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Wednesday, March 19, 2008

It's the Productivity Stupid

I am compelled to jump in with a post on "the economy". Financial
markets are crashing. Currency values are crashing. Credit markets
are crashing. Stock markets are crashing. Housing markets are
crashing. Commodity markets are soaring.

What did anyone expect?

Ask the average American what they think drives an economy and you
get answers like "consumer confidence", "healthy job market", "good
wages", "low prices", "low credit costs". The market savvy and
economic professionals might even talk to international indicators
like "trade surplus", "strong dollar", "ready capital", "strong
growth and low inflation", "reasoned and responsive monetary policy",
"well trained labor force".

I read the papers. I watch TV news. I poke around on the internet.
And never does anyone talk to issues that actually CAUSE economic

Never a mention of PRODUCTIVITY. It is a simple concept.
Productivity is simply the total amount of value created, divided by
the number of people. It is the size of the pie, or more
specifically the average size of each individual's slice. What
matters, what seems to have been lost in our collective conversation
about the economy, is that productivity is not a measure of what gets
consumed, but what gets built and how efficiently it gets built.

There is nothing one can do on the consumer end of the economic
machine that will effect productivity. Consumption is a by-product
of productivity... an effect to productivity's cause. Same goes for
monitory policy. Same goes for markets like equity, stock and
commodity markets. Same goes for indicators like the consumer price
index, gross national product, the amount of currency in circulation,
inflation and growth rates, new housing starts, employment rates,
consumer debt, business debt, price to earnings, etc. These are all
more effect than cause. If you want to account for the parameters
that effect the relative strength of one economy vs. another or of
one economy as compared to that same economy at another time, you
have to look to the deepest factors that cause wealth in the first

You have no doubt read that a modern post-industrial society employs
far fewer people in the production of food. In the United States for
instance, only 1.8 people per one hundred produce all of the food for
the other 98.2 percent. Compare this to per-capita food production
figures of other nations or our own nation just 100 years ago and you
get some notion of the power of productivity to indicate the strength
of an economy. Of course all factors that lead to higher
productivity are inextricably linked across an economy. One of the
reasons we need so few people in the fields is the fact that we can
efficiently manufacture large powered farming machinery, the reason
we can manufacture these tractors is our ability to extract raw
materials and smelt them into high quality metals, polymers, and
reactants. The reason we can refine and ship raw materials is that
we have developed a profound understanding of the properties and
behavior of natural elements and systems. The reason this knowledge
can be applied across our economy is because we have developed a vast
and more or less equal and effective education program. All of these
factors together give us the wealth and structure to build and
maintain a stable and consistent public infrastructure that
facilitates reliable transportation of goods, services and people,
clean water, power, refuse and sewer. And with the efficiencies that
result, we build towards other more intangible contributors to
productivity; policing and justice, civil and human rights,
recreation and travel, personal and intellectual expression,
democratic representation, national defense, welfare and protections
for the disadvantaged and unfortunate, etc.

If you can design an industrial process that allows you to build a
pound of steel with one half the labor or one half the coal, you have
doubled productivity. In due time, the value of your currency will
reflect this increase. This is what fuels productivity. If one of
your citizens discovers the true and measurable relationship between
electricity and magnetism, others will parlay this understanding into
profound and powerful new kinds of materials, material processing,
machinery, and computers that help still more people who will be able
to afford the luxury of time and stability that will allow them to
discover yet more about the causal relationships between matter, and
dynamics in nature which will yield yet more wealth as a byproduct of

When did we stop thinking about productivity? When did we start
believing that consumption could replace productivity? When did we
begin believing that we could forever rest on the productive results
of our parents and their parents? The nightly news is jammed to the
brim with stories about the fed chairman's latest action or inaction
in the adjustment of the federal lending rate, about the state of
equity markets, or the health of stock markets, or whether or not we
are going to the mall as often, but nobody talks about building
anything that builds other things that makes it more efficient to
build yet other things that matter. Production is assumed,
forgotten, ignored.

Of course you can't get productivity yields simply by building
things. What you build matters. What you build, what you choose to
build, and how you go about choosing what to build, is what really
matters. These decisions are driven at the most basic level by
knowledge and infrastructure, by the the ability of the member's of a
society to be able to build a better and better understanding of
nature, of the process that is change, to accurately project this
knowledge as predictor of the shape of the future that matters, that
will be more likely to happen. Then, the infrastructure of that
society must have what it takes to facilitate the development of that
knowledge into finished usable process or product.

At base and at issue here is the very real difference between a
superficial, top-down cosmetic approach to understanding or solving a
problem and a causal, bottom up, holistic or paradigmatic approach?
Do we seek a solution to our problems or means to ignore them?
Monetary policy is reactive, productivity building is proactive.
Markets are reactive, they exist only to the extent production has
already happened, research, invention, design, tooling,
manufacturing, providing services and products is proactive.

I am not fundamentally opposed to Fed Board adjustments, but I am
dismayed by the fact that we have no fed or cabinet level policy
organization or institution that seeks to understand and effect
productivity itself. Why do we rather make a science of reactive
adjustments, and consistently ignore awareness, concentration,
attention, design, and intent towards the base of any economy,

I just finished reading a well written, and well intended article in
a major American news paper attempting to demystify the current
market crisis through a historical recounting of the inner workings
and machinations of the novel real estate-facing financial products;
loans and loan aggregation investment packages and the companies that
were formed to take them to the public and the stock markets of the
world. Wow. Well written. Well researched. Well paced. Truthful.
But none of it explains the real reasons behind the collapse of the
dollar. Even so, I understand why it is intoxicating or simple to
come to these conclusions. Its like a woman who says the family is
in financial ruin because her husband stopped going to work and
instead spent his time hanging out at the beach. Technically, it is
true that he made no money at the beach. But the base problem was
his absence from work, where, had he showed up, he would have
continued earning a wage. We would laugh pretty hard if the woman
attempted to remedy the situation with beach related solutions;
conservative sand policy, federal wave intervention, beach towel
restrictions, fiduciary sun screen programs). The author of the
article was dead right about one thing, our ignorance of the causes
of this crisis does indeed impact its likelihood, the effectiveness
of our intervention afterwards, and the frequency with which we will
likely find our selves dealing with such a crisis again.

It is exactly as though we have been living in a shopping mall. We
experience the world as though it is full of ready made products. We
see the economic cycle clipped to the scale of retail consumption.
Why should we not develop an ignorance of the base of an economy,
production? The last president who attempted any kind of
sophistication in understanding and directing economic policy was
Clinton. Even so, his choice for economic advisor (Robert Reich) was
a labor wonk. I am a big liberal and my liberalism is informed by
the kind of fairness and equality principles of the civil rights
movement and rooted in the labor movement of the 20's, 30's and
40's. But labor is only a adjunct to productivity. Necessary, but
more ingredient than product.

And then there is the issue of human nature. We concentrate on and
are attracted to results. It is way more fun to take a trip to the
bank or the mall than to the strip mine or the factory. Way more
engaging or naturally attractive to check and manipulate earnings
statements than it is to invent a new process or material that might
someday lead to other products and materials. Way more fun and
immediately appealing to purchase and use an iPhone than to try to
understand, measure, and predict the parameters that truly effect the
evolution of global economies.

Robert Reich's blog:

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