Finally free to write on something besides the sucking black hole that is Brexit, I wanted to write on the other issue that seems to be a point of major hysteria on the part of the media in Britain; that is the “productivity puzzle.” The issue comes down to why an economy with almost stagnant growth with employment rising (we will discuss that issue later) primarily producing services (of various types) has low productivity. Moreover, as always in questions like this whose “fault” is the problem? Is it a problem or is it a consequence of a neoliberal export-led growth model? Why would increases in productivity occur and do capitalist producers actually want increases in productivity? Is this really an issue or are we looking at the situation in a manner that is misconceived?
The way in which I will share some thoughts is by going back to the basics of economic theory; the two writers who actually wrote the most on the question of productivity and economic growth are Adam Smith and Karl Marx. Smith’s discussion of the division of labour (and economic growth) and Marx’s discussion on the production of surplus value both address the issue of working conditions and increased productivity and the production of the surplus and/or surplus value enabling economic growth. Let’s begin there and see how much we can address the issue we are considering.
Every time there is a report on the state of the UK economy there is the inevitable discussion of falling unemployment, almost stagnant growth and the lack of growth in productivity (which of course relates to the stagnant growth). Weirdly, the people that are brought in to discuss this issue (invariably economists working for finance capital, i.e., banks) somehow miss the obvious basis for the issue which relates to capital investment and the nature of a low skilled, low wage economy in the period since the economic crash of 2007-8. Basing a recovery on low paid, low skilled labour has a cost especially if that situation is maintained over a long period of time (more than a decade).
What is productivity?
This is a good place to start. Productivity is the output produced per worker hour; given that this differs depending on techniques of production in use in different sectors and even within the same sector; average productivity is the measure that is used most often. So, if we are saying that a country has a lower average productivity as compared to another country, we are discussing how much output of goods and services are produced in one country per worker as compared to another.
Needless to say, how productivity is increased has been a topic of discussion since the beginnings of discussions on economic growth itself (we are going to look at Adam Smith’s discussion later). The question is whether this is actually a problem or is it a deliberate choice by producers in an economy riddled with uncertainty. Whether you want to increase productivity will depend on a whole host of things like levels of wages and profits (and the rate of profit or expectations of the level of profits), available choice of technique and whether you believe that the economic conditions warrant an increase in production of output of goods and services which you could sell at a price which ensures a sufficient level of profits. From the point of view of the capitalist system, these are the only relevant considerations. From the point of view of the majority in a society and given environmental considerations, we may instead want to concentrate on provision of social needs in an environmentally sustainable manner, rather than massive increases in output and profits. What we must always keep in consideration is the nature of the world economic system in which we are living.
Neoliberalism
Let’s start by placing the British economy in the context of a world neoliberal economic order in which manufacturing production has mostly been shifted to developing economies (with the exception of some highly skilled sectors like finance, aerospace, automobile, and pharmaceutical industries) and in which the predominate sector is that of service production rather than good production. Moreover, with the elimination of much of manufacturing and industrial production (in which increases in productivity are easier to understand and manage and in which most discussion has historically been based) under Thatcher and the following governments raising productivity becomes much more difficult.
In order to provide a basis to discuss the question, we need to understand the neoliberal economic model upon which Britain has been based and upon which the economic recovery has cemented in place.
In response to the economic crisis of 2007-8, wage incomes were stagnated or frozen and profits increased. This was not only done in the private sector (in which unionisation is much weaker outside of industry and manufacturing), but in the public sector where wages were initially frozen and then only allowed to increase slightly. Privatisation and outsourcing of the public sector weakened the power of organised labour to fight both wage stagnation and the attack on working conditions. Working conditions were also undermined using this process; the rise of temporary jobs, zero-hours contracts and sub-contracting destroyed the general labour market. As part of this process, the welfare state was also eroded; benefits were restructured and tied to conditionality of work. Additionally, benefits have been and remain frozen.
Additionally the manner in which the UK government decided to base the recovery, that is an export-led growth model where production of goods and services is based upon low wages and low skilled employment for sale overseas, has contributed to much of the productivity problem. Essentially, Britain was already following the route of a low wage/low skilled economy from Thatcher onwards; the crash only accelerated the phenomenon and much of the problem of productivity stems from there. This is first year economics and the fact that this is not discussed on the news is pathetic.
Moreover, the export-led growth regime also relates to not only having low wages as a way of cheapening costs of goods for export; the additional issue becomes one of consumption. If your economic growth is not dependent (or less dependent) upon domestic consumption of domestic production, then low wages needed for export growth are less of a hindrance to the economy and its growth. However, that leaves you in a situation where consumption demand is less of a driving factor of economic growth; instead what is more relevant is international demand for your services. So, what you are concentrating on relates to the export sectors rather than domestic producers. Encouraging productivity increases in export sectors is not necessarily something that the government or the Central Bank can do, rather that depends on the producers in those sectors and whether it is in their interest to increase productivity.
Of course, the service sector represents a broad grouping of things, including financial services (e.g., insurance, financial markets, banking), distribution (including retail), state services (e.g., education, health care). Some of these produce things for domestic use, some of it to cover social needs, many companies produce services for sale abroad; some require highly skilled workers, some low skilled with a minimal division of labour or used with capital. One of the biggest issues that needs to be mentioned (and deserves a massive amount of attention which cannot be done here) are the attempts by various governments to actually introduce private sector motivations on the public sector including rationalisation of skills and jobs, attempts to induce productivity measures that have undermined the initial purpose of the job (provision of education, healthcare) where the perceived measures of “success” actually may contradict the purposes of the work itself (think of all the various tests forced on children to measure the success of education and the shift away from teaching children how to learn to teaching children how to pass tests).
Google “productivity puzzle” UK and a massive number of articles come up. We find out that low productivity in Britain is an historical problem (compared to similar economies like France and Germany) and that this problem has increased in the post-crisis period.
Increasing Productivity?
I am sitting here with two of the greatest (and earliest) writers on productivity and economic growth sitting on my table; Adam Smith and Karl Marx. One interesting discussion (lasting all of 2 minutes) I had recently was with my MP at the meeting of our local Labour Party who talked about the economy and mentioned the productivity puzzle; he argued that the productivity problem was due to low wages and bad working conditions. This is a discussion in Smith’s theory of wages (adopted by modern mainstream economists as an efficiency wage model). Smith argued that in a growing economy, wages will increase (he assumes that workers will get part of the increase in productivity; a point of disagreement with Marx who argues that workers will only get this increase in wages if they organise and fight for it).
Smith argues that wages relate to the social subsistence (that consistent with common humanity, which differs between countries and over time), but that wages can actually go above this subsistence level in periods of economic growth:
“There are certain circumstances, however, which sometimes give the labourers an advantage and enable them to raise their wages considerably above this rate; evidently the lowest which is consistent with common humanity.
When in any country the demand for those who live by wages; labourers, journeymen, servants of every kind is continually increasing; when every year furnishes employment for a greater number than had been employed the year before, the workman have no occasion to combine in order to raise their wages. The scarcity of hands occasions a competition among masters, who bid against one another, in order to get workmen and thus voluntarily bread through the natural combination of masters not to raise wages.
[…] It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. In it not, accordingly in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest (Smith, 1776, I, viii, pp. 86-7).”
Smith then relates the growth of wages to the issue of increasing productivity and increasing economic growth:
“The liberal reward of labour, as it encourages the propagation, so it increases the industry of the common people. The wages of labour are the encouragement of industry, which, like every other human quality improves in proportion to the encouragement it receives. A plentiful subsistence increases the bodily strength of the labourer, and the comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high accordingly, we shall always find the workmen more active, diligent, and expeditious, than where they are low […] (Smith, 1776, I. viii, p. 99).”
Smith’s argument requires a growing economy with rising productivity to allow the workers to gain the portion of increasing productivity. This, as such, is not an explanation for low productivity; instead we need to turn to Smith’s argument on the division of labour to understand productivity and its growth. This situation that Smith raises is a result of high productivity, not an explanation of low productivity. Moreover, given the state of the British economy, with low levels of economic growth and low wages (they have only begun to start rising over the rate of inflation recently), it makes more sense to view the situation as almost stagnant. Moreover, in a stagnant economy, an increase in wages will mean that there is a decrease in profits; only in a situation where economic growth is increasing can wages and profits both rise together. On the other hand, the economy is not completely stagnant, so we could argue in favour of wage-led growth (thereby stimulating domestic demand as the basis of economic growth) rather than the fantasy of trickle-down or profit- led growth; in other words, abandoning the neoliberal model of economic growth.
So, addressing the issue of how to increase productivity means we need to look at the division of labour. Smith’s discussion on the division of labour is perhaps Smith’s most brilliant contribution to understanding the capitalist economy and its economic growth.
Essentially, Smith discusses not only the productivity of labour, but how it is increased under circumstances in which work itself is conducted to ensure that the workers actually produce as much as possible. Some of this concentrates on the skills of the workers themselves and what hones them, but a large part of the discussion relates to the investment of capital that workers then use in the production process. This is an important clue (which is developed by Marx in his discussions of the production of surplus value, both relative and absolute). This also addresses an important point which is the manner in which production is organised by capitalists rather than the workers’ skills themselves.
Smith argued that the greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity and judgement with which that labour is applied, are the effects of the division of labour.
The division of labour takes two forms: 1) the first is to separate the different trades and employments that enter into the production of a final commodity from one another; in this case, the same worker no longer is responsible for all the different stages of the production process. As an example we could examine the textile industry. The division of labour in textile production began with the separation of the industry into carding, spinning, weaving and dyeing of cloth. What is the work of one man in an underdeveloped economy is the work of several men or different firms in a capitalist economy. Prior to the industry being done in a factory, textile production was done at home in the spare time of agricultural workers as a putting-out system. What was done originally by one person began to be broken down even at this stage: children carded, women spun the cloth and men were weavers. The first part of this industry that entered the factory system was spinning due to the invention of the spinning jenny as the blockage for meeting the demand at that time lay in the spinning portion; 2) the second form of the division of labour concerns the rationalisation of work within a firm, that is, the separation of the production process within the same firm. In this case, let's look at the auto industry: the production process is broken down, and each individual on an assembly line merely does one step in the process of production of each part.
According to Smith, the division of labour enables the increase in the productive powers of labour leading to a massive increase in the output produced in society in three ways: first, the division of labour enables the increase in the dexterity of every particular worker as they are only concentrated upon one aspect of the production process (as such, their ability to do that aspect efficiently and properly is developed); second, the division of labour enables the saving of time which is lost in passing from one type of work to another; and third, the division of labour will lead to the invention of machinery which facilitates and reduces the amount of labour used in the process of production, this enables one worker to do the work which was formerly done by many (Smith, 1776, I.i, p. 17).
What becomes very clear in this discussion is that a low skilled, low wage economy with a minimal division of labour, is an economy based upon the very opposite of those things which will lead to higher productivity and hence economic growth. In Smith, economic growth (brought about by the increase in the division of labour) does run into some limits; in Smith that relates the limits of division of labour to the extent of the demand for the products produced in that economy. For Smith, the importance of domestic demand and the growth of domestic demand to the division of labour are essential and enables the economic growth of nations.
The question we need to ask is this relevant for economies in which growth is export led? Probably, as it limits the amount of control for domestic economic growth and limits the amount of domestic consumption forcing dependence on realisation of profits on foreign markets. But theoretically, there is no reason why we cannot sell what we produce domestically for goods and services produced overseas, but in a period of economic crisis control over employment and increasing production is limited by overseas demand rather than something done domestically; but this does not prohibit job creation in the state sector or production of services destined for social needs to be done by the state. In many senses, this relates as well, to the usefulness of Keynesians counter-cyclical policies; if we get the majority of goods for domestic consumption from overseas, we have more limits to increasing production in periods of recession; of course we can introduce them and employ more workers when needed by government, but is this a policy that we want to be reliant on rather than actually decide to have socially needed production done by the state/public sector anyhow? However, we need to understand that this is a serious impact of globalisation and neoliberalism on domestic economies as realisation and profits are not necessarily reinvested in domestic economies but overseas. This combined with the difficulty of taxation also impacts upon the ability of governments to actually intervene in periods of economic crisis.
I am sitting here wondering whether we even need to discuss Marx in this context. Marx’s discussion of the production of surplus value (and hence the ongoing accumulation of capital and economic growth) comes to similar (although more advanced) conclusions to Smith. The production of absolute surplus value based on the extension of the working day or the intensification of the process of work and the attempts to decrease the amount of time required to produce the value socially necessary goods (the production of relative surplus value) enabling more time spent on production of surplus value all require the usage of capital (in the form of technical change or introduction of machinery) to augment the amount of produced by workers; the obvious role of capital investment is already clear in Smith’s discussion of the division of labour. So, the issue of investment is already clear and that is the primary problem with this issue. The question also arises are the limits to use of new machinery or changes in production techniques in the service sector; clearly there have been changes over time. The use of computers has certainly altered the capital/labour ratio in service production.
Perhaps we can discuss the issue of technical change raised by Marx and when or whether it will be employed will be more useful. Shaikh discusses Marx’s theory of technical change and how it relates to the process of competition.
As Shaikh argues:
”Productivity growth is essentially a measure of technical change and its steady long-term rise speaks to the fundamental role of technological progress in capitalist development (Shaikh, 2016, p. 60).”
He clarifies in footnote 2:
“Productivity can be raised in the short run by intensifying the working day (i.e., speed-up) and by lengthening it. But both of these methods face practical and social limits. Thus, over the long run, changes in the manner in which production is undertaken (i.e., in the technology) account for the bulk of productivity growth (Shaikh, 2016, p. 60).”
Essentially, when we are talking about productivity, it is technical change that is ultimately what we are discussing; placing this discussion in the notion of real competition He then links this discussion to the role of real competition within an industry (producing the same good) and between an industry (towards the formation of a general rate of profits); it is competition itself which drives technical change within an industry and whether or not techniques of production are employed. Not all techniques of production are automatically adopted and generalised, much of that depends on the costs of production (will it decrease costs or will the costs of introducing a new technique be worth it if it impacts significantly on potential profitability).
If increasing the amount of capital (in the sense of a new form of machinery or a revolutionary technique) costs more than simply hiring more labour (if wage costs are low), it makes no sense to adopt it. Moreover, various techniques of production can co-exist; whether you adopt the new technique will not only depend on costs but whether you think that you will be able to realise the potential profits produced. If wages are low and workers can be easily sacked and hired, why would you introduce techniques of production that require greater capital outlay?
Rising Employment?
This brings us to the discussion of “rising employment” that we have been seeing. On the one hand, the definition of employed being used in Britain is somewhat problematic. During the period of the Con-Dems and under Cameron what we were seeing in increased employment was two-fold. On the one hand, much of the increased employment was self-employment which is extremely precarious as it is dependent upon demand for what you are selling and of course, for women it was part-time self-employment (so people that lost full time jobs became self-employed, men in full-time self-employment; women in part-time self-employment). We also saw rising numbers of women working more than 1 job around the times that children were in school; so, mothers brought kids to school, they worked one job during that time; once the kids were finished at school, they picked them up, fed them and then had another job later. On the other hand, those that were working in apprenticeships and forced labour schemes to receive benefits (and which were paid in benefits) were considered as employed even though their incomes were paid in government benefits. What is also happening recently is that being employed means that you are working 1 hour per week (again as part of benefit conditionality, you are required to work a certain number of hours).
For the purposes of discussion (and statistics), yes, you are working a defined number of hours, but what has happened is that more and more working people are living in poverty. The nonsense espoused by the Tories of working your way out of poverty (a favourite line of our PM whenever someone raises the misery in which working people are living in Britain) essentially means that your incomes are low, you are working in unskilled jobs, and employed for insufficient hours to actually be able to survive on your work alone. In fact, food banks are increasingly being used by those in work rather than the unemployed; both employed and unemployed are increasingly dependent on benefits to survive.
Uncertainty and Expectations are relevant
Moreover, in a situation where after a decade of keeping wages and wage incomes low and where workers have weak trade unions and the conditions of work are undermined, why if you were an employer would you increase capital outlay? This certainly would be done if you were expecting periods of economic growth; but that is not really the case, is it? Let’s use the word to be precise; Brexit. If you are a capitalist producer of services, where global economic growth is stagnated (and let’s not forget that incipient trade war between the US and China), and even more so, where you have absolutely no idea what the situation following (what is probably the ultimate in uncertainty) Brexit and its impact on remaining industry and manufacturing and even sale of services like finance will be? So, cheap unskilled labour can be taken on and sacked; if you need highly skilled labour in production, you probably will also try to keep that labour on hoping for an uptick in demand or growth in the sector (finding highly skilled workers is also difficult), this is where the issue of labour hoarding becomes relevant (and it has remained so since the crisis of 2007-8; capitalists held onto skilled labour rather than sacking it); this also would impact productivity as skilled labour (that is less productive) is kept on just in case.
So, in some senses, what has become relevant is something that was addressed in his discussion following a capitalist crisis in Chapter 25 (The General Law of Capitalist Accumulation) in Volume I of Capital where he discusses the creation and maintenance of the relative reserve army of labour; labour is drawn into production when needed and thrown out when it is not.
On the other hand, what is also now relevant as well was not addressed by Marx in detail, that is the issue of uncertainty and for that we need to move to more modern discussions of economics and growth theory in Keynesian discussions. While Marx (as did Smith in relation to the gross product) did recognise that production does not exist as an end in itself; rather that production in the context of the capitalist economic system relates to realisation (or sale at a good price) of the good and service produced and that is not guaranteed once we leave the safety of Say (or Mill’s) law of markets. For a discussion on that we need to expand our discussion beyond our initial considerations.
No conclusions, just some more thoughts
This whole discussion has arisen around what has been described as a “productivity puzzle” by economists and the media which is trying to understand why productivity is low in an economy in which services are the primary sector of production and in which growth is almost stagnant. Is this a puzzle or is this a result of the nature of neoliberal economic production and the race to the bottom in the British economy?
The thing that I find so weird is why this is considered a puzzle; in many senses what we are seeing is definitional. Low skilled and low paid workers have low productivity. In a situation where we are producing mostly services raising productivity is even more difficult. In the case of the public sector, attempts to force productivity measurements have often impacted the services themselves being forced into something that they are not designed for rather than providing an improvement of the service itself; why are the rules of profitability relevant for something that is not based in profitability itself? Anyway, we have seen that those making decisions in the system have known how to raise productivity; the issue becomes more of why they are not doing so and why choice of techniques are in use and others not.
What are the issues that we have discussed so far? We have raised the issues of the role of the division of labour in raising labour productivity; we have raised the question of technical change and its importance in raising productivity. These are two dominant themes historically; what is important to note is that low labour productivity does not imply that there is a fault at work on the part of the working class (irrespective of how this is portrayed in the media) rather this is a consequence of the form of capitalist economy and economic growth that is predominantly in use.
In which directions do we (as socialists) think we should move towards (rather than the system’s own laws of motion)? On the one hand, the nature of the situation we are seeing is one in which large numbers of people in the economy are living in poverty in the midst of extreme wealth; this is not a by-product, but it is the nature of the economic system in which we live. On the other hand, productivity is something that is relevant for the system of production (and its growth); we can understand (if not fully explain) what is going on if not essentially finding a causal relationship (this piece only has some ideas, it is by no means conclusive). The issue for me actually is less interested in finding a solution but offering a different way forward. What is it that we want to do in a society run under different rules rather than the rules of a system based on inequality and exploitation? As socialists, can we restructure the situation to ensure social needs are met rather than the needs of the system? We can see where we are, but where do we want to go?
References
Karl Marx (1867) Capital, Volume I, Penguin, 1990.
Anwar Shaikh (2016) Capitalism: Competition, Conflict, Crises, Oxford University Press.
Adam Smith (1776) An Inquiry into the Nature and Causes of the Wealth of Nations, Volume I, Oxford Economic Press, 1976.