The productivity myth

by Alasdair Macleod, GoldMoney:

Every now and then, there’s a rash of commentary on national productivity. And for the British, productivity is all part of the Brexit angst, with the OECD, the Treasury, the Bank of England and Remainers all saying the average Brit’s poor productivity just goes to show how much they need the certain comfort of being in the EU. As Hilaire Belloc put it, we must hold on to nurse, for fear of something worse.

Only this week, the OECD came out with a paper repeating its disproved nonsense about the economic consequences of Brexit, even recommending Britain should hold a second referendum to reverse the Brexit decision. To back up its analysis it claimed Britain’s labour productivity is at a standstill, while that of France, Germany the United States and the OECD averages are all improving.i

Regular readers of my articles will know I have no truck with statist statistics, averages and the neo-Keynesian analysis that goes with them. The econometricians’ analysis of productivity is a prime example of why statistics derived from questionable information should be disregarded entirely, as I will show. You can prove anything with statistics, except the truth. The OECD, which is the source of the productivity statistics quoted by politicians, uses statistics not in a genuine search for the truth, but as a cheerleader for statism. Being based in Paris this institution is particularly sympathetic to the basic concepts of European statism. It’s a wonder they tolerate private enterprise at all.

This is the organisation that brings official statistical analysis of economics, while being funded entirely by self-interested governments. However, on the face of it, productivity should be uncontentious, and hard to criticise. GDP divided by the number of hours worked is simple. How can it be misleading? Read on.


The OECD’s approach to productivity

The OECD’s brief paper, Defining and measuring productivity, quotes Paul Krugman:

Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise output per worker.ii

Krugman implies in this quote that productivity is a function of government and therefore by implication not that of the employer. This is plainly in contravention of the facts: an employee only produces if he or she is employed by an employer for profit. It is up to the employer to make that decision, not government. That the OECD quotes Krugman confirms the OECD’s economics are in line with his thinking.

From here, the statistical errors commence, starting with the relevance of GDP. GDP is designed to capture final consumption, and underplays the production of goods of a higher order, for example machinery, by not recording the intermediate steps in production. This important point was recently recognised in the US by the introduction of a new statistic, gross output (GO).

GO is now reported quarterly by the Bureau of Economic Analysis, and it is nearly double the GDP number. Therefore, in the US, GDP per hour worked is roughly half the realistic measure of total production. GO confirms that using GDP in a productivity formula is outrageously misleading. But the OECD does not estimate GO, and it should be noted that different countries have varying degrees of intermediate production, which makes it impossible to compare them on a like-for-like basis anyway.

We can also expose the concept of labour productivity as baloney in our daily affairs. For example, if you are in retailing, you may judge your sales staff to be productive, because they produce sales. But most of the foot-fall into your store probably has nothing to do with the salesman’s skills. The window-dresser may or may not have contributed, and are the cleaners and accountants productive, along with the warehouse staff and the van drivers who deliver to the store? Taken individually, they are a cost, difficult or impossible to relate to final sales, which makes up GDP. This is why running a business is about teams of people with complementary inputs, and to record the production of individuals in GDP terms is nonsensical.

In a free market economy, arbitrage tends to even out returns on capital employed across the full range of businesses, of which labour is only a part. In addition to labour, there is capital investment in the establishment, plus equipment and working capital. Taking all these elements together, if one business line stands out in its profitability, it will attract competition. If another business line produces insufficient return, it will be closed and its capital redeployed. After all, all forms of capital are scarce, and therefore a valued commodity to be deployed properly.

When capital is not redistributed to better effect, it is nearly always because the state intervenes. The state doesn’t want businesses to lay off workers who are part of a failed production line. Instead, the state obstructs the redistribution of capital by subsidising the uncompetitive businessman. Government also penalises profitable businesses by sequestering profits.

Furthermore, different industries deploy their capital in different ways, so within the total the contribution from human effort varies considerably. A mechanic on an automated production line supervising expensive robots cannot be averaged with a park attendant.

The government’s own GDP contribution must be excluded from any productivity calculation, as it is a drain on genuine production.

The problem with statistics such as productivity is that everyone thinks they mean something. And, of course, the political class, including finance ministers, stand for nothing and fall for anything. That notwithstanding, let us ignore the fact that this econometric gem is only paste, and recast the figures into something more meaningful. Something that a businessman will find useful as a basis for comparison in the quest for the best jurisdiction to establish his business. Something that will guide him about whether he should relocate from Britain to mainland Europe.

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