Jun 11

GDP – Consumer Surpli

Consumer surplus is defined as the difference between the highest price a consumer would have been willing to pay and the price actually paid

It’s the unquantified value customers obtain from tangible stuff they buy – such benefits include taking less time or effort to do things, obtaining more fun and pleasure from life, having more social contacts with friends and family – all things people want, all demand growth areas, but all difficult if not impossible to measure

Nowadays, statistics on tangible outputs, GDP and national productivity levels seem to be flat-lining as we simply replace stuff, once worn out or used up, rather than add to it as in the past as more of our needs were met – and much of it, thanks to productivity improvement, would be available at lower unit prices (thus lowering GDP) if it did not incorporate significant quality and design improvements

For example:

  • In 1985, about 100,000 wealthy families were willing to pay over $1,000 for a set of the Encyclopedia Britannica – some would have paid more if they had to – others would have bought if the price had been a lot less
  • To calculate GDP, government statisticians looked at the market value of actual sales and multiplied the average price by the number of units sold – $100m say
  • Nowadays, Britannica sells about 50,000 online subscriptions at $75 each – a total of less than $4m
  • So the contribution to GDP from Britannica has dropped by 97%
  • But we are better off, not worse off
  • Thanks to the internet, Wikipedia and many other sources of specialised knowledge, the cost of such information consumption has fallen to near zero
  • We’re getting a lot more and paying a lot less

A similar story can be told for many other modern goods and services e.g. phones, GPS, voice recorders, digital watches, portable music players, video cameras

But economists and national statisticians can’t cope with this consumer surplus – they use measures better suited to the 20th century tangible world, not the new 21st century intangible world

As Matt Hancock, ex Bank of England economist and now UK Health Secretary, suggests, the growth of free apps is benefiting consumers but potentially dampening economic figures: “I don’t think economics has caught up with the impact of zero marginal cost production (digital copies) or products that are free”

Indeed, we believe consumer surpli may well represent a vast black hole in the GDP universe and may well explain much if not all of the so-called ‘productivity puzzle’ currently afflicting most developed nations

As Milton Friedman once famously claimed: “There is no such thing as a free lunch” – consumers always pay, somehow – they have to offer something of value in return for any freebie they get – and freebie services have proliferated over the last decade

Freebie services are used to trap people into revealing private data about themselves and their buying interests, preferences and search criteria – data which is then sold on to a wide variety of suppliers enabling them to focus their marketing and selling efforts on people most likely to buy from them, thus maximising their ‘hit rates’ – so the more attractive a freebie service can be, the more people will sign on to it and divulge their data, making the service even more valuable

Freebie services are thus carrots, modern ‘hidden persuaders’, clever marketing ploys predominantly peddled by IT entrepreneurs – during the past decade alone we’ve enjoyed an increasing variety of them via the iPhone, Uber,  Airbnb and Amazon plus Google, Facebook, Twitter and WhatsApp – and the value of those services to their customers, if counted somehow, would surely have increased national GDP and so productivity levels well beyond those officially announced – perhaps even making up the claimed big differences (18% in the UK) between actual current GDP levels and trend levels

No wonder Professor Hal Varian, chief economist at Google says: “GDP has a very hard time with free”

And Professor Erik Brynjolfsson agrees: “They (freebies) add a lot of consumer welfare but do not show up in GDP”

To underline his view, Erik determined the value offered by many digital services which go unrecorded by GDP:

  • He paid people to stop using freebie services and worked out a ‘reservation price’ for each one – an estimate of hidden GDP
  • He found the average user:
    • Would drop Twitter for nothing
    • Valued Facebook at £85 a month
    • Wanted £470 per month to give up WhatsApp, commenting “I run my life around it – I wouldn’t be able to go to any parties on Saturdays – I wouldn’t be able to contact my babysitter”
  • He concluded that: “Some of these services have become almost indispensable”

Clearly, the actual value of this consumer surplus varies per person as each of us usually has a different maximum we will pay for anything – hence it is nigh impossible to measure it for any nation as a whole

That said, some expert has already claimed that Whatsapp alone would add 3.74% to the Dutch GDP if 10 million of the country’s 17 million people used it (n.b. another statistic that gains credibility because nobody can disprove it)

Conclusions::

  • GDP only records transactions at market prices – it’s completely silent on what we might be getting free
  • Volume of sales may have peaked but value of benefits is forever rising
  • G7 economies are currently undergoing radical changes through digitisation but economists and their performance measures are not keeping pace – they focus on tangibles that dominated growth over the last century but this new century is increasingly concerned with intangibles
  • Some new measures are needed for national productivity, prosperity and well-being

Jun 04

Small Businesses measure up differently

Michelle Ovens campaigns for the UK’s 5.5 million SBs in the ‘Small Business’ publication

She notes that small businesses are responding to this time of change and uncertainty with Brexit by keeping faith in the community values that make them the backbone of the UK economy.

She asks: “Perhaps we have been looking at small businesses through the wrong lens? Perhaps there is more to success than traditional measures of productivity, and more to business than the EU?”

The UK’s GDP per hour worked is around £50m less than the EU’s two major powerhouses, France and Germany – so what is it about UK workers and business that means we don’t measure up when the UK seems to be a thriving, digitised, successful economy?

The UK comprises a huge variety of business models and structures, with 99% defined as “small”, over 60% of private sector employment being via these businesses and some £2 trillion of revenues generated – clearly, they have a huge impact – nevertheless. they are forever being told their impact could be bigger if only they improved their productivity levels.

But when one asks small business owners what is important to them, productivity is not a factor – even profit is not considered as important as creating a living for others – it is a far cry from the ‘greed is good’ days of the 1980s.

Small businesses are putting people and communities first – they are looking to create ‘Good Work’, to foster supportive environments and meaningful working lives for their staff and wider stakeholders – there’s a shift to more flexibility in work, more giving back to the community, and a continued focus on the role of the business in the wider society and economy.

This is not all out of altruism – towns such as Grimsby in Lincolnshire, Holywell in Flintshire, and Frome in Somerset are being rebuilt around thriving small businesses – reducing local employment, increasing house prices, and even increasing local school standards.

The heroes of this small business revolution care less that both they and their employees make less money than their German counterparts, and more that the people in their community have jobs in the first place, and an improved quality of life:

  • Almost three-quarters of small businesses have or would consider keeping on a member of staff even if they did not economically need them anymore
  • There is a recognition of the importance of that job to that person, of that person to the wider community, and of the impact of losing employment
  • This speaks to better mental health, better social mobility and can even impact physical health outcomes.

What would be seen as bad for productivity is almost priceless to the person who keeps their job even when times are tough – hence, staff are appreciating the benefits of working for a small business on a much broader set of criteria than just paying the minimum wage, especially covering the longevity and stability of the work they provide.

Small businesses are thus creating better communities, appreciating their employees as people rather than merely a means to profit, and their communities are appreciating them in return.

Michelle concludes: “It’s now time that the wider world of stakeholders – particularly big business, local and national government, and charities – start to realise the critical and valuable role these businesses play, and reward them for it; not hold them to a set of metrics that simply do not apply”

Jun 03

AI, the future of work and inequality

An excellent article follows, by Daniele Tavani, Colorado State University, USA – reprinted in full

One of the most spectacular facts of the last two centuries of economic history is the exponential growth in GDP per capita in most of the world. Figure 1 shows the rise (and the difference) in living standards for five countries since 1000 AD.

Artificial intelligence, the future of work, and inequality
Figure 1: Gross Domestic Product in five countries, 1000-2015. Source: The CORE-Econ Project. Credit: Colorado State University

This economic progress, unprecedented in human history, would be impossible without major breakthroughs in technology. The economic historian Joel Mokyr has argued that the Enlightenment in Britain brought new ways to transfer scientific discoveries into practical tools for engineers and artisans. The steam engine, electricity, sanitation are examples of technological discoveries that propelled the engine of economic growth, increasing standards of living across the planet.

At the outset of the Industrial Revolution, the Luddite movement rose out of fear of labour displacement in the British textile sector. Famously, the Luddite protesters destroyed the very machines they were using at work, in order to preserve their role as active members of society. Their reasoning was that if automation could double, triple, or quadruple a worker’s output, the economy would need half, a third, a quarter of the current workforce. The Luddite movement was eventually suppressed by military force in 1816, but history has proven them partly correct.

Humans do work shorter hours today than in the 19th century, as shown in Figure 3.

Artificial intelligence, the future of work, and inequality
Figure 2: Luddite protest. Credit: WikiCommons

Many Silicon Valley executives like the Tesla CEO Elon Musk believe that we are on the verge of a new technological revolution that will see Artificial Intelligence (AI) automating a majority of tasks that are currently performed by humans. Just as horses were displaced by motor vehicles, truck drivers may soon be replaced by self-driving vehicles.

Factories producing components for personal computers and tablets are also becoming highly automated. The BBC reports that FoxConn has replaced 60,000 of its workers with robots. An Oxford University study claims that 47% of US jobs could be lost to automation, along with 69% of jobs in India, 77% in China, and 57% worldwide. Machine learning enables robots to make decisions based on a vast amount of data on (sometimes very difficult) decision-making by highly-skilled humans.

Should we then fear that the forthcoming AI Revolution will force humanity to completely rethink the current organisation of our lives?

One of the most important economic thinkers of all time, John Maynard Keynes, wrote in his 1930 essay “The Economic Possibilities for our Grandchildren” that by the 21st century we could fulfill our needs and wants with a 15 hours workweek and devote the rest of our lives to non-monetary pursuits. Fast-forward to 2014, when the late physicist Stephen Hawking told the BBC that “artificial intelligence could spell the end of the human race.”

Artificial intelligence, the future of work, and inequality
Figure 3: Annual hours worked, 1870-2010. Credit: The Maddison Project 2013

Should we see AI as liberating or as a destructive force?

Economists have debated the effect of technology and automation on jobs for a long time. The first set of questions regards labour displacement and whether there is any future for work at all. The second set of questions has to do with how automation impacts income and wealth inequality. On the one hand, if the ownership of robots is concentrated in the hands of a few—let’s call them the 1%—and a majority of jobs disappears for the 99%, it will exacerbate inequality, which is already on the rise (see Figure 4). On the other hand, technological change is also creating polarisation in the labor market among the 99%. According to the MIT economist David Autor, between 1989 and 2007 job creation has occurred mostly in low-paying and high-paying jobs, while middle-class jobs were affected by job destruction on net.

It is true that automation displaces workers in some sectors, but workers relocate to other sectors over time. Historical examples in advanced economies like the US are the transition from rural agriculture to urban manufacturing during the first half of the 20th century, and from manufacturing to services in more recent times.

The net effect on jobs does not seem to lend support to Hawking and Musk’s gloomy predictions. This is even more true if one considers another beneficial effect of technological change: everyday objects like dishwashers, vacuum cleaners, washers, and dryers, reduced the burden of housekeeping and freed up time for women to seek employment. Indeed, the labor force participation rate was 67% in 2000, compared to 59% in 1948. The increases in labor productivity brought about by technological change spill over into higher wages for workers

Artificial intelligence, the future of work, and inequality
Figure 4: Top 1% Fiscal Income share, US, 1913-2015. Credit: World Inequality Database

This is not to say that technological change has no costs for society. The transition from agriculture to manufacturing took time, and in the short run produced economic anxiety, unemployment, and poverty among former agricultural workers. The same applies to the transition to a service economy, although there are some troubling peculiarities about the latter process. The transition to manufacturing was associated with higher wages and employment protection through union membership. The transition to services not so much: low-skill service workers tend to be paid less than workers of similar skills in manufacturing, and service workers are in general not unionised: consequently, they do not take advantage of the benefits of collective bargaining in terms of wages.

Another cause of concern is that automation and technological change is characterised by increasing returns: doubling the scale of production enables production at more than twice the output at the initial scale. Increasing returns lower the cost of production as the scale of a firm expands, which leads to firm concentration toward few, large firms with lots of market power. And it is not by chance that the most visible hi-tech industries, such as Apple, Amazon, Google, and Microsoft are all basically monopolies.

The decline of manufacturing employment and the increasing concentration of the US corporate sector are two reasons why average wages have not kept up with the increase in labor productivity over the last 40 years. An average 2015 worker is almost 2.4 times more productive than an average 1948 worker, but her wage is only 110% higher. Wages were growing on par with labour productivity up to the 1970s; starting in the 1980s, productivity has been growing at a much faster pace. The process of job polarisation has fed into this pattern, determining rising employment in low-paying sectors and high-paying sectors, at the expense of good middle-class jobs.

Although it is possible that AI is completely different from the technological advances of the past, we should be sceptical that automation will mean the end of work. Jobs—or even specific tasks—will be displaced, but workers will relocate to different jobs or take up different tasks. For low- and medium-skill workers, it is likely that the relocation will occur in jobs of lower quality, meaning either lower pay, or fewer benefits, or a combination of both. Workers who possess skills that are complementary to new technologies, on the other hand, will benefit from the advent of automation by reaping most of the productivity increases in the form of higher wages. And the very few CEOs of successful tech companies will see their incomes skyrocket.

Hence, citizens and policymakers concerned with the rise of automation should focus on its effects on inequality. During the 1980s economists have embraced supply-side views that inequality is beneficial for growth, but recent academic research has shown that the opposite is true. The work by economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman has suggested that high marginal tax rates on top incomes—that is, tax rates levied on every dollar earned above a certain, typically very high threshold—would go a long way in reducing inequality without distorting the individual incentives to work hard. Indeed, the US economy grew fastest between 1950 and 1970, when the top marginal tax rate was well above 70%. The corresponding tax revenues could be used to provide unemployment compensation or foster the provision of public goods such as education and training for workers to relocate when their jobs are automated.

May 20

Ethical capitalism

We have waxed long and hard on these pages about CEOs acting like pigs at the trough, robbing their businesses, the golden geese that should be improving the lot of all in society, by paying themselves huge unjustified pay and bonuses and maximising their share prices (and hence their shareholdings) whilst paying their employees the bare minimum and investing little for growth

At the same time, we’ve often applauded the John Lewis retail chain, in particular Spedan Lewis, founder of the company – his aim was: “Solely to make the world happier and a bit more decent” – JL now has 400 shops and 83,900 employees, called partners, who share profits made in an annual bonus scheme – this has obviously increased employee motivation levels, improved their attitude towards colleagues and customers and been a significant factor in their success

Now, another splendid example has hit the headlines

Julian Richer founded his eponymous TV and hi-fi chain Richer Sounds in 1978 – the company has a gross turnover of about £200m, is worth £9.2m and has 522 employees:

  • He is to give control of the company to an employee trust i.e. a 60% share of his company
  • And a further £3.5m as a cash bonus so each employee will receive £1,000 for each year of service – an average of £8,000 each
  • And all this on top of giving 15% of profits to charity

Apparently, Richer regularly monitors his employees’ morale by asking them for their ratings from one to ten – he also calls anybody suffering a bereavement or health treatment – and 70% of his employees use his 12 holiday homes at least once a year, funded (he says) by ‘reduced internal theft’

Overall, he says: “Companies should be encouraged, not forced, to act in a similar way”

Richer explains: “I am increasingly angered by what I see elsewhere – disreputable people running their companies in a way that involves taking as much as they can from society and then sneaking their profits out of the country”

The Times says:

  • “Richer’s decision shows a laudable commitment to the company’s employees and an acute understanding of how capitalism rests on public-spiritedness rather than avarice
  • Companies have more obligations than the enrichment of their shareholders, and acknowledging this can be a route to business success
  • The good company owes profits to its shareholders, secure jobs for its employees, good products or services to consumers, and an obligation to society – it’s how the market economy can serve the many, not the few
  • There are a mere 350 employee-owned businesses in the UK – aligning the interests of employees and owners is good for business by stimulating productivity”

Conclusions:

  • Nowadays, many bosses are more concerned with feathering their own nests than building their own companies for the benefit of all – they display what Prime Minister Ted Heath called ‘the unacceptable face of capitalism‘ – how do they get away with it? – “Because they can” according to President Barack O’Bama
  • Richer’s whole attitude towards his employees is key to his own financial success – he not only ups their pay and ownership status but treats them as equals and shows genuine concern for their welfare, both at work and at home – no wonder Archie Norman consulted him when boss of ASDA and is doing the same now he’s boss of M&S
  • Too few managers realise the potential lying dormant within their teams, not least because of them
  • Some believe most teams could perform at least 30% better if only their bosses thought and acted like Spedan Lewis and Julian Richer

May 19

WHERE MEASURING ENGAGEMENT GOES WRONG

An article by Peter Cappelli and Liat Eldor in the Harvard Business Review is reproduced below close to its entirety

Surveys to assess how engaged workers are in their jobs are highly popular among employers, who hope the results will help them improve employee productivity and creativity and reduce turnover – but consultants and academics have long differed in their conclusions about how much can be inferred from the results of these surveys

Based on our own work as academics, we caution business leaders implementing such surveys – they may not tell you much about your employees that you can do anything about

One reason for this is that there is no universal definition of “engagement” as it applies to workers – another is that while engagement has been shown to have some ties to employee performance (e.g., absenteeism, turnover, performance appraisal scores, self-reports of performance), those ties account for a small amount of the variation in individuals’ performance

Typically, companies are interested in employee motivation when they conduct engagement surveys – the more motivated workers are, the higher their level of performance will be, the thinking goes

We do know that employees tend to be more motivated and engaged when they feel their jobs are crucial to their employer’s success or contribute to society, when their leaders support them, and when they can try new things – but changing those factors and, in doing so, increasing engagement and motivation — is devilishly difficult to do

Before canvassing employees on engagement, business leaders should understand the surveys’ shortcomings, clarify what they want to accomplish, and explore whether they might be better off with alternatives

Surveys that gauge workers’ satisfaction with specific factors such as pay, benefits, and work schedules, for example, or that evaluate how they are being managed by their immediate superiors, might be more useful in reducing turnover

THE ORIGINS OF ENGAGEMENT SURVEYS

The current surveys sent out by human resources departments have their roots in the morale surveys conducted by the U.S. military during World War I – “morale survey” was a catchall term for evaluations covering a wide range of topics, but the military was especially interested in the troops’ willingness to fight

After the war, many of the experts who had conducted the morale surveys moved into the private sector and created organisations to apply the lessons from military psychology to employees

The popularity of these kinds of surveys among employers grew in the 1930s, when companies such as Sears, Roebuck used them to figure out how to fight off unions – this explains the initial focus on whether workers were satisfied with factors like pay and supervision – if companies were aware that their workers were dissatisfied, and knew why, they could address the problems before unions had a chance to step in

The Big Idea

By the 1950s, major corporations’ worries about unionisation had waned, as companies either succumbed to unions or were able to keep them out

HR departments kept the surveys alive to ask workers about issues in HR’s purview, such as satisfaction with pay, benefits, and work schedules, which can indicate whether employees will leave for new jobs

The notion that satisfied workers are productive workers made surveys even more popular, until more sophisticated analyses starting in the 1980s found that satisfaction did not predict much about job performance

These findings, combined with a new field of research, caused employers to embrace the idea that measuring worker engagement, rather than satisfaction, could tell them something about how hard their employees were working

The concept of engagement came out of the academic research of William Kahn, a Boston University psychologist interested in examining the degree to which individuals brought their “full selves” and energy to their jobs

The idea advanced with the identification of employee burnout as an issue — the finding that work performance suffered when employees were psychologically and emotionally exhausted from their work experience – if lack of energy was a bad thing, then the opposite (engagement) should be a good thing, posited Wilmar Schaufeli of Utrecht University and his colleagues

A number of contemporary definitions of engagement tap into employee commitment (Do I care about my employer’s interests?) and motivation (Am I actively trying to advance those interests?)

THE PROBLEMS WITH ENGAGEMENT

One problem that companies often stumble over when using engagement measures is that different definitions of the term abound – the European version, for example, associated with Schaufeli, emphasizes the idea of “vigour,” and there are an array of others

Consultants also tend to use different definitions from their competitors, which contributes to the confusion:

  • Gallup Consulting, for instance, says that engagement is pride, passion, and enthusiasm for work
  • Willis Towers Watson defines it as “employees’ willingness and ability to contribute to company success.”
  • One of the most widely cited pieces of engagement literature defines it differently still, as “the individual’s involvement and satisfaction with as well as enthusiasm for work”

The predicament is when an employer wants to find out, say, how hard employees are working, and the engagement survey it uses measures something else, such as pride in one’s job or ability to contribute

A second major problem with engagement surveys is that many employees don’t respond to them because they don’t believe management will do anything with the answers

A recent survey found that 70% of employees do not respond to surveys and nearly 30% of them think they are useless – and anecdotal evidence suggests that the pervasiveness of those sentiments hasn’t changed since then

When we survey employees, we are signaling that we care about what they think and that we are going to actually do something with their answers – if we don’t really care, and our employees know this, because they didn’t see any changes after the last survey was conducted, an additional survey will only increase worker alienation

Finally, many employers are interested in the idea of engagement because they believe it tells them something about job performance and, in particular, whether people are working hard – but job performance and other employee behaviours are influenced by many factors that most engagement surveys can’t take into account, including the tasks people are given, which sometimes change daily; what their supervisors are doing; what is going on with their project or the company; and so on – in addition, many factors outside the job affect an individual’s performance, such as ill health or family problems

The results also vary depending on what a business does – engagement has been shown to be far greater in organisations with a clear social mission, such as saving children’s lives, than in those that lack one, like investment banking

Given all this, the hope that we can predict someone’s future job performance with accuracy based on any self-reported statement about that person’s current mental state is unrealistic

Consequently, employers should rethink their survey strategies and make sure they are using the type of survey that can give them the best information for achieving their goals

WHAT YOU SHOULD DO INSTEAD

Before conducting an employee survey, figure out what you actually want to know:

  • If you want to find out whether employees think your compensation and benefit policies are fair, ask them that question directly
  • If you are concerned about who might quit, ask about that directly as well
  • If you want to know how employees are performing their jobs, you can survey them on their perspective (or, better yet, ask their supervisors – we believe their assessments are better indicators of job performance than the self-reports from individuals about their motivation levels)

You can also learn a lot simply by asking employees open-ended questions such as “What would you change about your job and how you are managed?” and by having meaningful conversations with supervisors about what prevents them from getting more work done

You are likely to learn more about how to improve performance from these kinds of questions than from surveys about engagement

So, if you are truly interested in your employees’ motivation and commitment and decide to conduct engagement surveys, just be sure to keep their limitations in mind:

  • Once you have the scores, be realistic about the meaning of the results
  • You shouldn’t expect your workers’ engagement to be anywhere near 100% – few people are completely focused on their work even when they are at the office
  • Engagement scores are also reasonably stable over time – employees who are highly engaged tend to stay that way
  • The same holds true for those who are not
  • Don’t expect that a new compensation system or a culture change initiative is going to result in higher engagement scores

Second, remember that engagement scores measure the perceptions of a group of employees, but this does not address causation – and while some surveys try to ask employees directly why they are disengaged, this is often difficult for workers to self-diagnose

The best approach is to ask employees directly about factors that research has shown matter to engagement:

  • Employees want to have a sense of purpose in their work and to feel that their role is meaningful to the organization’s success
  • They want leaders who lead by example, who are supportive, who set clear goals, and who give regular, meaningful feedback
  • They want a safe environment where they can take risks and try new things

Are they seeing that at work?

Finally, do something about the results – improve the factors employees report are lacking

Engagement scores, for all their prominence in HR and media circles, are ultimately about something both remarkably simple and also difficult to do successfully – doing a good job of managing your employees every single day