Productivity and Prosperity

2006-02-20

James McCormick's fascinating essay-review has introduced me to the work of William Lewis, specifically his book The Power of Productivity (it's on its way to me through the Denver Public Library). Lewis and his team completed years of research at the McKinsey Global Institute to try to determine the causes of the modern wealth of nations. The key, says Lewis, is productivity. But not productivity in a few selected, high-profile industries like auto manufacturing or computer hardware. No, you need to look at productivity across all sectors of the economy, including unfashionable sectors such as retailing, construction, transportation, and food processing.

When you do that, you find that producivity is higher -- indeed, almost shockingly higher -- in America than anywhere else on the planet. For example, productivity in the Japanese auto industry is perhaps 150% of that in the American auto industry, but in retailing Japanese productivity is only 50% of American productivity, and in food processing only 30%. Similarly, illiterate Mexican construction workers building residential housing in Houston are four times more productive than illiterate Brazilian construction workers building residential housing in Sao Paulo. Now, why is American productivity so high? It's not because Americans are so much smarter or harder-working than people in Japan or Brazil or France or wherever, because they're not. Any difference this pronounced must be systemic.

As far as I can glean from James's review and from the interview with Lewis that he points to at Tech Central Station, Lewis sees two fundamental reasons for America's extreme productivity: one is an openness to competition in all sectors of the economy, and the other is a relentless focus on meeting the needs of the consumer. For example, retailing in Japan is strongly controlled by the small stores, which have successfully resisted the onslaught of large chains; yet in America, despite token resistance from Main Street nostalgics, the "big box" retailers (Wal-Mart, Target, Home Depot, et al.) have come to dominate mass-market retailing through relentlessly improved sourcing and logistics. (That doesn't mean specialty retailing has disappeared; instead it has focused on aspects of the shopping experience where the mass-market retailers can't compete, such as customization, style, and taste.)

The American emphasis on competition is usually seen from the perspective of the producers: the dog-eat-dog world of capitalist enterprise, wherein big companies fight over market share and seek to drive their competitors out of business. Yet Lewis ties American competitiveness to American individualism in a surprising way -- not the individualism of the producer, but the individualism of the consumer. Many commentators have noted the power of consumerism and consumer interests in America (shopping malls as "cathedrals of commerce" and all that), but Lewis argues that consumerism has deep roots in America that go all the way back to the nation's origins. Citing Gordon Brown's book The Radicalism of the American Revolution, Lewis notes:

[A]t the time of the Revolution, consumerism exploded in the US. And it was associated with the fundamental notions of individual rights... prior to that, at least in the feudal societies of Europe, consumption was viewed as a luxury to which only the land owning class was entitled. And everybody else was entitled to subsistence -- enough food and enough shelter to survive and that was it. And at the time of the revolution, because the revolution was so rooted in ideas of individual rights and equality of opportunity and equality of desire and equality of demand, everybody said, 'why not me?'

Now, long-time readers of this blog know that the revolutionary philosophy of individual rights was in many ways a wartime rhetorical strategy and that American culture was a mostly direct offshoot from Britain (although quite likely it was the more individualistic, or at least culturally deviant, British who left for America). Yet even within the nations of the Anglosphere, which score higher along the dimension of individualism than other parts of Western civilization, this overt consumerism is relatively absent. Only in America has the culture of the consumer emerged (e.g., Americans are much more likely to complain of poor service than are people in Britain, probably because they expect their needs to be met and will vote with their feet if not).

Lewis contrasts the American economic culture of competition and consumerism with the opposite approach of planning and what we might call "producerism":

However, the other side of the coin, and the thrust, the modern thrust, that conflicted with this so strongly in the first half of the 20th century and even mid century, was the thrust of, I will call it, planning - the Soviet Union illustrating that to the greatest degree, with a fully centrally planned economy. It is interesting how many economists and how many intellectuals and how many other people really thought that was the way to create the superior economy because smart people could just figure out what should be done.

And I think I have in the book this great quote from Gunnar Myrdal right after he won the Nobel Prize. It must have been back in the 1950s. It said "what the poor countries or the developing countries need is super planning." And that kind of thinking just permeated the poor world, and also the developing institutions. There were vestiges of that thinking left in the middle 1970s when I was at the World Bank and it still echoes around in Delhi when we were there working on India. Nehru was a great admirer of the Soviet Central Planning System. He and the leaders in India thought, and in some respects probably still think, at least some of them are smart enough to figure out how all this should happen.

And of course the way you make a plan happen is by having a plan for production, not for consumption. There is no way you can plan or affect the individual choices that the people make as individuals when they buy things, but you certainly can affect strongly what they have to buy through production planning. And so this whole idea of the producer orientation was aided and abetted in modern times by the planning idea.

It's easy to focus on producers because they are a special interest who realize disproportionate benefits from legislative protection. The hard thing is to focus a nation's political economy on the consumers, whose actions cannot be planned or predicted and for whom the benefits of competition are so widely dispersed. Somehow, through its culture of individualism, America has done this to an exceptional degree, other Anglosphere and Western nations have done it to varying degrees, countries such as Russia, Brazil, India, and China have done it hardly at all, and places like Africa and the Islamic world don't even really participate in the global economy as producers or consumers.

I don't say this primarily to celebrate America but to bemoan the lack of respect for the individual (yes, even the individual consumer) in most of the world today. And that lack of respect has serious consequences for productivity and prosperity. If current trends continue, Americans will keep on getting richer and richer, while much of Europe will stagnate and so-called emerging economies like China and India may in fact never emerge. The implications for global relations will be profound.


Peter Saint-Andre > Journal