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  1. Creating Capital
  2. The 80-20 Rule
  3. The Power of Productivity
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The Power of Productivity

Economic productivity is something for every member of society to celebrate. When productivity is rising in a society, wealth is being created, and more and more wealth is available—through the trickle-down effect—to satisfy the wants and needs of the whole population. However a society chooses to divide its output, productivity drives output upward. There’s nothing more important for the economic well-being of any society.

Labor productivity, however, is often misunderstood. It has little to do with how hard the work force labors. It actually measures the power of capital: Capitalists acquire the land necessary for their enterprise. Capitalists select the sources of the enterprise’s raw materials. Capitalists borrow money or sell shares in the enterprise so they can make these investments and hire workers. (Or capitalists hire managers to do these things.)

When workers take their tools from the owner of the enterprise, use them according to the owner’s direction, and become more productive than they could be on their own, their labor productivity increases. (Their labor productivity might also increase if they work harder each hour, if they bring their own, better tools to the factory, or if they acquire more training or education and learn to work smarter and more efficiently.)

Many economists separate out such intangible factors as advancing technology, innovation, managerial skill, luck, and organizational change and call these the fruits of total factor productivity, not of capital alone. Those who study this kind of productivity say that more than half the advancement of U.S. productivity since World War II has been the result of these intangible factors. But capitalists should get most of the credit for introducing new work methods as much as for purchasing new machinery.

For a simple example, suppose a furniture manufacturing business has been hiring skilled painters to brush-paint its products. The boss buys some paint sprayers, which are easier and faster to use. Almost immediately, the painters can paint 50 percent faster, with results that are just as good. Any student of productivity would consider this a case of capital deepening, in which the advancement of output is due to the increase of investment in capital equipment. Over time, the workers become more skilled with the new equipment, learning, for example, that they can layer several coats of paint without waiting for each coat to dry. The factory owner also rearranges the work floor so that the spray painters have easier access to the work they are painting. Output rises again, even though there was no further investment in capital equipment. This may be called an increase in total factor productivity, but it should be credited to the original capital investment in paint sprayers.

There are three ways a nation can enjoy more income, three ways to make the economic pie get bigger. First, more people can go to work: A country might encourage immigration to fill newly created jobs. Second, people can acquire more skills: A country might open educational opportunities to women, easing their entrance to highly paid professions. The United States has used both methods in recent decades, but they are not indefinitely repeatable opportunities. The third way is to encourage people to invest in plant, equipment, and organization. The third way is harder, more expensive, and potentially unlimited.

An important reason economics has been called the dismal science is that its honest practitioners offer so little comfort to politicians and other wishful thinkers. A dollar spent on ice cream won’t be available later to spend on meat and potatoes. That’s hard enough to accept, but here’s something worse: Dollars spent on wages won’t be available later for the business to purchase new equipment or build new factories, so later there will be fewer jobs, and fewer well-paying jobs, than there might have been had the boss paid less. Many of our leaders would prefer to tell us something else—that businesses can spend more money on wages and benefits and still have enough profits to create more jobs, or that corporate profits and individual capital gains can be cut or taxed without harming investment and productivity.

What is really dismal is that so many economists are ready to feed the fire of political redistribution. Reckless economists advise politicians to favor consumption over investment labor over capital, and jam today over meat and potatoes and jam tomorrow.

The pursuit of productivity and wealth requires more self-restraint and more determined investment in the pursuit of profit. In the following chapters, we examine the continuing conflict between consumption and investment.

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