What is state sector productivity?

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I note Gary, my regular commentator from PWC, is commenting tonight on public sector productivity and how it, supposedly declines as the scale of state sector spending increases. Doesn’t that just show that this man is a consultant, knowing the price of everything, the value of nothing and computing ratios between apples and oranges and delivering an answer in cooking cherries?

To explain, let me explore for a moment why it is inevitable that state sector productivity falls as the scale of state sector spending rises as a proportion of GDP.

Productivity is, of course, a ratio. It’s a ratio of labour to something else: usually capital employed. Labour could be the number of people. Normally it’s their cost.

And in private sector business productivity tends to rise with scale because as a business grows it tends to become more capital intensive, more systematised, more automated, less tolerant of variance and with a lower cost of capital, as is commonplace in larger business, more likely to substitute capital for labour. This means productivity usually appears to be higher in large business than in small business. The result is consultants assume big is good as labour cost per unit tends to fall and they call this enhanced productivity – somewhat ignoring on the way that the cost of each job created as a consequence can be astronomically high as a result.

But the state is different (how often do I have to say that?) First of all because the state tackles the easy targets first (which is a good thing). These tend to be the projects with economy of scale built in. So teaching children in large classes looks really productive. And tackling relatively common and easily treatable illness is obviously efficient. So the state does these things when it first has programmes of public education and health. And quite right too. That’s the basis on which the welfare state was built, and I’m delighted it was.

But as income rises (which it does when states invest in things like the welfare state) so too do expectations. So whilst we were once happy to teach children in classes of forty knowing many would leave school at 15 without qualifications and that they’d find work in our economy all the same we’re not happy with that now. We want them to have higher qualifications. But that means they’re taught for longer. And in smaller classes. And because labouring has disappeared (by and large) from our economy we require that everyone can read and write and be numerate, so we provide remedial teachers and classroom assistants and so have more than twice the staff in a room with fewer pupils in it. Outcomes, of course, are better, collectively and individually (and they are – of that I am convinced). But labour to capital ratios collapse. Productivity falls dramatically. But we’re all better off despite that fact – and yes I mean we all are (I refer to the Spirit Level principle, of course).

It’s the same with medicine. As my wife says as a GP,  once upon a time, not long ago, treating heart attack was easy. You turned up. If the person was still alive and they said they’d had crushing chest pain you as the doctor said they’d had a heart attack and you went away again: there was nothing else you could do but record it in the notes. It was the same with stroke. And when you got cancer by and large it too ran its course, with ever larger doses of morphine easing the process. But that’s not true now. Heart attack requires immediate action, and follow up (if the patient is still alive, of course) and long term preventative care, and ongoing scans, and then cholesterol and blood pressure management, and on, and on and on. Walking away in the old fashioned way was really very efficient in productivity terms. Doctor to patient time on a heart attack case was low. Now it is high. Outcomes have improved. But productivity collapses.

Now of course we can go back to high productivity. But letting people die is one requirement of doing so. And don't look after the elderly is another – let them fall victim to the first bout of pneumonia they get is great for productivity (and one reason why it is no doubt so good in the US where healthcare is not in the public sector). And also let’s go back to the 3Rs in big classes and leave a lot of children unable to do anything (which despite all the claims from the right wing is not what I witness to be happening, by and large). You'd improve productivity – and massively shrink well being at the same time.

In  other words – lower state productivity is highly likely to be associated with very good outcomes for the well being of populations paying for high levels of public services who quite rightly don’t give a damn about what consultants say about productivity – precisely because they instinctively that such consultants are using the wrong unit of measure – but who do really enjoy the enhanced life prospects for the young, old and all in between that strong social, educational, health and other services bring when a high proportion of GDP is expended upon them.

PWC have got a lot to learn about the real world. And even about ratios. And the power of doing nothing because, as I’m also told by many doctor friends,  the hardest thing they often have to decide upon is when not to act – when doing nothing is the right course of action. That looks like crass lack of productivity, except for the fact that the human body sometimes has an extraordinary ability to put itself right that the doctor can impede. How is that measured in productivity terms? It can’t be. But it remains the right thing to do.

Listening to the likes of Gary is the wrong thing to do if we want to increase wellbeing for all but PWC. And I’m pretty sure most people would go for the more egalitarian form of that equation. So shall we leave PWC and its ilk aside and go for low productivity and high outcomes?