In our previous post, we described how productivity is of fundamental (and often overlooked) importance to humanity; and that the rate of economic growth did not really begin to accelerate until the 18th Century and advent of the First Industrial Revolution. We also pointed out that the very meaning of the term, and how to measure it, remain surprisingly controversial.
There is much debate as to whether there is a “natural” or “normal” rate of productivity growth (or Total Factor Productivity- TFP) for a particular economy, e.g., the US, China, or Japan- each of which is perceived as having a very different set of factors which affect TFP. More recently the focus has shifted to whether we are in the midst of an extended cycle of “secular stagnation”, in which, no matter the policy tools which governments and central banks deploy, economies remain mired in a trough of low growth and the ever-present risk of deflation. Where are “animal spirits” when one needs them?
While the latest PRC Five Year Plan may now set a range, rather than a minimum target level of real GDP growth, it remains to be seen whether and how what is still an astonishingly high level (6.5 to 7% per annum) can be achieved and sustained- and at what cost. Will the “growth” really be productive in the sense that not only does it improve people’s standard of living, but also that the resources employed are used efficiently and not wasted for the seek of achieving a “headline” success? After all, Japan reached a point in its own growth post-WW II in which there was a notorious level of waste. “Productivity” may have been high, but roads and bridges to nowhere, or the concreting of the land served no productive purpose.
Similarly, the measurement of productivity is increasingly controversial. The UK’s Office of National Statistics (ONS), recently published a report which pointed out that, when it comes to identifying and measuring the output and TFP used to produce “things”, data tend to be remarkably detailed and granular, but when its comes to the services and intangibles which undeniably now comprise the great majority of most developed economies, the quality and reliability of data leave much to be desired, because the mindset that most statisticians use remains grounded in another age (in reality that of war production in a command economy.) We are probably being rather unfair to that estimable profession (after all- if one cannot measure it, does it exist?), but the basic point stands. Should one measure something as a “cost” (say, a new computer or cloud-based system), or as an “investment” (say, R&D)? They both cost money, which is quantifiable; but how “productive” are they? Is it “productive” to replace 10 jobs with one that manages a new expert system? How “productive” is R&D, if, in pharmaceuticals, its costs billions of dollars to produce compounds that may or may not improve the human lot? And is the amount of money lavished on “defence” really, when added to GDP as it is, productive? The more expensive the weapon the better…
Having teased and tormented our Readers, with yet more paradoxes, what should we say about “productivity” and the outlook for it in the (re)insurance industry? Well, we have decided to sustain the suspense, and leave that for a third and final post on this fascinating topic!
The Awbury Team