Everything You Wanted To Know About Productivity, @JohnMcDonnellMP, But Were Afraid To Ask …

I was recently asked for my view on the first response from Dorkins to The Economist: The Productivity Puzzle:

“I don’t get what the huge productivity mystery is supposed to be. The UK is a country in which productive work is not really rewarded due to the system of rents (high near employment centres) and taxes (mostly raised from labour). Many people quite sensibly respond to this by avoiding heavily taxed productive work as much as possible (e.g. doing the minimum number of hours required to qualify for tax credits) and instead focus their efforts on extracting rents from other people (e.g. arranging their living arrangements to maximise benefit and tax credit income, becoming BTL landlords).

Maybe if there was some kind of reward for productive work (higher net income, better standard of living, ability to buy secure housing) then people would do more of it?”

The neo-liberal fallacy in a nutshell?  The assumption that people act like calculating machines, 24/7, and so make such fine (selfish?) calculations at each and every opportunity.

Incidentally, if this year I earn £20,000 gross and £18,000 net and you cut my taxes next year so I net £19,000 for working no harder, why should I work any harder than I do now?  I am £1,000 better off without working my fingers any further to the bone.  Neo-liberal argument hoist by its own petard?

Poor productivity in the UK economy, as measured as at national level, is most likely to be down to ongoing poor investment in research and development, capital and labour.  Deming, amongst others observed, that most workers only have control over about 10% of their workload and so their productivity is not within their capacity to improve, except very marginally.

British management, which notoriously cuts investment in capital and labour (and advertising) at the first sign of a downturn in the economy, has the major responsibility for the poor productivity of its staff.  And in 2008, and thereafter, it yet again cut significantly its investment in staff training.  You reap what you sow.

Real world economics has a tendency to trump neo-liberal theory every time, perhaps because it studies the real world and then theorises rather than trying to impose its (politically motivated) theories on the real world?  In this instance, it helps if one understands what economists mean by productivity:

“An economic measure of output per unit of input.  Inputs include labor and capital, while output is typically measured in revenues and other GDP components such as business inventories.  Productivity measures may be examined collectively (across the whole economy) or viewed industry by industry to examine trends in labor growth, wage levels and technological improvement.

Productivity gains are vital to the economy because they allow us to accomplish more with less.  Capital and labor are both scarce resources, so maximizing their impact is always a core concern of modern business.  Productivity enhancements come from technology advances, such as computers and the Internet, supply chain and logistics improvements, and increased skill levels within the workforce.”

Read more at: http://www.investopedia.com/terms/p/productivity.asp#ixzz3cDZ7K300

You will notice that working harder and/or longer hours do not figure in the above!  Neither does increasing the number of entrepreneurs as that might actually reduce productivity averaged out across the economy.

Improving productivity is about working smarter not becoming a latter day Stakhanovite.

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