Richard is going to tell us all why productivity will naturally fall as the state sector gets larger as a portion of the economy.
This will be good, won\’t it?
To explain, let me explore for a moment why it is inevitable that state sector productivity falls as the scale of state sector spending rises as a proportion of GDP.
Productivity is, of course, a ratio. It’s a ratio of labour to something else: usually capital employed. Labour could be the number of people. Normally it’s their cost.
And tadaaa! the double facepalm!
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For productivity is not the ratio of labour to capital! It is, rather:
Productivity is a measure of output from a production process, per unit of input. For example, labor productivity is typically measured as a ratio of output per labor-hour, an input. Productivity may be conceived of as a metric of the technical or engineering efficiency of production. As such, the emphasis is on quantitative metrics of input, and sometimes output.
Yes, that\’s right, it\’s the, when we\’re talking about labour productivity, relationship between what we get out of the system for a unit of labour that we put in.
We can also talk about the productivity of capital, of copper, of children\’s clowns (perhaps the number of smiling, gurgling babies we get per clown in the economy).
Having got the definition wrong everything else Richard says about productivity in public services and sectors is of course entirely wrong.
Sadly, for it leads him into the terrible error of ignoring all of the interesting and important things that people have been saying about productivity in public services and sectors.
Baumol and his cost disease for example, where we note that increasing productivity in services is more difficult than it is in manufacturing. More difficult, but not impossible: in fact, one way that we do improve labour productivity in services is to turn them into manufactures. The comely maiden with the brow cooling damp cloth certainly aids my recovery from headaches: aspirin has mechanised that task (unfortunately) and seriously improved labout productivity in the comely maiden classes (and my own of a morning or two after the night before as well).
Or Bob Solow\’s point about where economic growth comes from: 80% of the 20th century\’s growth came from increased total factor productivity…of which increased labour productivity is a part. Paul Krugman\’s about how average wages are determined by average labour productivity: if that\’s falling in a sector of the economy then it\’s making average wages lower. Even, Paul Krugman again, the point that non-market systems seem to find it almost impossible to improve total factor productivity while market systems can and do.
Even the natural experiment we\’ve had in the NHS in recent years: England adopted a more market stance than Wales and Scotland. Productivity in NHS England has increased while that in NHS Wales or NHS Scotland has not.
Which leads us to the final and really important point.
The very fact that in services we do find it more difficult to improve productivity (whether of labour or total factor types) means that we need to have more markets, markets being the thing which we know improves productivity, in services. That is, that the very analysis of productivity in state supplied services proves absolutely that we should have markets in state financed services instead.