The Enigma of the Productivity Growth-rate

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Abstract

Value creation is the one of most desired attributes by humankind. We generally like to assume that everything we do contributes to something or someone. And this feeling of having contributed fills our minds and hearts with satisfaction. When we feel that we are creating value, our state-of-mind enters what has been called the ‘flow’ zone (Csikszentmihalyi, 1990): in this well-known phenomenon, we don’t feel the passing of time or our disconnection from our immediate environment, and collaboration with our colleagues becomes something like a jazz musicians’ jam session.

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So, how is it that business does not address its challenges with the same attributes of value creation?

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One case in point is the enigma of the productivity growth-rate.

The productivity growth-rate has become a major concern among government, businesses, and society at large.

Growth in productivity represents the potential power of the economy and businesses to grow. The common school of thought, which we may call the ‘Materialistic Paradigm’, defines this as an issue of ‘productivity’ and not one of ‘growth’. Hence, it tends to be measured incorrectly by economists, using ‘productivity language’, namely Output divided by Input. This is a good example where using an incorrect definition and measurement leads to incorrect remedies. For example, investment in physical assets might represent the waste of scarce resources.

This paper proposes an alternative approach, that of the ‘Intangible Paradigm’. Two factors can bridge the gap of productivity growth: the Management Factor Gap, and the Human Factor Gap.

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The Management Factor Gap

Economists like to examine the productivity growth enigma through the lens of scarce resources: what is it that limits our ability to increase output? Their intuitive approach tends to be materialistic by nature: investing in tangible capital to release manufacturing constraints. This approach was part of what can be called Management 1.0 thinking: what we may call the language of efficiency.

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Economists seem to have forgotten that their profession belongs to the area of human, and specifically social, studies.

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Managing the modern economy in the twenty-first century desperately needs what we may call Management 2.0 thinking.

The implicit assumption behind Management 1.0 is that there are a select few who know far more than others, and who operate in an atmosphere of Command and Control.

The thinking behind the Management 2.0 concept is that each of the human beings involved has a unique contribution to make: the Human Factor. There is clearly a huge gulf between these two approaches.

To use an analogous example, we may consider thinking about the best way to manage road junctions, whether by using traffic lights or roundabouts.

The traffic light method assumes that central planners are much smarter than the people actually at the junctions. The claim is that central planners somehow have better knowledge and capabilities than the drivers who are actually approaching the junction. We now know that this debate has been over for many years (Wikipedia, n.d.). This analogy can serve us well when trying to distinguish between the central planners of the economy at large (Management 1.0) and those people actually serving at the forefront of managing activities (Management 2.0).

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The Human Factor Gap

The second claim in this paper is that the Human Factor should be considered as the major factor in solving the enigma of the productivity growth-rate.

I consider the Human Factor to be the scarce resource: a delicate balance of Human and Social Capital. Why is this so?

Management 1.0 does not require the mind and the soul of the human beings involved or employed: “just give us your two hands” is all that is required. On the other hand, Management 2.0 requires the mind and the soul of each and every person. Each has his or her own and unique contribution.

Human Capital represents the intellectual and emotional capabilities of each individual: their curiosity, ability to learn, adapt and adopt, and their ability to improve cooperation with others. In short, their ability to create value for themselves and many circles in society at large.

Social Capital represents the ‘glue’ between individuals’ Human Capital. It is an expression of the ‘team effect’ when many different aspects of Human Capital are combined into one force for the benefit of the firm.

 

Social Capital is thus the end result of many avenues of cooperation between individuals that create value for themselves and the environment around them.

This is what we mean by the Intangible Paradigm. And this is the essence of creating value.

 

Keywords:

value creation; productivity growth; management; human capital; social capital

 

References

1. Csikszentmihalyi, M., 1990. Flow: the psychology of optimal experience. 1st ed. New York: HarperCollins Publishers.

2. Wikipedia, n.d. Roundabout. [Online]
   Available at: https://en.wikipedia.org/wiki/Roundabout
   [Accessed 13 February 2019].