Productivity as a mirror: A ratio for all seasons

As every textbook tell us, productivity is a very simple concept: a ratio which sets output over input. The simplicity is beguiling; it’s clear that more output for the same or less input is obviously more ‘productive’. Increasing productivity must be a good thing. 

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At the level of macro-economy, a productive economy means wealth; tracking the changes in overall productivity is a major pre-occupation of policy makers, journalists and academics. In recent times, the concept has attracted several narratives. 

In the UK, the story of the moment is that the historical rise in productivity is tailing off. In other words, the source of our steadily increasing prosperity over many decades has seemed to stop working, particularly since the financial crisis. This ‘productivity puzzle’ is interesting not least for the fact that most economists will confess to being baffled. 

Without increased productivity, it is argued, the nation will fail to recover from its current struggles and fall behind our competitors. The demographic shifts mean that a relatively smaller working population needs to be creating more wealth to support the growing burden of the elderly, but the curve of improvement is too slow to avoid future penury.

In other parts of the world, the productivity narrative is slightly different: in the US, productivity figures look a bit more promising, but seem to have become disconnected from employment growth. 

The traditional connection between productivity and prosperity – the happy rising tide on which all boats bob – seems to be weakening. The result is an increasingly unequal distribution of the benefits of advancing technology. 

Productivity improvements are leading some to think that, after all, the robots will come and take our jobs. This development follows a longer period in which economists puzzled as to why the huge developments in information technology appeared to have little impact on productivity; intuitively, people thought all those computers would be making firms super-efficient, but the evidence appeared muted at best. But now the technology seems to be having its effect, but at the cost of equality. The new productivity seems to be delivering new wealth to the educated and powerful, and stripping away the less skilled jobs that have supported the ordinary worker. 

These developments are driving a wide range of policy responses, all of which zero in on the need for ‘better’ productivity. There is no shortage of prescription and there is a growing sense of urgency. Something must be done! But in fact the debate mostly acts as a vehicle for commentators to air their prejudices.

One big problem is that macro-level productivity is an idea which only makes sense if you have confidence – actually, quite a lot of confidence – in the ability of governments to calculate reliable measures of economic activity. Although talking about ‘the economy’ and ‘growth’ is a routine part of everyday discourse, it is worth remembering that there is no big machine with a dial and a needle from which the state of the ‘economy’ can be read. 

When economists talk about aggregate economic activity, they are quoting a figure that emerges from an extraordinarily complex process riven with a vast number of estimates and frankly creaky theories. The figures we use are contrived by adding together fragments of data according to rules that have been adapted and developed over time, and are applied by different countries in many different ways. 

This article is part of a serialisation of the white paper "Productivity: A better way; A look at solving the productivity puzzle", written by Steve New, Associate Professor at Oxford University’s Saïd Business School.

Read the next blog in this series: "Deeply Flawed?"

Download and read the white paper in full >

Tackle the Productivity Puzzle at www.productivitypuzzle.com

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