Sector mix explains ‘productivity puzzle’?

Once upon a time, we humans kept on inventing/ innovating/ improving tangible stuff:

  • First to meet our basic needs for must-haves such as food, shelter and/ or defence
  • Then, to make our lives easier with like-to-haves
  • And, nowadays, with many of those needs sated, we chase after love-to-haves which make our lives more enjoyable


It was the agriculture sector which led the way – the manufacturing sector then emerged in the 18th century – and, by the end of the 20th century, it was services which dominated so-called developed economies

To climb this ‘hierarchy of needs’ as Abraham Maslow called them, we needed inventors and innovators to come up with the bright ideas for all the goods and services needed, plus capital investment to supply them

And, as people evolved ways to produce more, they also earned more so they could afford more other stuff – and not just more must-haves but more like and love-to-haves too

Hence national wealth pies grew, eventually enabling national education and health services to be afforded, followed by personal services such as house cleaners, chiropodists or dog trainers

But this growth curve now seems to be flattening out

Developed nations find themselves at a watershed, moving from an old world focused on meeting people’s material needs and increasing their standard of living to a new world meeting their mental needs, focused on improving their well-being and quality of life

As Winston Spencer Churchill said: “The empires of the future are the empires of the mind”

However, this ‘new world’ presents a problem for official bean-counters when they try to measure national output and productivity:

  • Output in the old world was essentially tangible stuff and relatively easy to count – costly inputs were restricted to labour numbers or hours, again relatively easy to count
  • But those days are over
  • In the new world of both tangible and intangible stuff, the full value of all outputs is no longer easy to count – and costly inputs can be much more capital investment in offices, machines, ICT, robots or  AI rather than just labour, thus making any labour productivity measurement unrepresentative of the total national productivity picture


So let’s dig a little deeper

First, where are we now?

Over just the last 300 years a clear hierarchy of sector groups has emerged

                                C. 21st century – ‘ Love-to-haves’ – to make lives more satisfying and enjoyable: 

              • Services:
                • Private – Leisure, entertainment, media
                • Public –
              • Manufacturing – iPhones (+ freebies)
              • Personal – Hobbies, Charity work, Sports clubs


                      B. 20th century – ‘Like-to-haves’ – to make lives easier/ increase positives of life:

          • Universal services:
            • Private – Airlines, Hotel chains, Holidays, Telephones
            • Public – Universal health/ education, water supply, communications
          • Personal services – Hairdressers, dog trainers
          • Manufacturing – Cars, motorbikes, airplanes, yachts, computers 


          A. 18-19th century – ‘Must-haves’ – to survive/ reduce negatives of life:

        • Agriculture – Food, Drink
        • Manufacturing – Steel, Cotton, Wool
        • Public services – Defence



As each human need was met and original suppliers were seen to do well, other suppliers would pile in to their markets – competition thus grew – productivity improvement became vital to stay competitive – to succeed, market share growth became the aim – eventually, profitable sectors would become over-supplied whilst demand growth would stall when most targeted customers had ‘enough’ existing stuff – they merely replaced it when worn out rather than adding to it – their ‘old needs’ having been met, their spare pennies moved on to buying radically new stuff on offer either from existing sectors or completely new sectors

And, as sectors mature, the scope for finding fresh new radical stuff within them diminishes – hence, growth in any sector eventually stalls unless new customers, and so demand, can be found in new geographic markets:

  • The good news is most ‘old’ sectors do not ‘fade away’ – the human needs they meet do not disappear – indeed, most actually continue to grow in volume and value offered, albeit slowly – it’s just that new sectors often grow much faster – agriculture thus gave way to manufacturing – now, despite producing more volume and value than ever before, their combined share of the total UK economy has shrunk to less than 20% over just the last 100 years – at the same time, they both continually shaved their labour needs – some of the off-loaded labour was able to move on to new, even better paid, sectors – others to ‘gig employment’
  • The bad news is it seems the material countable world has run out of new sectors to continue on its remorseless growth curve – hence GDP and so national productivity levels have flattened out, not least because there are fewer opportunities for productivity enhancing investments plus many of those workers off-loaded from productive sectors have no option but to work for existing ‘low productivity/ low wage’ sectors where labour supply often exceeds demand, thus keeping wages low despite society valuing some of those services highly e.g. elderly care


So how might all this explain the current oft-quoted ‘productivity puzzle’ – why does the UK never close its ‘productivity gap’ with the G7 – and why does Japan always come last in the G7 productivity league table?

Their relative positions are bound to persist because:

  • National economies comprise different mixes of sectors which tend to focus on what those nations are good at, build on their strengths  and leave other nations to provide their other needs – and those national sector mixes cannot change overnight
  • Some private sectors have proved to be a lot more productive than others, whatever the nation viz:
    • High – Manufacturing, Big pharma, Digital, Oil extraction, Media
    • Medium – Education, Financial services, Retail, Construction
    • Low – Health and Social care, Tourism, Hospitality, Catering – and small farms in Japan
  • The proportion of vanguard versus long-tail organisations per sector also varies little
  • Finally, the output value of public sector services, offered with no price tags,  is assumed to be equal to their ‘cost of inputs’ – a dubious assumption which encourages a culture of always seeking more cash inputs rather than best value from limited inputs – and one which attaches a huge lead-weight to any improvements made elsewhere affecting GDP and productivity



  • The reason current (labour) productivity gaps persist for so long is mostly due to the mix and size of each sector in each nation’s economy, neither of which can be changed quickly
  • Equally, national outputs and productivity levels have stalled, in all developed nations at least, because the world has reached an economic watershed, moving from an old material world, where most human needs have been met in a limited, zero-sum exchange for cash, to a new mental world where most human needs can be met in unlimited, positive-sum exchanges
  • Current official bean-counters thus need to update their systems of measurement concerning national output to cover not only countable goods and services that people buy but also stuff, currently deemed uncountable, that enhances their well-being
  • At present, their gloomy results depict a world which is stagnating – in fact, we may already be on a new, unlimited and exciting growth curve



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