Productivity

An excerpt from the forthcoming book: Ownership Revolution: How Working People are Buying Up Big Business

Productivity pays

Phil and Jane rarely see stories or articles about productivity in the newspaper or on TV. When they do, it's usually just another story on the economy that defies understanding.

Which is too bad. Their prosperous standard of living arrived, in large part, because of the ability of companies and organizations everywhere, and for the past several hundred years, to get more done using the same amount of resources.

As Ted explained to Phil, productivity simply refers to how much labor or money it takes to create a product or service. If a carpenter can build one house in one month, then the carpenter's productivity is one house per month. If the carpenter gets new tools or new ideas and does the job more quickly, his productivity goes up.

Every time productivity goes up, the carpenter's standard of living goes up, too (generally speaking). Here's another example of how productivity works:

Suppose a British company discovers how to make steel products just a tiny, tiny bit harder. Then a company in the U.S.A. uses this process to make ball bearings that last an average of 423 days rather than 420 days, when they're used in truck axles.

A trucking company that hauls washing machines from Mexico City to Boston and Montreal buys trucks with these better bearings. That means it can haul a load for a few dollars less. In turn, this means the cost of each washer goes down by a few cents.

But, what's a few cents less when you're paying hundreds of dollars for a new washer? What's more, Phil would observe that you only need a new washing machine once every fifteen or twenty years.

That's true, but as Ted points out, this productivity improvement is just one of the many millions of improvements we've seen since the Industrial Revolution (and some improvements even predate that period).

Jane's been listening in, and objects that productivity has been going up for a long time, especially since the Industrial Revolution a couple of hundred years ago, so what's the big deal now?

Ted respond with two points. First, productivity improvements have a cumulative effect, which is to say they build on each other to multiply the gains. Second, productivity has increased at an unprecedented rate for the past half century.

The most obvious example sits on Jane's desk: a personal computer. When she started in the department, she prepared letters on a typewriter, one letter at a time. Now, using a computer and word processor, she selects a stock letter from a collection that covers most common issues, adds a name and address using mail merge, sends the document to the printer, and in seconds a completed letter lands on her desk.

The personal computer, though, is simply the tip of an iceberg. Almost everything mechanical or electrical works better or works faster than its counterpart of 50 years ago.

Now, buy a pre-publication copy of Ownership Revolution: How Working People are Buying Up Big Business or go back to the Table of Contents

Copyright Robert F. Abbott 2005