Why chase productivity improvement?

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

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


2. How does PI achieve these aims?

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


3. PI growth pattern to date:

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


4. What if input resources are running out?

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


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

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


6. Conclusions:

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

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