I have been musing on productivity over the weekend. The conclusions are at least fivefold.
First, productivity measures are totally distorted. Those in manufacturing assume that abuse of the environment has no cost. As a result wages in (almost entirely private sector) product creation are artificially inflated.
Second, those in services unrelated to manufacturing (most commonly in the state sector) have no such subsidy from abuse of the environment.
Third, as a result and given that neither most of economics or accountancy takes the cost of environmental degradation into account even if they are the biggest issue of concern in the world right now, it is presumed that those in manufacturing have earned greater reward due to their efficiency.
Fourth, those providing labour intensive services are told as a result they must work harder to match the artificially inflated claim of productivity, and so worth, of those in manufacturing linked sectors.
Fifth, when that demand for harder work reaches impossible levels three phenomena emerge.
One is that those working in services seek work linked to manufactured goods where the wages are better and the work is easier.
The next is that we are told we can no longer afford the public services we could afford when we were materially much poorer and must now do without them because as a society what was once possible is not any longer, precisely because we are (apparently) richer.
Lastly, it is claimed that the problem with the services we can no longer afford is that they are supplied by the state. If only they were subject to private sector discipline the problem in their supply would be solved.
Let me be clear:
1) The supposed productivity gains in manufacturing are largely false: they come at cost to the planet and the apparent profit from them which permits the payment of higher wages to those associated with them arises because we are failing to account for environmental degradation.
2) Those in the service sector are not inefficient. They are working under impossible burdens with insufficient resources because they do not get a subsidy from abusing the planet.
3) There would be no gain from privatising supposedly inefficient services. There would just be an attempt at profit extraction which would only make matters very much worse.
So what is the answer? Glaringly obviously it is to get the accounting for the cost to the planet right. Do that and what now looks to be very efficient would look like what it actually is, which is a despoiling activity running the chances of successful life on earth in the future.
In comparison, services would look to be incredibly efficient precisely because they do not wreck the planet and so do not attract the associated costs. What is more, it is they and not the manufacturing sector that would look to be where the future of affordable work is to be found.
The answer is straightforward. We need to redefine productivity so that it equates to using the lowest material input possible in a process. And we need to incentivise this by, firstly, accounting for the costs of planetary destruction and, secondly, imposing environmental taxes to actually reflect that cost on those companies that cannot or will not adapt to the world we live in.
Can we afford this? Of course we can. We know most manufactured items are of such little value that we throw them away sooner or later, with sooner becoming ever more commonplace. In contrast, health, education, the arts, entertainment and so on are what are really valuable.
Distorted definitions of productivity and poor accounting have inverted apparent values in ways that we all know to be instinctively destructive. It is not credible that we cannot afford education and healthcare because we are apparently richer. In that case what us wrong is the measure of wealth. And that is what we need to get right.
That's the theory sorted. There are now just the practicalities to deal with to get the world on an even keel again.
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“Those in the service sector are not inefficient. They are working under impossible burdens with insufficient resources because they do not get a subsidy from abusing the planet.”
My problem here is that this includes those working as economists; and accountants in the major accounting firms, and management consultancies. There are lots and lots of service companies that I spent my business life baffled that they could make a living out of what little they actually did, or added value to anything, save a superfluity of guff; but made lots of money and presented themselves as experts on pretty well everything (their professional representatives seemed to be CEO of just about everything – in technical and scientific sectors or whatever; accountants have become the business polymaths of the age). Forgive me, but I am struggling with this …….!
Hang on, I carefully caveated this
I referred to services linked to manufacturing and those that are not
Richard,
My comment was half serious, half light-hearted. I think the serious point is that just as a case can be made against manufacturing, a case can be made against services. It surely depends what they are doing; the nature of that which is produced? Gambling (or some aspects) may be considered a service industry. Manufacturing will include scientfic and medical equipment.
Bit the issue is a measure of productivity – not what is made
And that measure is wrong
A defence may even be made for the inrinsic value of gambling; NS&I for example; Premium Bonds have a modest element of the lottery. Over the long term an investor will likely receive whatever the rate offered; (unlike the lottery) but there is an element of risk of underperformance, or the chance of a subtantial prize.
“We need to redefine productivity so that it equates to using the lowest material input possible in a process.”
As a definition I think that plays into the hands of those you oppose. As a matter of fact most businesses follow that prescription, on cost grounds; but notice that those who produce high quality artisanship and artistry in the production of textiles, clothes or furniture (just for example) if they were required to limit their creativity by an equation establishing the limit of material input.
I understand you intention, which is sound; I remain sceptial of the means or definition you offer.
I don’t agree with you
They minimise input in proportion to price
They maximise it in proportion to labour
Very diffewrnt things, I think
Your musing is amazing – good post.
The other thing – which I think you touch on – is the link between production and services that is manifests itself as a cost of production – the health and other social impacts of production – on services.
Some examples:
People who have been made sick by our industrial model – from people suffering from coal and asbestos production/utilisation right up to those of us who are choking on the air we breath because of the ‘great car economy’ who present at health services.
People who are fleeing from war – fed by the armaments industry who put pressure on other services (border controls, immigration, health services etc.,) or lose limbs due to land mines and unexploded ordnance.
People who are going to have to move because of climate change – rising sea levels and places becoming too hot to live – who are going to need services to help them (one would hope they will be there!!).
As you say, the production part of these processes incur it seems no charge on these unreported causal factors – they are ‘blameless’ within the current mode of accounting.
How often have we seen the principle – ‘the polluter pays’ ignored or skipped around?
But also, how short sighted to under fund services?
But then again, it’s the passive equivalent of pulling up the drawbridge and also obtaining ‘channel shift’ on demand to the private sector as my recent forays into the NHS seem to be telling me.
Fascinating idea, and I agree that accounting for environmental impact as well as cash flow would force a re-think of many presumptions about efficiency and productivity.
However I don’t see your generalisation holding enough to use as a basis for a new economics comparing sectors. For example, healthcare with all its single use (sterile) plastics hardly has a low environmental impact. However if we had the numbers, that alone might enable behaviour change.
You’d rather use non-sterile items?
This is an re where plastics are needed
Of course the sterile goods are objectively needed. What I was pointing out was that any inverse relationship between productivity and environmental cost doesn’t work paticularly well if you dig down.
But the first thing has to be being able to put a number on environmental cost, which in turn needs an accounting convention acceptable across the world. Which I think is part of what you are saying.
Sorry: I disagree
I think it works incredibly well. The material input into the NHS is tiny compared to the labour input
Ditto education
The opposite is true for manufacturing
That generic difference is what is matters
Splitting hairs does not change the generality
And we don’t need to put a num,ber on the environmental cost: we need to require that companies do so
https://materialdistrict.com/article/turning-plastic-back-into-oil/
Plastic is so very useful, applicable and adaptable for soooo many purposes, it is what we do with it afterwards that is causing the planet problems. This closed loop of re use is brilliant, but not appreciated by fossil fuel producers of course !
To be honest, I am not sure that I see the linkage between affordability of public services and manufacturing productivity…. but you do make sensible points on each.
Personally, I have always struggled with productivity measures. They seem to make sense in (say) a coal mine – how many tonnes of coal dug per miner per hour worked. But for information industries it is not so easy – modern connectivity means my output is greater… but is it merely because I can check my e-mail at home… and so work longer hours.
How do you measure the productivity of a nurse versus a banker? In general, I find productivity data pretty meaningless.
What IS clear is that when we use the word “Productivity” we really (nearly always) mean “Labour Productivity”… and this laziness of language says all you need to know about attitudes towards resources/environment.
You think we need to consider “resource productivity” along with how productively we use labour – and should include any other “negative externalities” (eg. dumping waste etc.).
I agree entirely.
The problem is that in a modern global economy it requires global agreement or at least tariffs on imports that come from “lower standard” countries.
Despite these problems, the starting point must be to try and measure this. And the World Bank does (sort of); a kg oil equivalent delivered (PPP adjusted) USD 3.5 in 1990… and 25 years later it delivered USD 8 (not sure why the data stops there). We need to go further and consider/measure other “inputs” – not just oil and labour.
What you are forgetting is the power of money as a measure
It’s not being used for transactions here
Nor is it a store of value
It’s just being used as a relative measure
But the manufacturing ratio is distorted by a big subsidy to material costs and the services ratio is not
And that means as a measure it is, as I would put it, CRAp, or a completely rubbish approximation to the truth – and yet it is changing behaviour
And that is deeply dangerous
… but money is a poor relative measure.
By that measure, doubling nurses pay would make them twice as productive over night (as they their “output” is measured at cost, I believe). Bank profits are cyclical – are bankers more productive in “the good times”?
…. and that is before you get to any distortions related to not accounting for materials/resources negative externalities etc.
I guess my point (perhaps not well made) is that “Productivity”, on the surface, sounds a good thing to increase – who would not want to be more “productive”? But the current measure, as a measure to base policy on, is a nonsense at so many levels.
“Those in manufacturing assume that abuse of the environment has no cost”. True & policy is lagging.
The EU has taken a tokenistic approach towards environmental impact via initiatives such as – “the circular economy” in which “stuff” is recycled. However, this largely misses the point, that, most “stuff” could be built to last & for in-field service.
Taking the UK and 23 million households most have a fridge and washing machine & vacuum cleaner. A majority also have a freezer and dish washer. White goods have “service” lives in the range 12 to 16 years. Which points to something in the range of 5 million items of white goods scrapped per year – oops sorry “recycled”. Technology in this area is at a point where, with appropriate design most of the kit could be field repaired and using appropriate materials (stainless steel frames/panels) would last for ………centuries. For example a fridge or freezer could be built with vacuum panels (using aerogels) minimal cold loss & thus low elec consumption. Washing machines (and dishwashers) could be designed on a modular basis – allowing efficiency improvements to a given module whilst still allowing improved modules to be exchanged in the field.
The above will not happen for as long as white goods mfus are allowed to follow the path “make-it, sell-it, service-it a bit, scrapped/recycled, sell a new one. EU efforts in this area are at best tokenistic and flooded by lobbyists from the white/shite goods mfus who claim it is all too difficult. We could also have a discussion on cars, battery bikes etc etc.
I make furniture as a hobby. I have cast iron planes that will last centuries – the only changes being to the cutters. In a related area, chisels have moved to being made out of high-speed steel – which means they keep their edge for ages (bought a set of Japanese ones last year – heavy use – still have not needed to sharpen them).
We have the tech to minimise envo impact and footprint, what is preventing this happening is lobby groups and political invertebrates & frankly, a can-do attitude.
So true
A useful analysis, revealing some of the ways conventional economics have led us to our current problems.
The financialisation of everything – even whole ecosystems – can only exacerbate the situation.
So many things used as “KPIs” are utterly nonsensical. It never ceases to amaze me that supposedly intelligent & successful people are fooled by the whole “performance measurement” industry.
As soon as something is used as a Key Performance Indicator, any manager worth their salt works how to game the system, and then gets back to keeping the show on the road, in the face of the worst their boss can do to them. It hadn’t really dawned on me before that the whole “money” thing is just another KPI, if you don’t need the income to pay essential bills.
I would also add that public sectors such as education and health make a huge and fundamental contribution to the productivity/profits of private sector industries. Yet, this isn’t recognised on their accounts. Even far less enlightened politicians of 150 years ago recognised the need to invest in public funded education and health if Britain was to maintain its position in an increasingly competitive industrial world.
I broadly agree, but supply chains are hugely complex and global. Do we have anything close to the global governance structures that would be required to actually make this work? I don’t think we currently do which is why so far a carbon tax has been close to useless and why aviation fuel remains exempt from the taxes which are applied to other fuels. And those are just simple cases…
Unless we imagine it is possible it will never happen
That is how change happens
True, but the ideas around ecosystems services and costing environmental externalities have been around for several decades now. In practice (at least for pollution) hard limits on emissions within different sectors have been more successful at reducing impacts than taxation or costing based measures. Can we imagine the governance structures that will actually make these costing based measures work in practice? I confess I work at the science end of this so not fully aware of the literature, but I don’t see these structures developing or even a vision of the framework required. Unless you can point me to any further reading…
Check out my sustainable cost accounting.
https://www.taxresearch.org.uk/Blog/2022/03/31/accounting-for-environmental-change-the-corporate-accountability-network-issues-a-new-draft-financial-reporting-standard-that-says-its-time-to-account-for-net-zero/
“There are now just the practicalities to deal with to get the world on an even keel again.”
Doesn’t a lot of it come down to Corporate Governance
There are several problems with corporate governance
(1) shareholders don’t exercise oversight
(a) Because so much shareholding is institutional there is a democratic deficit – the fund managerare part of the club and don’t represent the interests of the people that they are, in theory investing for. This is just as big a problem as union bosses wielding block vote
(b) a lot of share ownership is transient – shares are traded by computers instantly, the so called investors have no real stake
(2) The shareholders don’t actually have much power to carry out oversight
(a) in practice corporations have been captured by a managerial class of carpetbagger – they buy off the shareholders by paying dividends even when not justified, whilst doing this they pay themselves obscene amounts of money, enabled by share price manipulation, rigging renumeration committees and justified by spurious claims to need for incentives, and retention of talent
(b) an annual meeting isn’t much use, the non- executive directors are a revolving door drawn from the same carpetbagging group
(3) the culture and frame of reference is plain wrong
(a) corporates shouldn’t exist to maximise profit for the shareholders they should exist to do something worthwhile as a by product of which they make a return for the shareholders that is bigger than putting the money on deposit and will beat inflation
(b) instead of tolerating the business lobby do a 180 degree turn – since what companies do impacts us all we as citizens require some representation on their boards
Remedies for this – here’s my list – they may be rough and need refining (some are flight of fancy), but the point is it needs a different way of thinking and package of measures (its a system) – there is no one single fix
– Bonuses to be paid only when the money earned becomes liquid not when it’s just a paper profit – think about it – the fund manager won’t chase big bonuses and may want a long term return
– Fund Managers to be obliged to invest in their own funds
– Fund Managers to be obliged to consult their investors on key decision of companies they area invested in – or for views to be polled at the point of investing and a report back on how this has been undertaken to members
– Insist on a link between performance and pay – make it a legal reporting requirement to prove that the person being paid made the difference that is to be rewarded
– Make Corporation tax recoup the public subsidy of poor wages – we know through computer systems who works for who and how much they are paid in benefits – reclaim the benefits paid from the firms paying low wages
– Complete limit on top pay, after £2m make it 90%, or have a top:bottom earnings ratio, or both
– Enforce regulations but on the notion that limited liability is a reward for acting responsibly, including removal of that privilege. In any case remove the notion of the corporate individual, make the board members personally responsible for their areas of responsibility
– If we judge shareholding to be a serious undertaking we could perhaps introduce a minimum holding period. As an adjunct to this I’d exclude all the derivatives and other types of traded secures but the banks would have to be split and retail banking isolated from the casino. The only guarantees would be to protect retail banking deposits all other exposures to the market take the risk and can fail.
– Insist on board representation from all stakeholder groups (including the wider public), specifically the workforce, and the groups served by the products. To avoid cronyism have the candidates on a register (open to anyone demonstrating a stake) and select those to serve randomly using sortition (as for jury’s)
– Insist on a minimum % workforce share ownership
– Encourage alternative forms of organisation structure (trusts, partnerships, not for profit) by giving equal weight in law and encouraging conversion, perhaps dare I say it we could insist on conversion at a certain size e.g. Mr Bezos thank you for the public good you have created, we’ll take over now, off you go and do it again…
When it comes to the public sector.
It may be argued that the problems with outsourcing stem from the problems highlighted in Richards original blog post, fixing coprporate governance should remove those objections and also the public scrutiny/democratic deficit that arrises because of the use of commercial confidentiality to hide a multitude of sins from the people who are the service users.
There is a residual question about commissioning and being an expert at providing a service which Id be neutral about if the governance is fixed and learning organisation processes are adopted.
– Restore the Whitley calculus referred to by another in this thread
– Only outsource to companies that fulfil public benefit, sound employment, and governance tests (see above)
– For preference outsource to small, local companies, preferably worker coo-ps or public benefit corportations
Final comment (if anyones still reading) you cannot put a fixed monetary amount on things that are priceless. Trying to do so creates the risk of a perverse effect of trying to value things will encourage developers to offer compensation (which won’t be enough or appropriate) e.g. a tract of ancient woodland cannot be replaced with a few acres of saplings in a totally different place – but thats what you could get.
Thanks