We agree with his conclusion for the long-term, despite his reliance on the official national productivity statistics quoted, but would humbly add that cutting waste and inefficient use of existing resources would also make a massive short-term difference.
Times are also a-changing – wellbeing has become as important if not more so to more and more people, especially in OECD countries – hence we believe a better and more balanced national scorecard is now needed before the stars our leaders currently follow lead us in wrong directions.
We recommend you read the following extracts from Keating’s article first – then consider the heavyweight criticisms of the GDP statistic that follow, and see what you think.
Keating extracts:
- Through history the reason why living standards have risen over time is almost entirely due to increased labour productivity.
- Furthermore, the most dramatic increase in living standards ever has been since the Second World War when productivity increased very rapidly in the developed economies of the OECD countries and later in much of Asia.
- However, in the last decade or so, productivity growth in the OECD has slowed.
- The (Australian) Productivity Commission is planning to unpack the factors which led to this slow-down in labour productivity:
- One possibility is that the progressive shift to being a service economy could be slowing productivity growth as the value of services is typically less per employee than for goods production.
- Second, the opportunities for mechanisation leading to increased productivity are less for services than for goods production.
- Third, the official statistics are often not able to measure the increase in service quality when extra teachers or policemen are hired, leading to the data showing a misleading fall in their productivity.
- But analysis by the Productivity Commission indicates that productivity declined in both the market and non-market sectors.
- Thus, most of the slow-down in productivity growth is probably real and is impacting people’s living standards.
Can productivity growth be restored?
- Everyone is clamouring for reforms that will increase productivity – but how much difference are they likely to make?
- The truth is that throughout history the rate of productivity growth has been overwhelmingly determined by the rate of technological change.
- Governments can influence the rate of business innovation by supporting research and development, education and training, and various incentives – and regulatory changes to improve the organisation and flexibility of individual workplaces can also help.
- Nevertheless, the experience over centuries is that the new technological breakthroughs that make a major difference to productivity have owed little to government support.
- This is perhaps a little less true in modern times when governments have played a leading role in the development of digital technologies, but there are still limits to what governments can achieve in trying to accelerate productivity growth if there are fewer scientific breakthroughs.
- If government policies could make much difference to the rate of productivity growth then we would expect to see more difference between the experience of different countries.
- As the Table below shows, the slowdown in productivity growth has affected all developed countries whose economies are similar to Australia’s.
Productivity growth rates compared
Average annual growth rate %
- In almost all these OECD countries the increase in productivity in the 2010s was much less than in the previous decade.
- And most recently, in the last four years or so, productivity growth has been close to zero everywhere in the OECD except the US.
- The reality is that most developed economies quickly adopt the same technologies and the general slow-down in productivity is indicative of a slow-down in technological innovation.
Conclusions:
- We have grown up in a culture where we expected to be better off than our parents, and better off over time
- However that is no longer true, and may explain much of the success of populism in the developed economies.
- Maybe the AI revolution will restore productivity growth and enable us to better pursue our dreams.
- But it would also be prudent to plan for how we live in a society where productivity and living standards are not increasing much at all.
___________________________________________________________________________________
GDP – Professor Diane Coyle
- I recently listened to an excellent podcast on national productivity featuring economist Diane Coyle, Professor of Public Policy at the University of Cambridge in which reference was made to her book ‘GDP – A Brief but Affectionate History’
- Many of her conclusions seemed to chime well with ours, specifically and with apologies to her for any misunderstandings:
- GDP is a flawed statistic – but it’s the best data we’ve got
- GDP involves a mix of averages, samples, estimates, uncertainties, assumptions, regression equations etc
- GDP also does not count much ‘difficult/ impossible to measure’ legal and illegal human effort which has economic value – e.g. housework and crime – and what’s the output of a bank? – and how does one count the value of one mobile phone 10 years ago versus one nowadays?
- Public sector output cannot even be measured as most is not ‘sold’ at market prices so the output value of such services are assumed equal to the cost of providing them – this means the more HMG pours into public sector inputs, regardless of how well it is used, the more output will rise whilst its productivity ratio stays level
GDP shortcomings:
- Simon Kuznets, one of the inventors of GDP, warned:
- “GDP tells us about aggregate consumption but not 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”
- Robert F Kennedy, USA Attorney General, once spoke about GDP as follows:
-
- Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things
- Our GDP, now, is over $800 billion dollars a year, but that GDP – if we judge the USA by that – counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage
- It counts:
- Special locks for our doors
- Jails for the people who break them
- The destruction of the redwood
- The loss of our natural wonder in chaotic sprawl
- Napalm and nuclear warheads
- Armoured cars for the police to fight the riots in our cities
- Whitman’s rifle and Speck’s knife
- TV programs which glorify violence in order to sell toys to our children
- Yet GDP does not allow for the health of our children, the quality of their education or the joy of their play
- It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials
- It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country
- In short, it measures everything except that which makes life worthwhile
- And it can tell us everything about America except why we are proud that we are Americans
1 comment
Interesting article and link between poor / outdated national statistics and the under-lying need to enhance productivity. Since the dot com crisis we have been unable to determine the value of anything intangible. Yet our economy is today built around intangible infrastructure – not just societal (less so in fact) but certainly in business investment. As you well know almost 90% of “value” of a stock on the S&P 500 is now represented by “non financial” organizational value. If one combines that with a 30% – approximately employee engagement level (Gallup), we should not be surprised that productivity is lower than it could or should be. A recent book by a UK author Paul Sweeney “MAGNETIC NONSENSE: A SHORT HISTORY OF BULLSHIT AT WORK AND HOW TO MAKE IT GO AWAY” that I have started reading seems to capture the problem. To build productivity in a 21st century intangible (or as Warren Buffett says “asset light”) economy we need to change the way leaders lead and manage organizations. Until we crack that nut we will be chasing rabbit’s down rabbit holes and wringing our hands about poor performance.