advanced economies has been declining since the late 1990s and is now at historically low levels. There are concerns that the COVID-19 crisis may exacerbate this negative trend and further reduce total factor productivity growth.

Recent research shows that if TFP growth falls, then this can negatively affect living standards in the U.S. and in other rich countries.

A very recent paper by the economist Thomas Philippon analyzes a large amount of data for 23 countries over 129 years, finding that TFP does not actually grow exponentially, as Solow and Romer had thought.

Instead, it grows in a linear, and slower, progression. Philippon’s analysis suggests that new ideas and new recipes do add to the existing stock of knowledge, but they don’t have the multiplier effect previous scholars had thought.

Ultimately, this finding means that economic growth used to be quite fast and is now slowing down – but it’s still occurring. The U.S. and other nations can expect to get wealthier over time but just not as quickly as economists once expected.

Faster productivity growth would solve many problems

Canadians are beset by economic problems. Inflation is hammering their purchasing power. Forecasters are predicting weak, if any, growth in living standards. And now headlines are warning that tighter monetary policy may cause a recession. The list of challenges seems dauntingly long. On the other hand, they have a single underlying cause: slow growth of Canada’s productive capacity. Governments, especially the federal government, can and should help.

 

 

Forecasters are warning about weak growth in living standards in the years ahead because business investment in Canada is so low that our stock of capital per worker is falling. Too many Canadians are working with equipment that has worn out and intangible capital that has gone obsolete. Low investment also means less of the innovation and technological progress that raise living standards over time.

 

Slow growth of productive capacity also increases the risk of recession — actual declines in real activity. To get inflation down, the Bank of Canada needs to bring demand back into line with supply. If productive capacity were growing fast, that might mean slower growth in the volume of spending for a quarter or two. But with productive capacity growing as slowly as it is, the volume of spending may have to fall.

 

Suppose that the economy’s ability to supply goods and services were rising at four per cent per year. Bringing demand back into line with supply might mean reducing its growth from five per cent to three per cent. Disappointing, perhaps, but hardly a disaster. On the other hand, if supply is growing at only one per cent a year, then bringing demand into line might mean reducing its annual growth from two per cent to zero per cent. Zero real growth and below — when the economic pie is actually getting smaller — is when both the pain and the squabbling over who gets what intensifies.

 

Bottom line: When supply is rising fast, the central bank can keep demand close to supply without large risk of recession. Periods when demand actually falls are rare and short. But when supply is rising slowly, the fluctuations hurt more. Recessions happen more often and last longer.

 

In fact, these examples understate the challenge the Bank of Canada faces right now. Inflation around seven per cent shows that demand is running way above supply. To get it back to two per cent, demand will have to run well below supply. So the odds of at least a couple of quarters of falling real activity over the next two years are high.

 

But though the challenge right now is especially severe, the key point from the stylized scenarios holds. Faster growth of Canada’s productive capacity would make it easier to bring demand back in line with supply. We could hold the line on demand while supply catches up, rather than push demand down. We could lower inflation with less risk of recession.

 

The Bank of Canada cannot do much about the productive capacity of the Canadian economy, but governments can. They can free up resources for more productive uses by spending less. They can encourage investment by keeping taxes low, neutral and stable. And they can build confidence with transparent and predictable regulation.

 

Unfortunately, the federal government’s current directions promise no help for productive capacity. It continues to increase spending. It is depressing investment with discriminatory tax hikes — singling out specific sectors, such as banks and insurers, and specific products, such as cars, airplanes and boats — and it now proposes tighter limits on deducibility of interest when businesses borrow to invest. It is undercutting confidence with changes to competition law and greenhouse gas policies that seem longer on slogans than practicality.

 

As former Finance Minister Bill Morneau emphasized in a recent speech to the C.D. Howe Institute, the federal government has neglected economic growth, and needs to prioritize it. Faster growth of productive capacity in Canada would help lower inflation. It would yield higher living standards. And it would reduce the risk of recession.

 

A good time for a turnaround on productivity policy would be right now.

 

 

Inflation: there’s a vital way to reduce it that everyone overlooks – raise productivity

Professor in Finance at the University of Stirling and writing for the WEF – World Economic Forum – offers his thoughts on the current economic situation

Inflation has become one of the great issues of our times. The UK’s is the highest in the G7, weighing in at 9% a year according to the most recent figures on consumer price inflation.

 

When you look at the other common measure for prices, retail price inflation, which adds mortgage rates into the equation and is also calculated a little differently, it is even higher at 11%. This is important because RPI is used for raising prices across a range of items, from train tickets and mobile phone contracts to student loans.

 

The question of why inflation is so high is well rehearsed. The initial impetus came from greater demand, but it is being further fuelled by supply issues.

What caused high inflation

On the demand side, quantitative easing (QE) during the pandemic – in which central banks “created money” to help prop up the economy – has increased the amount of money in the system by over 20%.

 

When lockdown ended, this helped to ensure that there was pent-up demand for goods and services: retail sales rose by over 20% year on year in May 2021, for instance, and hit another peak of nearly 10% in January 2022. At the same time, demand from firms helped to drive huge price increases in key industrial commodities such as copper and steel. Also, oil prices rose by approximately 67% in 2021 and another 20% in 2022 to date.

 

Heightened demand has collided with constraints on the global supply chain from social distancing, self-isolation rules and renewed lockdowns in China. As a result, the cost of shipping goods is around 35% higher than the pre-pandemic high (and over 700% higher than its low). And all of this is before discussing the war in Ukraine.

 

The response by the Bank of England has been to increase the headline rate of interest from 0.1% to 1%, and to stop QE. Tightening monetary policy affects demand as the interest due on many debt repayments is rising and the cost of borrowing is going up.

 

This combination of higher interest rates and higher prices has increased the likelihood of a recession. In part, this is because increasing interest rates discourages businesses from investing. But there’s also another problem with discouraging investment: it’s part of the long-term solution to our inflation problem.

Productivity and investment

This is linked to the UK’s long-term problem with productivity: in other words, how much each worker produces. The UK productivity rate is growing, which you would expect as technology brings improvements, but the growth is less than that of key international competitors like the US, Germany and France.

 

While the rate of growth has returned to pre-pandemic levels after plunging during the lockdowns, it is still slower than in the years before the global financial crisis of 2007-09.

 

PwC report from 2019 highlights that annual growth in UK productivity was 2% for the ten years to 2008 and 0.6% for the ten years after, with a productivity gap of approximately 10% to Germany and over 30% to the US. (N.B. continuing the analysis work we started with the CBI way back in 1987 – good for them)

 

G7 productivity growth, 1997-2021

A chart showing G7 productivity growth, 1997-2021

 

Why does productivity matter for inflation?

When a workforce is more productive it produces more goods and services, and at a lower cost per unit. This means there is a greater supply of these things, which puts downward pressure on prices and is therefore associated with lower inflation.

How do we raise productivity?

One important way is to invest more, but this has been a weakness in the UK. Business investment plateaued in 2016 following the Brexit referendum, fell with COVID-19 and remains almost 10% below the 2019 level.

The nation’s investment spending as a proportion of GDP (16.7%) compares poorly with the US (22.5%), Japan (25%) and the EU (24.3%). This is despite evidence that UK companies are holding £140 billion in cash and have a backlog of accumulated projects.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What can be done

The question is how to encourage firms to release this investment potential. The government is planning to increase headline corporation tax from 19% to 25% in 2023, which is not going to help and should arguably be scrapped. To further incentivise investment, there’s also a need for more generous rules around tax relief, including extending the “super-deduction” that was brought in two years ago, which can reduce companies’ tax bills by 25%.

A close view of a person with a tool belt
Better apprenticeships are vital for productivity.
Image: Unsplash/Callum Hill

As well as encouraging companies to invest and expand, the government needs to incentivise people to start new companies. For example, the UK has lost three-quarters of a million self-employed workers since February 2020.

To encourage more start-ups, the UK government, the devolved administrations and councils need to come together to develop strategic plans for different regions. This includes making better use of universities as local hubs for expertise and developing clusters of similar firms based on local specialisms that can help one another by sharing equipment and collaborating. Plans exist, but need to be actioned; levelling up must be more than a catchy slogan.

Public investment has to be part of the picture. This especially includes education, both at school, where upgraded facilities are required to ensure that young people are fully trained in the latest technology; and for over-18s, with a clearer balance between university and apprenticeship training.

Getting east to west is about to become substantially easier in London thanks to Crossrail, but remains tortuous elsewhere, whether from Leeds to Manchester or Edinburgh to Glasgow. Quicker transport links improve the mobility of goods and labour, while truly upgrading internet connections (full fibre and 5G) improves links when travel isn’t necessary. Both improve productivity.

Inevitably, these kinds of interventions involve further spending. But this has to be viewed as a long-term solution. After WWII, government debt was well over 200% of GDP and took 50 years to be paid off. The same time scale can be considered now.

UK Chancellor Rishi Sunak has been talking a lot about the need to unlock investment and raise productivity, but there is still very little detail about what the government intends to do. There are lots of economic benefits to raising productivity, but bringing down inflation is the one that everyone seems to have missed.

Unions can be good for labor and business

I well remember the 70s, the days of ‘Red Robbo’ who destroyed the British owned car industry with outrageous, incessant strikes for more totally unjustified pay rises – and sitting around a boardroom table whilst the Union reps led the meeting and the CEO wld just sit there and dare not disagree – so read the following by Harry Katz, published by Fortune.com, and wonder whether times really have changed

After two years of a pandemic that exposed the grueling life of essential workers and the social justice issues that exacerbate challenges faced by low-wage households, labor is having a moment.

Now that unions have won a representation election at Amazon’s Staten Island facility and at several Starbucks coffee shops, the managers of those two companies and the leaders of the unions that won bargaining rights need to sit down to negotiate their first collective bargaining agreements.

Managers often resist unionization because they do not understand how unionization can actually benefit their businesses if they make the right choices.

The reality of collective bargaining

With tension between company and union leaders at a boil, it’s easy to be pessimistic about the outcome of these talks. The tendency within contemporary U.S. labor relations is for parties to be drawn into costly conflicts. Our labor law only requires “good faith” in bargaining, not an agreement, and only 48% of first contract bargainers reach an agreement within a year.

Decades of research on collective bargaining show that Amazon and Starbucks have the opportunity to turn these discussions into positive gains for their business, all while workers secure essential rights and better employment terms.

Collective bargaining–both the contracts that set pay, work rules, and other employment terms and the daily administration of those collective bargaining agreements–can provide positive contributions to both sides through a reduction in turnover and an improvement in communication.

Research has shown that unions reduce turnover, which increases worker productivity. Experience matters. For example, there are unionized Ford plants in the U.S. that rival the productivity found in the top-performing Toyota plants.

This sort of productivity gain is particularly visible in service-oriented workplaces like hospitals. Kaiser Permanente, in its hospitals and clinics, with the help of a longstanding partnership with the unions that represent its nurses and other healthcare workers, has been a top-performing provider.

We should expect to see this productivity increase in retail (Starbucks) and distribution (Amazon) as well if positive labor-management relationships are established there.

Managers often blame workplace conflicts on unions when speaking in public. However, in private conversations, top executives at several unionized Fortune 100 companies have told me that unions and collective bargaining in fact cause their organizations to communicate more effectively with the workforce, enhance employee morale, and facilitate teamwork.

Hard data

My own research shows that the effects of unionism depend on the relationship forged in the workplace between labor and management. There is no uniform union effect on productivity and profits. Rather, effective collective bargaining can address the many conflicts that commonly impair organizational performance (and company growth by extension).

Management at Amazon, Starbucks, and elsewhere should avoid the defensive temptation to see the union as an outside third party that distorts worker-manager relationships. Union leaders should avoid seeing management as the enemy. Rather, collective bargaining can become a vehicle through which joint solutions to productivity, safety and health, scheduling, and workplace governance can be devised and effectively implemented.

Dialogue can identify solutions that benefit both labor and management. Leading up to the recent representation elections, both the Starbucks baristas and the Amazon warehouse workers complained that managers had been unresponsive to workers’ pandemic-related concerns over safety and had forced them into schedules that failed to consider family pressures. Without institutional channels to force real dialogue, both businesses and workers suffered.

To get to mutually beneficial solutions, the parties need to exchange ideas and take everyone’s concerns seriously. Inevitably, there will be some differences in interests, particularly with regard to pay and staffing levels. But even those issues would benefit from looking at hard data on relevant comparable jobs and the cost of living, for example.

The field of labor relations shows that the employment relationship is fundamentally a mixed-motive one: there are both zero-sum and win-win issues at stake.

The task facing both labor and management bargainers is to promote their side’s interests while finding ways to expand the pie for everyone. Amazon and Starbucks should seize this opportunity to simultaneously improve their business and worker rights.

Harry C. Katz is the Jack Sheinkman Professor and Director of the Scheinman Institute on Conflict Resolution at the ILR School, Cornell University.

 

How does South Korea surpass Japan in real GDP per capita?

Richard Katz, a Senior Fellow at the Carnegie Council for Ethics in International Affairs, draws a few lessons from the growth experience of South Korea versus Japan over the last several years which could provide useful guidelines for the UK and others

A major geoeconomic event occurred in 2018 when South Korea’s real GDP per capita surpassed that of Japan.

By 2026, the International Monetary Fund projects that South Korea will be 12 per cent ahead of Japan. What makes this event all the more important and illuminating is that South Korea shares so many of Japan’s structural flaws. South Korea overtook Japan because its growth in productivity has outpaced Japan.

Until the early 1990s, Japan was rapidly catching up to the United States. Its productivity peaked at 71 per cent of the United States’ level in 1997. Since then, it has fallen back to just 63 per cent. By contrast, South Korea’s productivity has continued growing and is now just a few percentage points behind Japan.

But that begs the question: how did South Korea manage to do so when it shares so many of Japan’s economic flaws? Like Japan, South Korea is a ‘dual economy’ — a hybrid of extremely efficient exporting sectors, and woefully inefficient domestic manufacturing and services sectors. The productivity gap between South Korea’s corporate giants and its small and medium-sized enterprises (SMEs) is the third worst in the OECD.

South Korea’s economy is so lopsided that Samsung Electronics accounted for an astonishing 20 per cent of all South Korean exports in 2019. What happens if Samsung falters? Meanwhile, more than a third of the country’s labour force consists of low paid non regular workers.

Despite these structural flaws, South Korea has managed to avoid Japan’s fate by getting more of the ‘basics’ right. It has also made more serious efforts to address its structural defects.

South Korea has managed to create stability in macroeconomic demand to create resilience in the face of economic shocks.

Wages have risen in tandem with overall GDP. This eliminates the need for chronic government deficit spending to stoke demand — a problem that persists in Japan. From 1990 to 2020, the average Japanese worker enjoyed virtually no increase in real wages. Meanwhile, South Korean workers saw their pay double to a level higher than in Japan. As a result, South Korea’s GDP rose by 4 per cent even as Japan’s fell 7 per cent during the 1998 global financial crisis. During the first two years of COVID-19, Korea’s GDP rose 3 per cent while Japan’s fell 3 per cent.

Raising productivity growth requires an abundance of capital investment. In 1980, South Korean laborers had less than one-sixth as much capital to work with as their counterparts in Japan for each work hour. By 2019, they had 95 per cent as much.

South Korea has also invested more efficiently. South Korean companies get almost twice as much economic benefit per dollar of investment as those in Japan. While both countries suffer from a digital divide between corporate giants and SMEs, South Korean companies who do invest in information and communications technology have exploited its potential much more effectively. When 64 countries were ranked in 2021 on ‘business agility’ in the digital area, South Korea came in 5th place. Japan lagged behind at 53rd.

Acquiring the latest technology has minimal benefits unless managers and workers have the skills to use it imaginatively. Human capital measures the amount of schooling each person receives and also how effectively that education contributes to growth. In 1960, South Korean human capital was only 70 per cent of Japanese counterparts. By 2019, it was 5 per cent more. A key contributor to Japan’s lag is less spending by Japanese companies on off-the-job training, which has dropped 40 per cent since 1991.

Innovation only flourishes when new companies with new ideas have genuine opportunities to challenge incumbents. Politicians in both Seoul and Tokyo talk about encouraging entrepreneurship, but South Korea is turning more of its rhetoric into action. In Japan, only 12 per cent of government financial aid to research and development goes to companies with less than 250 employees, the least among OECD countries. In South Korea, half of the financial aid goes to SMEs.

There is a silver lining to Japan’s declining growth in real GDP per capita. South Korea’s experience shows that the right structural reforms can spur sustainable growth and raise real living standards.

 

Capital Spending Boom Helps Raise Productivity

American businesses are ramping up technology investment and other capital spending as they emerge from the pandemic. If sustained, that investment boom could boost productivity and living standards and counteract inflation pressure.

Private non-residential business investment grew 7.4% in 2021 from the previous year after adjusting for inflation, the fastest pace since 2012 and a strong bounceback from the 5.3% decline in 2020.

Spending for software and information-processing equipment such as computers rose 14% in 2021 from the previous year. Since the first quarter of 2020, when Covid-19 began spreading rapidly in the U.S., those categories have grown vastly more than others, such as buildings, for which there is less need as work is increasingly done remotely.

Business spending will likely stay strong this year. Manufacturing firms surveyed by the Institute for Supply Management plan to raise capital expenditures by 7.7% in nominal terms in 2022.  Service firms expect a 10.3% increase.

The new investment has contributed to an uptick in productivity by making workers more efficient.
Productivity, which measures workers’ output per hour worked, grew an average 2.2% a year in 2020 and 2021, up from a 0.9% average between 2011 and 2019, before the pandemic.

A more productive economy can produce more goods and services with the same number of hours worked. Over time that could raise workers’ wages without pushing up inflation.

Robert Rosener, a senior economist at Morgan Stanley, said the uptick in capital spending “is one area that stands out as a significant bright spot for economic growth in the longer term.”

In particular, new technology spending could occur in non-tech sectors, such as retail trade, spreading productivity gains more widely, he said. About three-quarters of retail executives surveyed by Morgan Stanley last year said they intend to increase spending on information technology, up from 21% in 2019.

One driver of the push toward technology is a labor shortage that has executives struggling to recruit and retain employees. In December 2021 the U.S. labor force was about 1.4% smaller than in February 2020, before the pandemic became widespread in the U.S.  Economic output, on the other hand, was 4.5% higher in the fourth quarter of last year than in the first quarter of 2020, after adjusting for inflation.

Brian Niccol, chief executive at burrito chain Chipotle Mexican Grill Inc., told investors in a February earnings call that the company has been struggling to recruit and is looking at automating some more tedious tasks. “How do we get rid of the jobs people frankly don’t love doing?” he said. “If there was a way to cut and core the avocados so that all our team member has to do is mash and add the salt, add the lime, add the onions, that would make their job so much better.”

 

Walmart Inc., the country’s largest employer, announced last year it would bring robots to 25 of its 42 regional distribution centers at a time when retailers nationwide have had trouble staffing warehouses. The company separately said last year it was looking to hire 20,000 permanent workers for its supply-chain operations and has boosted pay and bonuses.

Another driver is the move to remote work for legions of white-collar workers whose offices were shut down at the height of the pandemic. Firms have invested in online tools and software to allow their employees to work from home.

DocuSign Inc., which makes e-signature software saw a “dramatic acceleration of purchases” early in the pandemic, said CEO Daniel Springer, in a March 10 earnings call. The company’s revenue grew 45% in its latest fiscal year, he said. “As the pandemic subsides and people begin to return to the office, they are not returning to paper,” he said. “E-signature is here to stay.”

Research by Jose Maria Barrero of the Instituto Tecnologico Autonomo de Mexico, Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago has found that many workers will continue working from home once the pandemic is over. About 20% of workdays will be at home post-pandemic versus 5% before the pandemic, they estimate.

That will boost productivity by about 1% using the Labor Department’s measure, they estimate. At-home workers are more productive, they found, in part because they are spared office distractions.

Still, it is hard to predict how the rise in capital expenditures and remote work will affect productivity in the long run. Even in normal times, productivity is difficult to capture accurately. Pandemic-related disruptions, such as mass layoffs and rapid hiring in a relatively short amount of time, might have muddied the statistics further.

“My best guess is it’s probably a small positive,” said Mr. Bloom.

Robert Gordon, a Northwestern University economist, sees reasons to be both optimistic and pessimistic about future productivity growth. On the one hand, the increase in business spending suggests “more automation and productivity-enhancing replacement of workers by machines,” he said in an email – On the other, Mr. Gordon’s research suggests that much of the recent rise in productivity comes from industries such as finance or professional services, where a significant number of employees have been working remotely.

“To the extent that this shift from office to at-home work is temporary, so is the productivity-growth revival,” he said.

 

 

Productivity is key to “levelling up”

In an article for Prospect magazineAdrian Pabst, a professor of politics at the University of Kent, claims  HMG’s current initiatives for ‘levelling up’ are somewhat half-hearted . Pabst is also the author of ‘The Demons of Liberal Democracy (Polity)’ and Deputy Director (Social and Political Economy) at the National Institute of Economic and Social Research

The government’s White Paper sets out an ambitious agenda

to “level up” deprived areas but requires a laser-sharp focus

on productivity if it is to succeed.

 

Productivity—output per hours worked—is the foundation of prosperity and life chances. Higher productivity, which requires investment in both labour and capital, raises living standards through higher wages and assets. Those assets are not just financial or real estate but also intangible ones like skills or social trust.

As high-performing countries such as Germany show, a more productive economy needs sufficient fiscal firepower as well as coordination and cooperation between national, regional, and local levels. After unification in 1990, fiscal transfers from West to East Germany totalled about £70bn a year over nearly 30 years. This reduced the 40 per cent productivity gap to 15 per cent. It massively boosted the worse-off areas, and led to output per person in certain eastern German regions now exceeding that in certain northern English regions where, according to research by the National Institute of Economic and Social Researchproductivity is less than half of that in London.

This fact alone shows how broken the British economic model is, stuck in a vicious circle of low investment, low productivity, low skill, low wage and low growth. UK productivity growth has flatlined since the 2008-09 financial crisis. Since then, according to figures published by the Office of National Statistics last month, output per hour growth was the second slowest across G7 advanced economiesNIESR forecasts that over the period 2023-27 the economy will grow by just 1.25 per cent per annum.

None of this is helped by an overcentralised system of governance where lower levels lack the decision-making powers and resources which are concentrated in Westminster and Whitehall. London and the metropolitan parts of the South such as Cambridge or Oxford are doing well enough, but the rest of the regions are falling further behind.

For over a decade, we have seen deepening disparities between regions. On a host of measures, from income and asset inequality to life expectancy, people in suburban, rural and coastal areas in the Midlands and the North are doing a lot worse than those living in urban, metropolitan areas in the South.

The Levelling Up White Paper is a good start to tackle some of these inequalities. But the government has to implement three reforms that are vital for sustained regional regeneration.

  1. A long term skills plan:

First, a long-term strategy that combines a holistic approach with the right scale of investment, instead of a patchwork of policies and endless churn, as we have seen for too long. This means No 10 will have to overrule the Treasury’s refusal to commit new spending.

For instance, £3 billion pledged on skills over the next three years is not much of a “skills revolution” as it barely returns expenditure to 2010 levels. A quick win is to triple the funding for mixed HE/FE colleges in deprived towns such as Grimsby, Southend, or Blackpool—places that voted Brexit because  after decades of neglect the people who live there want an economy that benefits everyone.

The government could also bring together business, trade unions and local government to provide significantly more apprenticeships and more vocational entry opportunities to the labour market, especially in areas of skills shortages such as health and social care. Adults need lifelong learning grants as part of a system of education and training that goes well beyond the sticking plaster of “skills bootcamps.”

Second, the UK is in dire need of some institutions with a long-term outlook that can boost greater investment, especially capital investment in productive activities such as high-tech manufacturing jobs and high-quality service jobs. The National Infrastructure Bank located in Leeds is a beginning, but more than infrastructure projects are needed to regenerate our regions: financing energy-efficient, socially affordable housing, providing assistance to small businesses and helping with export finance are just some examples of how a National Development Bank has supported thriving economies like Germany and South Korea. The point is not to pick “winners” but rather to help unlock greater private investment.

3. Regional devolvement of power and funding:

Third, regional regeneration has to involve local design and delivery. Knowledge about local needs and comparative advantage is key, as is accountability to local citizens. The greater powers to metro-mayors and new mayors announced in the “Levelling Up” White Paper are necessary but not sufficient. Local councils need more decision-making powers and resources that are independent of the Treasury.

The current system of partial business rate retention is too limited and it benefits already affluent parts of the country. While the government’s pledge in the October 2021 budget to increase local government expenditure by 3 per cent is welcome, it does not begin to compensate for the cuts since 2010 and the rising costs associated with social care. Full business rate retention should be considered, or a share of income tax receipts.

Local government is emasculated and emaciated, lacking the power and resources to address the deep gaps in local and regional capital markets and labour markets. Little wonder that over two-thirds of all Foreign Direct Investment and venture capital flow into London and the metropolitan South-East.

The UK has one of the poorest productivity performances and highest inequalities among the OECD’s 38 advanced economies. Regenerating our regions requires a decentralised economy and governance system. If policymakers return to the same economic structures post-pandemic that failed to resolve the productivity problem pre-pandemic, then the UK is set for another decade of low skill, low wage, low productivity and low growth. We must and can do better.

Five Days a Week in the Office? It’s Better for Everyone.

Allison Schrager makes several good points against 100% WFH – she is a Bloomberg Opinion columnist, a senior fellow at the Manhattan Institute and author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”

I recently spoke with a 50-ish successful executive at a large media company. She said she never wanted to go back to the office. She loved working from her second home in Miami — or the resort in Mexico she just returned from. She said she was just as productive, if not more, working this way. I asked if she thought the arrangement was equally good for junior staff.

This executive had built valuable contacts, culture and camaraderie by logging many hours in the office with her co-workers while rising through the ranks. There is a lot of grunt work early in a career, but time in the trenches with colleagues, ordering takeout when you work through dinner and going out for drinks afterward is what helps make it bearable. You form relationships that last the rest of your professional life.

The executive agreed that she benefited from spending days in the office when she was younger, and that senior staff had mentored her. I asked if she felt a need to repay that generosity by going back. She thought about it, and then argued that going to the office posed a health risk, so it’s different now.

Going back to work is emerging as a collective-action problem. Older, more established people don’t want to go back and don’t feel it’s necessary to do their jobs. But having them return to the office is important for workplace culture, long-term productivity and for passing skills and influence on to younger colleagues. If these older workers don’t return, there is less motivation for younger people to return, too. And right now not that many people are going back: Office occupancy rates are only at 40% in the U.S., and are even lower in cities like New York and San Francisco.

True, going to the office may feel like a waste of time. It involves putting on nicer clothes and commuting, sometimes for long distances.

Research by Stanford economist Nicholas Bloom and his co-authors estimate that working from home during the pandemic increased productivity as much as 5% (depending on the job), largely from avoiding a commute and having more quiet time. But he explained over email that there can be too much of a good thing: “I see the WFH impact on productivity a bit like going to the gym — great in moderation but problematic in excess.” He is concerned about the long-term impact on productivity from too much working from home. He says you need about three days in the office for many jobs to facilitate creativity, innovation and culture building.

So why not just go back two or three days a week?

Bloom’s survey suggests that’s what most people who can work remotely plan to do. He thinks a hybrid model may be optimal productivity-wise, since it balances saving commuting time with enough in-person time. And the return to the office will probably start that way.

But it may not be sustainable. Eventually, the working-from-home option may become equivalent to the idea that you don’t have to answer your email on the weekend. Technically it’s a choice, but not one you can really make if you want to advance. Showing up every day signals more dedication and offers the opportunity to volunteer for big assignments, or just chat over coffee and decide something important with the other people who showed up that day.

Your boss wants to boil you slowly like a frog

Chloe Berger, writing for Fortune.com, says beating the Monday blues will be especially trying for Google employees. Workers are required to come into company headquarters three times a week. But according to Laszlo Bock, former chief of Google human resources and current CEO of Humu, this hybrid model won’t be around much longer.

Bock says that after three to five years of flexible work models and hybrid plans, the normal in-office schedule will prevail at Google—and beyond. He predicts this transition will happen over the next few years, telling Bloomberg it’s the “boil the frog method.”

“The purpose of the ‘boil the frog method’ [is] to do it subtly and thereby avoid difficult questions and conflict,” Bock told Fortune. “But that’s not only bad for trust and morale, it’s also not the best thing for employees or for the company.”

Bock said his research at Humu shows that the perfect mix of employee productivity and worker happiness is a 3+2 schedule, in which three days are spent in the office, and two are remote. This combination, he says, gives individuals the chance to build relationships in-office and work on individual tasks that are easier at home.

But Bock says that executives are reluctant to accept permanent work-from-home models. This could be due to the large investment that companies make when buying luxury offices. But it could also have to do with management itself.

“Most executives have been working in offices for 20 to 30 years, so it’s comfortable for them. It’s the environment in which they know how to lead,” he told Fortune. “They want to go back to what is familiar, and they believe their experience trumps what Humu’s science shows: A hybrid model is better for productivity and happiness than being in the office five days a week.”

When the pandemic hit in 2020, many white-collar jobs shifted to remote work for safety reasons. The tech sector readily adapted to this new format, as many employees learned that they liked the flexibility that working from home afforded them. But a new wave of companies, including tech giants like Meta and Apple, are starting to try to coax (or summon) their workers back to their headquarters.

While some studies have shown that this shift to virtual work does not lead to a lack of employee productivity, Bock tells Fortune that this research is missing the full story. “It’s true that total workforce productivity hasn’t changed, but workforce productivity per hour worked has dropped. People are working longer hours, taking fewer breaks, and working on weekends because it’s become impossible to turn off work.” He adds that there is an emotional toll to working isolated without any teammates or coworkers present.

Bock said he thinks workers will likely begin to want to come into the office themselves when they see bosses giving more promotions and opportunities to staff who are in the building over those who work from home. The new power dynamic will likely force reluctant employees to get back to the office when trying to gain favor with their supervisors.

Bosses looking to push their employees back to their headquarters should make sure that there are obvious benefits to coming into work. Whether that be providing in-person coaching opportunities or free lunches, Bock suggests that employers make the perks to working in the office clear. He also urges companies to ensure that their promises hold weight.

“Many companies will promise a great in-office experience but will fail to deliver,” Bock said.

 

The COVID ‘productivity boom’ is a myth

Janice C. Eberly is reported on by ‘Business Insider’ – she claims that, with remote work, employees lose the connectivity that might help them advance their careers – in particular:

  • New research shows the GDP would have fallen more steeply in 2020 if people weren’t able to work from home.
  • But working from home prevents employees from forming strong bonds to their organization.
  • Remote work poses short-run benefits and long-run costs for both companies and workers.

In 2020, Janice Eberly gave a keynote talk to a finance society in the UK. Normally, she would have flown overseas and spoken in person to a room of attendees. But in the midst of the COVID-19 pandemic, she addressed people by videoconference from her house in Illinois.

After the talk, Eberly, a professor of finance at Kellogg, chatted with two colleagues and posed a question: What would be different if the COVID-19 pandemic had happened in the early 2000s, when most people didn’t have broadband Internet connections at home and Zoom didn’t exist?

Without a doubt, the virus had been catastrophic for public health and the economy. But in the past, firms might have also laid off or furloughed most office workers; now, many people were still doing their jobs remotely.

Just how much of a difference did this make, the researchers wondered. In an analysis of seven countries, the team found that GDP would have fallen much more steeply in early 2020 if people had not been able to work from home.

The economic contribution of remote workers came not only from their labor but also from these workers providing their own capital. For instance, they converted parts of their homes into makeshift offices and covered the cost of utilities such as electricity and Internet connections. And they repurposed computer equipment that had originally been purchased for personal use to perform work tasks.

Whether companies and employees will — or should — continue to push for remote work in the future isn’t clear. The team’s study suggests that work in many industries is highly “substitutable,” meaning employees are generally able to perform the same tasks at home as in the office. And people’s home office setups are already in place, so little effort is required to stay remote.

But working from home comes with downsides too. For one, it pushes employees “further in the direction of having a gig” rather than a strong attachment to an organization, Eberly said. This type of arrangement could ultimately be detrimental to both the firm and the worker.

“I worry about short-run benefits and long-run costs on both sides,” she said.

Building in resilience

Businesses have made efforts in the past to create backup plans for moments of crisis. For instance, some firms arranged alternate spaces where employees could work if the power went out in their buildings. Or they cross-trained employees so that critical services could be performed by, say, the Chicago office if the New York office went offline.

Managers generally figured that these stopgap measures would be used only briefly. With COVID, “that strategy you anticipated the need to do for a few days ended up being 18 months,” Eberly said. Yet companies were still able to rally, thanks to the webcam-equipped laptops and fast Internet connections that employees already had available in their homes, along with easy-to-use videoconferencing software.

So just how much did employees contribute to the economy by shifting to working from home? To quantify this, Eberly collaborated with the colleagues with whom she had chatted at the conference, Jonathan Haskel at Imperial College Business School and Paul Mizen at the University of Nottingham. The team focused on seven countries: the United States, UK, Spain, France, Italy, Germany, and Japan.

The researchers gathered data on the countries’ GDP, number of employed people, and the hours they worked. They also compiled information about workplace capital, based on the amount of money firms had spent on expenses such as equipment, office furniture, and property. Records of commercial electricity usage allowed the team to estimate how much offices, factories, and other work spaces were being used. And by using mobility data from Google, the team could also estimate the number of hours employees worked remotely or in person.

A false productivity boom

First, the researchers examined declines in output produced at companies’ premises such as offices and factories. They calculated each country’s expected drop in GDP based on those figures — which showed what would have happened without a transition to remote work — and compared them with actual GDP trends.

On average, GDP would have fallen by nearly twice as much from the first to the second quarter of 2020 if no one had been able to work from home, the team estimates. The contribution of remote work was “huge,” Eberly said.

The team then considered productivity: the efficiency of production after accounting for all inputs and outputs. Anecdotally, “we saw firms saying, ‘Wow, we’re so productive during COVID,'” Eberly said. After all, many companies had drastically scaled back on office space or had far lower utilities usage, so their business costs had decreased. Meanwhile, employees kept producing similar levels of output.

That claim appeared to be true in some countries if the researchers accounted only for inputs at workplaces, such as the cost of office space and utilities. In the US and UK, “it actually looked like there was a boom in productivity,” she said.

But this productivity measure doesn’t account for the fact that work space and utilities were still being used at homes to support the business; they were just paid for by employees. “You’re not counting all of the inputs,” she said. Once the team included inputs at home, the boom largely vanished.

So should companies pay for the capital that workers are contributing, such as their home office space and electricity bills? Workers haven’t raised a big stink about these costs yet, perhaps because they no longer have to pay for commuting expenses. But they may eventually start asking firms to compensate them.

“That could easily become part of the contract,” Eberly said.

From Netflix to PowerPoint

The researchers then focused on employees’ home computing equipment. Many people already had laptops and Internet connections at home that they had bought for personal use and repurposed for work during the pandemic. How valuable was that type of capital to the economy?

They found, overall, that workers’ home computing setups contributed roughly as much to countries’ output as did the information and communications technology (ICT) that firms used at workplaces. This result was calculated using a measure called output elasticity. If companies’ ICT doubled, the country’s output would rise by 5%; if home computing equipment doubled, output would increase by 4 to 14%.

It’s somewhat surprising that the contribution of home capital would be on par with that of workplaces, Eberly said. “It’s not as if you optimized your home computer setup” for your office job, she said. “You probably chose it to watch Netflix.”

The team couldn’t directly measure whether people were more productive at home or at work. But they did look into a related question: As it started to cost companies more to have employees work in person — perhaps due to safety and social-distancing measures — would they respond by shifting people to do their jobs at home? This would suggest a high degree of “substitutability” — meaning much of an employee’s work could be done either at home or in the office.

To investigate, the researchers analyzed survey data from the UK. Companies in a variety of industries had been asked how the costs of keeping employees on the premises had changed over the course of the pandemic. New expenses might have included buying masks for staff or rearranging work spaces so employees could socially distance.

As expenses increased, companies in some industries — particularly professional services — sent employees home to work in greater numbers. And when costs came down again, people returned to their offices.

“We found that there’s a pretty high degree of substitutability,” Eberly said.

Weaker ties

Clearly, remote work helped bolster economies during a crisis, despite the challenges of pivoting quickly, family-care demands, and the pandemic itself. So should companies and employees automatically embrace remote work for the indefinite future?

Not necessarily, said Eberly. When people provide not only labor but capital, they’re becoming more similar to gig workers who are responsible for their own “kit,” such as a freelance photographer. Remote work could also weaken connections with colleagues and employees’ attachment to their organization.

From the firm’s perspective, that mentality raises the risk that employees will be more likely to leave their jobs for greener pastures. And for workers, career growth could stagnate; moving up in an organization often relies on developing strong ties with colleagues over many years.

“You lose the connectivity that might help you advance at work,” Eberly said.

Employers want workers in the office for the company culture, not productivity

Rebecca Greenfield, writing in Bloomberg News, raises some interesting thoughts concerning WFH – especially those of Mark Mullenweg, founder of ‘WordPress‘, the software which brings you this post, and CEO of web software maker Automattic, who has operated for 16 years without a home base

Ask executives why they’re desperate to get workers back in offices, and productivity—the corporate north star and initial obsession of pandemic anxiety—suddenly has nothing to do with it. Many sound like Judith Carr-Rodriguez, the chief executive officer of FIG, a New York City-based advertising firm. She was shocked at how well things went when her staff of 80 pivoted to remote work; the firm actually grew. Yet, she’s resisting a fully remote future because of the je ne sais quoi of the office. “I know people are being productive,” she says. “But are they learning, growing, being challenged? I worry we’re creating a culture where people are not exposing themselves in ways they would be in the office.”

We know by now that people were wildly productive during COVID lockdowns. A Goldman Sachs Group Inc. survey from July found that worker output per hour rose 3.1 per cent in 2020, more than double the growth rate of the previous business cycle. Yet bosses have been pushing hard for in-person work ever since, well, it didn’t seem in poor taste to. Multiple heads of the biggest U.S. banks, have, in so many words, called working-from-home the dumbest idea they’ve ever heard. Sure new COVID-19 variants have upended their short-term plans, but eventually they want butts in seats, at least some of the time. In a June survey of 1,000 human resource professionals, fewer than 10 per cent said their employers plan to operate fully remote long term.

While talking to nearly a dozen CEOs about this attachment to a physical space, they all had the same reason for bringing people back. “We’ve spent all the effort to create this great culture,” says Willy Walker, the CEO and chairman of Walker & Dunlop, a commercial real estate financing firm. Walker’s had a “get vaccinated; get back in the office” attitude for his 1,200 employees since last summer. When I ask him to elaborate on what he means by “great culture,” he says—from Denver, in one of his company’s 41 offices—“that’s a long conversation.”

What is workplace culture, anyway? Talk to a half-dozen management theorists and you’ll get as many different answers. Some say it’s a common set of beliefs, behavior, and assumptions shared by a group of people working together. Others believe it’s what employees say their goals and values are and how they act—which aren’t always the same things. What they all agree on is that some sort of culture inevitably develops when people spend time together. “Cultures emerge, whether you want it or not,” says Amir Goldberg, a researcher studying organizational behavior at the Stanford Graduate School of Business. “It’s not as if there are companies without a culture.”

There is little doubt among the experts that shifting to fully remote settings has changed company culture. People are interacting in new and different ways. But what’s most worrisome to bosses is that they now have less insight into what those changes look like because they can’t physically witness them. And even if they do know what’s going on, they have less power over everyday interactions. “Culture is a way for organizations to control their members, police their behavior,” says Goldberg. “That’s difficult to do when you can’t—after a meeting—say: ‘You know, John, maybe you shouldn’t have said x or y.”

It’s not entirely unreasonable or self-serving for leaders to fret about these things. Strong cultures do enhance performance and can manipulate people to work more, but they also reduce harassment, burnout, and fraud. What the office enthusiasts misunderstand is that facilitating healthy workplace interactions doesn’t require the trappings of a conference room or a midtown high-rise. “Culture is happening in every interaction that the people in your company have with each other, regardless of whether you’re in person or not,” says Matt Mullenweg, the founder and CEO of the web software maker Automattic.

Mullenweg has some credibility when it comes to this point: His company has operated without a home base for its entire 16-year existence. The founder has become a sort of sage for the post-office era. Mullenweg hosts a podcast called Distributed, on which he has heady, meandering conversations about remote work with such guests as Twitter co-founder Jack Dorsey and Basecamp’s Jason Fried. They talk about tips for improving Zoom meetings—have people submit their ideas via Google Docs beforehand—and creating “water cooler moments” on Slack.

Mullenweg is the prototypical millennial startup success story; he dropped out of college to work on his side project, WordPress, the open source platform that now serves as the backbone of many online publishers. A year later, he started Automattic, the parent company of WordPress.com, and hired whomever he thought was best for the job, wherever they happened to live. His first employees worked from Ireland and Texas. The company staff has since grown to more than 1,800 people working from every continent except Antarctica—and it still has no headquarters. Mullenweg circulates among Houston, San Francisco, and Jackson Hole, Wyo. He has no love for offices, calling even the nicest ones a “very subpar experience,” but in some ways he doesn’t sound that dissimilar from his peers who favor offices. “I love thinking about culture,” he says.

To Mullenweg, there is nothing inherently beneficial about working alongside people in a physical space. Indeed, the work-from-home revolution has revealed that aspects of the analog experience are toxic for many. Black workers, for example, say that while working from home in the past year, they’ve been treated more equitably, have come to better value their co-workers, and feel more supported by management, an October survey from Slack’s Future Forum found. Many variables could be contributing to that, but Black people say physical distance from racism and everyday slights has brought relief.

Even Walker & Dunlop, the real estate financing firm, saw a 10 percentage point increase in employees saying they felt like they could bring their whole selves to work during the pandemic, says CEO Walker. That question is known to be a key predictor of employee engagement, which keeps people happy and productive so they are less likely to get antsy for new opportunities. Walker recognizes that eliminating certain in-person dynamics has relieved burdens for some, but he can’t let go of the idea that the costs of staying home are too high.

He could be right in his particular case; just as the office doesn’t automatically confer some cultural special sauce, neither does working from home. The pandemic has revealed plenty of ways toxic cultures can fester in our digital work lives. Workplace harassment happens online, for one. It can be isolating; parents fear they’re being unfairly judged, and young workers or new hires may have a harder time learning the ropes. Managers can also easily exploit the lack of boundaries between home and work lives.

But as much as bosses want to will remote work away, all signs point to at least some days spent at home. Even the finance industry, which has aggressively pushed for a mass return, is seeing just 27 per cent of workers commute to its skyscrapers daily, found a survey in October of major employers by Partnership for New York City. In the meantime, homebound workers are forming new cultures. Stanford’s Goldberg says it’s too soon to tell whether those are worse or better than what existed before the pandemic. He suspects bonds—both among workers and with their organizations—have weakened. A more interesting question to him is: Who’s benefiting from the new world order?

Mullenweg encourages his fellow CEOs to lean into remote work. He has some practical tips: When he hires two people in the same city, he likes to have them work on different teams to encourage some interteam mingling. Automattic uses a networking tool called Donut that randomly pairs two people for informal chats over Slack—his company’s way to simulate some of the informal networking that happens in offices. He suggests that leaders, particularly those who once relied heavily on charisma, brush up on writing skills: Clarity is key when communicating mostly via email and chat.

It takes work. “I wish I could say there was some secret to distributed organizations—that if you do this one thing, it would unlock everything,” Mullenweg says. “It’s really about understanding your colleagues, communication, empathy.” Whether that happens in the company kitchen or over Zoom, that’s incidental.

Sunak’s economic growth philosophy

Rishi Sunak’s Mais lecture revealed a chancellor focusing hard on how to address the UK’s flagging long-term economic growth but overlooking the need for a more muscular, interventionist approach, says Giles Wilkes for the Institute of Government

After last autumn’s budget, I asked “where is Rishi Sunak’s plan for growing the economy?”. In a lecture given on the day Russia invaded Ukraine, and two years into his chancellorship, he delivered much of the answer.

 

The annual Mais lecture is often an opportunity for current or future chancellors to set out their economic views. Sunak’s was worth the wait, even if many of his positions are exactly those you might expect of a UK chancellor. No one should be surprised by his support for sound money, rule of law and free trade – although it draws attention to how these values are under some strain in the current policy environment. His refusal to lend support to the cause of unfunded tax cuts was noteworthy given the popularity of that idea among Conservative backbenchers unhappy with the policy of the government.

There was nothing revolutionary in Rishi Sunak’s Mais lecture

Unlike, say, Nigel Lawson’s much-lauded 1984 lecture, Sunak’s speech does not cement a stark new direction for government policy. His diagnosis of the UK’s productivity ills reflected themes seen in last year’s Plan for Growth, which in turn reflects many orthodox views typical of the last 50 years. In this orthodoxy, what matters for growth are Capital, People and Ideas. Relabel them Investment, Labour and “total factor productivity”, and you have the basic building blocks of many growth models built after WWII.

Instead, what distinguishes this speech is a blunt refusal to be complacent about growth, and analytical clarity about why recent performance is not good enough. More than other recent chancellors, Sunak does not think improved growth will just turn up if we wait long enough. Something needs to change to break us out of what he called the “great slowing down”. This is a response to the call from the CBI to “go for growth”, as well as the more pointed attacks from Labour’s new shadow Chancellor, Rachel Reeves. [1]

Having set out where he thinks we must concentrate – productive capital, skilled people and new innovations – Sunak distinguished where within each category he thought the real problems lie.  So, for example, on Britain’s poor rate of capital accumulation, the problem lies with business investment, not the government’s capital spending (which is high by historic standards). And business investment cannot be blamed on having the wrong sectoral mix, but perhaps on tax incentives for investment. With skills, the problem lies neither with schools nor our world-class universities, but the adult skills system. On innovation, the Chancellor took the side of the optimists over those who see nothing in modern technology to match the impact of the 20th century’s breakthrough inventions.

All in all, it was like a talk delivered by a bright new executive brought in to rescue a failing company, breaking the problem down into more manageable chunks to be targeted for special treatment.

The focus is broadly right but solutions are hard

The data supports his chosen focus – to a degree. Weak business investment is indeed a longstanding problem. ONS analysis suggests that insufficient “capital deepening” is responsible for a quarter of the 26-percentage point gap in productivity that has opened up since 2008. [2] The ever-lower corporate tax rate achieved between 2010 and 16 cost a great deal without appearing to work, as Sunak acknowledged. This suggests that any improvements to incentives may arise through better capital allowances – maybe, something like the CBI’s proposal of a Permanent Investment Deduction. [3]

Weak skills, while less directly responsible for the sudden slowdown in productivity growth, are key to any explanation for geographical imbalances in earnings and productivity [4]. The chancellor is right to draw attention to relatively neglected adult skills, with the bold promise to make education “a central experience through your whole life”. However, solutions may not match the promise. A plan to tidy up the thousands of qualifications and review the Apprenticeship Levy will be welcomed by business, but does not signal a step-change.

The chancellor ascribes the rest of the UK’s underperformance to the catch-all term, “multi-factor productivity”; effectively, it captures how cleverly the economy uses its endowments of capital and labour. Again, solutions are not obvious, although the government’s large increase in R&D spending and efforts to bring the private sector along are the right way to start.

The chancellor appeared to reject active industrial strategy 

The speech was as interesting in what it downplayed or rejected as it advocated. There was little reflection on how this productivity problem really mushroomed since the financial crisis of 2008-9. Slow-moving factors like skills, investment and technology do not suddenly go into reverse – yet that is what charts of productivity growth imply. The opposition Labour party is less reticent on this point, suggesting that a ‘lost decade’ of weak demand growth (abetted by insufficient government support) was the culprit.  With the UK now close to its supply limits, the chancellor may not think this is relevant debate. But if the Ukraine crisis triggers another serious slowdown, government fiscal support for the economy will return as a hot topic.

Nor does the chancellor dwell on the UK’s weak trade performance since the Brexit referendum, or on the damage likely to result from reduced access to the huge market on our doorstep. This is understandable in political terms, but quite an absence in such a pro-free-market speech. Any plan to achieve higher growth surely needs to tackle the question of UK’s underperforming exports, too.

The chancellor appears to reject active industrial strategy, or what he called the idea that “government should decide which sectors will be important in the future”. This marks a dividing line not only with the opposition, but also elements of his own government.  The Innovation Strategy from BEIS contains phrases like “key sectors likely to transform our world in future” and talks about identifying the key technology families. The Levelling Up White Paper is also more interventionist in tone, appearing far more bullish about government’s ability to kickstart innovation and growth around the country, for example.

Finally, there was little discussion of the quality of the UK’s economic institutions as a cause of weak productivity – such as the competition system, utilities regulation, labour market rules or how the financial system works. Given that Brexit was meant to represent an opportunity to govern Britain differently, this was a surprise. Does the chancellor think there are few deeper structural problems in the UK that stronger skills, more R&D and better tax incentives for investment might not fix? More charitably, it may reflect the difficulty of covering too much in a single speech.

The economy will need a more muscular, directive approach than Sunak’s non-interventionist approach

In conclusion, Rishi Sunak is pushing himself towards the heart of the government’s efforts to address the problem of flagging long term growth. This is welcome – the consequences if the country must live with just 1% growth as the norm are very disquieting. By most accounts, Sunak is academically omnivorous, open-minded and cares about what actually works, not just what sounds good. This showed, and on the strength of this speech, he means to bring Treasury analytical rigour to the task, allied with an attention to the details of growth policy that you do not often see in a chancellor.

That is the good news. Against this, critics will see here a very “Treasury view” account of the UK’s struggles – an account that has been dominant throughout the years of productivity disappointment. Despite his acknowledgement that focussing on the foundations “will not accelerate growth in and of itself”, what he set out so clearly is still very much a high-level foundational philosophy (you do not get much more high level than People, Capital and Ideas). But the crises and challenges of the past few years will demand a much more muscular, directive approach. Sunak’s non-interventionism risks becoming too distant from a new orthodoxy that sees a clear need for government direction in many aspects of the economy: the shift to net zero, the push for more resilient supply chains, and more focus on national security to name three. A series of regulatory reviews is not enough.

The Treasury mind resists this, pointing out that the evidence for all this new interventionism being growth-enhancing is spotty and selective at best. That is fair; our work at the Institute for Government confirms that massaging Britain’s sectoral shape would do little for growth. But intervention and structural change for the UK are coming, whether the Treasury wills it or not. Even before the eruption of the Ukraine crisis, governments in the USA and the EU were committing hundreds of billions into programmes intended to transform their economies, not just shore up their foundations.

No matter how excellent this foundational analysis, what the government needs from its preeminent economic department are some positive ideas about how to go about it, not just cultured resistance.

Britain’s productivity has been battered by the scarcity of affordable homes in cities

Affordable housing is an important but often-overlooked factor in determining a nation’s productivity performance

– the following article published by City.am

Room Rents Fall By Up To A Third In Inner London

Londoners are feeling the squeeze. The Bank of England has forecast the biggest annual fall in living standards for at least three decades: energy costs are surging, and rents are going up by 5.5 per cent.

The high cost of housing leads to a worse quality of life in familiar ways, through lower disposable incomes, overcrowding, low rates of home-ownership, long commutes and poor quality homes. But that just scratches the surface. By making it harder for entrepreneurs to start and scale businesses, expensive housing holds back the fundamental driver of increasing living standards: economic growth.

Decades of failing to build enough homes has shrunk London’s talent pool by pricing out young people and pushing them towards less productive jobs. Think of a biology graduate from a top university. She could move to London and work in a biotech company, earning about £45,000, or she could move to Blackpool and work in something lower-paid, earning about £35,000. But in Blackpool she would have a larger home, a shorter commute, and after tax and housing costs would still come out about £1,000 better off.

 

Entrepreneurs are punished too. After paying higher staffing costs for less productive work, they are then punished again with high office rents.

Peter Francis, the co-founder of FluidStack, which rents out data centres, says that they hire remotely when they can, to save on costs, but that it comes at the expense of teams working together less and therefore damages their productivity. And Elle Sharman, the founder of Swan, an algorithmic matchmaking app, says that she would like to build her business in London but that it’s difficult to justify that choice when housing is often three times cheaper in other European cities.

As housing becomes more expensive in Britain, we lose out on entrepreneurs who either choose to move abroad or choose not to start businesses at all – meaning we have fewer new businesses, fewer of the jobs they create, and less economic growth.

It’s not all doom and gloom. The foundations of the housing crisis are hooked up to low productivity, true. But that also means there is a path forward. The planning system is rife with opportunities to open this up, such as creating  greater flexibility to switch properties between commercial and residential uses, building on low-quality agricultural land near train stations, and the Michael Gove-endorsed idea of allowing suburban streets to vote to densify.

By making housing cheaper, we can raise London living standards and boost economic growth. It would bring in entrepreneurs, and support the ones already here, bringing us many more innovations and making us more productive.

A short history of jobs and automation

Sean Fleming, writing for the World Economic Forum’s Sustainable Development Summit, highlights that robotics and automation have come to play an important part in many aspects of modern manufacturing – the same could be said for the impact of computers and the internet on the other 80% of developed economies, the service industries.

A worker walks past a 'Motoman' dual arm robot by Japanese company Yaskawa Electric during final preparations at the "Hannover Messe" industrial trade fair in Hanover April 18, 2008. The world's leading fair for industrial technology, with about 5,100 exhibitors from 62 nations, opens to the public on April 21 and runs till April 25. The exhibitors will showcase their latest trends in automation, technologies for maximizing energy efficiency and security and automotive solutions with Japan as this year's guest country. REUTERS/Christian Charisius (GERMANY) - BM2E44I0ZTM01

  • One-third of all jobs could be at risk of automation in the next decade.
  • People with low educational attainment are most at risk.
  • Previous waves of mechanization have caused difficulty and anxiety too.
  • Technology could create millions more jobs than it displaces.

 

Millions of people across the globe have lost their jobs to the COVID-19 crisis. In major economies like the US, some of those jobs have already been recovered, although “there is a long road ahead,” as Bank of America economist Michelle Meyer told The New York Times.

But for many people, the job they used to do might not be coming back. And increasingly, as employers battle with the challenges of the pandemic, this could be due to automation.

automation ai machine learning jobs economics workforce skills important soft employer employee recruitment vacancies cv resume automation
Percentage of existing jobs at potential risk from automation.

 

Anxiety over job losses caused by the increased use of machinery has been around for hundreds of years. With each new development, someone has faced the prospect of their livelihood or quality of life being changed irrevocably.

16th-century stockings

In the 16th century, all labour was manual labour. Until a clergyman named William Lee hit upon an idea to mechanize – at least in part – the production of stockings. He adapted looms that were used in the manufacture of rugs to make a long sheet of stocking material, which could then be cut and stitched into stockings. It was far quicker and cheaper than the traditional method.

There is a legend that Lee’s request for a patent on his machine was rejected by Queen Elizabeth I, who was concerned for the welfare of former stocking knitters, who would end up out of work.

At the time, his machine had limited wider impact but became the basis of other textile machine developments.

19th-century textile riots

Hundreds of years later, English textile workers faced bigger changes. And they weren’t the only ones.

As the Industrial Revolution gathered pace, people moved from rural communities into the new, fast-growing cities. There they found work in mills and factories, where steam-powered machines were driving unprecedented growth in output of items previously hand-crafted by artisan workers.

Farmworkers too faced the challenge of mechanization. Growing populations demanded more food, and that drove the adoption of machines to handle everything from sowing seeds to harvesting crops.

The reaction from working people was not uniformly positive. In the UK, a movement that became known as the Luddites struck back at the increased use of automation. They rioted, smashed machines and even set fire to business owners’ homes.

20th-century car manufacturing

The use of robots in vehicle manufacture became increasingly common in the latter part of the 20th century. Initially used to perform simple, repetitive tasks, they helped increase output, standardize production quality and keep costs under control.

In 1979, the Fiat motor company ran a TV ad showing the production of its Strada hatchback complete with the tagline “hand built by robots”.

Assembly-line tasks such as welding and spray-painting were among the first jobs to migrate from people to robots. But humans were on hand to supervise the machines. As the technology has improved, the range of jobs passed on to robots has expanded to cover more complex procedures, such as fixing windscreens into vehicles. They are also widely used to move heavy and bulky items through factories.

Automation and the future

According to many estimates, there will be more jobs created over the next few years than lost by automation.

The challenge facing world leaders and policy-makers in the wake of COVID-19 will be to ensure that people aren’t overlooked in the rush to rebuild economies

“COVID-19 has accelerated our transition into the age of the Fourth Industrial Revolution,” says Klaus Schwab, founder and executive chairman of the World Economic Forum. “We have to make sure that the new technologies in the digital, biological and physical world remain human-centred and serve society as a whole, providing everyone with fair access.”

A brief history of GDP

Author Peter Vanham, from the World Economic Forum, looks at GDP – Gross Domestic Product – the sum of the value of all goods and services produced in a country each year, which has become the main tool for measuring a country’s economy – and rightly emphasises its inventor’s warnings about its limitations

What if your invention changes the world, but not in the way you intended it? That is what happened to Simon Kuznets, a Russian-born US economist, who helped develop the concept of gross domestic product, or GDP, almost a century ago.

For Kuznets, who tried to make sense of the Great Depression and its impact on the economy, GDP was a useful measure. It helped account for how much goods the US economy produced, and how quickly it rebounded after the crisis. But the economist also warned it was a poor tool for policymaking – to no avail.

For many markets and policymakers, GDP growth has become an all-consuming metric, even though it is counterproductive to solve some of the world’s biggest problems – inequality and environmental degradation – which are getting worse over time.

The crises we are facing may be the ultimate “I told you so” of an oft misunderstood economist, and could be summarized as “Kuznets’ Curse”. But before we get deeper into this “curse”, let’s examine who exactly Simon Kuznets was, and when and how he invented GDP.

Who was Simon Kuznets?

Simon Kuznets was born in Pinsk, a city in the Russian Empire, in 1901, and studied economics and statistics at the University of Kharkiv (now in Ukraine). But despite his promising academic record there, he would not stay in the country of his birth for long after reaching adulthood.

In 1922, Vladimir Lenin’s Red Army won a years-long civil war in Russia. With the Soviet Union in the making, Kuznets, like thousands of others, emigrated to the US. There, he first got a PhD in economics at Columbia University, and then joined the National Bureau of Economic Research (NBER), a well-respected economic think tank.

His timing was impeccable. In the decades after his arrival, the US grew to become the leading world economy. Kuznets was there to help the country make sense of that newly found position. He pioneered key concepts that dominate economic science and policymaking to this day and became one of the world’s most prominent economists.

Backdrop of boom and bust

When Kuznets arrived in the US, the country was on an economic high; it came out of the First World War swinging. US manufacturers introduced goods, such as the car and the radio, to the country’s huge domestic market, selling them to a public hungry for modern goods. Aided by a spirit of free trade and capitalism, the US soon became the world’s leading economy.

But the heady experience of the Roaring Twenties soon turned into the calamitous Great Depression. By 1929, the booming economy had spiralled out of control.

The context was one of economic extremes. A handful of individuals, such as oil magnate John D. Rockefeller, bank titan John Pierpont Morgan and steel giant Andrew Carnegie, controlled colossal amounts of wealth and economic assets, while many workers had a much more precarious existence, still often depending on payday jobs and agricultural harvests.

Moreover, an ever-rising stock market, not backed by any similar trend in the real economy, meant financial speculation was reaching a fever pitch.

In late October 1929, a colossal collapse of the stock market occurred and set in motion a chain reaction all over the world. People defaulted on their obligations, credit markets dried up, unemployment skyrocketed, consumers stopped spending, protectionism mounted, and the world entered a crisis from which it would not recover until after World War II.

The birth of GDP

As US policymakers grappled with how to contain and end the crisis at home, they lacked the answer to a fundamental question: how bad is the situation, really? And how will we know if our policy answers work? Economic metrics were scarce, and GDP – the measure we use today to value our economy – had not been invented.

Enter, Simon Kuznets. An expert in statistics, mathematics and economics, he developed a standard way of measuring the gross national product or GNP of the US. It would give an idea of just how much goods and services were produced by American-owned companies, whether at home or abroad. A few years later, Kuznets also developed GDP.

GDP was the sum of the value of all goods and services produced in a country each year (and, unlike GNP, excluded the value of US-owned facilities abroad). It could be measured either by adding the value of all finished goods and services, and subtracting the cost of intermediary products, or you could find it by adding up all salaries, profits and investment incomes.

The most common way to calculate it was the so-called “expenditure approach”. It calculates total GDP as: Gross Domestic Product = Consumption + Government Expenditure + Private Investment + Exports – Imports

Image: Bank of England

 

From an economic perspective, all those sums should add up to the same:

Aggregate production = Aggregate income = Aggregate expenditure.

Kuznets’ invention was a stroke of genius. It summarized in one number the economic strength of the entire nation and gave policymakers hints on to how to improve it.

During the remainder of the 1930s, other economists helped standardize and popularize it, and by the time the Bretton Woods conference was held in 1944, GDP was confirmed as the main tool for measuring economies around the world.

GDP’s limitations

Since then, GDP has become something of a talisman. When GDP is growing, it gives people and companies hope, and when it declines, governments pull out all the policy stops to reverse the trend.

Although there were crises and setbacks, the story of the overall global economy was one of growth, so the notion that GDP growth is good, reigned supreme.

In the 30 or so years after the Second World War, reporting GDP was a recurring triumph, especially in the West. It was the “Golden Era of Capitalism” in America, the “Wirtschaftswunder” in Germany, and the “Trente Glorieuses” in France. Nominal GDP growth could reach 10% or more, and in real, inflation-adjusted terms still often topped 5%.

Kutnets’ warning:

But there is a painful end to this story, and we could have foreseen it had we better listened to Kuznets himself. In 1934, long before the Bretton Woods Agreement – and before even the scepter of war – Kuznets warned US Congress not to focus too narrowly on GNP or GDP: “The welfare of a nation can scarcely be inferred from a measure of national income,” he said.

This assessment proved prescient. GDP tells us about aggregate consumption, but it does not tell us about personal well-being.

It tells us about production, but not about the pollution that comes with it, or the depletion of natural resources it requires. It tells us about government expenditure and private investments, but not about the quality of life they generate.

Oxford economist Diane Coyle told us in a recent interview that, in reality, GDP was “a war-time metric.” It tells you what your economy can produce when you’re at war – as was the case in the early 1940s – but it does not tell you how you can make people happy when you’re at peace. It tells you how valuable trees are when you cut them down and turn them into fences or benches, but not what they’re worth when left standing.

Despite early warnings from its inventor, GDP conquered the world. Everything was done to prop up its growth. Roads and highways were built, personal consumption encouraged, industry and transportation were subsidized, and so on. But, starting in the 1970s, the GDP growth story did start to cool down, first in the West, then globally.

 

Why did this happen? In part, because the so-called quality of new GDP growth was low. After some oil shocks in the 1970s, government money began repaying previous debts, or subsidizing unprofitable industries and practices, rather than investing in crucial areas such as education and housing.

But, as global annual GDP peaked, our ecological footprint did so too, leading to an ecological deficit. Forests were cut to make way for agriculture and industry, oceans were depleted of their fish stocks, and fossil fuels were burned and polluted the air, leading to climate change. In the short-term that led to growth, in the long-term it damaged our health, wealth and well-being.

To reinvigorate GDP growth in the 1980s, governments liberalized industries and opened to trade, in the hopes it would spur competition, and unleash a new wave of economic growth. That did happen at first, but by the 2000s, its side effects became clear: rising market concentration and a declining labour share of income. Median incomes stagnated, and public services worsened.

The result is that the magic formula of GDP growth now seems exhausted. In the West, GDP does not grow like it used to, and well-being stopped increasing a long time ago. A feeling of permanent crisis has taken hold of societies, and perhaps with good reason. As Kuznets knew, we never should have made GDP growth the singular focus of policymaking. Alas, that is where we are today.

Valuing natural, social and human capital

So, what can we do to better summarize the economic performance of a nation, and to do so in a way that incites progress for all people and the planet?

On a micro level, it would be more useful if we looked at the “median disposable income” of a household, rather than a “per capita production” number. It does a better job at indicating how citizens in a country are faring economically. In the past few decades, it would have warned us, much sooner than GDP growth did, that the average family in fact was no longer experiencing economic gains.

On a macro level, it may be better to also account for the “spring” of our wealth, not just its “flow” each year, Girol Karacaoglu, the former chief economist at the New Zealand Treasury said. To do so, we need to value not just financial capital, but also the natural, social and human capital of an economy: indeed, they are the true “source” of our wealth.

View of Queenstown, New Zealand.
New Zealand has begun to factor well-being as a measure of economic progress.
Image: Pixabay

 

New Zealand has started doing this, and it reveals in a much clearer way that GDP growth often goes at the expense of other sources of well-being. It showed, for example, that economic growth that happened at the expense of the environment, did in fact lower our overall wealth, rather than increase it. And that just because the nation got financially wealthier, it didn’t necessarily increase the satisfaction or well-being of its citizens.

Moving beyond GDP

Finally, even if we do stick with GDP, we should remember that it is an “idea”, Diane Coyle said. It reflects what we want it to reflect – and that idea changes over time. For example, GDP by convention does not consider unpaid work in the household – often done by women – as it doesn’t “produce” anything. But by now, we should recognize its value in a modern economy. We should thus update the definition of GDP.

In the span of less than a century, GDP has become incredibly important – and for good reason. It helped war-torn economies that wanted to rebuild their production capacity in peacetime, and developing economies like China, seeking to industrialize their economy: thanks to GDP, they could measure just how much progress they were making towards that goal.

But in today’s economy, we know that well-being is about much more than just the measurable production and consumption of goods and services. It is about valuing the environment and all the benefits it brings, the care economy and the happiness and health it generates, or the “social contract” that comes with having everyone in a society better off, rather than just a few.

In the 21st century, we need better measures of well-being. We need to go beyond GDP.

Why do we still measure things in horsepower?

A thought-provoker by published on LiveScience

If you’re buying a car and have no experience with power measurements or vehicle stats, you may be baffled by one of the vehicle’s key capabilities: its horsepower. Based on that term, you may assume that a horse can produce around 1 horsepower. Linguistically, it makes perfect sense. In reality, however, it’s way off the mark.

A horse and carriage

A horse and carriage in New York City – Getty Images

So, how much horsepower can one horse produce? And how did this term get started, anyway?

 

The maximum output of a horse is actually much closer to 15 horsepower, according to the University of Calgary’s Energy Education website. In fact, a more befitting name for the unit might be “humanpower,” given that the average healthy person can produce just over 1 horsepower.

So where did the term come from, then?
It was first coined in the late 1700s by James Watt, a Scottish engineer remembered for his iconic, and incredibly efficient, steam engines. Seeking a way to advertise the contraptions, he invented a unit of measurement that would effectively showcase the superiority of his steam engines compared with something people were familiar with – horses.

 

Watt determined — from personal observation rather than rigorous scientific study — that a working horse could turn a mill wheel 144 times each hour. Using this number, he estimated that horses were capable of pushing 32,572 pounds 1 foot per minute, or about 14,774.41 kilograms 1 meter per minute. For convenience, he rounded this up to 33,000 pounds foot-pounds of work per minute (14,968.55 kilograms), and the “horsepower” unit was born, according to Encyclopedia Britannica.

Watt didn’t care much about the accuracy of the measurement, only that it highlighted the drastic productivity improvements buyers would experience if they purchased one of his steam engines. His machines were indeed far more powerful and reliable than horses, and as a result, very few people questioned — or cared about — the veracity of his calculations.

Watt was, by all accounts, an engineering genius, and was so revered by his peers that, in recognition of his pioneering deeds and endeavours, the “watt” unit of power was ultimately named after him in 1882. However, given that we now know a horse can exert far more than 1 horsepower, why do we still use a term Watt created as part of a marketing campaign?

“Because of the way language is always changing, there are more words that are estranged from their origins than people might realise,” said Eric Lacey, a senior lecturer in English language at the University of Winchester in the United Kingdom.

James Watt was a pioneering engineer who coined the term “horsepower.” (Image credit: Keith Lance via Getty Images)

“Sometimes, words don’t look right because they’re using older meanings,” Lacey told Live Science in an email. “There is nothing tall or high about a ‘highway’ — this word comes from an older meaning of ‘high’ which was ‘main,’ and so a ‘highway’ is just a ‘main road.’ We have the same sort of thing in the phrase the ‘high seas,’ which just meant ‘the main seas.'”

This type of confusion plagues many of our words for measurements.

“There are also a lot that just don’t make sense anymore because, as with ‘horsepower,’ they were based on estimations that could be variable or misguided,” Lacey said.

“The measurement of an ‘acre,’ for example, was roughly the unit of land which could be ploughed by one person with a single yoke of oxen in one day — roughly 4,426 square meters [47,641 square feet]. However, this could be higher or lower depending on the type of plough, the shape of the land and how demanding the overlord was.”

A word’s meaning can be corrupted or largely forgotten over time, but what makes a term stand the test of time? Why are some words consigned to the past while others, such as “horsepower,” become ubiquitous?

“This is the holy grail of linguistics! If we could accurately predict what words would be ingrained in people’s minds, we’d be earning a fortune providing them to the advertisement industry,” Lacey said. “The crucial thing to bear in mind here is that the words people use are guided by two things: individuals, and the way they interact.

Individuals may avoid words like slurs because they have problematic meanings or negative connotations, or may select words because they like their new meanings or how they sound, Lacey said.

“Secondly, individuals may select certain words because of the bigger picture of their various interactions — they might participate in social trends, or respond to cultural events or be trying to emulate the vocabulary of somebody they aspire to be like,” Lacey said. On a group level, people may use words to signal their identities and values, to show they are up-to-date or to mock something.

“Against this backdrop, we can see how a [culturally significant] word like ‘horsepower’ survived,” Lacey said. “If horses hadn’t been the most obvious sources of industrial energy in the early 19th century, it’s doubtful the term would have been as popular, but the fact that a single word could both convey the desired redundancy of the old and simultaneously usher in the new meant it ended up at the forefront of everybody’s minds.”

When asked if he would be supportive of rebranding “horsepower” to “humanpower,” Lacey said, “As a linguist, I’d be very happy with that!” It would be a neat example of a word actually telling people what it did and would be more meaningful as a unit of measurement, he added.

 

The rise of intangible capitalism

 In a 2014 book, the Nobel laureate economist Joseph E. Stiglitz and Bruce C. Greenwald argued that the most important societal endowment is the ability to learn. Today, it is increasingly evident that the “learning society” has not only been created, but is starting to drive our economies.

From the nineteenth century until about 25 years ago, businesses largely invested in physical infrastructure and machinery, from railroads to vehicles.

But in the past quarter-century, investment in so-called intangible assets — such as intellectual property, research, software, and managerial and organisational skills — has soared.

Recent McKinsey Global Institute (MGI) research found that, by 2019, intangibles accounted for 40 per cent  of all investment in the United States and ten European economies, up 29 per cent from 1995. And intangibles investment appears to have surged again in 2020 as digitalisation accelerated in response to the COVID-19 pandemic.

We believe that this trend strongly hints at the emergence of a new model of capitalism, in which companies’ success will be measured more by their people and their capabilities than by their machines, products, or services. Moreover, we think there is no going back.

Firms such as Amazon, Apple, Facebook and Microsoft are clearly scaling up dramatically and achieving hypergrowth. Intangibles may well be driving this phenomenon. After all, there is certainly a correlation between investment in intangibles and higher productivity and growth.

MGI’s research found that companies in the top quartile for growth invest 2.6 times more in intangible assets than the bottom 50 per cent of firms. Similarly, economic sectors that have invested more than 12 per cent of their gross value added (GVA) in intangible assets grew 28 per cent faster than other sectors.

Economies in which intangible investment is increasing are also posting growth in total-factor productivity. (albeit a ‘magic-fairy-dust’ measure according to the BoE)

Notably, the only companies that were able to maintain 2019 rates of growth after the pandemic hit in early 2020 were those that had invested significantly in the full range of intangibles: innovation, data and analytics, and human and brand capital.

In a dematerialised, digitised, knowledge-driven world, corporate returns, productivity and economic growth will increasingly be tied to such assets. But unlocking their true value requires not only investing in them, but also developing the skills and managerial know-how, or human capital, needed to make effective use of them.

An MGI survey of more than 860 executives indicates that the major difference between fast-growing and slow-growing firms is that the former not only invest more in intangibles and appreciate their importance for boosting competitive advantage, but also focus on deploying them effectively.

The growing salience of intangibles thus makes the imperative of raising skills and capabilities even more acute. This emerging new form of capitalism is potentially marvelous for qualified people with highly portable skills, but somewhat scarier for the less skilled and less digitally savvy. Companies that lack the resources to make necessary investments in intangibles also could fall further behind.

The dematerialised economy, if not managed well, thus risks being a recipe for inequality.

 

 

Many ways to stuff up productivity

More good stuff from down under – with Ross Gittins, Economics editor of the Sydney Morning Herald, offering solutions to the current ‘productivity puzzle’ afflicting most G7 nations at least

A good New Year’s resolution for readers of the business pages would be to read more widely and think more broadly, so their thinking about economic problems and their solutions doesn’t get into a rut, returning repeatedly to the same old solutions to the same problems.

No reader of these pages needs to be told that the key to higher material living standards is improved productivity – the ability to create more outputs from the same quantity of inputs of land (raw materials), labour and physical and intangible capital.

Construction workers and engineers hard at work on a major infrastructure project.
Construction workers and engineers hard at work on a major infrastructure project. CREDIT:JAMES ALCOCK

Almost continuous productivity improvement over the past two centuries is the outstanding achievement of capitalist, market economies, the proof of capitalism’s superiority as a system of organising production and consumption.

It’s what’s made us so much more prosperous than our forebears were, with much of that prosperity spilling over from the owners of capital to the middle class and people near the bottom.

But, as I’m sure you know, over the past decade or so the rate of productivity improvement in Australia and all advanced economies has slowed to a snail’s pace. Hence, all the talk about productivity and what we can do improve its rate of improvement.

So far, a decade of hand-wringing hasn’t got us anywhere. We need to think more broadly about the problem.

One new thought is to wonder if there is – or should be – more to the good life than economic growth and a higher material standard of living. If there are ways we could improve the quality of our lives even if they didn’t lead to us owning more and better toys.

A negative way to express the same thought is to wonder if being able to afford better houses and cars will be much consolation if we succeed in stuffing up our climate, with more heat waves, rainy summers, droughts, bushfires, floods, cyclones and a rising sea level.

But we’ll return to those thoughts another day, and descend now to the more prosaic. One rut we’ve got into is thinking it’s up to the government to lift our productivity by “reforming” this or that intervention in the economy.

This is model-blind thinking of the part of econocrats, hijacked by rent-seeking businesses and high income-earners wanting more power to limit the earnings of their employees and more of the tax burden shifted to other people in the name of improving “incentives”.

The same people show little interest in reforms that really would increase economic growth by increasing women’s participation in paid work, such as free childcare.

Another rut we’re in is thinking that we won’t get faster economic growth until we get back to faster productivity improvement.

This has much truth, but it misses the deeper truth that the relationship between economic growth and productivity can also run the other way: maybe we’re not getting faster productivity improvement because we’re not getting enough economic growth.

In practice, what does much to increase the productivity of labour is businesses – in mining, farming and manufacturing, but also the service industries – replacing old machines with the latest, most improved models.

But business investment has long been at historically low levels, making our weak productivity performance hardly surprising. And the dearth of new investment spending is also hardly surprising considering consumer spending has been so weak for so long.

Nor is weak consumer spending surprising when you remember how weak the growth in real wages has been. One reason wage growth has been so weak, as Reserve Bank governor Dr Philip Lowe has pointed out, is the present fashion of businesses using any and every means – legal or otherwise – to limit labour costs and so increase profits. There are other paths to profitability.

While we’re thinking unfamiliar thoughts on the possible causes of our productivity plateau, remember this one: when businesses have been investing strongly in new equipment in the past, it’s often been a time when labour costs have been rising rapidly, giving them a strong incentive to invest in labour-saving machines.

(Note, it’s precisely because this increases the productivity of labour, and thus increases real national income, that the pursuit of labour saving simply shifts the demand for labour from goods-producing industries to services-producing industries, leaving no decline in the demand for labour overall.)

Last year some economists at the International Monetary Fund wrote a blog post on yet another contributor to weak productivity improvement, which will certainly come as a surprise to “Brother Stu,” federal Education Minister Stuart Robert, who late last month sent a “letter of expectations” to the government’s Australian Research Council outlining the Morrison government’s desire to prioritise short-term research jobs that service the interests of commercial manufacturers.

It’s possible he and Scott Morrison merely wish to swing one for the Coalition’s generous business backers, but my guess is they imagined they were striking a blow for higher productivity. If so, they’ve been badly advised.

Research by the IMF economists finds that productivity improvement in the advanced economies has been declining despite steady increases in research and development, the best indicator we have on “innovation” effort, the thing so many business people give so many speeches about.

But get this: they find that what matters for economic growth is the composition of spending on R&D, with basic scientific research affecting more sectors for a longer time than applied research (commercially oriented R&D by companies).

“While applied research is important to bring innovations to market, basic research expands the knowledge base needed for breakthrough scientific progress,” they say.

“A striking example is the development of COVID-19 vaccines which, in addition to saving millions of lives, has helped bring forward the reopening of many economies . . . Like other major innovations, scientists drew on decades of accumulated knowledge in different fields to develop the mRNA vaccines.”

Which suggests the Morrison government has just jumped the wrong way in its latest intervention into the affairs of our universities. Should have done more R&D of their own before jumping.

 

Productivity down under

Large extracts follow from an interesting article by Judith Sloan, a leading economist and ex Commissioner of the Australian Productivity Commission, writing in ‘The Australian‘ – she makes many good points which other ‘experts’ tend to skim over, including recognition that current productivity measurement is seriously lacking – but she then goes on to base her conclusions on those same flawed measures, presumably because there’s nothing else  

Labour productivity grew at more than 2 per cent a year between 1992-94 and 1998-99 – but the growth in this century has been much lower. Picture: Zoe Phillips

Productivity is a dry economic topic to discuss (why do so many productivity ‘experts’ describe it so? – it’s complex, yes, but dry? – no!). Many people will equate productivity with workers being made to work harder and heartless managerialism (ugh!).

The cor­­relation between higher productivity and improved living standards is not widely appreciated.

The basic idea of productivity is straightforward enough: it’s the ratio of output to inputs. Economists differentiate between labour productivity, which is the ratio of output to hours of work, and multifactor productivity, the ratio of output to all inputs. (N.B. MFP was described by a Bank of England big-wig as ‘magic fairy dust’)

The much more difficult part of using productivity as an analytical device is its measurement.

For market-based activity, output can be fairly accurately measured by using the value of output. But a great deal of what happens in the economy does not occur in the market sector – it is entirely undertaken in the public sector or is funded by the public sector on an outsourced basis.

It’s always worth keeping these measurement issues in mind when working through the implications of trends in productivity. It is widely acknowledged that measurement prob­lems, including the inadequate treatment of quality improvements, are part of the explanation for what has happened to productivity.

There is also the shift towards investment in intangible assets rather than physical capital, which is itself a reflection of more services-dominated economies. Much of this former investment will be expensed and, as such, won’t show up in the capital figures.

Even so, it’s worth taking a look at the official productivity figures to see what has been going on. (Why, after all you’ve just said?)

While the pandemic has created havoc with productivity outcomes, it was clear well before last year that the growth in productivity, both labour and multifactor, was very sluggish. (iff official measures were a fair reflection of what actually happened with the nation’s standard of living)

If we take the five-year period ending in 2019-20, annual multifactor productivity grew at only 0.12 per cent (unconvincing accuracy) whereas annual labour productivity grew at 0.83 per cent. If we consider a longer time frame, there was clearly a purple patch for productivity in the 1990s – labour productivity grew at more than 2 per cent a year between 1992-94 and 1998-99, for instance – but the growth in this century has been much lower. (maybe growth of countables has stalled, but what if uncountables are now booming?)

It should be pointed out here that sluggish productivity growth is a feature of many developed economies. In the two decades ending in 2006, multifactor productivity growth  was strong in many economies including the US and Britain. By contrast, in the decade ending in 2016, multifactor productivity growth was negative in Japan, Canada, Germany, France, Britain, Italy and the US (just), among others. Whatever factors are at play (howzabout an educated guess?) they are unlikely to be specific to Australia, in the main.

One way of thinking about what has been happening to productivity is to consider the three components of efficiency: technical efficiency, allocative efficiency and dynamic efficiency. (a veil of management-speak to hide a void of understanding?)

Technical efficiency is where producers operate as close as possible to the maximum in terms of the ratio of output to inputs. (but how does one calculate the maximum capacity of a bank, management consultancy or hospital, say, let alone a nation, and so judge if they are ‘technically efficient’?)

Factors that are raised in the discussion of poor productivity growth include the presence of zombie firms (often sustained by government programs) (surely zombies are just the tail of a long tail?), slow take-up of technologies, particularly digital ones, and the relative decline in the number of firms entering particular industries. The net effect is to reduce the relative number of firms that can be deemed technically efficient.

When it comes to allocative efficiency, the key is whether a country is undertaking the range of activities best suited to its comparative advantages. Of course, some of these advantages are obvious; for example, agriculture and mining in Australia. But the role of governments is critical in boosting some activities at the expense of others.

This is a significant issue here and overseas as the size of government grows. With government payments as a percentage of gross domestic product at all-time highs and with slow reductions anticipated, the issue of the distortions in the composition of economic activity – think here the boost to (low productivity) healthcare and social assistance – becomes more important.

Dynamic efficiency refers to the capacity of firms to respond to new shocks and opportunities, particularly by way of innovation. Indeed, in some literature, productivity is essentially equated with innovation, assuming that technical and allocative efficiency have been achieved.

While we don’t fully understand the processes that underpin innovation – there are a myriad of possibilities – it is clear that, by and large, governments don’t drive it. (No – they play a major role in R&D – ask Bill Gates, Tim Berners-Lee). Moreover, there are unlikely to be any silver bullets such as larger tax concessions for research and development or higher spending on education (which has occurred in any case). Governments getting out of the way and ditching excessive regulations are likely to be helpful.

The bottom line is that while productivity may seem like an arcane concept, (an apt description) it is critical in driving higher living standards as well as assisting governments fund the services that the members of the public are keen to receive.

 

Judith Sloan

CONTRIBUTING ECONOMICS EDITOR
Judith Sloan is an economist and company director. She holds degrees from the University of Melbourne and the London School of Economics. She has held a number of government appointments, including Commissioner of the Productivity Commission; Commissioner of the Australian Fair Pay Commission; and Deputy Chairman of the Australian Broadcasting Corporation.

Billionaire investor warns inflation to curtail gains

Billionaire investor Ray Dalio sounded the alarm bell after inflation in the US surged to the highest level since 1990 and warned his social media followers that rising portfolio values do not necessarily signify increasing wealth.

“Some people make the mistake of thinking that they are getting richer because they are seeing their assets go up in price without seeing how their buying power is being eroded,” Dalio wrote on LinkedIn. “The ones most hurt are those who have their money in cash.”

Dalio, the founder of Bridgewater Associates, has long been known for his view that there are better assets to hold than cash amid central bank money printing.

In periods of rising prices, he says that it is more important to look at what you can buy with that money.

“When a lot of money and credit are created, they go down in value, so having more money won’t necessarily give one more wealth or buying power,” Dalio wrote, adding that real wealth becomes a function of production capacity over time.

“Printing money and giving it away won’t make us wealthier if the money isn’t directed to raise productivity,” he wrote.

Dalio had a firm warning for the US and said it would be important to keep the implications from policy developments in mind.

“There isn’t an individual, organization, country, or empire that hasn’t failed when it lost its buying power,” he wrote. “The United States now is spending a lot more money than it’s earning and paying for it by printing money that is being devalued. To improve we have to raise productivity and cooperation. Right now we are on the wrong path.”

“At this time 1) the government is printing a lot more money, 2) people are getting a lot more money, and 3) that is producing a lot more buying that is producing a lot more inflation,” he wrote.

“Right now there is far more financial wealth than can ever be converted into real wealth so it has to be devalued. When you are seeing your financial wealth go up as is happening now don’t think you are gaining real wealth when your buying power is going down,” he wrote.

“Spending money on investment and infrastructure rather than on consumption tends to lead to greater productivity, so investment is a good leading indicator of prosperity. On the other hand printing money and distributing it without being productive won’t raise wealth,” he wrote.

Automation – friend or foe?

Robert Skidelsky, writing in the Guardian, points out that the growth of mechanisation brings many benefits, but vigilance is needed to keep it in check

A robot sitting at a conference table using a laptop

 

What the economic historian Aaron Benanav calls the “automation discourse” has been going ever since the luddites smashed textile machinery in Nottingham in 1811.

At issue is whether machines destroy or create jobs. The first case is easiest to understand. Machines are labour-saving; and labour saved means labour unemployed. Fear of unemployment has always been the dominant response of the workforce to the introduction of machinery.

The second case involves taking into account repercussions. The cheaper it is to produce something, the more demand there will be for it. This means more workers can be employed.

One can see then, how the spread of mechanisation to all branches of industry can multiply favourable effects: more people employed producing more and varied goods at higher wages for reduced effort. The fear of unemployment, say economists, is really a displaced fear of leisure.

With computer technology, not just physical work, but so-called “cognitive” work can be automated. Modern luddites foresee the growth of white-collar and service-sector unemployment. Again, say the optimists, they fail to notice the upside. The economic argument is straightforward: “Higher productivity implies faster economic growth, more consumer spending, increased labour demand, and thus greater job creation,” Christopher Pissarides and Jacques Bughin argued in their 2018 paper.

The problem is social: to ensure that the fruits of increased productivity are passed on to the mass of the people in the form of higher wages and non-work income. The political debate is about how much public intervention is needed to ensure that the wealth created by machines trickles down to all sections of the population.

The interesting question right now is: what effect will the Covid-19 lockdown have on this automation discourse? Three effects in particular are worth noticing. The first is the likely speed-up in automation; the second, the increase in automatic shopping; and the third, the growth of home working.

Despite all the hype, automation made little progress in the UK before the pandemic. According to the International Federation of Robotics in 2018, the UK had only 71 robots to 10,000 workers. The main reason, I think, was that cheap labour from abroad was an alternative to automation, especially for small- and medium-sized enterprises that could not afford the capital cost of installing machinery.

However, this supply has dried up, and will not be rapidly restored. We now have the paradoxical combination of a near-record adult employment rate together with the highest ever job vacancy count.

Covid-19 is almost certain to accelerate automation in line with the experience of past pandemics such as Sars in 2003, with the driving forces being economic recession and the need to cut labour costs, and the perceived increased risk of human contact. Jobs with higher levels of physical proximity, such as retail, hospitality, leisure and medical care, are the most likely to be automated post-pandemic.

Unless the government intervenes to subsidise investment (say, through a national investment bank) the financing of automation will be brought about through a further concentration of industry in large firms and the bankruptcy of many small and medium-sized enterprises.

The second source of automation will come from the consumer switch to remote shopping. This is the joint result of a change in habits forced by lockdown and fear of contamination. One symptom is the rise in cashierless stores. The first Amazon Fresh convenience store (with automated sensors to detect when items are taken from shelves and which automatically charge customers) opened in London in March, promising a more “frictionless” consumer experience. Many more are promised.

Finally, increased home working will demand increased use of surveillance technology. The proportion of working adults who did any work from home grew from 27% in 2019 to 37% last year on average, with Londoners the most likely to work remotely. Business sees a clear productivity gain in the reduction of time spent travelling and chatting in offices.

However, the realisation of such gains requires investment in surveillance technology. A recent report in the Financial Times highlighted the growth of electronic techniques for monitoring home working, including the installation of cameras and microphones in every house. This widens the discussion to the impact of technology not just on jobs but on freedom.

When Jeremy Bentham invented his panopticon for monitoring the movement of prisoners, he suggested that it might be fruitfully applied in schools and hospitals.

George Orwell carried this thought to its logical conclusion in his futurist novel Nineteen Eighty-Four. A two-way television screen in every flat ensured that “Big Brother is watching you” the whole time.

So on which side of the optimism-pessimism divide does the automation discourse now fall? Automation is not good in itself; it is only a means to an end. We need always to have in mind the question of what purposes it is designed to serve.

Unless this question is continually asked, and answered with action, we are destined to become slaves to the machines and those who control them. The luddites understood this.

 

Clusters to level up UK

YahooFinance reports that the best way for the government to deliver economic growth across the UK is by creating, or building on, clusters of economic activity in different parts of the country – something the Confederation of British Industry (CBI) is about to say – years ago, we strongly recommended the same in ‘Productivity Knowhow’, echoing the words of John Rose, CEO of Rolls Royce at the time, who asked : “Why does the UK not have something like France’s world competitive cluster in Toulouse?”

CBI director-general Tony Danker will say in a speech to a business audience that “growth in turn provides better paid jobs, skilled work, firm-level success and creates the kind of virtuous circle that helps a place to prosper”.

Combining these elements in economic clusters, where businesses co-locate to an area for mutual benefit, will greatly contribute to levelling up.

“For us, the answer is a clusters approach,” Danker will say. “Where you get a concentration of firms co-located. They compete, but also collaborate. They have the same skills needs. And supply needs. Their ideas and innovations spur each other on.

“It becomes an ecosystem, made up of start-ups and anchor institutions, colleges and universities. Thus, flows skills and expertise in turn generating innovation and ideas. Surprise, surprise — then finance, legal and professional services show up. And soon, adjacent sectors come to town.”

Economic clusters have already been adopted successfully in the UK and around the world, the CBI said.

“It’s not a new idea. We know London did it in finance; Aberdeen in oil and gas; Cambridge in science. It’s also enabling South Wales to emerge as a player in the world’s compound semiconductor market, which is projected to grow to over $300bn (£223bn) by 2030,” Danker will say.

“In the US, it’s cemented Massachusetts’ reputation as a global leader in biotech innovation (aka the Boston life-sciences cluster). And, in Germany, it’s helped Hamburg to become a world-leading civil aviation hub.”

In order for the cluster approach to work, the CBI said there are four key elements that are needed to lift productivity and allow more areas to prosper: high-value sectors; high-value firms; high-value skills; and higher business investment.

“There is a clear correlation between high-productivity sectors in a place and the economic outcomes for local people,” Danker will say.

“The truth is that in too many sectors, the UK now feels like a branch line economy. With the most productive parts of a sector, such as HQs, too often based in London and the South East, and the branch managers and the back-office based everywhere else.”

The CBI is calling for this to be replaced by an “economy of many hubs” made up of “high-value firms” that will be “the job-creators, the skills-builders, the innovators — a catalyst for growth in our local economies”.

Danker will also call on the government and businesses to focus on levelling up skills across the UK.

“When skills rise, so does economic growth. And that golden thread between skills and productivity only becomes more important over time,” he will say.

“In parts of central London, such as Wandsworth, Camden and the City, around three quarters of workers are educated to at least degree level. That’s a big part of the explanation why London has the highest productivity of anywhere in the UK. It’s a similar story elsewhere, with other prosperous places, such as Edinburgh, Bristol, Brighton and Hove having relatively high graduate shares too.

“But many of our other major city-regions have traditionally lagged behind — like Leeds, Birmingham, Manchester and Glasgow, despite being home to some of the UK’s leading universities.

“And we can guess why that might be — better prospects elsewhere. All of this, in turn, exacerbates local skills shortages. It’s an age-old problem, but it’s one we must crack if we’re to level up”.

The CBI also wants business investment to increase across the UK. “Business investment is something that needs tackling locally, but nationally too. That’s about tax and markets. And about regulation too, which we need to think about more holistically. We need UK regulators to pioneer pro-investment and pro-innovation regulation, alongside competition and consumer price,” Danker will say.

 

Having the power to put a spanner in the works pays very well

If your skills mean you can hold things up at work you’ll be rewarded far better than the easily replaceable”

Power matters. It’s central to international relations and politics, but doesn’t always feature prominently in economics. The power that does get attention, for example when thinking about who gets paid what, is often invisible market forces rather than people.

So a thought-provoking new paper putting power centre stage is rightly making waves. It asks why managers’ earnings vary with the productivity of their firms, while lower earners’ pay is largely unaffected.

It’s because the former have power, rooted in their ability to “hold up” production via quitting. Hold-up power is where a worker’s role is essential and they have specific skills so replacing them will take time. A waiter is essential but only the chef has hold-up power, given that a replacement will take time to learn recipes. Where those conditions exist, more productive firms that have more to lose from being held up pay above-market rates to stop us leaving.

The authors rather ghoulishly examined which roles were likely to have hold-up power by observing the hit to Danish firms when individuals in different roles died. They fell most for a manager at a high-productivity firm, an involuntary sign of hold-up power.

Men are more likely to be in roles with hold-up power. This also explains why superstar firms such as Apple choose to pay above-market rates, increasing inequality. So power matters and is getting more attention in our economics. Now it just needs to feature in our economic policymaking.

 

Weak investment, innovation and management hamper UK productivity

A study by researchers at the London School of Economics and Resolution Foundation think tank says low business investment was the clearest difference between Britain and higher-productivity nations.

Business capital investment in Britain was 10% of gross domestic product in 2019, compared with 13% on average in the United States, Germany and France. (but isn’t it what one does with capex that matters most – the efficiency and effectiveness of its use, not the initial costs?)

British business investment in research and development also lagged behind levels in other countries. (same question as for capex?)

Last month Prime Minister Boris Johnson highlighted Britain’s productivity problem (though few economists agreed with his diagnosis) that immigration of low-paid workers from the European Union bore much of the blame – that a ‘high-wage, high-skill, high-productivity’ economy comes from restricting immigration so that truck drivers, care-workers and other shortage occupations are paid more, levelling up the country – and that levelling up poorly performing companies or poorer regions will raise productivity significantly for the UK as a whole

The study claims that ‘output per hour worked’ in Britain is around 15% below that in the United States, Germany and France – though above that in Japan (which should cause pause for doubt about the validity of the base stats), Italy and Canada – and has barely grown since the financial crisis.

Bank of England policymaker Jonathan Haskel, speaking on a panel to discuss the report, said Brexit played a big role in depressing business investment since the 2016 referendum and would continue to do so:

  • “You might for political reasons support Brexit. That is perfectly okay. But from an economic point of view, all the uncertainty that led up to that, the series of cliff edges around the negotiation of the withdrawal agreement, were really bad for investment”
  • “A lack of access to finance – particularly for firms that rely heavily on ‘intangible’ investment such as in-house software development – was probably a bigger barrier”

A global survey of management practices suggested high-quality (how defined?) management was more common in the United States and Germany than in Britain, although not in France

But other commonly cited factors – such as Britain’s smaller manufacturing sector, big gaps between the most and least productive companies, or workers being stuck in ‘zombie’ firms – did not explain Britain’s underperformance. (not even partially?)

“Rather than focus on the UK’s long-tail of unproductive firms, we need to see economy-wide improvements to how firm invest and innovate, as well as how staff are managed and trained,” said Greg Thwaites, research director at the Resolution Foundation – (i.e we need to improve on all fronts?).

But then he adds: “It would be better if more work was done by stronger, more-efficient companies. This would involve quite a reallocation of work and the closure of many firms”.

(Sadly, that seems to be a non-starter conclusion for such an important study from such eminent economists)

Digital Solutions empower the employee experience

Enterprises are still adjusting to hybrid work. While many challenges still stand in the way of efficiency, new digital solutions are accelerating new channels of communication, new ways of networking, managing, and generally helping employees thrive – the following reads as an ad in disguise, but it’s still interesting

From wellbeing to productivity: Digital Solutions empower the employee experience

This is exactly where, in the past, digital solutions have come to bridge a gap in the organizational network. Spanning across industries, new software has been introduced to help both large and small enterprises stand up to new challenges.

Hilton Grand Vacations Club in Orlando, Florida, is one such example of a business that has had to navigate a number of challenges over the last year. While its operations were suspended indefinitely, the hotel looked at ways in which technology could better enable its operations and turned to Microsoft Teams to improve internal and external connectivity, and keep staff inspired and better connected.

As it slowly started to open its doors to guests again, Hilton Grand Vacations Club had found new ways to keep its team of frontline workers, including security, cleaning, maintenance, front desk and others connected throughout all its operations. The hotel staff not only interacts more efficiently, but even uses the platform to increase team member engagement, and learn better practices from the chain’s national network of connected employees.

Nurture over nature

Throughout 2020, companies had to constantly reconfigure their approach towards employee experience. The hybrid workflow has proven more than just doable, but a tool that the most innovative companies can use to their advantage.

According to Microsoft, enterprises should reduce the amount of importance placed on efficiency, and rather focus human productivity towards ingenuity, creativity, and innovation.

The transition to hybrid work highlighted the ‘nature vs. nurture’ aspect of corporate challenge and solution.

Leaving employees to the “nature” of remote work creates siloed teams who can become increasingly disconnected and disruptive to workflow (and not in a good way).

Rather, companies should look to the “nurture” side of a hybrid environment; improving networking channels, developing new collaboration tools, and putting the employee at the center, all facilitate a flexible and inclusive environment for both company and employee to thrive.

This is a big reason that companies look to leverage new and innovative technologies to help improve employee wellbeing.

Microsoft, understanding the potential of hybrid work, launched Microsoft Viva, an AI-powered employee experience platform (EXP) – ugh!!! –  that empowers teams and the individuals that make them to be the best they can be – it encompasses the full spectrum of employee experience from sharing professional knowledge and insight to forming new relationships and establishing stronger communities – these types of virtual engagement solutions help employees feel included, inspired, and important on their journey alongside their employer, who benefits from smarter (data-backed) and more aligned teams.

Since remote work became the new normal, Microsoft reports that close to 60% of people feel less connected to their teams, while almost 70% of employees have experienced an increase in stress levels, with 40% reporting a decrease in mental health.

Add all this to the lack of allocated time set for learning new skills, and employees desperately need support.

 

Busy but not productive?

HOUSTON

new APQC study found that the average knowledge worker spends only 30 hours out of a 40-hour week on productive work, resulting in lower job satisfaction and greater likelihood of leaving their company. APQC’s research found that training, mentoring, and employee empowerment can help organizations navigate these productivity challenges.

APQC, which surveyed 982 full-time knowledge workers, found the biggest productivity drains relate to collaboration and information flow. Each week, knowledge workers estimate they spend:

  • 3.6 hours managing internal workplace communication,
  • 2.8 hours looking for or requesting needed information, and
  • 2.2 hours participating in unnecessary or unproductive meetings.

Other drains include creating/using workarounds for broken systems and processes; recreating information that already exists; and seeking out the right people to answer questions or provide expertise.

Lauren Trees, APQC’s principal research lead for Knowledge Management, said: “Companies that are doing nothing to address these productivity challenges are at great risk of a talent exodus, as nearly 60 percent of their employees express lower job satisfaction and 44 percent are more likely to jump ship. Fortunately, our research indicates a path forward.”

APQC’s research found that process and knowledge management programs—along with related activities such as simplifying/streamlining processes and documenting critical knowledge—significantly improve employee outlook on these issues.

Technology solutions, such as enterprise search capabilities, are critical for improving productivity and reducing organizational risk by ensuring knowledge is documented and easily accessible. However, APQC found the most tangible productivity gains come from hands-on approaches to educate people about potential tactical improvements and encouraging them to act, such as:

  • Training and mentoring help streamline information exchanges, so employees waste less time supplying duplicate information and answers.
  • Mentoring helps strengthen employees’ networks, thus reducing time spent recreating already existing information or seeking out experts.
  • Empowering employees to suggest improvements helps limit busy work as front-line workers often know what processes can be streamlined.

All three of these interventions equate to less time spent in unproductive meetings, as employees will know better how to limit meetings or suggest alternative approaches.

Holly Lyke-Ho-Gland, APQC’s principal research lead for Process and Performance Management and the study’s co-author, added: “Many of the best productivity improvements come from employees themselves, if given the opportunity. Such initiatives should not happen to people, but with people as they identify pain points and co-develop solutions.”

APQC is the world’s foremost authority in benchmarking, best practices, process and performance improvement, and knowledge management. Learn more at www.apqc.org.

View source version on businesswire.com: https://www.businesswire.com/news/home/20211109005449/en/

Contacts

Ross Coulter
214-394-5538
ross@mpdventures.com

Entrepreneurs – Naturally More Productive

According to John Hall for Entrepreneur United States: “Being an entrepreneur isn’t for the faint of heart. While it’s true that there’s some luck involved, not only do you need a big idea, you also have to have the courage and tenacity to see it through. As a result, this means putting in long days for little to show for it.”

It’s because of the entrepreneur stereotype you can assume that entrepreneurs seem to be naturally more productive. And, because of the following ten traits that they possess, that assessment seems spot on.

1. Autonomy.

Running your own business drives happiness and motivation. In turn, this boosts productivity? While not exactly surprising, why is this the case?

It boils down to autonomy.

“Basically, autonomy is having a job where you at least have some control over your job,” explains Deanna Ritchie in a previous article.

“While more businesses are starting to offer this type of independence, running your own business achieves independence, adds Deanna. “You’re determining when and where you work, as well as are the final decision maker, and this helps.”

“Autonomy, however, is more than just being the head honcho,” she states. There has been evidence that independence leads to higher levels of job satisfaction and engagement.

In addition to lowering negative emotions, controlling your circumstances and your career has health benefits, such as reducing heart disease.

But don’t just take Deanna’s word on this. According to a survey from Cox Business, independence, satisfaction, and flexibility are the top reasons people want to become their own boss.

2. Creativity.

Regardless of what you call it, creativity is the key aspect of entrepreneurial success. Just ask Simon Sinek, who insists that entrepreneurs are problem solvers at heart. Or, Tina Seelig, a professor at Stanford University, promotes teaching creative problem-solving to business students.

Additionally, Entrepreneur’s Leadership Network member John Boitnott has creative thinking at the top of his list of entrepreneurial qualities. Using creativity to make valuable connections, he believes, will improve your creativity and productivity.

3. Focused.

“Don’t get distracted. Never tell yourself that you need to be the biggest brand in the whole world. Start by working on what you need at the present moment and then what you need to do tomorrow. So, set yourself manageable targets.”  Jas Bagniewski, Co-Founder of Eve Sleep

Let’s be honest, distractions are inevitable. But, entrepreneurs have the ability not to get sidetracked by tasks that could be delegated or obsess over what can’t be controlled. Instead, possessing this superpower allows them to laser-focus on what truly matters.

4. Decisiveness.

“To be successful, an entrepreneur has to make difficult decisions and stand by them,” Kelsey Miller writes for Harvard Business School Online. “As a leader, they’re responsible for guiding the trajectory of their business, including every aspect from funding and strategy to resource allocation.”

“Being decisive doesn’t always mean having all the answers,” adds Miller. It takes confidence to take on challenging decisions and see them through if you want to be an entrepreneur. The decision to take corrective action is equally important if the outcome is less than favorable.

5. Harder, better, faster, stronger.

Entrepreneurs are well aware that they need to take care of themselves if they want to be their best. I mean, if you stay up all night partying and stop by McDonald’s on the way to work, how productive are you going to be? As such, successful entrepreneurs know that they need to get enough sleep, exercise, and eat a balanced diet.

They also make time to address their mental health. And, entrepreneurs also are constantly learning new skills or information to become more well-rounded.

6. Challenging the status quo.

“When an entrepreneur becomes successful, they don’t stop there,” writes Micheal Gilmore over at MoneyMiniBlog. “For them, taking the path of least minimum resistance is never the right option.”

“Entrepreneurs are progressive,” he adds. When they observe a situation, they consider how they can improve it. As a result, they constantly step outside of their comfort zone and challenge the way things have been done — which can help improve their output.

7. Meditate.

Meditation has been found to increase creativity and improve leadership skills. And, it can also make you more productive.

Regular meditation can help meditators stay focused and on task without getting distracted for longer periods of time. Having discovered the benefits of meditation, Vishen Lakhiani founded Mindvalley. Most days, he meditates between 10 and 30 minutes per day. Additionally, he teaches his methodology through Mindvalley’s meditation quests.

“We looked at the science of meditation, and we created six unique exercises that are stacked together that create the most transformative impact on your mind and your body and your soul in 20 to 25 minutes a day,” he says.

8. It’s not all about work.

Elon Musk once infamously said it’s impossible to achieve great things without hard work. “There are way easier places to work, but nobody ever changed the world on 40 hours a week,” he said concerning his companies Tesla and SpaceX.

Sure. Entrepreneurs are all about rolling up their sleeves and busting their tails; they also know they need time off. “The right measure is not how many hours you chip in,” entrepreneur and CEO of Fishbrain Johan Attby told Forbes. You need sleep; you need food, and you need a healthy relationship if you have a family and friends.”

Moreover, entrepreneurs have pursuits outside of their work. Whether it’s writing, martial arts, yoga, video games, or playing a musical instrument, hobbies keep entrepreneurs in peak condition.

9. Focus on strengths and supplement weaknesses.

A successful entrepreneur focuses on what they do best while outsourcing everything else. Some calculate their rate per hour so they can avoid activities below that level. By doing so, they achieve meaningful results. Moreover, they recognize that developing popular software or starting a business differs significantly from being an effective leader and will also develop those skills.

Also, they realize that they don’t need to have all the answers. So instead, entrepreneurs surround themselves with people who can supplement their weaknesses.

10. Passion.

Passion should be the index card of every entrepreneur, as necessity is to the inventor. You cannot envision solving a problem or selling your idea to investors if you don’t believe in what you’re doing. Moreover, passion helps maintain focus and motivation — even after startup failure.

According to a psychological study of entrepreneurial behavior within organizations, passion isn’t just another personality characteristic. For those who are passionate, everything else flows. Individuals are no different. After all, creativity, tenacity, and salesmanship are all driven by passion.

The British Government’s approach to the economy’s productivity problem needs a rethink

 Derek du Preez, writing  for diginomica.com, claims that the British Government has a tendency to focus on sector specific issues whilst failing to recognize that productivity is an economy-wide problem that is highly interconnected

It is widely acknowledged that the UK has a productivity problem. After decades of growth, the financial crisis of 2008 led to productivity flatlining for years to come. Whilst employment has continued to grow just as strongly as before the financial crisis hit, GDP growth has slowed to approximately 1.5 percentage points less than the decade before 2008.

It is also widely accepted that increases in productivity – achieving more output from less input – is what drives prosperity. This is why the ‘productivity problem’ has been a central focus of government policy and investment in recent years. However, it’s become even more critical in recent months as a result of the challenges facing the UK in the face of Brexit and the COVID-19 pandemic.

Prime Minister Boris Johnson has made clear that in his mind the key to solving this challenge is prioritizing sectors that are highly skilled and high growth – such as science, technology and the green economy. Johnson has made comments about turning the UK into a ‘scientific powerhouse’ and a key part of the government’s agenda has been to ‘level up’ all parts of the country.

We’ve seen sector specific deals carried out – including in fields such as AI – and there has been a number of innovation policy investments announced.

However, a new report out this week released by think tank Institute for Government (IfG) provides some interesting food for thought – at a top level, IfG debunks the myth that a decline in manufacturing investment is the source of the UK’s productivity pain, pulling data that suggests that even if the UK had kept up with Germany’s growth in manufacturing, that it would only account for a fraction of productivity growth.

Equally, it rightly notes that productivity can’t be tackled on a sector by sector basis. So many of the challenges associated with improving productivity are interconnected and economy-wide, and policy intervention should instead focus on agendas that cut through all aspects of the UK’s economy.

And whilst the government appears to want to be at the center of technology creation, it would do better to focus on technology adoption and structural changes within sectors to drive productivity. In addition, focusing on improving skills across the UK would have a greater impact than being the country that cracks the next big high-tech innovation.

It’s complicated

IfG notes that it must be tempting for government and policy makers to place the blame for a decline in productivity on the UK’s failure to nurture high-productivity sectors, favouring a growth in service-led sectors.

Hence we see the Treasury, for instance, making calls to focus on “high-growth, innovative sectors” – the implication being that these are the ‘right’ sectors for the UK’s future. But in reality it’s not so black and white. Sectors such as retail and hospitality actually have the potential to deliver high levels of productivity gains, which has been helped by the shock of the COVID-19 pandemic and the adoption of new tech and business models.

Equally, the research shows that this is an international trend and whilst some of the UK’s peers may have outperformed in certain areas, when you look at the totality of the impact on productivity, the likes of the US, Germany and Italy are facing the same problems. The IfG report notes:

Moreover, the country’s shift towards services should not be portrayed as a productivity-sapping strategic mistake. The shift was seen across many countries and is natural during the evolution of advanced economies which, as they age, spend more on services. The government should treat it as an invitation to take services – even the traditionally low value-adding ones – more seriously as a potential source of growth. Differing sectoral shapes are not sufficient to explain the regional gaps in productivity that preoccupy policy makers. Although the UK has shifted employment away from manufacturing to some lower-value services, the timing of this shift does not match the worst spell of productivity weakness that began after 2008. Even if the UK could have stemmed the erosion of its manufacturing share, as Germany has managed to do, most or all the past decade’s weakness would remain.

Sector boundaries are not the key

The IfG’s sector analysis shows that the shortfall in productivity growth that occurred post-2008 was skewed towards a few industries, such as ICT and professional and business services, as well as the financial sector. But weaker performance was seen right across the economy – most employees worked in a sector that grew less in the 10 years after 2008 than in the 10 before – and, as such, economy-wide perspectives are needed.

IfG states that sector boundaries are “often arbitrary” and the sectors themselves are interdependent. It adds:

A narrow sector-by-sector examination risks focusing upon individual economic areas to the detriment of macroeconomic insight – to ‘miss the wood for the trees’. The state of aggregate demand is one variable that might be overlooked. A broad productivity crisis hit many developed countries at the same time as the financial crisis damaged global demand and confidence. Sharp movements in aggregate demand land unevenly across sectors and are often highly correlated with shifts in productivity. The persistence of these effects must be considered before the performance of any sector is accorded a purely sectoral diagnosis.

The report goes on to say that whilst Johnson’s government puts a heavy emphasis on innovation policy as a tool for driving economic progress, the sector-level relationships between technology, innovation, productivity and livelihoods are far from straightforward.

In essence, it states, more technology does not always lead to a large market, more pay or higher jobs. You only have to look at the US economy which has generated $6 trillion of extra equity value in just four giant digital tech companies.

What’s the solution?

If a sector by sector approach isn’t what’s needed, how should policy makers be thinking about improving productivity? The key message to take away is that productivity cannot be solved by focusing on certain sectors, such as high technology. The efforts need to be much broader in scope.

The objectives also need to be considered. For instance, the report adds:

It is also a mistake to see growth or productivity as the only objective for innovation. Energy sector innovation is a clear example; this is going to be vital for the transition to net carbon zero and, done well, will have a positive effect on myriad other parts of the economy. But it might do this without having any direct perceptible effect on the GDP figures, as lower CO2 emissions do not count towards GDP.

Some of the things the government is currently doing will likely have a greater impact on productivity than its sector-specific deals and investments, and these should be scaled up. For instance, the government’s ‘Help to Grow’ scheme, which is aimed at improving management skills, or its policy interventions to encourage the adoption of digital tools across all businesses – these are far more strategic in achieving higher productivity gains. Again, it’s the *use* of technology that will make the most fundamental difference, not its creation.

As noted above, we’ve seen drastic changes in recent months across the economy as a result of the COVID-19 pandemic – the changes happening in retail and office spaces would have likely taken years to occur without the ‘shock’, but could well have positive impacts on productivity.

How can technological innovation mitigate climate change?

Stephen Carson  and Harald Edquist, in an article published by ericsson.com, claim technological progress has the power to transform lives, but it’s often come at a high cost – they outline how technological innovation, specifically ICT, can play a leading role in addressing the challenges of climate change. In effect, the more ICT employed, the less CO2 emitted. a planet-saving productivity inversion you might say!

 

technological innovation climate change
When the subject of the Industrial Revolution is raised, what images come to mind? You might think of the steam engine, the expansion of the railways or electrification literally illuminating the world. For many, it’s a period that also sparks visceral reactions, with thoughts of living in a city such as Manchester, Birmingham or London in the nineteenth century, with factories spewing smog and soot into the air and dumping pollutants directly into rivers and streams.
Regardless of your feelings, it’s clear that the Industrial Revolution enabled massive productivity gains and improved the standard of living for millions of people. But the gains were largely powered by the carbon-based fuels that are now destabilizing our climate.
In the time of the Industrial Revolution, machines took the place of manual workers as production moved from cottages and workshops to factories. The resulting productivity gains were from relentless improvements in efficiency—or increasing outputs from the same or fewer inputs. The same process had similar effects in agriculture, transport and electrical distribution. Underlying most of these industries was coal, and then petroleum-related fuels.

Technological progress and the ‘Jevons paradox’

Productivity gains have rebound effects as higher productivity leads to lower prices and increased demand. In 1865, the economist William Stanley Jevons observed that deploying innovations which increased the efficiency of coal-use did not result in less coal being consumed. As less coal was needed per unit of work, the demand for coal increased—a phenomenon known as the Jevons paradox. He argued that contrary to common intuition, technological progress could not be relied upon to reduce consumption.
This effect can be clearly seen today as improved productivity in the manufacturing of consumer electronics leads to lower prices and more demand for both consumer electronics and other products, resulting in a rebound effect: higher CO2 emissions.
ICT has contributed considerably – at least 15% – to world GDP growth in the last decade. We are in the midst of a digital revolution, but carbon-based fuels remain integral to the economy.  ICT has the potential to break the pattern of productivity linked to fuel consumption. It can be a key source for how to reduce our dependence on fossil fuels and work proactively to fight climate change across economic, social and environmental domains.
technological innovation climate change
Figure 1. Sources of carbon emissions (million tonnes per year) in the world between 1750–2019. Source: Our World in Data (2021).
However, the level of rebound also depends on the policy framework in effect including carbon pricing and should not be seen as an argument against productivity and efficiency per se. With policies such as subsidies on electric cars, rebound effects could be positive for the environment as more consumers shift to electric cars. Moreover, the total spending on ICT products has increased and this could lead to an inverted rebound effect as less is consumed of other products and services in a process of dematerialization.

Moving together towards a low-carbon era

Many developing countries are at levels of consumption lower than more advanced economies, and are working hard to reduce poverty and improve living conditions. As productivity gains reduce costs, it is not unreasonable to expect significant increases in consumption due to rebound effects.  Meanwhile, in the more advanced economies, dematerialization is increasingly evident, implying that the more advanced an economy becomes, the fewer of the world’s resources will be used to maintain consumption if rebound effects are under control.
Developed countries will need to aid developing countries to jump into the low-carbon era, compressing or even skipping the lag between innovation and economic impact. This will be possible as technologically advanced countries work through the myriad of improvements to general-purpose technologies, allowing the developing world to leapfrog whole generations of technology.
The current CO2 situation should be viewed as a gigantic market failure. In many countries the cost of emitting CO2 has been negligible for a long period of time. If CO2 emissions had a tangible cost attached at an earlier stage, it is probable that many more innovations would have been focused on reducing emissions.
Nevertheless, it is evident that the consumption of coal, oil and gas will have to be reduced.
technological innovation climate change
Figure 2: Annual production-based carbon emissions (million tonnes per year) in the world between 1750–2019. Source: Our World in Data (2020).

Staying one step ahead: How 5G can help reduce emissions

Today, we have an advantage over the inventors of the Industrial Revolution era: we know that carbon-based fuels have an important long-lived effect on climate change. The increase of CO2 emissions leading to higher average global temperatures is a threat to the stability of our societies and of the economic system, not to mention the planet itself.
Technological innovation plays an important role in addressing the challenges of global climate change. To leverage market forces in this process, policies must increasingly support regulations and treaties using bonus-malus mechanisms. Increasing subsidies on goods and services reducing greenhouse gas emissions balanced with costs tied to such emissions, are needed to secure the transition towards a decarbonized economy.
5G is likely to have large impact on productivity for the next decade. It can be viewed as a flexible innovation platform that can meet diverse user needs both for consumers and industries. Some use cases will be based on improved mobile broadband, fixed wireless and massive and critical IoT. This will likely have a direct effect on GDP.

Low-paid migrants are no answer to labor shortages

The Wall Street Journal reports on a speech to Boris Johnson’s supporters where the U.K. prime minister talks of a new economic model but meets criticism from some traditional party backers

British Prime Minister Boris Johnson said he would press ahead with his government’s pledge to end the influx of low-paid migrant workers despite the country’s labor shortages, describing it as a radical change for the British economy.

Speaking at the Conservative Party’s annual conference, Mr. Johnson looked to turn the page on over a decade of his own party’s rule, calling an end to high immigration, which he said had depressed wages and productivity.

“We are embarking now on the change of direction that has been long overdue in the U.K. economy,” he said. “We are not going back to the same old broken model with low wages, low growth, low skills and low productivity, all of it enabled and assisted by uncontrolled immigration.”

The approach sets up a clash with some traditional Conservative supporters in business, agriculture and among proponents of free markets.

Britain is in the midst of an unusual economic experiment: explicitly shutting down the flow of foreign labor as demand for workers soars. Britain tightened immigration rules after it quit the European Union last year, ending the automatic right of EU citizens to live and work in the country. The pandemic, meanwhile, prompted hundreds of thousands of European workers to leave the U.K.

Now as the economy rapidly reopens after Covid-19 lockdowns, some business associations are urging the government to temporarily loosen visa restrictions in some sectors. Mr. Johnson is saying no, telling businesses to attract staff with better pay or invest in ways to boost existing worker productivity.

Across the world, Covid-19 has sparked worker shortages. However, the situation is particularly acute in the U.K. after the country cut ties with the EU—its largest trading partner and for years a vast reservoir of workers.

Currently, the military is delivering fuel to gas stations in parts of the U.K. following a shortage of tanker drivers. Farmers have begun culling healthy pigs because there aren’t enough abattoir workers or butchers to process them. Protesters from the farming industry stood dressed as pigs outside the gates of the Manchester conference, chanting for government help.

Tony Danker, the director general of the Confederation of British Industry, warned that ambition on wages “needs to be backed up by action on skills, on investment and productivity.”

The move is a further break with Conservative Party pro-business, pro-market orthodoxy. The pandemic has accelerated a shift away from the small state, low-tax model championed by former Conservative leader Margaret Thatcher.

Matthew Lesh, head of research at the pro-market Adam Smith Institute, said Mr. Johnson had described an agenda for a “centrally planned, high-tax, low-productivity economy.”

The prime minister led the party to electoral victory in 2019, winning over blue-collar workers, many of whom had never voted for the Conservatives before. Now Mr. Johnson said his approach would boost the fortunes of these newly acquired voters through higher wages and more investment outside London.

“Yes, it will take time and yes it will sometimes be difficult but that was the change that people voted for in 2016,” Mr. Johnson said, referring to the year of the Brexit referendum, in a speech with no new major policy proposals.

One risk is that the labor constraints will push up inflation faster than wage growth. Inflation is due to rise above 4% by the end of the year, according to the Bank of England, largely due to a rise in energy costs.

The Office for National Statistics said that in August median monthly pay had risen 5.3% compared with a year earlier, though the agency warned it might be overestimating wage growth because earnings fell during the year-earlier period and many low-paid jobs were lost during the pandemic.

Nor is it clear that cutting immigration will spur productivity. “It wasn’t the fact that we had a high level of immigration that was responsible for employers not training their workforces,” says Kathleen Henehan, a senior analyst at the Resolution Foundation, a think tank.

The government, meanwhile, has wound down its Covid-19 jobs-support program and is removing a boost to benefit payments for the poorest people put in place during the pandemic. It will leave social-benefits payments at their lowest level in real terms since the 1990s, according to the Resolution Foundation.

The government recently announced increases in both corporate and payroll taxes to bolster the country’s state-run health service. Treasury chief Rishi Sunak said Tuesday that the size of the state will in coming years be at a “historically high level for us.”

Despite the shortages and tax raises, public opinion for Mr. Johnson’s government has broadly held up. The pandemic means that people still feel that the prime minister has been dealt a tough hand, pollsters say.

How to boost productivity with ‘Autonomous Motivation’

Some interesting thoughts from Dr Marc Nickell, a Forbes Business Council member and co-founder of Rocket Station – he is ‘obsessed with the pursuit of better practices’ – extracts from a recent article follow

Let’s start with the premise that your employees want to be successful in their work as much as you want to be successful in your business. Creating a work environment where employees are easily motivated to succeed, which then contributes to your success, is building a win-win situation for both you and your employees.

What Is Autonomous Motivation?

Autonomous motivation is  based on the idea that humans are best motivated to do tasks by intrinsic factors instead of extrinsic rewards – a feeling of independence drives people to do their best work and is at the heart of autonomous motivation – the more autonomy a person feels, the more motivated they become.

Extrinsic versus Intrinsic

Extrinsic is an outside factor that plays on a human being. Intrinsic is an internal factor that plays within a human being. The culture of an organization is built within.

Autonomous motivation activates these intrinsic factors. Employees have an inner drive to do their work and do it well.

Intrinsic values touch on how a person feels about their work and not just how much compensation they receive. Being paid fairly is important, but being paid more does not always correlate with being more productive. Money is not the only factor that motivates people to complete tasks. Other factors are at play encouraging workers to be successfully productive and will create a better culture within the organization.

Intrinsic definition

Intrinsic is an internal factor that affects human behavior. These factors are psychological in nature and come from within a person.

Common intrinsic motivations in the workplace include:

• Pride in work.

• Feeling respected and trusted.

• Personal growth and learning.

• Feeling work is enjoyable.

• A sense of accomplishment.

• Expanding competence and contribution.

• Feeling a part of a productive team.

• Choice in work projects.

 

How Do You Activate This Internal Drive?

As human beings, our desire to be independent begins from a very young age. If you have ever watched a baby working hard to pull up on furniture, take those first few steps or even say those first few words, you are witnessing intrinsic motivation. This type of motivation doesn’t stop once you know how to walk and talk. Your desire to be independent continues throughout your life. As a leader, you want to activate this independent drive within the work environment you set up.

 

How To Enhance Autonomy In The Work Environment 

There are three fundamental ways to develop autonomy in your office: fostering relevance, providing choice and allowing for criticism and independent thinking.

Fostering Relevance

When something is relevant to us as human beings, it means that it is important to us. We care about it. We want to achieve it. We have a reason to do it. Fostering relevance allows each employee to contribute to the success of your organization in a way that is important to each of them.

For example, it can be difficult for an employee to get excited about implementing a new process when its importance does not feel relevant to what the employee contributes. Not all employees do the same job, so each will see the importance of the new process in a different way.

As a leader, it’s valuable to create an environment where relevance is fostered for each employee. A place where an employee sees the new process as important to what they do as an individual and is tied to their personal achievement.

Providing Choice

Promoting a feeling of choice in your work environment can encourage autonomy within your employees, especially if their choices are tied to their personal growth and success. None of us likes to feel that we have no choice, especially in something as important as the work we do. We all want to perform tasks at work we find interesting.

This is not to say that every employee in your business gets to choose only the tasks they enjoy. There will always be the “not-so-enjoyable” tasks that need to be completed no matter the workplace or the job, but providing even small choices for each employee within the parameters of their job gives them a feeling of control. This feeling of control supports a feeling of autonomy.

Allowing For Criticism And Independent Thinking

This last way of developing autonomy in your office is two-fold. The core is for you as a leader to listen and accept criticism from your employees. It is not always the easiest of tasks, but it is important. An employee that feels safe expressing feedback on a colleague or problems they are encountering with you as a leader is an employee that also feels safe to think independently.

Fear of repercussions not only shuts an employee down to express criticism but also shuts them down when expressing solutions to problems that hold your organization back from success. Allowing space for criticism also allows for creative and innovative thinking. Feelings of autonomy grow in an employee who feels they can think independently on the job.

 

The Work Environment In Your Organization

Your office and employees are unique. Learning about your employees and what stirs them intrinsically can go a long way in creating a win-win environment. A place where your employees succeed in their work and you succeed in growing your company. Autonomous motivation can boost your employees’ productivity and, in turn, boost the success of your business.


Forbes Business Council is the foremost growth and networking organization for business owners and leaders.

Who Will Win and Lose in the Post-Covid Economy?

A wise, balanced article on national economic options which lie immediately ahead, post pandemic – published by the HBR, written  by Philipp Carlsson-Szlezak, Paul Swartz and Martin Reeves of Boston Consulting Group

As an extraordinary recovery is underway, it won’t be long before business leaders face a perennial political economy question: With wages rising and workers’ claim on economic output growing, will firms’ profits come under pressure?

With tight economic conditions all but guaranteed, there are multiple scenarios of how output will be shared between workers and firms in the post-Covid expansion. The policymakers who have placed the big stimulus bet also will have to negotiate the path ahead.

We’ve identified a small number of plausible scenarios that sketch the interaction of wage growth, productivity growth, and policy management. While workers and policymakers can live with several of the scenarios, only one will be truly appealing for firms.

The Ongoing Stimulus Bet

Fiscal stimulus was both enormous and necessary when the Covid crisis hit last year, and it successfully prevented the structural damage that weighs down recoveries. But even as the economy was on a better-than-expected rebound, the government opted for an additional stimulus package, in the hope of delivering a booming economy that will boost workers’ fortunes in the post-Covid economy. The downside to this stimulus bet is the risk of imbalances, such as inflation or asset bubbles, as the economy “overshoots.”

We summarize four ways in which this bet may play out — and who wins and loses.

1. Win-win: Wage gains are paid for by firm productivity growth.

The Goldilocks scenario is where workers, firms, and policy makers all win in the post-Covid cycle. Firms don’t lose out from higher wages if they’re paid for by productivity growth. And policy makers prefer this dynamic because there are no current or latent inflationary pressures as the potential of the economy expands.

However, this combination of wage and productivity growth is not a given. The period that most resembles this scenario was the late 1990s. Wage growth was very strong, but so was productivity growth, which muted the impact on corporate margins. Companies were happy to ride the wave of strong economic growth, itself driven by strong wage growth in a virtuous cycle.

In the post-Covid world there is a credible expectation of some higher productivity growth but whether it can be enough to meaningfully offset wage pressures remains to be seen.

 

2. Win-lose: Workers gain at the expense of firms — reversing a longstanding trend.

If productivity growth falls behind wage growth in the post-Covid world, firms will be faced with cost pressures. If they’re unable to pass them on to consumers, their margins will be compressed and workers’ share of economic output would grow at firms’ expense, reversing a multi-decade trend.

Across recent business cycles we have seen strong wage growth when the labor market is tight and firms’ margins fall.

Keep in mind that firms’ profits may continue to grow in this scenario, as the strong economy drives top-line growth that can offset margin pressures. But it’s a less attractive scenario than the first one because we don’t see as much overall economic growth.

Policy makers would approve of this scenario, not only because of their policy objective to raise wages but also because firms’ absorbing wage pressures in margins means less inflationary pressure. However, their approval would be qualified, as rising wages cannot be sustainably absorbed in firm margins indefinitely, eventually leading to inflation.

3. Lose-lose: Inflation threatens the cycle as policy makers deal with a losing bet.

If wage pressures are not offset by productivity growth, and firms have the pricing power to pass them on to consumers, then inflation will result.

If this occurs at a modest pace (say 2%) policy makers may be satisfied. But if it drives inflation sharply higher for some time, policy makers will have lost their stimulus bet. Faced with too much inflation, they would have to raise interest rates and risk a recession — a lose-lose all around.

Such a “policy error” occurs when the Fed/ BoE has to move faster and stronger than anticipated to catch up with realized inflation. While an error, it remains the desirable course of action, because ignoring emerging pressures has the potential to deliver far worse than a cyclical downturn.

4. Lose, then lose again: Policy makers double down on a losing bet, leading to disaster.

The disastrous scenario is that monetary policy makers don’t raise interest rates even when prices are rising faster, and lawmakers push for even more fiscal stimulus in a quest to extend the cycle.

The ugliness in this scenario is that cyclical pressures can break the structural foundations of the inflation regime when pressure is high and sustained. Such a “regime break” is a higher bar and takes more time than just a few quarters or even years. But it can happen, and it has happened before — last time in the late 1960s, leading to a period known as “the Great Inflation.”

If this scenario happens, the outlook wouldn’t just be a single short recession, but more frequent recessions, low asset valuations, higher rates, and a painful process of re-anchoring inflation expectations.

Which Scenario Is Most Likely?

While scenarios are a necessarily stylized version of the future (not the messy reality), there are reasons to be optimistic.

With wage pressures almost certainly building, the good news is that productivity growth is likely to absorb some of it  — as the Covid crisis has facilitated new business learnings — but not all, so margins will be pressured to absorb some of it. If there is enough of these two outcomes, monetary policy makers can raise interest rates slowly without killing the cycle — a relatively good outcome for workers, firms, and policy makers.

If price pressures are passed through and too-high inflation does result on a sustained basis — which we view as less likely — policy makers stand a chance to avoid a recession, even though that window could be quite narrow. An early and well-balanced policy intervention can deliver a “soft landing,” where the economy cools down just enough, but not enough to push it into recession.

Only if inflation starts a fire that needs to be put out rapidly and policy makers deliver a recession is it a clear lose-lose bet. (Although conditions could change, we view this as unlikely.) Yet, this remains preferable to the structural inflation break (very unlikely in the near term) where policy doubles down on a losing bet and undermines the inflation regime.

What It Means for Firms — and What They Can Do

Stakeholders in the macro economy have different interests in the scenarios we laid out above. Workers are fine with scenario 1 or 2, and some politicians might even prefer scenario 2 where labor’s share most clearly rises. Policy makers would prefer scenario 1, but they would be satisfied with scenario 2 as well. They may also be willing to push the cycle if that scenario develops.

Firms, on the other hand, will strongly prefer scenario 1 and that means they have to deliver higher productivity growth in the post-Covid cycle.

It’s difficult to overstate the importance of productivity growth to firms. Passing on wage pressures to protect margins is only a winning strategy if other firms can’t do the same. If all firms can and do so, the inflationary outcome will drive up interest rates and thus be a headwind to growth. In aggregate, therefore, for firms to win they must deliver on productivity growth.

So, what are firms to do? Productivity growth, in essence, is about producing more with existing inputs, or producing the same with fewer inputs. That almost always is easier said than done, particularly when the pandemic has already put enormous strain on the workforce, but here are some key levers to do so sustainably:

  • Seize on the specific learnings from the crisis. Covid has forced many firms to survive and adapt to new realities, often by exploring new, digital, and often more efficient processes and channels.
  • Institutionalize the learning process from the crisis. Covid also forced firms to try things they wouldn’t have otherwise tried, often at surprisingly little cost. Now is the time to build processes that generate these learnings in more normal environments.
  • Understand that the old playbook of plugging gaps by hiring the next worker will be hard. Thus focus must shift to improving existing worker productivity through new technologies. In particular, the ongoing “digital transformation” of incumbent businesses has at worst the potential to increase the cost of doing business, and at best could drive both growth and productivity. In this respect, the biggest gains will be if business models are reimagined in the context of new needs and new possibilities, rather than merely incrementally enhanced.
  • Yet don’t ignore existing technologies. Often their use can be deepened today since previously the tradeoff between incremental labor or capital investment was less favorable.
  • And lead effectively. Leadership that gets everyone pushing in the same direction (ranging from the operational to the inspirational type) can unlock productivity gains as well.

 

Avoiding paying higher wages in the post-Covid cycle will be a losing strategy. Instead, making your firm more productive so that workers’ additional value creation pays for their higher remuneration is how firms can turn the post-Covid cycle into a win-win scenario.

 

Why Computers Didn’t Improve Productivity

“You can see computers everywhere but in the productivity statistics,” wrote Nobel-Prize-winning economist Robert Solow in 1987. His dictum spawned several decades of economic research aimed at solving the mystery that has become known as the ‘Solow Paradox’: massive investment in computers but no net gain in productivity.

A key to solving the Solow Paradox lies in recognizing that bureaucracy and computers are a marriage made in hell: computers generate a great deal more work, but not necessarily more useful work. In a bureaucracy, there is often no net gain. Until you tame bureaucracy, with more agile management, computers often make things worse.

The Solow Paradox Is Counterintuitive

The usual first response to encountering the Solow Paradox is disbelief: “If I have to write a few emails so that I don’t have to use a carrier pigeon, sign me up!”

But in a bureaucracy, the story of those few emails usually doesn’t end there. So, you send your few emails, and then you soon get email replies and comments. Now, you have to write more emails in reply to those emails, which are then sent up the hierarchy and to a chain of full-time reviewers, who each make a comment to show that they are useful.

So now you have to reconcile all these comments. And maybe you have to send more emails to explain to each reviewer how their particular comment has been dealt with, and you may get replies to those emails. And so on. What began as a few quick emails has turned into days of work by multiple people all over the organization. In a bureaucracy, computers help work spread like a virus.

The First Digital Computers

Digital computing began differently, with a big success. The first digital computer, Colossus, was developed by British intelligence in the 1940s. It deciphered encrypted messages between Hitler and his generals: it helped win the Second World War

Similar one-off triumphs were apparent with NASA’s moon landing in 1969, and with IBM’s computer, Deep Blue, which defeated world-champion chess player Gary Kasparov in 1997 and Watson, which won the game show, Jeopardy, in 2011. Yet widespread economic gains from computing have been harder to find.

Mainframe Computing

When mainframe computer systems began appearing commercially in the 1950s, big firms were thrilled. Suddenly, in a single system, top managers could for the first time see the results of massive amounts of data. Computers were used by firms for critical applications like bulk data processing, enterprise resource planning, large-scale transaction processing, and industry and consumer statistics.

Mainframe computers were expensive and required significant expertise. The computers were physically huge and needed special cooling systems. Access to computing time was strictly rationed. The systems themselves were monolithic and could not interact with other systems. The systems were also difficult to adjust or re-program.

By the 1990s, huge sums of money were being lost in mainframe computing because the work of software development was always late, over budget, and plagued by quality problems. Some big projects were never finished at all. Software programmers were seen as culprits and were punished. They worked harder. They labored evenings and weekends. They were fired. It made no difference. The software was still late, over budget, and full of bugs. Replacements were hired, but they did no better.

Standard management practices did not seem to work with big software systems. Managers found that the more they sought to control things, the less progress they made. The more staff they added, the slower the team became. Complexity did not respond to authority. Billions of dollars were being lost. Something different had to be found. But in the course of the search to find a better way, computer departments acquired a reputation for bad management.

Computers and Bureaucracy: A Marriage Made In Hell

Meanwhile the advent of minicomputers in the 1960s, and then personal computers, in the 1970s, democratized access to computing. Now everyone in the white-collar workforce had access to a computer. And indeed, computers enabled much more work to be done.

One or two redrafts of documents became incessant revisions. Individual reviews turned into multiple levels of reviews and further rework. Staff found themselves preparing, and then sitting through, endless PowerPoint presentations.

Spreadsheets spawned massive amounts of data analysis. Yet different computing programs often couldn’t interact with each other. Data was shipped back and forth, or up and down corporate hierarchies, or across different systems, or unbundled and re-bundled, or transformed into analog and then re-transformed back into digital.

The Spread of Unproductive Work

As anthropology professor David Graeber explained in his landmark book, Bullshit Jobs: A Theory, the workplace became riddled with useless work: “HR consultants, communications coordinators, PR researchers, financial strategists, corporate lawyers, or the sort of people … who spent their time staffing committees that discuss the problem of unnecessary committees.”

Graeber’s analyses suggested that in large organizations, as much as half of all work was being done by five categories of unproductive jobs:

·      Flunkies, who serve to make their superiors feel important.

·      Goons, including lobbyists, corporate lawyers, telemarketers, and public relations specialists.

·      Duct tapers, who fix problems—temporarily.

·      Box tickers, who create the appearance that something useful is being done.

·      Taskmasters, who create extra work including middle managers.

An Explosion of KPIs

As the quantity of useless work grew with the help of computers, bureaucracies developed devices to prove that their work was useful. Key performance indicators (KPIs) that supposedly defined what was important to perform by any person or unit flourished like mushrooms.

In practice, KPIs were mainly used to justify the bureaucracy, rather than to help determine whether any activity was creating genuine benefit for any external customer. Masses of computerized KPIs helped managers prove—to themselves and to their bosses—that what they were doing was useful.

The Solution: Agile Management

In the (good) old days before computers, you didn’t send unproductive emails. You just did what needed to be done.

And that’s what happens now in the winning firms of the digital era that have made the transition to agile management. All work, including computing, is focused on what will add value to external customers. So, you don’t send those unproductive emails: you are working in a team with a clear mandate on a customer-focused set of tasks in a sprint—i.e. work with a short deadline. You don’t need to continually check in with a steep hierarchy or with an army of reviewers. You just get on with it and get it done.

It’s not that computers aren’t potentially capable of great gains. But like most new technology, they need a different kind of management to realize that potential.

 

Collaboration Overload Is Sinking Productivity

Collaborative work — the time spent on email, IM, phone and video calls — has risen 50% or more over the past decade to consume 85% or more of most people’s work weeks.
The Covid-19 pandemic caused this figure to take another sharp upward tick, with people spending more time each week in shorter and more fragmented meetings, with voice and video call times doubling and IM traffic increasing by 65%. And to make matters worse, collaboration demands are moving further into the evening and are beginning earlier in the morning.
These demands, which can be invisible to managers, are hurting organizations’ efforts to become more agile and innovative. And they can lead to individual career derailment, burnout, and declines in physical and mental well-being.
In response, forward-looking organizations are taking action to protect employees from the volume of collaborative demands by employing organizational network analysis (ONA) – (O NO – not another unnecessary TLA!)
For example:
  • Two major life sciences organizations have used network analysis (aka ONA?) to systematically analyze calendar data and identify ways to reduce redundant meeting time.
  • One global software organization has focused on email to reduce volume, length, and cc’ing redundancies.
  • A globally recognized insurance organization has employed network analysis (aka ONA?) to identify the most overwhelmed employees and educate them on practices to reduce overload.
  • And, on a more dubious front, one global services organization implemented a 60-second timeout button – after a particularly difficult time, employees can hit a button that lets others know they are taking a mindfulness break — although one must wonder if this is akin to giving a band-aid to an amputee
This exclusive focus on quantity of collaborative demands misses two important drivers of collaborative overload:
1. The inefficiencies and subsequent cognitive switching costs of always-on cultures – i.e. the costs of being disrupted – the time needed to ‘get back up to speed’ – the increase in meetings and the number of participants per meeting from the use of Zoom or Slack, and the decrease in focus on results
2. The personal motivations that lead us all to jump into collaborative work too quickly – and unnecessarily – much of the blame lies with the individual, not others, by responding to most requests or perceived opportunities to feel one matters and/ or is in control – or from wanting to help somehow

 

To avoid these negatives, General Mills took the following action:
  • Implementation of “free-form fridays” – employees were instructed to leave their calendars blocked starting at 2.00pm every friday, so they could engage in “deep work,” catch-up on emails, and recharge
  • More frequent surveys of employees’ well–being and stress levels, with senior leaders emphasizing the need for prioritization and self-care
  • The development and deployment of “Ways of Working” training and tools for teams with high levels of collaboration, stress, and negative mood
On average, General Mills claim to have reduced collaboration time by eight hours per employee per week , and cut many non-value-added meetings — all without any negative effects on stress levels or moods
The authors thus claim ‘leading organizations that equip their employees to work more efficiently in this context will have an important advantage in terms of both performance and retention’

 

4 reasons hybrid offices won’t work

A provocative article by Joseph Woodbury, CEO of Neighbor, and published by fastcompany.com – arguing that WFH full-time is not a sensible productivity tactic

In a singular (and hopefully rare) global pandemic, we seem to have collectively forgotten our need for each other. Without thinking twice, companies are rushing to roll out remote work policies as if employees are robot machines that don’t need the human interaction of an office. As a result of one major unfortunate disaster, we have rashly set aside centuries of collective learnings about collaboration and teamwork.

Contrary to these split-second policies, the famous Westgate studies conducted at M.I.T. by social psychologists Festinger, Schachter, and Back proved that propinquity, or the state of being close to someone, heavily influences the likelihood that a close relationship will form.
Management Professor Thomas J. Allen later applied this concept to employees when he created the Allen Curve, which demonstrates that as the distance between engineers within an office increases, the communication between those same engineers falls exponentially, dropping off almost entirely after a distance of just 50 meters.

 

Here is my advice for leaders who prize speed, innovation, and trust, as they determine their return to office plans.

PROPINQUITY FOSTERS INNOVATION

But wait, hasn’t technology progressed so much that virtual relationships can be the same as physical ones?

Not quite.

A major study entitled “Distance Matters: Physical Space and Social Impact” set out to measure the effect that advances in communication technology have had on the power of propinquity in social influence. The study concludes: “We have presented evidence from three divergent samples showing that the empirical relationship between distance and social influence, first documented 50 years ago, still holds despite remarkable changes in the technology of communication.”
Behavioral scientist Jon Levy added earlier this year, “Even in the age of Slack, email, and Zoom, the fact remains: Out of sight is often out of mind.”

 

Innovation often happens when you overhear your colleagues talking about issues, during quick chats walking to the elevator, or the small talk before and after the meetings. These in-person, real-time conversations help get the creativity flowing. These close relationships and innovative conversations are essential ingredients of success, especially for ambitious startups.

BEING TOGETHER IS ENERGIZING

Deep down inside of us, we all feel the importance of human connection and community. As management consultant Meg Wheatley once observed, “There is no power for change greater than a community discovering what it cares about.” Humankind has long sought closeness in every aspect of life, from neighborhoods to social clubs to P.T.A.s to religious groups. Our natural intuition tells us there is something more connecting about a face-to-face interaction than a digital one:

  • It’s one thing to watch an important sports game on TV, but it’s another experience entirely to attend the game in person cheering shoulder to shoulder with fellow fans.
  • It’s one thing to hear a song on the radio and another entirely to see it performed in full concert alongside other enthusiasts.
  • It’s one thing to develop a friendship or relationship online, and another to build that friendship or relationship in person, face to face, especially with a colleague in a company.
  • It only takes one glance at Facebook to see that people talk to each other very differently (and make very different assumptions) online than they do in a face-to-face, personal interaction.

 

Throughout human history, great things have been accomplished by individuals coming together around a shared vision, from government initiatives like NASA’s space race to land a man on the moon to private endeavors like building Amazon, a company that reshaped the global economy. All of the most ambitious projects in human history were driven by a team working in close proximity to build and collaborate towards an audacious goal. Will your startup be different?

PROPINQUITY CAN FUEL PRODUCTIVITY

So much of the debate encircling the remote vs. office discussion has centered around worker productivity. Advocates of remote work describe periods of intense focus and deep work that contribute to productivity, while advocates of the office cite studies that show employees working remotely put in longer hours due to much less efficient productivity during the day.

At Neighbor, productivity is not relevant to the debate. Productivity is more about hiring great people than it is about the setting. With a strong internet connection, we trust that each of our employees would be just as productive in Antarctica as they would be in our office. Employers should trust their employees enough that productivity is a non-issue.

COMMUNITY IS A NETWORK EFFECT

Being in an office and working together in person demonstrates a network effects principle. Network effects occur when something becomes more valuable (often exponentially) as usage increases. This is certainly true of communities and teams.

As we’ve explored here, everyone benefits from face-to-face, physical interaction. Yet if a company simply provides an office and only a few individuals show up, then those exponential network effects aren’t able to take effect. An office simply becomes a lonely place to do work, no better than a home office.

True human and employee flourishing occurs when the conditions and culture are put in place to create a strong physical community, where no one is left out. In 2021, we need less digital interaction and more human interaction. That’s what we’re building by embracing an in-office culture.

 

History tells us what will decide whether we work from home in the future

Productivity Commission boss Michael Brennan and his troops have been giving the matter much thought and, as he revealed in a speech last week, such a radical change in the way we work would be produced by the interaction of various conflicting but powerful forces.

After all, it would be a return to the way we worked 300 years ago before the Industrial Revolution. Then, most people worked from home as farmers, weavers and blacksmiths and other skilled artisans. And, don’t forget, by today’s standards we were extremely poor.

What’s made us so much more prosperous? Advances in technology. But technology is the product of human invention. That invention could have pushed our lives in other directions.

What underlying force pushed us in the direction it did? As the Productivity Commission boss was too subtle to say, our pursuit of improved productivity.

Productivity isn’t producing more, it’s producing more with less. In particular, producing more of the goods and services we love to consume using less labour.

Why among the three “factors of production” – land and its raw materials, capital equipment and labour – is it labour we’ve always sought to minimise?

Illustration: Simon Letch
Illustration: Simon Letch

Because we run the economy to benefit ourselves, and it’s humans who do the labour. We’ve reduced physical labour, but now automation allows us to reduce routine mental labour.

It was the Industrial Revolution that increasingly drove us to the centralised workplace. Initially, the factory and the mine, then the office.

The move to most people working in a central location was driven by economic forces. Businesses saw the benefits – to them and their customers – of combining labour with large and expensive machinery, powered by a single source. Initially, steam.

“The factory provided a means for bosses to co-ordinate activity in real time, supervise workers and it also provided an efficient way to share knowledge – as did the office,” Brennan says.

So the central workplace reduced the cost of combining labour and capital, but did so by imposing transport costs – mainly on workers who had to get themselves from home to the central location and back.

For most of the 20th century, however, it got ever-cheaper to move people around, via steam, electricity, the internal-combustion engine and the aeroplane. So advances in transport technology reinforced the role of the central workplace. Over the past 30 years, however, the cost of moving people around has stopped falling. “We seem to have hit physical limits on speed; and congestion has meant that today it takes longer to move around our cities than was the case a few decades ago,” Brennan says.

This, of course, is why we fancy the idea of continuing to work from home. It’s only advances in computing and telecommunications technology that have made this possible. The cost of moving information has plummeted, while the cost of moving workers – in time and discomfort – has gone up.

 

How Artificial Intelligence Will Shape Our Future

A prescient and wise article just published in entrepreneur.com and penned by Archil Cheishvili claims we’ll witness the creation of industries that are unimaginable now, thanks to AI

As AI improves and becomes more powerful, its impact on the world economy will become vastly more significant. It will affect virtually every aspect of the world economy  from unemployment rates to economic growth, productivity, income inequality and more.

Some argue that so far, AI has not had a large enough impact, but as its development accelerates, its effects will grow exponentially. Whether we like it or not, automation and job displacement are already here, slowly pushing the human workforce into different domains. Similar patterns can be found throughout history; new technology made certain products and jobs obsolete, and eventually humans were forced to switch to more innovative products and new jobs.

For instance, occupations such as a milkman, switchboard operator and knockerupper (a human alarm clock that used to tap on windows) no longer exist today. Steam engines were replaced with internal-combustion engines, and coachmen became chauffeurs. It’s a natural process: As technology advances, it doesn’t make sense to have humans work the same old jobs.

Higher productivity at a relatively cheaper price

When we examine the job displacement, we should analyze the phenomenon referred to as “The Great Decoupling,” which reveals that up until the 1970s, productivity and hourly wage increased at the same pace; since then, however, the hourly income has not been able to keep up with the productivity increase. This disparity between the two curves might get even worse with AI automation.

Moreover, when we look at other economic indicators, such as returns to capital and labor, we can see that the former has been outperforming the latter consistently for the past decades. If we combine the mentioned indicators, we can infer that investors are getting higher productivity from employees at a relatively cheaper price due to the improvement in capital assets and technology used by the employees.

Furthermore, if we add AI automation to the premises above, we get super-high productivity from a fraction of employees for a fraction of the cost. The implications of this can be huge for the world economy. Will the rich get richer, leaving the ones without capital even more powerless? Or maybe it will level the playing field, and nobody will have to work for a living? The outcry that jobs will be lost has been there forever, but we clearly see that the world is a better place to live than ever before. Overall poverty levels have been declining across the globe, and the average human lifespan has been increasing.

When computers became cheaper, they served as the foundation for a variety of industries

In the mid-term perspective, AI advancement will enable products to be produced cheaply and in abundance. This, in turn, will lead to demand quantity increase for the cheaply produced products. That’s just economics: When the price of a product decreases, more people can afford it, and the demand quantity increases. This demand drive might mitigate the severity of the job losses — offsetting it to some degree. Additionally, when certain technologies become cheap, it sparks the creation of completely new industries, in which money is invested and jobs are created. For example, when computers became cheaper, they served as the foundation for a variety of new industries.

According to Moore’s Law, the number of transistors on a microchip doubles every two years; hence, the cost of computers is more or less halved. When computers become cheap, this means that the computational power can be utilized in ways never imagined before: smart watches, smartphones, tablets, smart glasses, smart homes, automotive self-driving systems and more. The fact that this much computational power became available at such a cheap price kick-started whole new industries and application ideas. Consequently, new products and jobs were created to satisfy the growing demand for such novel technology and products.

In economic terms, the supply curve shifted, meaning that at any given price, consumers would be able to purchase more of the computational power embedded in various products.

It cannot be refuted that so far humans have been able to create more jobs and income opportunities for an ever-growing population despite the fact that some of the older professions have been replaced by robots and technology. We cannot say for sure, but this trend may continue for the next 50 to 100 years at least.

We will witness the creation of industries that are unimaginable now

In the long term, AI will be able to perform more of the tasks that humans do right now, but for AI to replace the majority of the current jobs, it will take 80 to 100 years, maybe even more. Eventually, humans might be pushed out from most traditional jobs, but since we’ve been creating whole new industries and an increasing number of jobs, we might not care at all. Total human replacement is unlikely in the foreseeable future.

But if AI ends up in the hands of a few companies, then these companies will essentially take over the world. Although the economic pie will get larger, which in its turn should lift more people out of poverty, the income inequality might worsen. On a positive note, we will witness the creation of industries that are unimaginable now. Two decades ago, it was impossible to imagine that we would see an increasing number of people making a living by creating online content on platforms like Youtube and Instagram. The same way internet brought completely new domains and displaced some of the workforce, AI and automation will lead to the creation of totally new jobs.

The future of AI is both exciting and frightening

The future is not so bright

Realism or pessimism from Martin Wolf in the Financial Times – read on and decide?

The 2020s will determine whether we have a chance of averting irreversible damage to the climate. But, for the UK, this comes together with other big challenges. Its response will also determine what happens to the wellbeing of its people.

Dominic Cummings’ brutal testimony this week suggests that its leadership’s ability to deliver is very much in doubt.

The Resolution Foundation and Centre for Economic Performance of the London School of Economics have, to their credit, just launched an important inquiry into The UK’s decisive decade. It is decisive, because the country must grapple with recovery from Covid-19, the aftermath of Brexit, an ongoing technological revolution and the transition to net-zero emissions of greenhouse gases.

Moreover, it does so from a base of stagnant productivity, high inequality, rapid ageing and high debt. Only a frivolous person would assume that this is sure to work out.

Remember: in 1987, Italians celebrated il sorpasso, the year when their nominal incomes per head surpassed those of the UK. But today, after two decades of stagnant real incomes, Italy is well behind. Its gap with Germany has become bigger still.

Yet over the past decade, UK productivity has also stagnated. If that is not reversed, a declining UK will lose not just prestige, but the ability to give rising living standards to its people. The report spells out in sobering detail the challenges and the legacy.

On the aftermath from Covid-19, for example, there has probably been a permanent shock to high-street retail, a particularly important source of jobs for women. On Brexit, the impact on trade with EU countries is already visible, with little chance that trade with the rest of the world will soon (if ever) offset these losses. On technology, we must assume large and continuing shifts in the structure of employment and competitive pressures, with many firms disappearing. On the transition to net zero, the country must make huge investments well before any gains from lower operating costs become apparent.

Then there is the dire legacy. The low rate of growth of productivity reflects, among other things, weak investment and the slow adoption of new technology. The report notes that, “In 2017, the UK had only 71 robots installed per 10,000 manufacturing employees, compared to 309 in Germany and 631 in Korea.” Mainly as a result of slow productivity growth, the growth in real household incomes fell from 22 per cent in the 2000s to only 9 per cent in the 2010s.

Again, inequality soared in the 1980s and never reversed. As a result, “The UK Gini coefficient [a measure of inequality] is higher than in all countries in the EU, except Bulgaria, and the second highest in the G7”. The UK also has exceptionally big regional inequalities in productivity, which leaves the rather less unequal regional distribution of household incomes dependent on transfers from London, whose most competitive industry, services, has been gleefully sacrificed on the altar of Brexit.

In view of all this, the facile boosterism of the prime minister is a luxury the country simply cannot afford. What is needed instead is the “ruthless truth telling” recommended by Keynes to the then nascent IMF. As the report indicates, the UK has some important assets, notably its language, first-rate universities, a strong science base and largely non-corrupt politics. The government has also already laid down a “plan for growth” that has some welcome elements, including somewhat higher public investment, a plan for life-long learning, a focus on innovation and science and some targets for decarbonisation.

Yet there is no recognition of the costs of Brexit or of the obstacles to spreading prosperity more broadly. There is no certainty that the needed money will be spent on skills. There are big holes, too, in the plan for decarbonisation. Possibly most important, instead of ideas on how to raise private investment the chancellor intends, after a brief period of generous allowances for investment, to raise corporation tax substantially. This will reduce already low investment. Yes, we will get “freeports”. But these will prove a zero-sum gimmick.

When we look back at Covid-19, we see one blunder after another, partially redeemed by a flash of inspiration: the vaccination programme. But one inspiration will not secure the development of an economy in such challenging circumstances. That takes far-sighted policymaking and resource mobilisation by a competent political and administrative machine in a supportive relationship with a dynamic private sector. It takes policy, not gestures, and respect for reality, not slogans.

Is this feasible in the UK? Perhaps. Is it likely? No.

Britain is running out of new ideas and it’s killing productivity

Writing in Cityam.com, Sam Dumitriu, Research Director at the Entrepreneurs Network, addresses a longer term problem with current efforts to improve national productivity – the problem being that, despite more brainworker inputs, the impact of their new-ideas is becoming more and more marginal 

It is no secret that Britain is in a productivity slump (if one is to completely accept the ONS data, which we do not). The statistics should be familiar. In the decade before the pandemic, productivity grew at just 0.3 per cent per year. Before the financial crisis, it grew at 2 per cent. That might sound like an abstract or wonkish concern, but it is the difference between wages doubling every 35 years and wages doubling every 231 years.

In the short run, there are clear ways to lift our productivity levels closer to American or German levels. To their credit, the Government is implementing many of them. Reforming the planning system, a super-deduction for investment in productivity-boosting machinery, and a Help to Grow scheme to improve management skills will all help.

The above policies will bring us closer to the frontier, but pushing the frontier forward consistently is what really matters. In a way, the solution is simple: have more ideas. But it’s easier said than done.

When economists from Stanford and the LSE investigated whether ideas are getting harder to find, the answer was a clear “yes”. We now need eighteen times as many researchers to achieve a doubling of computer chip density, the famous Moore’s law, than we did in the 70s. Economists Ben Southwood and Tyler Cowen find similarly concerning trends across a range of scientific fields. We are getting fewer transformative discoveries even though the number of PhD researchers has surged over the past few decades.

If we can’t figure out how to reverse these worrying trends, then we will remain stuck. Our ability to solve our greatest problems from climate change to pandemics will be limited.

The Nobel Prize-Winning economist Robert Lucas once said of economic growth: “The consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think about anything else.”

In a foreword to a new essay collection, Patrick Collison, the co-founder of Stripe, observed that “many of the most important considerations that will determine the long-run rate of economic growth are not the foremost policy issues of our day.” How long do journalists spend reporting on the way we fund research? Even Dominic Cummings struggled to get it on the agenda.

It’s a concern shared by former Prime Minister Tony Blair. On technology he writes in the preface that “too often policymakers either ignore its importance or focus on questions like those to do with privacy which are important but limited; when the real debate should be around how we use technology to usher in a new advance for humankind.”

There may be a silver lining to the neglect: there is no culture war or partisan fight to worry about. In many cases, the low-hanging fruit has not been picked.

Take the way we fund scientific research for an example. A few recent studies suggest that radically different funding mechanisms could deliver substantial gains and liberate researchers from bureaucratic grant applications. Yet, the topic is under-studied. We ironically don’t apply the scientific method to science funding itself.

Or look at our approach to high-skilled immigration. We take a “build it and they will come” approach. At a stretch, we might create specialist visas. But we are in competition for global talent. Why not take a leaf out of the Premier League’s book? They invest serious money into scouting the next Neymar, Messi, and Salah. We could take a similar approach to scientific talent. The Government could fund scholarships at top universities for high-achievers at the International Math Olympiad.

These are just two ideas. We also need to make government procurement more open to new ideas, digitise the state to eliminate unnecessary frictions in civic life, and promote innovation to the next generation – through a 21st Century Great Exhibition.

In some fields, we have seen dramatic technological progress in the past year. CRISPR gene-editing is curing fatal genetic disorders, mRNA vaccines are bringing an end to the pandemic, and falling sequencing costs are enabling us to track new variants. Each technology is in its infancy, but has the potential to transform our lives. Imagine a world where every genetic disorder was easily treatable, where routine blood tests allow us to stop cancers at an extremely early-stage, and where infectious diseases are stamped out altogether.

It’s a future that is within reach. But we should be more impatient, more urgent. Boris Johnson wants to make the UK a science superpower. It’s the right rhetoric, but now is the time for action.

 

City A.M.’s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

World’s largest trial of a shorter work week

In an article for Mashable.com, Amanda Yeo reports that Iceland ran the world’s largest trial of a shorter work week – and says ‘the results will (not) shock you’

The trial was run from 2015 to 2019. An analysis of the results was finally published this week, and surprise! Everyone was happier, healthier, and more productive. Please pretend to be surprised.
The report was jointly prepared by the Association for Sustainability and Democracy (Alda) in Iceland and UK think tank Autonomy, who note that Iceland’s experiment could be used as a blueprint for future trials around the world.”This study shows that the world’s largest ever trial of a shorter working week in the public sector was by all measures an overwhelming success,” said Will Stronge, Autonomy’s director of research. “It shows that the public sector is ripe for being a pioneer of shorter working weeks — and lessons can be learned for other governments.”

Iceland’s test consisted of two trials run by Reykjavík City Council and Iceland’s national government. The former involved over 2,500 people while the latter had 440, together making up more than one percent of the country’s workforce. Workers were moved from 40-hour work weeks to 35- or 36-hour weeks with no reduction in pay, and a wide variety of workplaces took part, including offices, preschools, social service providers, and hospitals. Not all participants worked traditional nine-to-five jobs either, with workers on non-traditional shift times also included.

Regardless of these variables, the results of the trials were overwhelmingly positive. Productivity either remained the same or actually increased, and worker wellbeing was considerably improved. Perceived stress and burnout went down, while health and work-life balance went up, as employees were given more time for housekeeping, hobbies, and their families. Both managers and staff considered the trials a major success.

“For me it is like a gift from the heavens,” said one manager in Reykjavík, according to the report. “And I like it a lot.”

Workplaces tried out various time reduction strategies to accommodate the shorter work hours. These included delegating and prioritising tasks more effectively, having shorter and more focused meetings, and yes, letting meetings that could have been emails just be emails.

The trials’ success has helped Iceland’s trade unions negotiate for permanently reduced working hours since 2019, affecting tens of thousands of their members. The report states that around 86 percent of the country’s entire workforce now either has shorter working hours, or the right to shorten their hours.

“The Icelandic shorter working week journey tells us that not only is it possible to work less in modern times, but that progressive change is possible too,” said Alda researcher Gudmundur D. Haraldsson.

This is far from the first time the benefits of a shorter work week have made themselves known.

When Microsoft Japan trialed a four-day work week in 2019, productivity increased by almost 40 percent.

New Zealand firm Perpetual Guardian permanently switched to a four-day work week in 2018 after their own trial saw productivity increase 20 percent.

Companies around the world have tried shorter work weeks again and again, continually confirming the International Labour Organisation’s 2018 report that shorter work hours typically produce happier, more productive workers.

“We should continue on this journey, and I believe the next step is to reduce working hours to 30 hours per week,” said Icelandic parliament member Bjarkey Olsen Gunnarsdóttir.

Across the board, shorter work weeks have proved better for employees, employers, and society in general.

It’s high time life caught up to the science.

 

High productivity figures pre-Covid masked some underperformance

Martin Wall, writing in the Irish Times, reports that Leo Varadkar, Tánaiste (Irish Deputy PM) says the government is seeking to have a record 2.5m people in work in 2024 – he offers some ideas which other nations might consider

Ireland’s high national productivity figures before the Covid crisis masked significant areas of underperformance in some parts of the economy, Tánaiste and Minister for Enterprise and Employment, Leo Varadkar has said.

Addressing the second day of the national economic dialogue he [said] while productivity was not a term to grab the imagination, it was “crucially important”.

He said competitiveness and productivity needed to be improved, that there should be a “pandemic-dividend” for workers , He said the Government wanted to see record numbers of people – about 2.5 million –in employment within the next two to three years.

He said not all previous jobs would return after the pandemic and also warned that “capacity constraints may emerge quickly in certain areas, especially given the scale of investment required in areas like housing and climate”.

Mr Varadkar said that as well as helping businesses and workers through the immediate challenges facing them, the Government also had to look to the longer term.

“We need to put in place forward-looking policies that will create the right environment for an inclusive jobs-led recovery. That means helping business become more resilient and agile.”

“It means increasing Ireland’s competitiveness and productivity, placing a focus on expanding sectors, such as green and digital, life sciences, the creative industries and the health and social care economy.”

Mr Varadkar said that coming into the Covid-19 crisis, Ireland had ranked high in terms of international competitiveness and productivity. However he said “our high national productivity figures had masked significant areas of underperformance”.

“There is a long-standing and, also, growing productivity gap between high-performing ‘frontier’ firms, often foreign-owned – and the rest of the economy.”

“If we want higher levels of productivity in our SME sector, we need to figure out how those companies can learn from the high performing multi-national cohort. “

Mr Varadkar said the Government wanted to restore employment numbers to pre-pandemic levels and to then go beyond this “by targeting a record 2.5 million people in work in 2024”.

He said the Government wanted “to treat workers better after the pandemic”.

“Essential workers – from doctors, nurses and gardai – to delivery riders and supermarket staff – have got us through this difficult time. And we must do more for them.”

Mr Varadkar said he would be bringing forward new legislation to introduce sick pay for almost all workers. He said the the Low Pay Commission had formally begun work on examining how Ireland can move towards a living wage.

He said a series of reforms were also being progressed “to unleash the potential of remote working, including the right to disconnect and the right to request remote working”.

“I believe these reforms can form part of a pandemic dividend – a positive legacy which can emerge from the hardship and sacrifice endured by the Irish people during the pandemic.”

Prioritise employee wellbeing

A chap called Barney Cotton, writing in the Business Leader, recommends prioritising employee well-being, the latest hot business topic, or companies may suffer greatly

 

Personio, a European HR software for SMEs, is calling for businesses to prioritise employee wellbeing alongside company culture – or risk a boom of burnout, and in the worst cases, a talent retention and productivity crisis.

Despite the Covid-19 crisis having put people’s mental and physical wellbeing under immense pressure, the latest research from Personio finds that many businesses have not adapted their practises and principles accordingly. Only 25% of HR decision makers believe that mental health / employee well-being initiatives are a top priority for the HR function over the next 12 months, whilst just 15% stated that workplace culture initiatives were a priority. (If so, yet another demo that many HR departments are still being filled with those who cannot hack it in the mainstream – when they are the most important and so need the very best)

These figures stand in stark contrast to the sentiments of employees – who stress that feeling happy and healthy at work is a top priority. 58% of employees state that good work/life balance is a priority, and 39% say that a good workplace culture is a priority for them, indicating a clear disconnect between the priorities of employees and employers.

The research – released during World Wellbeing Week (first I’ve heard of it!)– also highlights the importance of employee wellbeing and company culture when it comes to talent retention and productivity. 23% of employees say that worsening work/life balance would encourage them to look for a new job if this were to happen in the next 6 months – and 21% say that a toxic workplace culture would encourage them to look elsewhere. (Only 23% and 21%?)

Zooming in on productivity, 83% of employees state that a good workplace culture helps them to be more productive. Meanwhile, employees say that low levels of motivation and morale (28%) and burnout – from overworking or being ‘always on’ (22%) are the top two factors that negatively impact on their productivity. (Hardly headline %s!)

Ross Seychell, Chief People Officer at Personio, commented: “After what has been a very difficult period for employees and businesses alike, these findings highlight how important it is for businesses to prioritise their people’s wellbeing, together with their company’s overall culture. Indeed, as we begin to put the worst of the pandemic behind us, employees will once again feel empowered to assess their employment options and look elsewhere if they feel unsatisfied – whether because they’re burned out, or they don’t feel appreciated.

The bottom line is that if businesses fail to implement a holistic people strategy that really places all aspects of employee wellbeing at its heart, particularly at this critical juncture, they will face the consequences of employee burnout, discontentment, and in the worst of cases, an exodus of valuable talent – and resulting productivity dive.”

Back to dreary normal?

, finishing on a ‘slender’ positive note 

Which isn’t as good as you might think. Before the pandemic, the economy was stagnant. Labour productivity, for example grew only 0.3 per cent per year in the 10 years to 2020, compared with 2.2 per cent in the 30 years before the financial crisis. That’s why real wages were flat.

Yes, the economy is recovering well now. But we must not confuse short-lived expansions for the trend. Before 2020, trend growth was weak. Why should the pandemic have changed this fact?

It might have made things worse. It has left many companies with huge debts: the Bank of England estimates that small and medium-sized enterprises (those with under £25m in turnover) have seen their bank debt rise 25.5 per cent in the past 12 months. That will limit any expansion plans they had. And the pandemic might have a scarring effect: it could permanently reduce optimism and the willingness to invest and innovate.

It’s not just SMEs that have been left with a debt overhang, though. So too has the government. And it plans to tighten its belt. The OBR foresees cyclically-adjusted borrowing falling from 6.9 per cent of GDP this year to nothing by 2024. This retrenchment will hold back demand growth.

So, what offsets these drags? We can disregard the government’s talk of building back better. Economists such as Dietz Vollrath, Peter Robertson and John Landon-Lane have shown that national economic policies actually have little impact upon longer-term growth.

Instead, there are other reasons for optimism. One is that as the IMF recently pointed out the pandemic has accelerated progress towards a digital economy, such as working from home, which could raise productivity.

Another is that if companies’ debt overhang forces enough of them out of business, it’ll raise the profits of their surviving rivals thus enabling them to invest – all the more so as they’ll be able to get cheap empty premises and equipment vacated by the dying companies. This lays the foundations for faster growth.

This is an old-fashioned viewassociated with economists such as Hayek and Schumpeter. It fell into disrepute in the 1930s, when the depression then proved not to be self-correcting. But it was a decent description of earlier recessions. And the previous two US recessions, in 2001 and 2008, did indeed greatly restore profitability, if only temporarily. Recessions can have what the MIT’s Ricardo Caballero has called a “cleansing” effect.

You might object here that the companies hardest hit by this downturn aren’t lame ducks – the best restaurants and hotels have had to close as much as the worst ones – and so killing them off won’t help raise productivity. True. But firm closure is only part of the story: there’s evidence from the US that companies that start up in hard times are unusually efficient – a fact that can raise productivity growth.

Perhaps, then, the new normal will be better than the old. Given how powerful the pre-pandemic forces for stagnation were, however, these are slender hopes rather than expectations.

A 5-hour workday is most productive?

Douglas Perry, writing in the Oregonian, claims the 8-hour workday is a ‘holdover of old ways; research suggests 5 hours is the office time sweet spot’

Eight hours is too long to spend at work. Recent research says so.

The 8-hour workday has been the norm for more than a century, but employee surveys suggest that most people are truly productive only for about three hours every day. This has led to calls for the workday to be reduced to five or six hours, with proponents saying it would increase employee well-being and ultimately productivity.

2019 survey of nearly 2,000 British office workers found the usual suspects accounted for what people most commonly did during the workday when they weren’t actually working: checking social media, reading news websites, talking about “out-of-work activities” with co-workers, making hot drinks, taking smoking breaks. Searching for a new job even snuck into the Top 10 list of non-productive office work time.

An Inc. magazine piece published shortly after the study’s release embraced the findings, insisting that with a six-hour workday “people would be better rested, more focused, and likely more productive.”

The coronavirus pandemic, which over the past year has forced millions of office workers to set up shop from home, has reignited the call for shorter hours.

new piece in Wired’s British edition says five hours, rather than six, is the ideal, calling this schedule “compressed working.”

“Research indicates that five hours is about the maximum that most of us can concentrate hard on something,” productivity consultant Alex Pang told the magazine. “There are periods when you can push past that, but the reality is that most of us have about that [amount of] good work time in us every day.”

The 8-hour workday is a remnant of the industrial age, and it came about in part because it made for a snappy labor-rights slogan: “Eight hours labor, eight hours recreation, eight hours rest.”

For millions of people, the information age has different requirements.

A few companies have experimented with shorter office hours in recent years, The Wall Street Journal has reported. The results apparently have been mixed. For some, productivity spiked; for others, it didn’t.

One CEO thought “team culture” and office relationships took a hit. That company considered banning distractions like personal cell phones to get the full productivity pop from a 5-hour workday.

For those companies out in front of the curve on shorter hours, the pandemic actually upended the experiment.

Working from home provided staffers “the flexibility to fit their personal lives around their work commitments,” Wired pointed out, “but it also means the key element that makes five-hour days a success — a solid period of unbroken concentration — is harder to achieve.”

— Douglas Perry

dperry@oregonian.com

@douglasmperry

The coming productivity boom

An article of optimism in the MIT Review by Erik Brynjolfsson and Georgios Petropoulos – AI and other digital technologies have been surprisingly slow to improve economic growth, but that could be about to change.

Productivity growth, a key driver for higher living standards, averaged only 1.3% since 2006, less than half the rate of the previous decade. But on June 3, the US Bureau of Labor Statistics reported that US labor productivity increased by 5.4% in the first quarter of 2021. What’s better, there’s reason to believe that this is not just a blip, but rather a harbinger of better times ahead: a productivity surge that will match or surpass the boom times of the 1990s.

Annual Labor Productivity Growth, 2001 – 2021 Q1

Annual Labor Productivity Growth 2001 - 2021 Q1
For much of the past decade, productivity growth has been sluggish, but now there are signs it’s picking up. (Source: US Bureau of Labor Statistics)

 

Our optimism is grounded in our research which indicates that most OECD countries are just passing the lowest point in a productivity J-curve. Driven by advances in digital technologies, such as artificial intelligence, productivity growth is now headed up.

There are three reasons that this time around the productivity J-curve will be bigger and faster than in the past.The productivity J-curve describes the historical pattern of initially slow productivity growth after a breakthrough technology is introduced, followed years later by a sharp takeoff. Our research and that of others has found that technology alone is rarely enough to create significant benefits. Instead, technology investments must be combined with even larger investments in new business processes, skills, and other types of intangible capital before breakthroughs as diverse as the steam engine or computers ultimately boost productivity. For instance, after electricity was introduced to American factories, productivity was stagnant for more than two decades. It was only after managers reinvented their production lines using distributed machinery, a technique made possible by electricity, that productivity surged.

The first is technological – The past decade has delivered an astonishing cluster of technology breakthroughs. The most important ones are in AI: the development of machine learning algorithms combined with large decline in prices for data storage and improvements in computing power has allowed firms to address challenges from vision and speech to prediction and diagnosis. The fast-growing cloud computing market has made these innovations accessible to smaller firms.

Significant innovations have also happened in biomedical sciences and energy. In drug discovery and development, new technologies have allowed researchers to optimize the design of new drugs and predict the 3D structures of proteins. At the same time, breakthrough vaccine technology using messenger RNA has introduced a revolutionary approach that could lead to effective treatments for many other diseases. Moreover, major innovations have led to the steep decline in the price of solar energy and the sharp increase in its energy conversion efficiency rate with serious implications for the future of the energy sector as well as for the environment.

The costs of covid-19 have been tragic, but the pandemic has also compressed a decade’s worth of digital innovation in areas like remote work into less than a year. What’s more, evidence suggests that even after the pandemic, a significant fraction of work will be done remotely, while a new class of high-skill service workers, the digital nomads, is emerging.

As a result, the biggest productivity impact of the pandemic will be realized in the longer-run. Even technology skeptics like Robert Gordon are more optimistic this time. The digitization and reorganization of work has brought us to a turning point in the productivity J-curve.

 

When you put these three factors together—the bounty of technological advances, the compressed restructuring timetable due to covid-19, and an economy finally running at full capacity—the ingredients are in place for a productivity boom. This will not only boost living standards directly, but also frees up resources for a more ambitious policy agenda.

Erik Brynjolfsson is a professor at Stanford and director of the Stanford Digital Economy LabGeorgios Petropoulos is a post-doc at MIT, a research fellow at Bruegel, and a digital fellow at the Stanford Digital Economy Lab.

A government review of social care

The following impressive, yet depressing, article from John Seddon, head of Vanguard Consultants – I have no connection with them, and never even met him, but regular readers will know I’m an admirer of their approach to productivity improvement which seems far more efficient and effective than all others peddled by the bigger consultancies, including my alma mater nowadays – let me first apologise for some of the language used but hope it does not detract from the vital points made

I’ve always been a fan of Private Eye. Forty years ago I worked for the BOC Group. The chairman Sir Leslie Smith would say he’d read the Financial Times to find out what’s happened and he’d read Private Eye to find out what was going to happen. Private Eye does a better job of scrutiny than many of our institutions.

It was a small item in a recent issue of Private Eye that got my attention; I learned that Brendan Martin, the man who runs Buurtzorg UK, had withdrawn his support for what was described as a Blueprint for social care. I like Brendan; he’s a good man with worthy intent. I also rate Buurtzorg – a Dutch care-service organisation – as amazing, a true innovation. Private Eye reported Martin withdrew his support because the Blueprint proposed a structural change whereas he believed the reform of care services must start with the needs of the care recipients. He’s right.

So I got hold of a copy of the Blueprint. It was authored by Josh MacAlister, CEO of Frontline, an organisation funded by public money to recruit and train social workers, in conjunction with Boston Consulting Group. The Blueprint has Buurtzorg all over it; representing the UK pilots of Buurtzorg as successes. Absolute rubbish; they were shocking failures. So I did a Podcast to argue that, compared to Buurtzorg in the Netherlands, the UK pilot results were, at best, pathetic – and I described the reasons for Buurtzorg’s success which, in short, began with the leader realising that the problem was the system; I also described how Vanguard’s clients in care services had learned the same; that the starting-point for designing a better system is understanding what’s wrong with the current system.

Then I wrote to the people listed as interviewees for the Blueprint, sharing the transcript of the Podcast with them. What astonished me was that everyone who replied – and bear in mind these were all significant people in the care-services world – told me they did NOT concur with the Blueprint’s plan of action. One or two were even quite cross to have been cited. One would have thought that with this lack of consensus, as the Blueprint places such heavy emphasis on Buurtzorg whose leader had withdrawn support, the whole thing should have been re-written, shelved or at least paused for reflection.

But then I think about what I’ve learned about policy-making in Whitehall. It’s like this: you have an idea; then you get other people in the Whitehall bubble to enthuse about your idea. And once you have a body of people onside you stand a good chance of the idea becoming policy. There’s neither desire nor means to base policy on evidence. In that crazy world you’d want to list lots of people in any proposal to give the impression that your idea is widely supported and you’d want to ignore the inconvenience of the main argument being torpedoed by its representative in the UK.

So I began to take the view that this Blueprint is a pitch; a pitch for public money. According to Private Eye MacAlister’s organisation has already received £72m over recent years for social-worker training. That too was a plausible pitch. We have a problem… turnover of social workers is too high… it must be a training problem… that’s how Ed Balls saw it when he was the minister. It wasn’t a training problem then and it isn’t a training problem now. Social workers leave because the system is rotten. Did the £72m have any impact?

Clearly not, the Blueprint reports that as many as 55% of social workers have had enough and are planning to leave. You might have thought that Josh MacAlister would have reflected on that as his organisation was set up on the basis that training would solve the morale problem.

The Blueprint uses the word ‘system’ but shows no understanding of how the system needs to change. For example, it acknowledges the current problems of bureaucracy, form-filling, mistrust, overbearing reporting to regulators and low morale and yet, again astonishingly, it asserts that the plan will adhere to all existing regulatory frameworks. Forgive my cynicism but this is either a ploy to avoid any opposition amongst the consensus-builders or MacAlister hasn’t got a clue about work as a system.

Perhaps he thinks his proposed structure represents a different system. His plan is to create a series of self-managed teams. A family-facing team that does the social work, a referral team that allocates work, an enabler team that helps the family-facing team by handling administration, an insight team that helps family-facing teams do best practice and a strategy team that guards the culture and ensures the teams are empowered.

Really? This is Big-Consultancy speak; lots of words with indistinct meaning. But then, eventually, I find out where it is going. You have to plough on to the end of the huge document, which has abundant repetition and is a tiring read, to find this: To deliver the plan in an initial 12-month phase for 2 family-facing teams the cost estimate is between one and one-and-a-half million pounds. What is delivered for this eye-watering fee? The 2 family-facing teams get 5 initial training days and 2 monthly training days in their first year.

Forgive me. But all I can say is fuck me. What a rip off. The estimate for a complete transformation of each local authority’s children’s service is 5 to 7 million.

Now here’s the thing: we have helped leaders of care services transform their services into systems that have results on a par with Buurtzorg for tens of thousands of pounds, with results in months, not years.

Camilla Cavendish (I admired her good-sense articles when she was an economics journalist) is working for the minister on the future of care services and chairs the Frontline organisation – in other words she is a collaborator with MacAlister – she came across one of our clients and was impressed. My team introduced her to another client who’d taken even further strides; they sent her my Podcast on Buurtzorg as she too was a fan and had eulogised about Buurtzorg as a journalist. She replied to say she’d read the script in one gulp. Maybe it gave her indigestion. She arranged for us to speak but on the day she was busy and instead sent an American student, who is working with her, to interview me. It was a bloody awful experience. Her questions showed she either couldn’t listen or had no ability to grasp what I was talking about; I gained the impression she’d been tasked with asking me some questions Cavendish wanted answers to which, given what I’d been saying, were neither good nor useful questions.

My central argument concerned the way regulation is the fundamental cause of sub-optimisation of these services. The bureaucracy MacAlister describes demands reports up the hierarchy, and many of them. Failure to report and reporting poor results both risk damage to reputation. I have published many examples of adherence to referral, assessment and care-plan targets, a focus on budget management and the methods of commissioning, all causing sub-optimisation and the signal that things are awry is the volume of failure demand hitting care services (failure demand is demand on the service which would and should not have occurred if things had been done right in the first place) – often over 80% of all demand.  Yet managers of these systems get the green light from regulators. Boxes ticked.

Ofsted is the primary regulator of children’s services; many of the measures that drive the bureaucracy are questions you would want to ask if you want to know the extent of what’s going on with children in need. You can understand why governments might at least want to know the extent of the problem. The regulator asks: How many assessments are occurring? Are children referred and assessed in a timely manner? Do the children have care plans in place within defined timescales? Is there evidence these are reviewed? How many children are be labelled as ‘Looked-after Child’ (LAC) and ‘Child in Need’ (CIN)? How many are there in terms of percentages per 10,000 of the population? And the like. These controls help no one understand or improve the system; instead they work against any such understanding and frequently can serve to make performance worse. But adherence to these controls protects reputation. Yes, you can have a lousy service and a good rating from the regulator. The controls focus leaders on activity at the expense of purpose. So it matters that activity targets are met rather than each and every child in need being understood.

The questions you would ask if you wanted to know how we are actually doing with helping children in need would be related to purpose, not activity. I shall return to this.

But first something that came to my desk recently – a manuscript of what I hope will be published as a book, describing one family’s experience of children’s services. It began with a tragic event: A family happily agreed to take in their friend’s three children for a couple of weeks when she was admitted to hospital. She deteriorated rapidly and unexpectedly died. What began as a two-week arrangement became extended and tragic. The family wanted to take the children in and the children wanted the same but there were two issues: the family had limited resources, so funding would be necessary, and the children had an estranged father who had been sent back to his home country, Latvia, for criminal behaviour.

The protection of children is, quite rightly, governed by law. In such circumstances the law provides for our statutory services to appoint the family as connected foster carers immediately, then later as Special Guardians, leaving more formal matters of suitability to later and to offer discretionary payment. It could have been very normal very quickly. But that didn’t happen. The motivation for the book was to share the horror of that result taking 18 months.

A hierarchy of social-work actors delayed, failed to act as agreed, told lies, threatened the family with taking the children away, contravened a judge’s direction, only to, eventually, do what mattered. It illustrates how the social work hierarchy sought to avoid bad news, for fear of personal and corporate liability. The book shows how mistakes and lies couldn’t be admitted; instead were denied, and further lies were generated to cover up; it being impossible to acknowledge the truth.

So you have to ask why. How can these people, who joined a vocational service, act this way? It’s how you survive; it’s how you climb the tree. Adherence to regulation, adherence to budget, avoidance of bad news – we have seen how scandals have driven up the number of children taken in to care, simply because it avoids loss of reputation.

Ofsted’s web site proclaims its regulatory function is insuring that services help children in need. It asserts that prerequisites for leadership, note that, prerequisites – you’d better have them – include a vision and values statement, a statement of philosophy, documentation for the structure of teams, controls on how cases move through the system, descriptions of how social work practice will be carried out, arrangements for the provision of help, protection and care for children, what the thresholds for providing services are, what services are expected to do and how services are monitored for quality and effectiveness.

And this is where regulation gets into deep water. One way to deal with all the above is to have documentation for everything, in spades. Regulators like documentation. But what constitutes ‘good’ in any of the above edicts is open to subjective judgement. Much of what is promulgated as ‘good’ isn’t good at all. Misjudgements, conflict, stress, staff turnover and claims for retribution are inevitable consequences.

It is the primary fault in our system of regulation: regulators bring theory. So adherence to their theory is the route to a good reputation. But their theory is wrong. Any of us can point to vision and values statements that are meaningless and not lived by. How cases move through the system encourages an industrial, specialised, cost-controlled design; specifying how work will be carried out impedes the system’s ability to absorb the variety of demand, the very idea of thresholds is to misunderstand how value is created for care recipients, and effective monitoring depends entirely on the measures in use; activity and budget measures do nothing to help us understand effectiveness.

Ofsted also publishes examples of good practice on its web site. In its view these things are good: Being child-centred, ensuring stable relationships (continuity) with social workers, co-producing plans with families, ensuring children grow up in their own families or extended families where possible, having a relationship with the whole family.

Well blow me down, who’d have thought? Having published this insightful list of the bleeding obvious, and despite publishing its view on prerequisites, Ofsted is at pains to point out that it favours no particular method.

And neither should it. In fact Ofsted – and all regulators of public services – should have NOTHING to say about how services should be run.

What we need is a complete re-think of our philosophy and method of regulation. We can only justify regulations if the controls they disseminate are economically and socially advantageous.  The way we regulate today fails both tests. Regulation today amounts to a plethora of specifications inspected for compliance. The specifications amount to opinion; the ideas ministers, administrators and regulators like. Instead of regulation by specification and compliance we need a regulatory system that drives innovation.

There is a systemic relationship between purpose, measures and method. To say it is systemic is to assert that it exists in all organisations for good or ill. When regulators specify measures and methods they create a culture of compliance (usually with bad ideas). Regulators need to limit their edicts to statements of purpose. The leaders of services must be free to choose how to work to achieve that purpose, determining for themselves what measures and methods they will employ. When inspection comes around inspectors need only to ask what choices of measures and methods have been made, and the inspector should go see for themselves how well it is working. The consequences are that transparency will increase (the usual hiding places are removed) and the reliability and validity of inspection reports will increase. Moreover it lays the foundation for innovation. It is to change the locus of control from the centre to those who are paid to run the services.

As I said many UK local authorities have adopted the Vanguard Method to improve care services despite having issues with regulators. But regulators can’t argue with the results: significant improvements in capacity – they provide better help for more people – improvements in service – they learn to give only what is required to meet the needs of care recipients – and significant reductions in the cost of service provision. These services have been subjected to scrutiny by local scrutiny panels. But there is an example of our work that has been subjected to external scrutiny by a number of bodies including the OECD; and that’s the youth service in Amsterdam. (An easier-to-read version, written as a case study is here.) Academics who are critical of the Blueprint for its lack of evidence, among other issues, argue in a recent article that this is the example from the Netherlands that MacAlister should have paid attention to, as it is more akin to children’s services than Buurtzorg.

And here are the results: Overall savings of 30m Euros across the Youth Protection system in Amsterdam; a 50% reduction in the number of families under care; a 61% reduction in protective measures; a 53% reduction in the number of out-of-home placements; a 46% reduction in youth parole measures; a 16% reduction in child custody; a 28% reduction in referrals to youth care providers; a 75% reduction in unnecessary administration. And, of course, many more lives more quickly back on the rails.

All achieved because the service focussed on doing what matters for each and every child. They changed the whole system to respond effectively and efficiently to the children’s needs. There’s the thing: high-quality services are always lower cost. Efficiency comes from effectiveness. All of the New Public Management paraphernalia went, thrown away, by leaders who learned how irrelevant and harmful it was to performance; supported by a government that had given up on New Public Management.

My current copy of Private Eye reports that the Department for Education insists that any recommendations in the “independent” review of children’s social care – chaired, would you believe, by MacAlister – requiring funding must include ‘as robust and detailed an evidence base as possible to demonstrate how, and over what period, this would be offset by savings’. So you might assume that MacAlister’s Blueprint is dead in the water. I wouldn’t bank on it; Big Consultancies are adept at creating fictitious spread-sheets and equally adept at avoiding blame when the savings don’t transpire.

But here we are, us who never went to school with anyone in government, with an evidence base that is as robust as anyone could want, with a method that any leader can follow, that results in far better services at much lower costs, and, in services where children can be separated from families, far fewer separations and thus much lower costs across the whole system. And, in every example, demand for services falls. Happier people and communities, isn’t that the purpose of public services?

Ours is delivered, MacAlister’s is entirely speculative.

The best thing we can do with the Blueprint is chuck it in the bin.

So what do you think about my arguments on regulation?

Thanks in anticipation…

John

john@vanguardconsult.co.uk

P.S.1 The academic article arguing our work in Amsterdam should have been MacAlister’s model can be purchased here: Dismantling the Blueprint: Buurtzorg in English child protection social work: European Journal of Social Work: Vol 0, No 0 (tandfonline.com) – One of the authors has agreed to provide free copies; contact joe.hanley@open.ac.uk

P.S.2 The OECD report that includes the Amsterdam work is here:  https://www.oecd.org/media/oecdorg/satellitesites/opsi/contents/files/SystemsApproachesDraft.pdf

P.S.3 An easier read of the case study in Amsterdam is here:  https://vanguard-method.net/wp-content/uploads/2021/05/88-European-Social-Fund-case-study-ChildProtect-Netherlands.pdf

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Pandemic provides unexpected boost to UK’s productivity prospects

Valentina Romei offers the following in the Financial Times

Technology and machinery investment is up 3.2% compared with pre-pandemic levels

The shift to homeworking, online consumption and social distancing during the Covid-19 pandemic has driven increased investment in new technologies that could deliver an unexpected lift to the UK’s long-term productivity slump.

Britain has been experiencing a productivity crisis since the financial crash in 2008-09 — a slowdown that has been more acute than in any other western country. Economists say low productivity growth matters because it is the rising value of output per hour worked — or productivity — that enables businesses to increase wages to workers and ultimately boost living standards.

Higher productivity also increases government resources to improve public services or cut taxes. But according to Office for National Statistics data for the first quarter of 2021, UK investment in machinery and in information and communication technology rose 3.2 per cent compared with the last quarter of 2019 — the last three-month period before the pandemic hit Britain. In contrast, overall investment over the same period fell 4.8 per cent while UK output declined 8.7 per cent.

What has offered encouragement to economic experts is the degree to which the investment in new technologies and machinery has been accompanied by a greater degree of business innovation and staff retraining which, in turn, has boosted productivity levels.

Spending on intellectual property products, such as software and patents, also surged in 2020 while official statistics showed labour productivity rising in 2020 and in the first quarter of this year.

Mark Posniak, managing director of Octane Capital, a specialist lender, said the first national lockdown last year acted as a “trigger” to automate their processes. “We are now a much more streamlined and digital-first lender, which is really proving its value with our borrowers and partners alike.”

Meanwhile, Craig Bunting, co-founder of coffee shop chain Bear, said that before the pandemic they were focused on the high street market. “Covid-19 changed everything,” he said. “We built an entire ecommerce platform in a matter of a few months.”

Andy Haldane, chief economist at the Bank of England, said earlier this month that spending on R&D and digitalisation “has actually picked up quite maturely and indeed quite unusually for a weak activity period”, which “may provide some clues to productivity doing a bit better than we might otherwise have thought”. He added that the shift to homeworking during the pandemic had provided a boost to productivity.

Nearly half of UK businesses are planning to shift towards greater homeworking as a permanent business model because of increased productivity, according to a recent ONS survey.

Martin Spring, director of the Centre for Productivity and Efficiency at Lancaster University Management School, said coronavirus had provided an incentive to companies to introduce changes that they might otherwise have put off. “That’s really the important point, those organisational changes, skills changes, capabilities changes have had to happen and that’s what makes the difference . . . if the pressure was not on . . . you would probably get away without bothering,” said Spring.

David Owen, economist at Jefferies, said the notion of the UK as a low productivity growth country could be challenged by the pandemic which had forced “new ways of doing business and innovation”.

The UK’s productivity crisis has long been a concern to economists. The UK’s prospects have been further limited by high Brexit uncertainty and low business investment since the EU referendum in 2016. Despite the boom in digitalisation in 2020, UK business investment was down 18 per cent compared with the second quarter of 2016, while it registered a double-digit growth rate in the US.

However, companies’ investment intentions, including spending in buildings and transport equipment which is currently very low, have picked up in April, according to the BoE agents’ survey, largely reflecting the waning of uncertainty related to Brexit and the pandemic as well as a brightened economic outlook.

According to Oxford Economics, UK business investment is expected to grow much faster over the next two years than in other G7 countries, driven by the government’s two-year tax break which allows companies to deduct 130 per cent of their investment from their taxable income. But Andrew Goodwin, economist at Oxford Economics, warned that business investment would still be limited by the costs of servicing debt that companies were forced to take on during the pandemic. “Brexit is also likely to prove a key headwind,” he said. Goodwin added that the “super deduction” was “relatively narrow focus and is temporary in nature” and “it’s hard to believe that it will have a significant long-lasting positive effect”.

Global economic impact tracker Ben Broadbent, a member of the BoE monetary policy committee, also raised a note of caution and said the lower use of capital such as offices and transport infrastructure would be a drag for productivity in the short term. Others noted that a one-off adjustment in innovation was unlikely to have long-lasting effects on productivity if the trend did not continue. “The trick now will be to hang on to those changes and build on them further, even as the expediencies of the pandemic diminish,” said Spring.

Bart van Ark, managing director of The Productivity Institute, a research organisation, said that while the change in digital transformation put the UK in a better place to reap the benefits from new technologies in the future, “digital transformation is not a one-off investment but a journey”. He added that UK productivity was so much lower than in France and Germany that even assuming a stronger productivity growth in the coming years, “it would require the UK outperform on investment and business practices for quite some time to visibly narrow the gap”.