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Tempus Fugit Memento Mori - Time Flies Remember Death
Only Luddites fail to grasp the significance of technology and productivity
by StFerdIII
Economic change is never linear nor without societal impacts. Some in society will win, others will lose as new technology, better processes, and the inputs of labor, capital and other assets are used in innovative and profit-enhancing ways. Even given such dislocations if there is a key to the political-economy, that key is productivity.
Productivity measures the improvement in the amount of output from given inputs. Producing more with less is the sought after goal of so-called ‘capitalists’; owners of money; and those engaged in trade and manufacture. Producing more output of a given quality with less inputs, should mean, [with all other costs considered], an increase in profits. This ‘surplus’ is then used to reinvest in more assets, expand manufacture or production, or it is returned to investors as dividend payments.
Profits then are the necessary driver for increased productivity, since it is profits or the expectation of some return that drives most inventions and productivity enhancements. Competitive markets make innovation mandatory since the various market players are looking for an advantage. Newer methods, ideas, or even new market creations are de-facto derivatives of openly competitive markets.
Monopolies, government inspired oligopolies, union or guild dominated industries, or markets with high tariff walls, all suffer from the illness of reduced competition, limited capital return expectations, and low productivity and innovation. Society in these examples is far poorer.
Two facts are apparent when viewing the use of technology and economic processes; first technology is vital for increased productivity and second, higher productivity means more profits, higher wages and better living standards. This is clear when looking at for example the difference in productivity, wealth per capita and living standards between the US and Europe.
The US economy has grown by 30 % in the past 5 years. US GDP per capita is now at U$43.000 – a remarkable number. With 300 million people the US economy valued at $13 Trillion is larger than the entire EU economy, valued at $11 Trillion, even though Europe has 50% more people. Just taking into account Western Europe’s 300 odd million people, the GDP is 40% less than that of the US. So what is wrong with Europe?
The short answer which leads to many longer discourses on the vagaries of socialism and Marxist mismanagement, and cultural destruction is – productivity. Recent studies by the University of Groningen and the University of Birmingham bear this out. From 1975 to 1995 EU productivity was about 2.4% per year and the US average about 1.3%. In the past 10-12 years the reverse is true. The difference is due to technology application. The higher use of technology by US firms has pushed forward all sorts of innovations in business processes, business management and in the globalization of the supply chain.
Productivity of course will vary by country, by sector and by firm. In a few areas the continental Europeans are doing well –some agricultural, component manufacturing and lighter manufacturing are examples where productivity is not terribly low. But the overall numbers for Europe do not look good. Even in lighter manufacturing and communications industry, EU productivity in the past 10 years is 30% below US levels [7% vs. 10%]. Greater unionization, higher protectionism, constrained budgets, more political interference and cultural standards tilted towards societal peace and ease of life, as opposed to competition and striving, are attendant issues which slow down EU IT adoption.
In services EU productivity is absolutely dismal. EU service productivity has actually fallen in the past 10 years, while in America it has more than doubled. In distribution for example, US productivity has doubled to 4.4% per annum, and in finance and business services it has increased from 0.2% to 2.6% per annum. These two sectors and their remarkably strong rate of productivity growth account for about 50% of total US productivity strength. The trend is clear - Europe is desperately behind in service productivity and falling rapidly behind in manufacturing and industry.
The recent studies by the University of Groningen and the University of Birmingham on Euro-productivity woes highlight IT as the big reason why Europe lags the US. Not only do Europeans produce less IT product and innovation than the Americans, they are far worse at using it to improve business processes. Starting in 1995 American business moved considerable resources and capital into IT. The Europeans did not.
The European investment in IT whilst impressive in some sectors [banking, telecoms] is noticeably behind the US example both in per capita totals and in aggregate by sector. Not only do the Americans spend more IT per worker than the Europeans, but their output across almost all sectors is greater as well. This means that US IT investment is producing a rate of return that will in part, be returned in the form of future investments in technology – enhancing still further US business process advantage. From the standpoint of technology usage, it is a virtuous circle.
The European malaise is multi-faceted. It is political, cultural, and societal. But a key component is productivity and the lack of technology application in European business. There are of course many exceptions. But a truism is clear. If you desire to help your society, the ‘poor’, the average worker, or fund the myriad of state programs that make up your ‘national identity’, then productivity should be embraced, not rejected.
Marxist class warfare, designed to protect the ‘worker’ actually does the opposite. By opposing the use of technology various populists and politicians make the world a poorer, dirtier place. Not a more egalitarian one.
