Walter Molano | The productivity dilemma
In the halcyon days of the early 1970s, before the advent of cable television and after-school sports programmes, kids ran home to watch reruns.
One of them was I Love Lucy and one of my favourite episodes was called 'Job Switching'.
The synopsis of the story was that Lucy and her best friend, Ethel, took part-time factory jobs packing chocolates on an assembly line. Everything was fine until the conveyor belt sped up, forcing them to invent all sorts of gimmicks to keep pace.
I felt like I was reliving the episode recently, when I visited the semi-empty trading floor of a large private bank. The few remaining traders were furiously trying to match trades as the orders cascaded on to their screens. Now I see why many of them have Bloomberg headers that read: 'If you want to contact me, chat. Don't call!' This is the essence of the productivity dilemma.
Productivity improvement has been the rallying cry of the economics profession for most of the post-war period. Economists have argued that increases in productivity will result in higher wages and living standards.
However, that has not been the case.
Many of the countries that witnessed the biggest increases in productivity were also the ones that suffered from wage stagnation or declines in real wages. This economic reality is fuelling the candidacies of right-wing populists and left-wing socialists, such as Donald Trump, Marine Le Pen and Bernie Sanders.
The problem rests with the essence of the capitalist model.
Adam Smith argued that land, labour and capital were the three main factors of production. Karl Marx took the analysis one step further, breaking down the three factors into competing classes, with capitalists and labourers being diametrically opposed. Modern economics appeared to have solved the impasse through the productivity argument.
By introducing government policies that increased productivity, workers could be assured of better living standards. Unfortunately, that has not always been the case.
Several prominent economists, such as Thomas Piketty and Emmanuel Saez, have taken aim at the dilemma. A recent book by Thomas Frank, Listen, Liberal, was an indictment of the Clinton and Obama administrations' failure to attend to the interests of the United States labour force, while kowtowing to their "Ivy League-trained" economic advisers (i.e., Larry Summers).
Capitalism not the problem
Frank's battle standard is now being picked up by the political left as evidence for the failure of capitalism. However, they fail to recognise that the problem is not the model, but the productivity initiatives, such as free-trade agreements, robotics and labour reforms, that improve output per unit of labour.
There is no guarantee about who reaps the benefits. The assumption has always been that labour would be the main beneficiary, but economists fail to recognise that, given that capitalists are the ones who pony up the funds for the new machines, robots and lobbyists, then they are the ones who naturally accrue the benefits.
This was a point that not missed by the FT's Washington bureau chief, who noted in a review of Frank's book that Karl Marx's Communist Manifesto was written during the Industrial Revolution - the biggest productivity surge in history.
Just like now, labour was displaced by new machines, technology and trade patterns. The surviving workers were lucky to retain their jobs, but the improvements in output were paid out to the capitalists who owned the factories and new technologies.
Of course, this led to the Gilded Age of the Victorian era and sowed the seeds for the massive social unrest that would erupt at the start of the 20th century.
As an aside, the decline in the supply of labour seems to be the only thing that leads to increases in real wages. A case in point was the Black Death during the end of the 14th century. It killed off almost half of Europe's population. Not only did it lead to consistent increases in wages, but it led to the decline of the feudalistic system. At the same time, it accelerated the process of scientific and technological developments.
Important advances, such as the printing press and the weaving loom, allowed output to increase with less labour. It could also be happening now as the baby boom begins to die off. Still, policymakers need to understand the multifaceted aspects of productivity. They need to understand who benefits and who loses from the increases in the amount of output per unit of labour.
Up to now, the electorate was told that they would be the main beneficiaries, but that was false. This has led to the frustration that allowed political entrepreneurs to appear on the scene, promising to rip up trade agreements and reverse globalisation.
The sad truth is that improvements in productivity should be proportionally taxed to redistribute the gains to the part of the society that lost out in the process. Such an innovation would mark the end of the uber revolution and solve the productivity dilemma.
Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.