Human productivity

Productivity Evan DavisIf I have learned any important lessons about economics (since I gained my degree in the subject over 35 years ago) they are these.  One, there is a huge gulf between how the theory is taught and how economic policies are formulated (although that could equally apply to management degrees). Two, the dichotomy between micro and macroeconomics is false and complicates matters (in much the same way as the false distinction between ‘short term’ and ‘long term’). Three, economists think their ‘science’ can progress without agreeing on working definitions (HR suffers in the same way with ‘engagement’).  None of these are presented here as revelations but they are all barriers to learning how to deal with fundamental problems in any economy and, while I accept that my chosen subject is the ‘dismal science’, it cannot afford to be discredited.

A particular case in point is the topic of productivity.  Since the industrial revolution, productivity has been closely monitored because an unproductive economy is a failing economy.  So why is productivity suddenly the hottest debate in town (see several links below)?  The emerging consensus appears to be one of confusion.  No one seems to understand the apparent phenomenon of UK’s declining productivity and, as Matthew C Klein remarks in the FT (8th June 2015) it is a general problem: –

“Adding to our confusion is a fascinating new paper from the National Institute of Economic and Social Research, which shows the UK productivity problems aren’t concentrated in any particular sector…” (from ‘Banks, businesses or the bust? Deeper into the UK productivity puzzle’).

Maybe a mature perspective can bring some clarity and deeper understanding?

The Maturity Institute’s (MI) perspective on this debate is that it is incomplete and immature.  It is incomplete because it has so far excluded any measure of the value of human capital.  It is immature because MI research reveals very clearly that management today has signally failed to account for the value of people in the productivity equation.  We need to resolve these two issues if we are to get much closer to solving the productivity puzzle.

At MI we start from agreed, working definitions.  The definition that focuses everything we do is value. We define it simply and it applies to the short and long term simultaneously. Profit declared today is meaningless if it brings comcomitant losses further down the road (or fines in the case of the banking and pharma sectors).

Value comes from a combined measure of output, cost, revenue and quality. Focusing on just one of these variables, in isolation (like George Osborne trying to squeeze public sector wage costs), will satisfy neither short term goals (shorter NHS waiting lists) nor those for the longer term (a sustainable NHS).  Likewise, moving a company’s HQ to benefit from lower tax rates might instantly line the pockets of shareholders but does diddly-squat for human productivity today and probably even less tomorrow.

Then there is the general issue of management immaturity; defined as a state where shareholder value not only eclipses every other, possible, organizational purpose but also becomes a zero sum game.  The reason productivity is back at the top of the agenda is because management is getting more difficult, not easier.  Yes, huge profits can come from market domination or sheer scale but where is the extra value that can be attributed to the increasing human productivity that will come from innate creativity, innovation and people working in harmony as part of a whole system?

The industrial revolution saw huge increases in productivity because of machinery and education; for the last 250 years that has been the formula for economic growth.  Where men, women and machines work in harmony we still see surges in productivity (as in the IT revolution) but we also see a huge waste of human capital (and don’t be fooled by Google and other tech companies’ claims to have reinvented people management). In education, has the exponential growth in university places added equivalent value (go and look at the graduate unemployment and under-employment figures). In industry, why have so many pharma companies failed to get fresh pipelines of life-saving drugs from their legions of PhD qualified researchers?

Unless executives, management scientists, economists, accountants and government policy makers work to agreed definitions and start asking the most difficult, most mature, questions about human capital and human productivity then the current debate on productivity is unlikely to be resolved to everybody’s benefit.  If productivity is not about benefitting the whole of society then it has not only lost its meaning but its validity and legitimacy as well.

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