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Economic productivity - The art of being useful

Apr 29th 2016, 14:25 by Buttonwood

ONE of the economic mysteries of recent years is why productivity gains have

been so slow. It is a big issue for the developed world since, with workforces

likely to stagnate or shrink as the baby boomers retire, productivity will have

to do all the work of generating economic growth. The pessimists, led by Robert

Gordon, argue that modern technology, like the iPhone, is nothing like as

transformative as late 19th and 20th century innovations such as

electrification or the car. The optimists say that mankind is only just

beginning to exploit the potential gains of the internet and that GDP measures

may not be capturing all of the recent gains.

A new paper from the Kansas City Fed highlights a very simple reason for recent

sluggishness; that the economy has seen a further shift to services. American

manufacturing workers are 10% more productive than the average; miners (another

sector to lose ground) are more than twice as productive. The share of hours

worked in manufacturing has been trending down for three decades but slipped

further in the last two years; mining employment (this includes oil) has

dropped from 904,000 in September 2014 to 720,000 in March 2016. By itself,

these changes may have knocked 0.7% a year off productivity.

All this recalls the old feeling that those who work in manufacturing are

simply more "useful" than those who work in services. Economists tend to

pooh-pooh this distinction; a manufactured plastic bucket is hardly more

valuable than the software that allows us to navigate, for example. The

anti-service prejudice may simply be a relic of an earlier age when coal, steel

and cars were the big employers. Go back in history even further and some

people argued that farming was much more important than manufacturing.

Still, there are some tricky questions. Productivity in the services sector is

much harder to measure (what's the output of a call centre?) and sometimes

harder to improve (would a 5-minute haircut be better than a 30-minute cut?).

Manufacturing generates lots of spin-off service jobs, from the accountants who

audit the firm's books to the shopkeepers who sell the resultant goods or the

restaurants that feed the factory workers. How many service jobs would

disappear if the manufacturing sector went bust?

Your blogger left college in 1980 with a group of friends, many of whom have

gone on to be successful in their chosen fields. But I have occasionally raised

the question: "Which of us does something useful?" There is a lawyer, a

chartered surveyor, a banker, an ambassador and a humble hack. All of us,

arguably, are not primary generators of wealth, but leeches dependent on the

real wealth generators. One friend was an engineer a real job in the classic

sense (he built stuff for the railways) but eventually became a consultant. My

friend the vicar could be the most useful of the lot at least he provides

spiritual sustenance.

Of course, I am simplifying and exaggerating. All economic activities are

dependent on someone else "the world is a circle without a beginning and no one

knows where it really ends" as the kids in Lost Horizon sang. The people who

manufacture iPhones are arguably the secondary wealth generators behind the

people who designed the gadget and wrote the software for the apps. Services

clearly create wealth. And there are other jobs that are not narrowly

"wealth-creating" in the financial sense but are vital in the societal sense

doctors and teachers, for example. Still, one wonders whether an ever-smaller

manufacturing sector supporting an ever-larger services sector can generate

sufficient growth.