Barriers to productivity growth

“The limits to productivity growth are set only by the limits to human inventiveness” says John Kay. This understates the problem. There are other limits. I’d mention two which I think are under-rated.

One is competition. Of course, this tends to increase productivity in many ways. But it has a downside. The fear of competition from future new technologies can inhibit investment today: no firm will spend £10m on robots if they fear a rival will buy better ones for £5m soon afterwards. As someone said, it is the second mouse that gets the cheese. It might be no accident that techno-optimism exists today alongside low investment, weak stock markets and high corporate cash piles.

The second is that, as Brynjolfsson and MacAfee say, "significant organizational innovation is required to capture the full benefit of…technologies."

For example, Paul David has described (pdf) how the introduction of electricity into American factories did not immediately raise productivity much, simply because it merely replaced steam engines. It was only when bosses realized that electric motors allowed factories to be reorganized – dispensing with the need for machines to be close to a central power source – that productivity soared, as workflow improved and new cheaper buildings could be used. This took many years.

It's not just organizational change that's needed, though. So too, sometimes, is social change. For example, household appliances such as vacuum cleaners and washing machines have allowed women to join the labour market. But it is taking decades to reap this benefit, because it also requires a change in social norms to accept women as workers of equal potential.

Similarly, I suspect that if IT is to have (further?) productivity-enhancing effects, they require socio-organizational change. IT should make it easier to communicate knowledge, but this only raises productivity if it is accompanied by a breaking down of silos and methods to facilitate co-operation and the exchnage of ideas within companies. It also should facilitate working from home, which could increase aggregate productivity by reducing house prices thus shifting spending away from a sclerotic sector of the economy towards more dynamic ones.

Without these changes, the internet might be like Hero of Alexandria’s aeolipile – an impressive device of little macroeconomic consequence.

However, there are always obstacles to the social and organizational change necessary for technical change to lead to productivity gains. These might be cognitive – such as the Frankenstein syndrome or “not invented here” mentality. Or they can be material. Socio-technical change is a process of creative destruction, the losers from which kick up a stink; think of taxi-drivers protesting against Uber.

Worse still, these losers aren’t always politically weak Ludditites. They can be well-connected bosses of incumbent firms, or managers seeking to maintain their power base.

So great are these obstacles that Joel Mokyr has coined the phrase Cardwell’s law:

Every society, when left on its own, will be technologically creative for only short periods. Sooner or later the forces of conservatism, the "if-it-ain't-broke-don't-fix-it," the "if-God-had-wanted-us-to-fly-he-would-have-given-us-wings," and the "not-invented-here-so-it-can't-possibly-work" people take over and manage through a variety of legal and institutional channels to slow down and if possible stop technological creativity altogether.

 He’ll not thank me for saying so, but this echoes Marx:

 At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters. 

The big question facing us is, therefore: do we have the right set of institutions to foster the socio-organizational change that beget productivity growth? These require a mix of healthy markets, to maximize ecological diversity; a financial system which backs risky new-comers; property rights which incentivise innovation; and state intervention that facilitates all these whilst not being captured by Luddites. If our politics weren’t so imbecilic, this question would be getting a lot more attention than it is.

Comments

[Keith]

All good points. But, surely the biggest problem slowing innovation is Capitalism itself.The need for innovations to make a profit. Many things may be useful to people but not a source of profit. Profit determines the allocation of factors of production and until a buck can be made the allocation will ignore needs that cannot be monetised. The progress of modern Science and technology has depended on public spending to a great degree. Military procurement, grants to Universities to pay for research in theoretical and applied Science and engineering, cross subsidy. The freedom to explore and play and create without the need to provide an immediate return in money is the product of the mixed economy. As in other areas is not the abandonment of the social democratic paradigm for a neo liberal obsession with market value killing innovation?

[Metatone]

Worth noting, as always, that compared to the businesses in some notable competitor countries (e.g. South Korea, Germany) UK businesses are particularly bad at reorganisation to improve productivity. That's why companies in those countries show the ability to increase productivity whereas here, as you often remind us, productivity growth comes mainly through exit of bad firms.

Which of course is a reminder that while most economists recommend that S. Korea and Germany reconfigure their institutions towards the direction the UK has already travelled in, the story might be more complicated...

[Dave Timoney]

One way that new institutions are embedded is by importing them from abroad. This can come about through state-led acquisition (Peter the Great, Meji-era Japan), hostile takeover (the legacies of empire), or through the working of capital markets (foreign direct investment). However, importation assumes a diversity (or, if you prefer, scope for arbitrage) within the world and thus the potential to "catch up".

Globalisation, in homogenising organisational and technical best practice, has reduced this diversity. Once there is no "elsewhere" whose proven tools and refined techniques we can adopt, and assuming aliens don't suddenly appear in our star system, are we limited to the incremental productivity growth of innovation alone? Is secular stagnation partly a result of globalisation, in the sense that opportunities for significant catch-up have now reduced?

[Matt Moore]

Hi Chris, normally I agree with you, but in this case I think you are just outright wrong:

"no firm will spend £10m on robots if they fear a rival will buy better ones for £5m soon afterwards. "

Why would we ("society") want to waste 10m on robots if we can have higher quality and cheaper ones instead?

I guess what I'm asking is - where is the market failure here? This example looks to be a straightforward investment decision, for which the expected profit is the correct criterion, both socially and privately.

[ChapWithNoName]

Matt, I guess the issue here is that we as a society need a sufficient number of firms to buy at £10m, or the market won't then invest to develop the £5m versions; and if firms didn't buy at £10m they also won't buy at £5m - what if a £2m is available next year? It's a deflationary problem, self-perpetuating once started.

[gastro george]

Why did anybody ever buy PCs, they get cheaper every year ...

[Fromarsetoelbow.blogspot.com]

@gastro, because in the mid-80s a PC cost £5k while a mini cost 20 times that and a mainframe 100 times. It's about relative value, not absolute.

From a corporate perspective, what matters is the depreciation schedule, not the ticket price. IT has moved from long-term fixed assets to commodities and services.

The falling price of investment goods is a key feature of secular stagnation, particularly in respect of the compositional shift from hardware to software.

[Kaleberg]

A good example is solar power. Everyone knew that the cost per watt of installed power generation went down as the manufacturing base got larger, but no one wanted to buy at the higher prices to push them down. The Chinese government made the move in their 10th plan and it was successful they increased spending in the 11th. Solar power is finally coming of age, but we could have done this in the 1980s. (http://mobile.businessinsider.com/china-laughed-when-it-saw-how-cheap-solar-could-be-2014-6)

Look at rural electrification in the US in the 1930s. Everyone knew that farms would be more efficient with electricity to pump water, milk cows, process hay and so on, but a capitalist system could not justify running the necessary power lines. During a brief fit of socialism, the US pushed for rural electricity and now a farm with electric power is uneconomic.

Personally, I think there are two reasons computerization hasn't shown its productivity effects. The first is that wages haven't kept up, so the benefits don't show up in accounting. Low wages have also suppressed demand. It's as if the US could make 50,000,000 cars a year but is only cranking out 20,000,000. It only looks inefficient because of the low operating level.

The other is computer software is extremely expensive to get right. My doctor today was foaming at the mouth about the software he uses. Drugs, for example, are usually prescribed in certain units e.g. mg and usually by certain rules e.g. 1/day 2/day. The system requires him to specify the unit first, wait for an update, then specify the number instead of defaulting, defaulting the unit or providing a list of common dosages. The per day thing is just as bad. When will this get fixed? When will the fixes roll out? I'm betting 10-20 years, meanwhile doctor time is relatively expensive and people don't become doctors to fight with data entry.

[Blissex]

«"The limits to productivity growth are set only by the limits to human inventiveness" says John Kay. This understates the problem. There are other limits. I’d mention two which I think are under-rated. One is competition." The second is that, [ ... ] "significant organizational innovation is required to capture the full benefit of…technologies."»

My guess is that this is an echo of R Gordon's awful book on "Great Inventions", which is in essence like the argument by our blogger above a celebration of randian-hero "wealth creators", from which prosperity trickles down to moochers and looters.

The problem with "innovation" is that some of it is just rearranging things and has very little impact, and most of the big impact productivity growth comes from the discovery and adoption of cheaper denser fuels and only rather secondarily from the exploration of the new landscape of technical possibilities enabled by their cheapness and density.

A man in a dozer is as productive as 50 men with shovels not because the dozer is a great invention that enhances productivity, but because the energy source for the energy motivating its scoop is cheaper and denser than the farm product needed as energy source for the 50 labourers whose muscles motivate the shovels.

Give the world a new far cheaper and far denser fuels and a new surge in productivity will happen, as people scramble to take advantage of the profit opportunities thereof.

The two "limits" above apply only to somewhat better, not far better, discoveries: it is hard to get people to explore the possibilities of new stuff that is only somewhat better.

But coal first, in low pressure and then high pressure engines, and oil later, in alternating and later continuous fuel-air engines, have been so hugely better than their predecessors that they have almost forced a massive rush to adoption.

Discovering and adopting better mineral fuel sources is the same as (this is not an analogy) discovering and adopting new extraordinarily fertile land that produces amazingly cheap and nutritious food (but with nonrenewable fertility).

The eastern desert of Arabia is probably the most fertile farmland ever discovered and put into production.

That is what has overwhelmingly mattered, not the silly mistake of "human inventiveness" and Great Inventors and the limits with which moochers and looters shackle randian-hero wealth-creators.

[Blissex]

And it is better fuels, not "human inventivenss", almost all the way down.

For example Great Inventions like electricity and steam are not at all sources of productivity, they merely transmit it from the much cheaper denser "food" from the "farms" in the Arabian desert to the engines providing work. A steam engine or an electrical engine are misleading named, because without the coal or oil or other fuels burned in producing the steam or electricity they wouldn't exist, and the steam and electricity are just lossy ways to turn the energy in the fuel into work.

It has amazed me that scholarly and erudite works of rabid and baseless randian propaganda like Gorden's long time research and his recent book haven't been widely laughed at for their so obvious misleadingness.

[gastro george]

@FATE - my comment was, of course ironic. But I think that we agree. I spent part of my career in IT pre-sales and I never once heard a customer discuss delaying a project because it would be cheaper in the future. As both you and Matt say in slightly different ways, (sensible) companies take a view on a business requirement and on the long term cost/benefits.

And investment is generally continual (or ought to be), so investment today means that a company starts in a better place tomorrow for further investment - and not having to force a massive Great Leap Forward through.

[George Carty]

Blissex, I guess the problem is that while coal was an inherently democratic fuel in that it required a large workforce to mine it (and thus more of the price of coal went in aggregate to the miners' wages rather than to the coal owners) oil and gas are inherently anti-democratic. They requires very little labour to extract and are very concentrated geographically, allowing those lucky enough to own the land where they are found fantastically wealthy.

We already have a power source (nuclear fission) that blows all chemical fuels out of the water where energy density is concerned, but the oil and gas rentiers have been able to stymie its progress through over-regulation, by using their concentrated wealth to both corrupt politicians directly (such as former German chancellor Gerhard Schröder, who instituted a phaseout of nuclear energy in Germany and was rewarded with a cushy job at Nordstream AG, set to build a Russia-Germany gas pipeline to replace the output of Germany's reactor fleet) and to finance fearmongering anti-nuclear propaganda (always via so-called "philanthropic foundations" in order to hide the true source of the money). The fact that many left-wingers opposed nuclear energy was also probably down to the fact that the Soviet state was itself one of the oil and gas rentiers.

[aragon]

Ironically the article on property rights, is [quite rightly] opposed to property rights and in favour of the abolition of patents.

"there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity."

[...]

"Our preferred policy solution is to abolish patents entirely and to find other legislative instruments, less open to lobbying and rent seeking, to foster innovation when there is clear evidence that laissez-faire undersupplies it."

The Luddites can be found among the rent seekers, monopolists and property owners.

[aragon]

The second mouse may get the cheese, the first paying a high price, in the form of the triggered trap. The article makes clear this does not apply to innovation, where first mover advantage is more important than patents.

See page 9.

The Fast follower contributes their own innovations, see the growth-share matrix,
from question marks, to rising star to cash cow and eventually dogs.

https://en.wikipedia.org/wiki/Growth%E2%80%93share_matrix

It is the cash cows and dogs which value patents to extend this phase not the rising stars, for whom competition can stimulate innovation through information transfer.

Patents represent a barrier to entry, and a monopoly to provide rents.