Breaking the Mold: the U.S. Productivity Miracle

By Cheryl Grey, on December 15th, 2008

All other things being equal, high productivity growth—a rise in the ability to create more with less of anything—remains the central driver for a nation’s economy, and United States productivity is world renowned (and envied). In the 1990s, productivity growth in many other economically-developed nations remained flat or even decreased; for example, in Spain productivity in service-related industries slowed -1.2% between 1995 and 2004. But in what some economists are calling a productivity miracle, the U.S. managed a 1.3% acceleration in the same field at the same time.

This productivity miracle is even more impressive considering the concept of convergence. Major technological advances generally happen in economically developed regions, particularly the ones such as the U.S. and the Eurozone that sponsor fundamental (non-patentable) research. Because it’s
easier to mimic somebody else’s success rather than create your own, developing countries tend to copy the innovations of their more advanced neighbors and ride on their technological coattails, leading to higher rates of productivity growth.  However, as these nations become richer themselves, their growth rates tend to slow to match everyone else’s. So while productivity growth rates are high in China (6.4%), Russia (3.7%), and South Korea (3.2%), it’s because they’re toward the beginning of that convergence pipeline, with a long row to hoe before they begin to slow.

For the U.S. to break out of that mold implied something unusual happened. Many researchers studying the U.S. productivity miracle are claiming it was caused by the concurrent rise in technological innovation,
especially in information technology, communications, and the Internet. Although it’s true that European firms also manufacture computers and produce software, and have equal access to the Internet, the  researchers are concluding that U.S. corporations more fully exploited these technologies during the 1990s. Their utilization in business to develop productivity-enhancing manufacturing and management techniques, such as just-in-time inventory control, boosted output per worker at rates unexpected by economists.

Among the rather small number of companies that produce Information Technology, the productivity growth rate between 1995 and 2001 was similar between the Eurozone (1.6%) and the U.S. (1.9%). However, among the sectors of industry that utilize the technology, such as banking, business services, and wholesale and retail trade, the difference was much more pronounced between Europe (0.0%) and the U.S. (3.5%). Across all industries, productivity growth remained lower in Europe (1.0%) than in the U.S. (2.0%).

A discussion paper published by the Centre for Economic Performance in April 2007 (authored by Nick Bloom, Raffaella Sadun, and John Van Reenen), entitled “Americans do IT better: US multinationals and the
productivity miracle,” found that this demographic extends beyond international borders. Within a few years of the transaction, the authors demonstrated, U.K. companies purchased by U.S. corporations became significantly more productive than either U.K. firms purchased by other foreign corporations or their domestically-owned counterparts, which remained the least productive firms within the dataset due
to their dependence upon traditional methods of doing business and low utilization of IT.

So it’s not just the technology, nor is it merely the creation of more powerful computers at lower cost, but something unusual happened to kick U.S. productivity into a higher gear since the mid-1990s. Specifically what was it?

The CEP discussion paper gives special emphasis to the flexibility of the U.S. business model in adopting technological changes to suit its needs and increase its efficiency. Although this characteristic doesn’t
give the U.S. a permanent advantage (nor make it inherently superior), it does provide multiple short-term and therefore temporary advantages over more traditionally inclined or commercially conservative nations.

If flexibility is the key to the U.S. productivity miracle, then there are two possible scenarios for the future: one, other regions of the world, in particular Japan, the U.K., and the Eurozone, may begin registering similar levels of growth as they adopt IT-enhanced business models, perhaps modified to suit their cultural needs; or two, if the world economy remains in a state of technological flux, the more flexible U.S. model could easily retain its advantage or gain another, fresh one as new innovations emerge and are adopted in turn.

As history shows, technological molds are made to be broken.



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The Science Of Decision Making

By Dan McLaughlin, on December 15th, 2008

Basketball fans are in their glory as their heroes take to the court. The season is underway and the stars are making news. They make sinking three pointers look easy, almost effortless.

None of those stars are mechanical engineers. They know enough about the laws of nature, however, to find the basket from twenty five feet out. They instantly processes all of the information necessary to release the ball at the exact moment, at the exact angle and with the exact velocity to find the net. The laws of physics can describe what happens in detail, but that knowledge doesn’t make it happen. Only their experience and decisions from moment to moment make it happen.

In the same way, the laws of economics describe what happens in daily life, but when you go to the market, you don’t need to be an economist to successfully provide for your family. Like our basketball players, you instantly process all of the personal preference and market information needed to make decisions.

Mechanical engineers use their knowledge of cause and effect to understand a certain result, the trajectory of a basketball, for instance. If the same conditions, inputs and processes are used, the result will be consistent and predictable. A basketball, backboards and hardwood floors have strictly identifiable characteristics. They will always react the same way to applied conditions.

Social engineers, on the other hand, try to use the laws of economics to bring about what they think is good. To a certain extent, that is possible, because we can anticipate the general reaction of the markets to external forces. There are multiple problems with this engineering approach, however. Real people have their own goals, ambitions and preferences. They have their own ideas of what is good. They don’t always do what is expected. There will be unanticipated disasters, hurricanes, droughts, business failures and government interventions that can dramatically change people’s perceptions, expectations and needs.

Physical scientists work with known quantities and constants. They can control the inputs and precisely describe the reaction of materials. In the social sciences, however, there are far too many variables and unknowns to arrive at any precise cause-effect relationships. Scientists can’t possibly know and measure all of the far reaching effects of actions on each member of society.

Even if they were able to perfectly direct the society to bring about the desired good results, who’s conception of good should be used? With 300 million people in this country, there is a wide divergence of opinion of what is good and appropriate. The more effective the social engineers are at imposing their own view of what is good, the more offensive and abusive they are to those that oppose them. People have a right to act in their own interest as long as they don’t infringe on the rights of others.

While the primary effects of market manipulation are somewhat predictable, secondary effects are usually hidden, but often just as or more significant than the primary. In the social realm, conditions and preferences can vary minute by minute. Humans are acting beings. They are not controllable, and react in different ways at different times.

In any event, the process of manipulation is necessarily political, and expediency is the rule, rather than what is good or right. The changes are guided by the selfish interests of politically powerful groups, and not by the general good, whether or not that good was known or even knowable. They will emphasize the here and now benefits to themselves or their group and ignore the negative consequences to other groups, or longer term effects. The use of political force to bring about good also assumes selfless leaders that act only in the public interest, an obviously unrealistic expectation to even passive observers of reality.

Many people claim to know what is good for the population, the citizens, the people, but the welfare of a population is maximized only when free people make free decisions without coercion from anyone. Economic freedom correlates with improvement in all measures of well-being. It is a rational consequence of the most fundamental elements of human action.

Scientists are trained to understand cause and effect, to explain what is. They can help individual baseball players or market participants achieve their goals, and players should use whatever knowledge will help them in their achievement. Scientists are, however, no more qualified than any other person to dictate to everyone what those goals should be. Decisions and opinions are not the realm of science but, rather, the realm of human choice. Humanity is always better off when basketball decisions are left to basketball players and market decisions to the market players, that is, you and me.



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