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Alternative theories on productivity: Economics – behind the numbers

08 Jan 2018

Arrow with statistics people

For centuries economists have shaped policy by aggregating the behaviours of the rational and self-interested ‘model’ individual. 

While it’s served as a useful baseline, it has largely ignored how economic, political and technological developments have impacted our society and psychology. And that ultimately alters who ‘homo economicus’ actually is.

Understanding the motivations behind our behaviour is thus crucial for effective policymaking. For example, despite knowing the theoretical link between investing in new technology and higher business productivity, how cost effective would an investment in faster broadband be if workers were ‘irrationally’ unmotivated solely by their wages, or simply used the additional bandwidth for faster social media engagement?

Relatedly, whilst numerous macroeconomic theories for the U.K.’s productivity crisis have emerged – from weak public and private investment to poor management skills to measurement issues – there are some behaviour-based hypotheses, which are also worth acknowledging.

Beginning with lifestyle: as economies develop, social values also shift. With greater social connectivity, information at their fingertips through technology, and parental support, millennials have starkly different workplace demands compared with older generations. A PricewaterhouseCoopers survey found personal development and work-life balance is more important for millennials than financial reward. Meanwhile employment with a social purpose – or enough flexibility to allow for it – is also a priority. Another survey by Cone Communications found 75 percent of millennials would take a pay cut to work for a responsible company. And they’re also less likely to stay with the same employer throughout their lifetime, compared with their parents.

So what implications might that have for productivity? Firstly, the Centre for Economics and Business Research estimates that a shift toward ‘the lifestyle economy’ might explain around a quarter of the shortfall in productivity since 2008. That’s largely because of the lower measured monetary output in the growingly popular social care, health, leisure, and education sectors. And secondly, if workplaces, working incentives, and management styles are unable to keep pace with new employee demands, motivation - and hence productivity - suffers. Of course, the move toward employment with greater social value only reinvigorates the debate on whether value creation might include non-monetary outputs. Yet, policymakers might seek ways to support these lifestyles alongside work. And business can play a pivotal role too by facilitating flexible working practices and building a strong brand of corporate social responsibility as motivators beyond simply increasing wages. In fact, a study by the Gallup Organization of 1.4 million employees found organizations with high employee engagement reported a 22 percent higher productivity level.

Another overlooked issue is the overall impact of technology. The going assumption is that technology is always and everywhere a positive thing – particularly for productivity. Of course, not all technological innovations necessarily make us more productive. For example yearly upgrades to iPhones might bring marginal improvements to conveniences in our lives, but do little to boost output per hour. Indeed, in a consumerist society ‘innovations’ can become increasingly motivated by the desire to sell – and not always to raise productive capacities. What’s more, Metcalfe’s Law – named after Robert Metcalfe, co-inventor of the Ethernet – outlines that while technology reduces the cost of communication, the number of added interactions also increases exponentially and so does the time taken to process them. A study published in the Harvard Business Review estimated that the average manager has less than 6.5 hours of uninterrupted time to actually work, once the processing of e-communications and additional meetings is accounted for. This doesn’t mean technology is always bad for productivity, but it reflects that businesses ought to understand how the additional capacity delivered by technological investment requires improvements in time management and coordination to make it productive. And, for government it means supporting a facilitating research and development environment to promote productivity-enhancing technology.

Similarly, some have argued that the information age is straining our attention spans. With more information vying for our attention from fingertip news access to social media messages, distractions are growing. This can reduce our productivity by directly replacing work time – for example the U.S. Chamber of Commerce Foundation finds that people spend on average an hour of the working day on social media. Then there are the added impacts from the time taken recovering from distractions, and keeping attentive amidst a deluge of digital information and interactions. Again, the implications are not for businesses to avoid technology but to understand how workers attention spans may be impacted, and to look for ways to mitigate distractions.

Altogether, the point of these niche productivity theories is not to lean on them entirely – or to ignore the importance of macro policies, including infrastructure investment, technology, and research and development – but to acknowledge how all the pieces of the puzzle fit together. They serve a wider exemplifying purpose on how social, cultural, and psychological trends interact with policy – and show how there is no single magic bullet.

As such, businesses and policymakers ought to think more systematically if they’re to truly tackle the multifaceted challenges of weak productivity.

Check out the first blog from Tej - Behind the Numbers: Productivity

You can read his second blog here - Behind the numbers: what does GDP measure and is it useful?

Tej Parikh, Senior Economist, IoDTej Parikh

Tej holds a Bachelor’s degree in Economics from University College London, and a Master’s degree in International and Development Economics from Yale University. Prior to joining the IoD, he worked as an economic analyst at the Bank of England in roles across monetary and financial policy. Subsequently, he moved to Cambodia where he was a journalist focusing on economic and private sector development for a national newspaper. He has since been a freelance political risk consultant and journalist, covering Europe and Asia in particular. He has published for numerous international media outlets including Foreign Affairs, the Guardian, and The Diplomat, and is currently an active member of London’s Great Debaters Club.

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