Productivity: The Mother of (Nearly) All Good Things

4 July 2011 at 8:57 am 7 comments

| Lasse Lien |

The mother of all good (material) things is productivity growth. Competitive advantage, firm level growth and survival, profits, economy-wide economic growth, job creation, and destruction, etc. are all outcomes that depend critically on relative productivity and productivity changes. So if you understood productivity really well, you would understand a lot about (material) outcomes across firms, industries and countries, too.

Also, if one wants to advance “the human condition” it is presumably better to advance the understanding of productivity than profits, since profits are contaminated by market power. Profit maximization  is good because – or to the degree – it tends to raise productivity. So while profit maximization and competition are means, productivity growth is the goal.

Though few would argue against the fundamental importance of productivity, productivity is nevertheless quite rarely used as a dependent (or independent) variable in strategy, organizational economics, organization theory, leadership, innovation, etc. The reason is probably that the considerable problems associated with  measuring productivity has scared us into focusing on more easily observable variables, such as accounting profits, Tobin’s Q, EVA, sales growth, survival, etc.

However, there is a large literature in economics that attacks productivity head on, and tries to elucidate its determinants. Though there is an unfortunate bias towards manufacturing in this literature (due to measurement issues), the findings from this research stream still makes extremely interesting reading (IMHO). Here is a recent review of the key findings from the past decade:

Economists have shown that large and persistent differences in productivity levels across businesses are ubiquitous. This finding has shaped research agendas in a number of fields, including (but not limited to) macroeconomics, industrial organization, labor, and trade. This paper surveys and evaluates recent empirical work addressing the question of why businesses differ in their measured productivity levels. The causes are manifold, and differ depending on the particular setting. They include elements sourced in production practices — and therefore over which producers have some direct control, at least in theory — as well as from producers’ external operating environments. After evaluating the current state of knowledge, I lay out what I see are the major questions that research in the area should address going forward. (JEL D24, G31, L11, M10, O30, O47)

Syverson, Chad. 2011. “What Determines Productivity?” Journal of Economic Literature 49(2): 326–65.

Entry filed under: - Lien -, Papers, Recommended Reading. Tags: .

Institutions and Political Economy Group Asset Sales and Financial Distress

7 Comments Add your own

  • 1. Marcus Linder  |  5 July 2011 at 1:43 am

    Good point about productivity rather than profits being the desirable end. Though when talking about improving “the human condition”, it wouldn’t hurt to add a footnote about the desirability that the production being improved should be somewhat sustainable as well. After all, productivity is presumingly about how much one gets out of a process given a certain amount of input, usually in terms of capital. Be that human, financial or environmental capital.

  • 2. Lasse  |  5 July 2011 at 4:07 am

    I agree Marcus. You could argue that a perfect measure of productivity should include all externalities, both positive and negative ones – for both present and future generations.

    It is interesting to reflect on what the ultimate/at the end of the day/final dependent variable is (or should be). I guess human happiness is a prime candidate, but even for human happiness there are questions related to the happiness of the present generation versus those of future generations. I mean how do you discount the happiness of future generations? Or should you discount at all?

  • 3. Peter Klein  |  5 July 2011 at 9:53 am

    A recent conversation with a hard-science colleague reminded me that they define concepts like productivity and efficiency in the engineering, rather than economic, sense. Perhaps another reason management scholars are wary of productivity measures is that they associate them with the operations research department, with physical, rather than economic value, notions of productive efficiency. It’s good to remind everyone that productivity, in the economic sense, is about creating economic value, not producing a bunch of stuff that sits on store shelves or creating really cool gadgets that engineers love but consumers ignore.

  • 4. Randy  |  5 July 2011 at 12:37 pm

    I like the post, Lasse. I don’t know whether to be sheepish about the fact that I force all my grad students to read M. J. Farrell’s classic (1957) on productivity measurement (http://www.jstor.org/stable/2343100) despite all the alleged progress on productivity published since.

  • 5. Lasse  |  5 July 2011 at 4:50 pm

    Randy, you should be proud. Actually, I feel sheepish about not doing the same….

  • [...] Productivity: The Mother of (Nearly) All Good Things – via Organization & Markets- The mother of all good (material) things is productivity growth. Competitive advantage, firm level growth and survival, profits, economy-wide economic growth, job creation, and destruction, etc. are all outcomes that depend critically on relative productivity and productivity changes. So if you understood productivity really well, you would understand a lot about (material) outcomes across firms, industries and countries, too. [...]

  • 7. Mental Model: Economics « Sportgamma.net  |  12 July 2011 at 5:52 am

    [...] “What Determines Productivity?” by Chad Syverson, Journal of Economic Literature 2011 49(2): 326–65. [...]

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