Essay on Productivity In A Service Economy

Productivity Flim-Flam

You can fool too many of the people too much of the time.
James Thurber, 'The Owl Who Was God', 1945


Claims of technological innovation and increased productivity were used inappropriately to justify high stock prices throughout the 1990s.

In both cases, the links between profits and these signs of vaunted progress were not clear.

In the case of productivity, the claims were based on questionable government statistics.

In this way, the Great Bubble was encouraged by irrelevant and inaccurate arguments.

What Is Productivity?

Productivity refers to the rate of output of goods and services for a given input of manpower and materials.

Productivity, like happiness, is good.

Since the beginning of the Industrial Revolution, factories have steadily increased physical output faster than they have increased the workforce.

Agriculture has also shown remarkable improvements in productivity so that few people in the United States are farmers today, compared with a century ago, although the country produces a surplus of food.

Productivity increases can lead to improved material well-being of an entire population.

Therefore, increased productivity, like happiness, is good.

No Link To Corporate Profits

However, there is no link between corporate profits and productivity.

Profit depends on income and expense and is positively influenced by lower taxes and rising demand in a non-competitive environment.

Productivity gains often lead to labor unrest and increased wages or to excess output and falling prices, circumstances not logically associated with expansion of profits.

Productivity gains do not justify high price-earnings ratios.

I would rather own stock in an old-fashioned brewery in an emerging market, with monopolistic control over distribution, than shares of a sleek, modern brewery in the U.S., besieged by lawsuits, taxes, and over-regulation.

Productivity gains do not justify high price-earnings ratios in any case, and certainly not when the figures are suspect.

Labor unions and their political allies want to show productivity gains to secure higher wages.

Economists, many of whom are on the government payroll, need productivity gains to reinforce assertions that increased government spending will not lead to inflation.

Productivity In Service

Although we understand productivity when talking about steel rods or bushels of corn, the notion becomes fuzzy when measuring intangible goods and services.

Productivity claims are not easy to prove.

The Service Economy. The United States has become a service economy, with shrinking industrial production.

As more people become engaged in activities such as law, healthcare, restaurants, martial arts studios, ballet schools, and diet reducing courses, it becomes increasingly difficult to measure productivity.

How do you measure productivity of a ballet school?

Economists seek to overcome this problem by measuring productivity not in physical terms, but in Gross Domestic Product (sales or revenue) compared with employment.

The problem is, of course, that a ballet school (or other service provider) may increase fees and income without providing more service, giving a false sign of productivity.

When a lawyer wins a million dollar suit, his productivity increases by this measure, although few non-lawyers would argue there have been efficiency gains that benefit the general population.

Do-It-Yourself. Fifty years ago, most manufactured goods could be picked up at the store in ready-to-use condition.

Today, stores sell the same goods in pieces and the consumer must do the job of assembly at home.

Productivity statistics ignore work now done by consumers.

From tables to bicycles, consumers now do some of the work that factories used to do.

Productivity statistics for partially completed goods will show improvement if we ignore the work done by consumers.

The service industries show similar fake productivity gains, such as when the client calls customer service and must respond by touch-tone before reaching a real person.

Offshore Factories. Many American industrial firms rely on workers in other countries to make goods sold under their logo.

However, in measuring productivity on a macro-economic scale, the statistician has no way of knowing how much foreign labor goes to make each of the millions of products sold.

Thus, productivity statistics in the largely industrial economy of 1950, when most goods were 'Made in USA', were more reliable than statistics today.

Declining Quality. Productivity measurements in the service industries ignore quality.

Jokes about house cleaners who no longer 'do windows' suggest the problem.

Productivity does not measure quality.

Fifty years ago, a doctor would come to your home to provide medical advice.

Retail stores had many more clerks than today.

Finding a full-service gas station is a problem.

Productivity does not measure quality.

Government Bureaucracy. The waste and inefficiency of government workers dilute productivity gains in the private sector.

Claims of improved productivity overlook government bureaucracy.

For example, productivity statistics do not reflect the inability of public schools to meet standards of the 1950s.

Even if productivity increases occurred at a faster rate than in the past – and there is little hard evidence of this – such improvement is not relevant to stock prices.

Innovation! So What?

Productivity gains make innovation necessary to create jobs for displaced workers.

As U.S. industrial production goes offshore, technological progress is essential to avoid unemployment.

Technological improvement has been going on for a long time.

The last twenty years offer myriad instances of technological development.

Innovation and invention is undoubtedly good, but technological improvement has been going on for a long time.

Since the Industrial Revolution, the world has developed new ideas and products.

In the 1990s, some said that technological change was so rapid that extraordinary stock prices were justified.

Wall Street offered the innovation argument even for companies without new technology.

Innovation Is Old Hat

The cycle of innovation providing employment for workers displaced by productivity gains has been going on for generations.

Investment in enterprises that exploit new technology has long been necessary.

The scale of capital investment needed in the information age is not yet clear.

In the industrial age, progress was dependent on massive investment in railroads, factories, steel mills, and telephone and electricity networks.

It is not as clear whether information age innovation needs investment on the same scale.

One reason for the collapse of the Internet bubble was that investors threw funds at ventures without thinking, leading to careless management and waste.

The Golden Decade

In the latter half of the nineteenth century, there was a time of such astounding technological progress that in one Golden Decade (1876-1886) the groundwork was laid for modern life.

In these ten years, our ancestors invented the electric light, transformer, railway, and motor, power stations, the steam turbine generator, the internal combustion engine, the automobile, the dirigible, reinforced concrete, the telephone, the motion picture camera, the phonograph, the vending machine, linotype, roll film, the fountain pen, the Dictaphone, the cash register, the germ theory of disease, vaccination, and the indoor flush toilet.

( 'The Timetable of Technology', Bryan Bunch and Alexander Hellemans, Touchstone Press, 1994.)

Income Redistribution

Professor Robert J. Gordon of Northwestern University points out that the much-vaunted technological gains of the last decade of the twentieth century pale in comparison to progress achieved one hundred years earlier.

('Does the New Economy Measure up to the Great Inventions of the Past?', Robert J. Gordon, published on the Internet as a draft paper for the Journal of Economic Perspectives, May 1, 2020.)

So far, the computer and the information society have had less impact on our lives than inventions of the Golden Decade had on the lives of people in the late nineteenth and early twentieth century.

The period 1876-1976 was a century of progress.

Developments in the first half of the twentieth century (the airplane, radio, television, and plastics) supplemented the magnificent inventions of the Golden Decade, transforming living conditions of one hundred years earlier.

The period 1876-1976 was a Century of Progress, needing vast quantities of capital to bring improved lifestyles to people everywhere.

By the 1960s, however, the United States, which had led the industrial world, began to turn away from capital-intensive endeavors towards redistributing wealth, spurred by Lyndon Johnson’s idea of a Great Society.

As a result, improvements in American lifestyles since 1965 have been less noticeable than in the first half of the century.

Advances in living conditions for the average U.S. citizen between 1950 and 2000 have been less dramatic than from 1900 to 1950.

Wall Street Ballyhoo

The argument that innovation is good for all investors is Wall Street ballyhoo, not fact.

Like productivity and happiness, innovation may be good for humanity, and still irrelevant to investment performance.

Innovation, like all change, does not benefit everyone.

At the millennium, biological scientists engaged in stem cell research and mapping the human genome in an attempt to extend life.

Innovation, like all change, does not benefit everyone.

Some predict that scientific advances may allow people to live two hundred years.

Of course, such progress would devastate the annuity industry.

If people who live to be two hundred continue to retire at sixty-five, not only will social security go bankrupt, but so will most retirees.

Producers of horse-drawn buggies did not benefit from the invention of the automobile.

Television closed movie theaters across America.

Few pioneer car producers lasted twenty years.

One could have invested in two hundred software ventures in 1980 and still have missed Microsoft.

Thomas Edison was never entirely successful in defending his inventions against patent infringement by less innovative competitors.

Profits from Internet stock are much more likely to have come from getting out before the crash, than from dividends earned on this new technology.

New Technology Is Risky

New technology implies change, and change represents risk.

Companies in an era of rapid innovation might more reasonably sell at low earnings multiples as a mark of risky times and possible need for added investment to adapt to the new environment.

Apologists for extreme stock prices argued that the impact of inventions like the Internet and cell cloning would be greater than the internal combustion engine, the electric light, the electric motor, and other innovations of the Golden Decade.

So far, there is no evidence that this is true.

Essay: End

copyright | privacy | home