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What is “Productivity?”

Nine years ago, January 2010, was the bottom of what I’ve come to call the Managed Depression.  Here is a piece from that time which is still relevant.  At that time, we were awaiting a “recovery” and hoping for productivity gains to get us out of it.  But they didn’t.  And the core issues outlined here remain.

What would make a recovery sustainable?  If you ask an economist, they’d tell you that what makes any economy grow and prosper is, ultimately, what they call “productivity gains”.  That’s the ability to make more with less that allows a people to prosper.  During the 1990s this was given as the reason why interest rates could remain low and we could have one Hell of a party – a sloppy, hazy bender.  We live in the hangover that resulted, but have we really learned how intoxicating this one, simple idea is?

Workers of the World, Unite!

Like a first drink, the initial effects are simple and hard to argue against.  Changes in technology, either physical or through more efficient organization, allow companies to either make more stuff or do what they are doing with fewer people.  The gain in efficiency, measured in dollar output per employee or capital required, means that the economy as a whole is producing value.

In the 1990s, cocktail of choice became information technology, aka computers and internet.  During this period of time “technology” came to mean nothing more than this narrow area of tech, but the principle has been the same no matter what kind of “skill” is reduced to practice in a way that increases people’s ability to put out more stuff per person.

Going back in time to the 1970s, however, we had a more fundamentalist view of this intoxicating stuff.  Back then, we relied more heavily on manufacturing as an economy and tended to focus on manufacturing systems.  Technological developments then were in the form of assembly robots and other mechanization, and they were not as well received.  The United Auto Workers warned everyone that jobs lost to machines were a threat to not just their jobs but the entire economy.

The reasoning of the time went like this:  if you make more things, there have to be people who are willing to buy them, and if you let people go while you make the same amount those people have to find new jobs.  Technology might be great for the company, but it’s hard on the economy as a whole.  This view was common right through the 1980s but was eventually drowned out by one simple fact – consumption, or money spent on things that don’t last, rose dramatically in this period from 62% of GDP to 70% of GDP.

By the time the information technology came along, the warnings of the grumbly Union Guys and their weak beer started to seem very old fashioned.  Popular culture started to assume that what might be true for one class of people wasn’t necessarily true for all.  Improvements in “productivity” brought by the information technology were somehow different, as if a Cosmopolitan was different from PBR.  Nevermind that we didn’t need as many people storing, maintaining, and recalling data written on paper to make things work.  Forget about how banks once managed risk by getting to know their customers and the intimate details of their lives.

The drinks just kept on comin’, and they were good.  Technology was a driving force that increased “productivity” and made it possible for us to all be rich because we’d be even more efficient.

It’s important to look back over the blur of the whole party because there’s no one point where we went over the edge.  It only worked because we were able to consume the excess that was produced through the bubble economy of the 1990s. We were able to change the popular mythology of what technology does for us because we had an amazing party.

There is little question that the downturn we are in started around 2001 because from that year forward the net growth in GDP minus Federal deficits is negative – every other part of our economy, from manufacturing to mining and from retail to services, has added up to a decline every quarter since then.  Once we were able to use these new systems to cash-out home equity, using our homes as a kind of ATM, the overall economy actually fell harder outside of these operations that generated quick, unsustainable cash.  The crash of 2008 gradually became inevitable.

Where did it all start?  It wasn’t simply the first drink of “productivity gains”, although these clearly resulted in a need for fewer workers or goods and services that we couldn’t consume fast enough.  It started with an excuse.  Just like the commercials against drunk driving tell us, impaired reasoning and a feeling of invulnerability created the excuse that allow us to justify stupid, destructive behavior.  We need to understand that it is just an excuse and there is still no substitute for a hard dose of reality.

Technology and the “productivity gains” that it can create are not always a positive, wonderful thing.  They create side effects that ripple through the whole system.  If we want our new understanding to serve us we have to not make excuses for it because it’s left us feeling giddy and powerful.  That’s when the technology, like any addictive substance, starts to take over your life.

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One thought on “What is “Productivity?”

  1. Exactly. what if there is no demand for more stuff? But this gets us right back to the trade deficit with China. I know you’ve said it’s very complicated but that is one of the problems here. But a trade war only makes it worse in the short term. What a mess!

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