The productivity puzzle again

Just this week, the chief economist of the Bank of England, Andy Haldane, delivered a speech on the causes of the UK’s productivity problem.  Entitled, “The UK’s Productivity Problem: Hub No Spokes” ,Haldane returned to a familiar theme that has puzzled mainstream economics since the end of the Great Recession.  Why has productivity growth in nearly all the major capitalist economies slowed to a trickle despite the new emerging technologies and the supposed economic recovery?

In the case of the UK, this slowdown has been very severe.  As Haldane put it, UK productivity has flat-lined for a decade. Productivity is running almost 20% below its pre-crisis trend. “It is a gap it is unclear will ever be closed.” In the UK, productivity levels are as much as one-third below those in the US, Germany and France. As Haldane joked “It is the source of the oft-quoted quip that the average French worker achieves by Thursday lunchtime what the average British worker achieves only by close of business on a Friday.”

Also, the productivity gap between the top- and bottom-performing companies is materially larger in the UK than in France, Germany or the US. In the services sector, the gap between the top- and bottom-performing 10% of companies is 80% larger in the UK than in international competitors. This productivity gap has also widened by far more since the crisis – around 2-3 times more – in the UK than elsewhere. This long and lengthening tail of ‘stationary’ companies explains why the UK has a one-third productivity gap with international competitors and a one-fifth productivity gap relative to the past.

Haldane remarked that “the UK is in many respects a tale (tail) of two companies: a small set in the upper tail gazelling along the productivity high road and a much larger set in the lower tail snailing along the low road.” As Haldane recognises “Capitalism always of course throws up winners and losers, hares and tortoises, gazelles and snails, upper and lower tails”.  But it appears that in the UK, however, these differences are far-larger, and have increased by more, than elsewhere. Over the ten years to 2014, top 1% of UK companies experienced annual productivity growth of 8% and the top 0.1% companies (the huge multi-nationals) achieved growth of 12%.  The rest stagnated.  The bottom 25% of UK companies have levels of productivity around 80% or more below the UK median. Their Germany and French counterparts have productivity around 60% or more below the median, large but not as large a differential as in the UK.

It’s not a problem of so-called zombie companies, says Haldane.  Most ‘tail’ companies are not zombies, overburdened by an insurmountable mountain of debt or a broken business model. Rather they are companies surviving, but not yet thriving. And they account for fully 80-90% of all jobs. “They are not the tail; they are the dog.” If you restricted ‘creative destruction’ to true zombies – those whose productivity was negative – this would make little arithmetic difference to average productivity, raising it by perhaps 1%.

In sum, according to Haldane, the UK’s long tail problem is largely a diffusion rather than innovation problem. And this problem seems to have its roots in transfer barriers – barriers to transferring technology, know-how, people and financing – from the UK’s thriving hubs to its striving spokes. “Stronger, longer spokes are needed to reach the long tail.”

The problem with Haldane’s analysis is this ‘long tail’ pre-dates the crisis and as he says himself “thus cannot by itself explain all of the UK’s poor productivity performance since the crisis.  In the UK, this technological trickle-down, from frontier to tail, appears to have dried up. “A lengthening flotilla of boats has remained in dry dock.”  By 2015 there were still only 13% of companies who had adopted all five of these basic technologies. And there was still a tail of 9-10% of companies who had adopted only 2 or fewer of them. Indeed, the top UK companies may have improved their productivity more than the small companies but at a slower pace since the end of the Great Recession and so overall productivity growth has slowed and fallen even further behind other capitalist economies.

So why productivity growth collapsed since the recession?  Haldane cannot answer this.  But I think there are explanations that apply to all major capitalist economies, not just the UK. Productivity growth in all the major capitalist economies has slowed because of the failure of capitalists in most economies to step up investment in new technologies.

There was one phase during the 34 years of the internet and ICT revolution when US economic efficiency sharply increased. In the period leading to 2003, US annual productivity growth reached its highest level in half a century – 3.6%. This was explained by a huge surge in ICT-focused fixed investment. US investment rose from 19.8% of GDP in 1991 to 23.1% of GDP in 2000, fell slightly after the ‘dot com’ bubble’s collapse and then reached 22.9% in 2005. The majority of this investment was in ICT. After this, US investment fell, leading to the sharp productivity slowdown.

The correlation between the growth in investment and the increase in labour productivity three years later was 0.86, and after four years 0.89 – extraordinarily high. When capital investment fell, this was followed by a decline in labour productivity. In other words, productivity growth depends on capital investment being large enough.

Why is productivity growth so poor in Britain, especially among the key big British multi-nationals?  The answer is clear: reduced business investment.  The latest business investment figure for Q1 2018 showed an absolute fall in investment.  Business investment growth has been on a steady trend down since the end of the Great Recession.Indeed, total UK investment to GDP has been lower than most comparable capitalist economies and has been declining for the last 30 years.

In the case of the UK, there is another particular problem: the UK is increasingly a rentier economy, relying on finance, business services and real estate.  These are unproductive activities that do not boost the productivity of labour, but do reduce available profits for productive investment.  Indeed, the relative fall-back in UK productivity compared to Germany and France etc can be particularly discerned from the early 2000s, when the oil revenues dissipated and investment increasingly went into a credit fuelled real estate boom.

A detailed sectoral analysis by the Economic Statistics Centre of Excellence has shown that three-fifths of the drop in productivity growth stems from sectors representing only a fifth of output, including finance, utilities, pharmaceuticals, computing and professional services.  The Bank of England did a similar analysis found that it is the top ones that have become the slackers. The most productive groups are “failing to improve on each other at the same rate as their predecessors did”, according to its research. The best companies still improved their productivity faster than the rest, but productivity growth among the best has sharply fallen and this has hurt the UK’s growth rate.

Investment in a capitalist economy depends on its profitability as I have argued ad nauseam in this blog.  And there is still relatively low profitability and a continued overhang of debt, particularly corporate debt, in the major economies.  In the case of the UK, the profitability of the non-financial sector is still some 12% below its level in 1997.  And in the oil sector, it has fallen 50%.

Under capitalism, until profitability is restored sufficiently and debt reduced (and both work together), the productivity benefits of the new ‘disruptive technologies’ (as the jargon goes) of robots, AI, ‘big data’ 3D printing etc will not deliver a sustained revival in productivity growth and thus real GDP.

And there is another factor, again particularly discernible in the UK: the lack of funding for smaller companies to invest in new technology.  As Haldane explains, new, ‘upper tail’ UK companies can attract venture capital finance. The UK has a large and liquid corporate bond market, totalling around £500 billion for investment grade securities, which allows larger and better-established companies to raise money at long maturities in capital markets.  But for the rest, it is much more difficult. Lending to the corporate sector by UK banks, at 6% of their assets, is around one third of the equivalent by German banks. In relation to GDP, bank financing of companies is around half that in Germany. The UK’s national development bank (the British Business Bank) has assets that are a small fraction of its German counterpart (KfW).  The big five banks in the UK do not help smaller businesses to invest but prefer to speculate in financial assets.

That makes the idea presented in a recent report by the UK’s Labour Party suggesting the Bank of England set a target for 3% productivity growth in its policy actions ridiculously utopian. The BoE has no real control over the lending policy of the commercial banks and no control at all over the investment actions of the major UK companies. Without such control, the 3% productivity growth target is just a dream.  To achieve it would require public ownership of the major financial institutions and the top 1% of UK companies (as Haldane has referred to them).

Compare the inability of the BoE to manipulate the UK capitalist economy with the power that China’s monetary authorities have.  Last weekend, the People’s Bank of China cut the reserve requirement ratio, the amount of cash that banks must hold in reserve at the central bank, freeing up Rmb700bn ($106bn) for new lending and investment.  Over the last 18 months, China’s central bank has been reining excessive lending by local authorities and ‘shadow banking’.  This has been achieved “even as growth remained surprisingly resilient” (FT).

Now the authorities are gradually preparing to reverse that policy as the trade war with the US rears its head and with a possible hit to China’s growth.  China’s authorities have the power to launch a massive investment program, as they did in the Great Recession, to sustain growth and productivity (which is motoring) because the state controls the banks and commanding heights of the economy.  That power does not exist for governments in the major capitalist economies.  In those economies, profitability rules and productivity stagnates.

13 thoughts on “The productivity puzzle again

  1. Michael. Thank you. A couple of points.
    1 Productivity is measured using the concept of total factor productivity, a complex, technical indicator. It’s possible that this is failing to reflect worker productivity (much as GDP and other measures are technically flawed)? International comparisons may also fail due to the varying ways data is managed.
    2 Most people now work in service industries and their output is intangible.It’s possible that the value-creation of workers is not being fully captured because it’s increasingly unquantifiable
    It’s intuitively obvious that people have never been more productive, but this is not resulting in higher profitability.
    Productivity is a managerial concept that’s less interesting to workers than wage levels and the degree of exploitation.

    1. I know you asked mr. Roberts, but, since he didn’t answer yet, I’m going to do it because I judge myself capable of doing so.

      1. Yes, every index have their imperfections, they are an aproximation. But in the right hands, they can be useful.

      2. There’s no economic difference between a service and a product, both are commodities.

      For example, a lady serves you an espresso at a café: is it a service or a manufactured product? Well, the lady got a portion of powder coffee, compressed it into the machine and activated it, then she put the coffee in a cup, the cup over a saucer, and walked the coffee cup over a saucer — possibly with a device which contains powdered sugar and a small spoon — towards you, to whom she deliverd the final product.

      From your point of view, she delivered a service, because, from your point of view (end consumer), the espresso came out of nowhere, from the lady’s hands. To the consumer, a lady appears out of the blue, thanks to the magic of money, with a cup of espresso.

      From the point of view of the lady, she manufactured a product. More specifically, she finalized the product, which begun in the coffee plantations, the coffee mill, the powdered coffee distributor, the espresso machine manufacturer and the logistics which bring all these products of labor together. She operated the machine, thus making her an industrial worker.

      But, from the point of view of the process as a whole, this difference of points of view is imaginary, only the general process of capital D-M-D’ existing. The lady that served you coffee was just the worker which operated the final phase of the production process of the commodity espresso. The difference here being merely one of logistics, since, to preserve its use value, an espresso must be manufactured and consumed instantly, in the act of D-M: this is the definition of “service”: a commodity which disappears in the act of consumption, intangible manufacture.

      The only exception to the case that Marx highlights is commerce: the act of transfering a ready commodity from one hand/place to another as it is. This process doesn’t creat value, it is not a commodity nor a “service”: it is a case of specialization of the circulation, but there’s no space to explain it here.


      Know, you would ask, what about intellectual work? (i.e. “smart jobs”,, intellectual property, patents)

      This is also easily explained: intellectual work doesn’t create value alone, it is fixed capital.

      For example: a trupe of actors make a Hollywood blockbuster. Was it a service or a manufacture?

      The answer, again, is that it neither: you could interpret it as service because the only thing that survived was the filming of it. You could interpret is as a manufacture for exactly the same reason!

      But, the real process is this: an acting of an actor is not productive labor because it doesn’t create value. Art, by definition, is unique, therefore you don’t have a socially determined necessary time for its production. Therefore, the value of the actors’ acting is zero.

      How does, then, Hollywood profits from it?

      It’s simple: they technically reproduce a unique piece of art so they convert it into a commodity: they film the acting, make x copies of it to distribute in cinema rooms and sell copies in optic unities for the masses. Those copies are produced by projector operators, Chinese factory workers etc. — it is those workers who are productive, are exploited by capital. This is so true that actors’ caches vary brutally: some receive caches that are clearly above what they need to reproduce themselves as actores, many receive nothing or near nothing (that is, below the level of social reproduction). But the rest receive salaries, their rate of exploitation being well calculated.

      1. Thank you.
        TFP, which is the data series normally used to track “productivity” is calculated using a complex formula.
        It’s been criticised by conventional economists.
        Perhaps someone with greater expertise than I have might comment on this?
        A product and a service are indeed both commodities.
        But one’s tangible and has quantifiable physical characteristics.
        The other is intangible and has none.

        Both have buyers, sellers and a price.
        But the amount people pay for a service is mainly determined by the relationship between the service provider and the service user and is shaped almost wholly by subjective factors).
        Hence the big difference between prices paid for coffee (almost identical physical ingredients, but different subjective perceptions of the value of the service interaction between cup of coffee maker/server and cup of coffee maker).
        This makes it difficult scientifically to quantify the value created in an interaction in a coffee shop (and in all service interactions, which now account for more than 80 per cent of all value creation in advanced economies).

        This doesn’t take into account the different measurement systems used in the UK, France, the US, Bulgaria, Chad etc.
        The fact is that most economies use a high degree of guesswork to develop GDP figures.
        That’s why TFP comparisons across countries should be treated with (at the very least) scepticism.

        This of course doesn’t detract from Michael’s analysis which is based on convincing theory and careful use of data.

  2. It seems to me that Michael Roberts has a point about the investment aversion of rentier financial capital in Britain and other advanced capitalist countries. But his ringing endorsement of Chinese economic policy is curious to say the least. All it amounts to is saying that state-ified ownership of wealth allows investment to flourish. His point about the utopian aspiration of the Labour Party to change the investment climate in Britain simply by setting targets for the BoE is well made. But he does not seem to acknowledge that much of China’s economic success is based on a primitive accumulation model of holding wages down by political repression.That (as well as the size of its domestic market) is what attracts foreign capital and makes exports cheaper and surely that rather than state-ifed ownership per se is the reason behind the economic success of China. Like the USSR during the Great Depression of the thirties, the sheer size of China (helped, no doubt, by the centralised state control of resources) enabled it to ride out the great 2008 recession seemingly relatively unscathed. I think it is an indisputable fact that not only China, but also South Korea during the sixties and seventies and perhaps Japan earlier, managed to successfully target sectors of the world market (in the case of South Korea, shipbuilding and electronics) in which they could enjoy a comparitive advantage over their competitors. These Asian giants were faced with similar problems of economic development from a position of relative backwardness and similarly ossifed social structures and therefore relied on activist state intervention.

    Ironically, the great Bolshevik theoretician Evgenii Preobrazhensky would have exactly understood the problematic facing these economies as he was confronted with theorising a similar economic dilemna in post-revolutionary Russia and termed it the problem of “primitive socialist accumulation”. What Preobrazhensky meant was the role of the state as a “merchant” controlling the terms of trade between domestic producers and the world market, taxing the surpluses of domestic producers and arbitraging the difference between domestic and world market prices for the purposes of accumulation. The rise of the Asian NIC’s seems to have largely followed this pattern and, while China may have a larger public sector than some of the other countries mentioned, the next economic downturn seems likely to be accompanied by the return to protectionism which is already gathering pace, making it much more likely that the state-ified economic structure in China will project geo-political and military power in order to hold on to its share of a declining world market.

  3. Output per hour of labour is increasing all the time because of the introduction of newer, more time saving tools for workers to use. Comrade Roberts makes a good point about capitalists refusing to invest in more productivity/machinery because they see an inability of people in markets to buy all the good and services for sale even though the commodities produced could be sold for lower prices. I wonder whether this has anything to do with relative stagnation in real wages and cuts to the social wage made using neo-liberal arguments about the need to “put the budget into surplus” in the face of growing government debt to finance capitalists who are the main buyers of government bonds?

  4. “China’s authorities have the power to launch a massive investment program, as they did in the Great Recession, to sustain growth and productivity (which is motoring) because the state controls the banks and commanding heights of the economy.”
    1. The post-2008 investment program built a huge mountain of debt. Chinese central bank and finance officials, not only the IMF, recognize it. They’ll not repeat such a program until they work down the unstable, partially hidden, tangle of debts.
    2. There is no overall planned allocation of investment in China, no unified control of the commanding heights. That was torn up about 30 years ago. Both the state-owned corporations and the big private oligopolies are divided into groups locked in struggle over the profit grab.

  5. Agree with previous comment, Rarely is the measure of productivity defined but it usually implies revenues rather than physical outputs. The distinction is relevant because the former feeds into the formation of the general rate of profit, while the latter determines the conditions of labour, and profits come before people. TFP is disembodied, so, for example, using the same labour and capital inputs, a simple change in the organization of the work flow process can raise TFP, something the Japanese turned into a just-in-time art form several decades ago. But TFP is also a major factor in determining the relative attraction for investments across competing nation-state capitals. So analysis of the differences between countries needs to be a key undertaking.

    Regards China, the above reference to Preobrazhensky is pertinent. A centralised state can accumulate capital quite effectively by arbitraging local costs of production and export prices. Keeping down costs was aided by China’s vast pre-market economy, but this supply of cheap labour (the costs of family reproduction not falling within and upon the system) has dried up. Keeping wage costs down (and hours long) requires strict control of trade unions and civil society NGOs. Following Deng’s reforms, the joke in China was ‘one household, two systems’ whereby one member of the family worked for the state sector, gaining state benefits such as subsidised housing and schooling, and another member of the family worked for the non-state sector to receive higher wages. China is now moving towards a middle-income trap whereby rising real wages (growing competition for labour due to shortages) and a shift towards mass consumption is hitting slow-down barriers: partly the hang-over of massive debts by state-owned enterprises and NFLs of the state banks that have bailed them out, and partly catch-up with the most world’s most efficient producers. ‘Made-in-China 2025’ is the blueprint for the strategy of developing the next generation of high-tech products, everything from 5G to AI (but note: always as “dual-purpose” simultaneously strengthening the military and the economy).

    In every sense of the word, therefore, the quintessential essence of China is as a ‘planned economy’ but the arbitrage is not just between domestic costs and exports (indeed, hidden subsidies for exports also play their role in building a long-term strategy of capturing markets – the Belt and Road being the latest manifestation of that) but also between who among China’s elite gets to accumulate capital and control the process. The way this works is to avoid as far as possible laws and regulations that are definitive and subject to an independent judicial process. In this way members of the elite (and foreign investors) can be easily wrong-footed if they step out of line.

  6. “The BoE has no real control over the lending policy of the commercial banks and no control at all over the investment actions of the major UK companies.”

    I agree, but the goal of monetary policy shouldn’t be more lending. The goal should be devaluation of money capital including debts, which would restore profitability (and be it negative profitability). And they never even tried that. Since 2008 no big central bank has delivered on their inflation targets, let alone raise them. I think helicopter drops would do the trick. Michael Roberts argues this would only create stagflation. I would really like to get a theoretical explanation why this should happen if there is real competiton between capitalists?

    Now, I would agree, if we imagine an economy without competition. Imagine a monopoly, let say an oil producer: people are consuming his oil and pay him with consumption goods and services, some are unemployed. Could we lower unemployment by printing money? No, because natural or artificial monopolies (ownership of natural resources like land, gas, oil or network monopolies) prohibit rising outputs, only prices would rise, ergo stagflation. So yes, if we evolved or better regressed to an economy where workers are exploited not for profits through production of capital, but by paying rents to owners of land or patents, money printing would achieve nothing. On the other hand, to criticize such a neo-feudal economy, you don’t need a Marxist, any bourgeouis economist can do that.

    What I don’t understand is how under conditions of real competition (which Marx assumes) capitalists could react to a helicopter drop by just raising prices? If they could do that, why is there a fall in profit in the first place?

    The theoretical question that interests me: does the power of capitalists lie in the private ownership of real capital or money capital? Michael Roberts seems to think real capital, I go with money capital. His slogan is: give me collective ownership of real capital and I give you full employment. My slogan would be: give me competition between capitalists and collective ownership of the printing press and I give you full employment.

  7. “Regards China, the above reference to Preobrazhensky is pertinent. A centralised state can accumulate capital quite effectively by arbitraging local costs of production and export prices.”

    Didn’t work out that way for the former Soviet Union, did it? Won’t work out well for China, either.

    1. In his correspondence with early Russian revolutionary socialists towards the end of his life, Marx indicated that he believed in the possibility that Russia might obviate the miseries of primal accumulation (i.e. capitalist accumulation), if she were aided in her socialist development by some or even one developed capitalist state, or, if, at the very least, she were left in peace.

      The tone of the letter to Vera Zasulich, however, was very guarded regarding the likelihood of any of the above possibilities. In the event, an actual revolution of peasants and soldiers occurred. The Bolsheviks didn’t betray this revolution. They had the revolutionary courage to refuse to abandon it.

      The Soviets lost over thirty million people directly as a consequence of Western imperialist military intervention (civil war, WW2). Then they lost the Cold War that immediately followed. Can the fall of the Soviet Union (or the failures of Chinese, Cuban, Venezuelan socialism) be explained hermetically, strictly in terms of abstract internal and external economic and political interactions–as if the employment of covert, extra legal economic and political activities, to say nothing of the threat and actual genocidal use (Korea, Vietnam, Indonesia, etc..etc…) of overpowering imperial military force were not involved in their formation and evolution? Can the long term absence of any viable revolutionary movement in the imperial West itself be explained only by bread and circuses, without taking into account the economic and (racist and classist) police terror of the liberal state?

      Obviously not. Hermetic political economy is for the liberals, old and new. What about rigorously employing Marx’s labor theory of value to the extant data? Not if employed as a critique of an ideal system of “socialism”. Yes, if employed as a tool of an historical materialist analysis of actually existing conditions, and in revolutionary sympathy with the people involved.

      Michael Roberts does just this often enough to make his blog a valuable compass in these woods.

    2. There is no perpetual economic solution. Central planification worked wonders for the USSR (it went from a completely destroyed country to a global superpower in less than 28 years — a world record that still stands. For a degree of comparison, the USA took 169 years) until change to toyotism was required.

      Then the model required a new collectivization, but the problem is that collectivization sacrifices a lot of human lives in a very short period of time, and toyotism has a future of investing in qualification of human labor, not sacrificing it. So the USSR was never able to do this transition — the nation that sent the first vehicle and man to space was never able to build a simple clean chamber to produce a single microchip!

      Ironically, the USA never fully converted to toyotism (its robot to inhabitant ration is still relatively small compared to its homenland, Japan). The USA chose another route to scape from the oil crisis of 1974-5: financialization, in a process that begun with the unilateral ending of Bretton Woods and was consolidated with the Plaza Accord in 1985. This tool, a unique feature of the owner of the universal fiat currency of the capitalist system, was not available to the USSR. Indeed, the USA avoided collapse, but never again really prospered in relation to its apex year (1969).

  8. Can the answer be a combination of a (very) high debt level and a (very) high oil price from 2009 until 2015?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: