Can We Have Too Much Productivity Improvement?
From airlines to professional services, is improvement in productivity always a good thing, especially right now? Is it the ultimate answer for foundering economies? Or will it increase the ranks of the unemployed? You decide.
There was a wide divergence of opinion on this month's column. A surprising number of respondents concluded that an economy could suffer, at least in the short-run, from too much productivity improvement. But many suggested that the source matters, particularly if the improvement comes as the result of exporting jobs to China, India, and other developing economies. Still others argued that the issue relates to end objectives, not the means, of achieving greater productivity.
Jim Noon characterized the first point of view. He wrote, "The inevitable trap with ever-increasing productivity is the need [for] ever-increasing consumption. Unfortunately unemployed workers don't consume much of anything." Garry Emmons reminded me that "We examined this issue with HBS profs in a February 1999 HBS Bulletin article. ("Too Much of a Good Thing?" See www.alumni.hbs.edu/bulletin.) It does seem to be a problem, and getting more serious." Alejandro Ocana suggested that "productivity improvement [should mean], 'How much more can we do with the people and resources that we already have?' and not 'How can we make more with less?'"
The rise of the global economy and the Internet were cited by some as being responsible for the current dilemma. John van Heteren paraphrased several respondents when he opined that "I believe that the existing definition in your article was not conceived in the Internet age ... in a global economy, productivity improvements improve life somewhere in the globe, but not necessarily in the U.S.A." Bill Donohue wrote that "In the 20's ... the root cause may perhaps have been the massive building of low cost assembly line-based industrial enterprises ... We have a similar yet different situation today, as China and to a lesser extent India are providing huge capacity additions to the global markets."
Still others suggested that the benefits to society of productivity increases might depend on what they are used for. As Sean Allen pointed out, "This may be similar to the question of whether or not too much money is a good or bad thing... it depends upon what you do with the money."
An equally strong set of voices doubted whether an economy could have too much productivity. Chris Walker summed up many of these views by commenting, "... the business community must have faith that markets will once again bring labor back into equilibrium... the alternative of suppressing advances in efficiency is not within the realm of reason." Amy Savin commented, "I believe that increases in productivity are ultimately good for the economy and the vast majority of its members. The process is not a smooth one."
The questions remain. Does productivity improvement hurt more than it helps? Or is this a transitory condition, peculiar to selected times and places? Will the old view that productivity has to be good have to be revisited, at least on a "local" or national basis, in the light of the development of the global economy and the Internet? What do you think?
We tend to think of improvement in the productivity of labor and capital like safety; one can't have too much of it. But is that always the case? Is the U.S. in fact experiencing untimely increases in productivity now?
These thoughts were triggered by several disparate and clearly unscientific "data" points. First, the buzz at a seminar of professional service managers in which I was involved last month was the potential for "gain sharing" the benefits of such things as process improvements and the export of increasingly highly-skilled jobs, among others, with clients. The rationale was that the resulting increasingly lower fees would lock out competitors for client relationships and create the opportunity for new business "wins."
As if to suggest that this phenomenon was not limited to the U.S., I read of Ryanair's plan to share the fruits of increased productivity with the passengers on its flights throughout Europe by reducing fares annually over the next several years. And then last week we learned that U.S. unemployment had risen to the highest rate in nine years.
Economists assure us that productivity (the ratio of product and service outputs to labor and capital inputs) improvements are good for all of us, whether we are employed (and thus factored into the statistic) or not (which the statistic ignores). It makes living more affordable for everyone. But can we have too much of it, especially when there is insufficient demand for the resulting output?
Given the economic challenges facing the world's economies, does productivity improvement at a time like this contribute to the downward price spiral so feared by economists from Alan Greenspan on down? Will it add to the ranks of the unemployed with attendant social and psychological costs, costs not factored into productivity calculations? Or does it provide the ultimate answer to foundering economies on which the world pins so many hopes? What do you think?