Improving Productivity

[00:00:00] Insofar as potential growth is determined by productivity and labour supply, we're putting a lot more emphasis on productivity growth really going forwards. And that is the thing that fell off in the post 2008 period. Certainly, I mean in all countries other than the US. And of course even in the US it's very focused on the tech sector. If you look at the US, the US absent the tech sector looks much like the rest of us in many ways. So going forwards in terms of what raises this potential growth rate, it really is productivity. We've got to look at productivity growth.

[00:00:29] This is the Debunking Economics Podcast with Steve Keen and Phil Dobbie. Well, that's Andrew Bailey, the Governor of the Bank of England, saying that if we want the economy to grow, each of us has to produce more output. But how? I mean output is dependent on energy and there's much less of that swilling around at the moment. So how do we actually increase productivity if that's the way to get the economy to grow faster? That's this week on the Debunking Economics Podcast.

[00:01:03] So many times, Steve, we've had economists saying the economy will pick up if we can just improve productivity. In other words, we have an economy which is using up its capacity. We're almost at peak capacity, in particular capacity for people to work. We've got a very tight labor market. You know, many countries in the world are saying that's where we are right now. So how do we get growth?

[00:01:30] Well, the only way we can get growth is that we need to pick up productivity. So in other words, for every hour of work, people are outputting more, whether they're working harder or machines helping them to work harder. However you get to it, we need to pick up productivity. But guess what? For a long time now, we've seen productivity not going anywhere in the West, maybe a little bit in the United States now. And AI might be able to help that.

[00:01:52] But by and large, we are service driven industries predominantly, and you can't get much productivity gains from those. So is it a vain hope now? Should economists stop talking about picking up productivity because it's just not going to happen? Well, again, it's what do economists mean by productivity. And they've made up a mythical thing they call total factor productivity.

[00:02:16] And when they talk about productivity not rising, what they're talking about this thing called TFP, total factor productivity, and they're seeing it growing very slowly. And when you take a look at how they came up with this concept, it's a complete and absolute myth. It doesn't exist.

[00:02:33] And this is, I've got to dive a bit back into history of economic thought here, but neoclassical economists believe that the distribution of income reflects the productivity of the people, of the inputs, factor inputs. So wages reflect the productivity of workers with marginal productivity. Profits reflect the marginal productivity of capital, and that's what determines prices. So productivity in that sense is embedded into their way of thinking.

[00:03:03] And then in the 1920s, two economists and a mathematician, Douglas and Cobb, together dreamt up a model of production they call the Cobb-Douglas production function, a very original naming. And what that said is output is the way that they measured output, and they said output is equal to a constant multiplied by labour multiplied by capital, where both labour and capital are raised to a power that reflects their share in GDP.

[00:03:31] So you had a constant multiplied by labour raised to the power of 0.75, because in those days workers got about 75% of GDP, multiplied by capital raised to the power of 0.25, because in those days capitalists got about 25% of GDP. And that's the model they fitted to data. And that became... So you invest more in machines, then GDP goes up, or invest more in people, but you have to invest a lot more.

[00:03:59] You've actually jumped a step ahead on the logic to where I want to say why they've got all these ideas wrong. Because, yes, machinery, technology is embodied in machinery. I mean, I've bought... You know, what have I bought? Here's what I've been entertaining myself today. This is my new piece of technology, which is my... What is it? It's a nut computer, okay? No, okay. I want to knock on the head the guy built a basin or that I can't bloody well remove, but that's technology. That's capital.

[00:04:29] Technology is embodied in the machinery, okay? It is not something independent. I don't take a... You know, I don't take this box, for example, and add technology to it and suddenly I've got a computer. Technology is built into the machinery itself. But in the 1950s, Robert Solow, who's one of the leading figures in mainstream economics, interesting personality. I have more time for Robert Solow than I have for most neoclassical economists. But he said, oh, look, we've left out technology.

[00:04:59] We've got labour and capital inside there, but we should also be looking at the role of technology. So what he said was, let's now make this production function equal to E. Income is technology. Would they use the letter A for it for some reason? Capital A. Multiplied by labour raised to this 0.75 times capital raised to 0.25. Now, then he had, how do you measure it? Now, he had, you've got data on GDP. So the why is taken care of.

[00:05:29] You've got data on labour. So that's taken care of. You can sort of fudge together, fairly complicated way, measure the number of machines you have. Okay. So you've got measurements for those. What about technology? Oh, we don't have that measurement. So what they then said, well, we've got measurement for income, measurement for labour, measurement for capital. The residual is what we're going to call total factor productivity. Okay.

[00:05:56] So they said the change in GDP reflects change in total factor productivity, plus change in labour, plus change in machinery. Now, with the, so they derived the total factor productivity one, they had to subtract change in labour and change in capital from change in GDP. And then they found that the contribution of what they call total factor productivity to growth was of the order of three quarters of the level of economic growth.

[00:06:24] So they said all, the labour and capital seem to be less important than technology. So we then have to find ways of raising productivity, total factor productivity. And now they obsess about this abstract concept outside physical labour and physical capital. And often they call it labour productivity. Well, we've got to make workers work harder. That's the sort of interpretation they made.

[00:06:50] In fact, the fact that you've described is actually making the technology work harder. That's how you produce higher output. You make machines that you can't. So the example for that right now would be with AI, for example, because there are strides being made where it's got an output, however you want to mention it. And hours wasted by people needlessly asking questions might be one of it.

[00:07:19] But anyway, we should do something about AI, whether it's good for mankind or who's going to destroy it. Yeah. With a conversation everyone's having these days, isn't it? Yeah. But whatever the output from AI, it can output the same or more for the same amount of energy compared to a couple of years ago, because chips have become capable of doing more, more efficiently for the same amount of energy.

[00:07:44] So that's an example of where there's a technology driver which has delivered productivity gains for the same amount of inputs. That's the sort of thing you're talking about. Yeah. And it comes down to the energy throughput. This again is because conventional economic theory. I mean, we're talking with people who might as well be discussing how many angels can dance on the head of a pin. Their theories are elaborate and completely irrelevant to the real world.

[00:08:10] So Solow's contribution of working out technology independent of machinery labor was a mistake. Okay. It was not a sensible idea at all because the technology is embodied in the machinery. Okay. Now, when they do their calculations to derive what they call total factor productivity, I can mathematically show that what they're actually deriving is the contribution of energy. Yeah. And that's what's left out of their theories.

[00:08:39] So they have a theory of production, which says output is produced by machinery and combining machinery and labor. But they have no role for energy. Now, that's where my little line, my one liner that led to one of my research agendas. Labor without energy is a corpse. Capital without energy is a sculpture. So it means when you look at it, you say, well, it's not labor you're inputting into production and it's not capital you're inputting into production.

[00:09:06] It's labor multiplied by the amount of energy that workers consume, multiplied by how much of that energy goes into production versus, you know, lifestyle these days. With the machinery, same thing. Number of machines multiplied by the energy consumption per machine per year, multiplied by how much of that gets converted into useful work.

[00:09:28] Now, when you do the mathematics of all that, you find that what neoclassical economists call total factor productivity is actually the energy throughput of machinery. That's what it really is. So the machinery, as the time has gone on, the amount of energy that a machine from 2025 can throughput is far greater than a machine from 1965, let alone 1865. So it's the energy throughput.

[00:09:55] So you need to be designing machines that can either use more energy or convert more existing energy into useful work rather than waste. That's where your productivity comes from. But instead, when you hear politicians talking about that, they're also saying, oh, you should deliver two newspapers rather than, you know, you could increase your productivity at the work. The person distributing our newspapers is a bad example. But it comes down to saying workers should work harder.

[00:10:23] Now, that's not how we increase productivity. We increase productivity by producing machines that can convert more energy into useful work and their predecessors. So it comes down to technology. But is it the case that you have to use more energy? Can't you say we can get more productivity out of the same amount of energy if the machine is just manufactured in a more efficient way?

[00:10:49] That is the hope that everybody had about, you know, improving productivity per unit of energy input. And that's where the Industrial Revolution began. Because if you take a look at the, I keep on forgetting the name, but it was a name like Bell Connor. No, that's a can or a suburb, but a name, Newcombe. Newcombe invented the first effective steam engine way back in the early 1700s. But what that happened, that had a single condenser.

[00:11:17] The chamber in which the water was heated by coal to cause steam to make it expand was also the one in which it was unable to cool down. And it meant that about 90% of the energy was wasted at that stage. So James Watts' invention was to produce a separate condenser, also a governor, which meant that the condensation occurred in a different chamber than where the expansion occurred.

[00:11:42] And that meant that rather than only getting about 10% of the power of coal into the steam engine, you got about 30%, something of that order. So, but the major leaps in energy efficiency have already been achieved over the last quarter millennium of capitalism. So the amount of room to be able to increase the efficiency with which we convert energy into useful work is not quite,

[00:12:10] but it's approaching the limits that thermodynamics itself applies. But are you just saying that because we can't foresee the future? So let's, so for example, right, if we were doing this podcast when I started my radio career, right, it would have been a bloody nightmare because I would be talking to you on open real tape and every single edit I'd have, I'd be getting out my razor blade and a little bit of tape and I'd be going through a very laborious process.

[00:12:38] And it would be all day, brain numbing tasks all day of trying to, and the energy that I'd use, I'm sure would be the same if not more, because there's the energy of keeping the mixing console in the studio powered up, the tape recorder powered up, and my time, which might translate from half an hour into six hours. So massive efficiencies, and that's relatively recent.

[00:13:06] I can't believe there's not going to be an example. That's because, I mean, I used to work in... And the next thing is going to be AI is going to go, well, I'm already, for example, there's one person I do an interview with on a regular basis and she ums and ahs a lot. And AI has already taken out the ums and ahs for me in a fraction of a second. So that's, that's another efficiency gain that if I was to go through manually, I probably would have used up the same, if not more energy. So there's, you know, so that's still happening. It's still happening, but then this is when I come back to the data.

[00:13:33] And when I look at the data, I mean, it's stunning, the correlation between energy and GDP, or GWP, gross world product. And that's what makes me think the limit, the, the propensity people imagine to increase efficiency just doesn't turn up on the actual data. So I, if, again, I haven't got the data because of my own computer hassles right now, I can't look at the data straight away.

[00:14:00] But the correlation between change in energy input and change in gross world product is pretty much 0.9. They're almost the same thing. What you do see over about a 40 year period, the amount of GWP per unit of energy has roughly doubled. But that's taken 50 years.

[00:14:19] Now, people are talking in terms of dramatically increasing that rate of growth of GDP, gross world product per unit of energy. And you look at the data, it's taken us 50 years to double it. And maybe that doubling reflects a large expansion in the size of the finance sector, because the way we measure gross world products, the contribution of finance to gross world product,

[00:14:47] is simply add up the wages and profits as if that's been a contribution. It may be more sensible to deduct it because that's a cost of doing business. It's not actually creating anything in its own right. So even the gains we have seen may be illusory because of the increase in the proportion of gross world product captured by the finance sector. So I just don't think those gains are there. And so what are we saying?

[00:15:16] So we're saying then that the gains in productivity are not going to come from people working harder. Not anything like that. Or by investing more in machines, it's going to be investing in the advances in technology so that that capital component can work harder. That's where the real gains, that's where the ingenuity is. Yeah, in effect, yeah. It's got to come down the, yeah. So you think that is entirely related to, or largely related to energy. So you can do that, but you've got to power more energy out of it.

[00:15:43] So we can't, so productivity and energy are inextricably linked, is what you're saying. That's right. And that's the increase in the living standards we've experienced over the last 250 years, really has come out of increased energy consumption. I'll give you another silly anecdote before we go to the break with a mate of mine who's a bit of a throwback. He's great, great, great mate. But he resists the latest technological changes. Amusingly enough, it took him 25 years to get into electric toothbrushes.

[00:16:11] And he used to think, oh, these are just people who are too, too lazy to rub their own teeth. That was his, and then he tried an electric toothbrush. He'd almost pulled his teeth out by the roots. He was amazed. And I said, mate, the whole basis of progress is using more energy. So the amount of energy you can actually get from your hand is far less than putting a motor and a battery inside it and attaching it to the toothbrush. He said, he could almost pull his teeth out because his teeth were in such a bad way because he hadn't been brushing them properly. That's right. He hadn't brushed them. He wasn't using enough energy.

[00:16:40] So it comes down to the energy is the way with which we've increased productivity. Can we keep on doing it? And that's where we reach the break point. We're in the global economy. We've suddenly trashed 20% of the energy, fossil fuel energy output of the planet. We simply can't take up more. Okay. Which brings us nicely onto what I want to talk to after the break, but I won't talk about that now. I'll talk about it after the break. So we'll do that now back in just a second on the debunking economics podcast.

[00:17:10] This is the debunking economics podcast with Steve Keen and Phil Dobby. So, Steve, the thing that we face now, of course, is that we have moved from a world of just in time to, you know, we've just got to be safe. You know, we've, we've realized that the most efficient way supposedly to operate was to be buy stuff wherever it's made in the world for the lowest possible price. Yeah.

[00:17:39] Get it to us because shipping it became relatively inexpensive comparative to the cost of producing stuff locally to all of a sudden COVID, Ukraine, and now what's going on in the Middle East has challenged all of those supply chains. We've realized that just in time is a very dangerous assumption to make. And so now we're starting to go, if that was the most efficient way of doing stuff, but it can't be trusted, we've got to start building up reserves.

[00:18:07] We've got to start producing stuff locally, which might not be as efficient. So productivity slides, doesn't it? And here we are talking about per worker output per machine has to fall in these circumstances. So the whole, you know, if they work harder, be more productive, all that sort of, you know, slogan stuff you see coming out of management and amplified by economists as well. It's the opposite direction we need to go on. What we need, we don't need more efficiency or productivity. We need more robustness.

[00:18:37] And that's again, one area where, again, I'd quite be surprised when I see China's data. You know, the one and a half years of fuel reserves. I was talking with a young student of mine, an ex-student who's now living in China, commenting on the ridiculous conversation I had with a China bear about two or three months ago. And he claimed, and I haven't had a chance to check it, but he claimed that China's grain reserves are one and a half years worth of consumption.

[00:19:05] So most of the rest of the world is going to face energy shortages and food shortages. The one country that we know won't face either of those is China because their ethos… Unless it's all been eaten by maggots over two and a half years, of course. I've got a feeling that China's are keeping an eye on the maggots. Besides, most of them work on Wall Street anyway. So, yeah, I'm trying to… I was feeding you the lines, Steve. I was feeding you the lines.

[00:19:33] But yeah, this to me is the worry that the fact that China has a Marxist background and the fact that they also, you know, they try to plan things in the future means that they're prepared for this gigantic shock to the capitalist economy. That the capitalist economies are going to be completely devastated by. Yeah. So it points out the importance… Again, trash neoclassical theory. I've got my criticisms of Marx, as you probably know.

[00:20:03] But in the sense of having an idea about the physical nature of production and the need for buffers and being able to absorb disturbances you can't actually plan for. That is built into the Marxian way of thinking. It's completely foreign to the neoclassical way of thinking. Now we're hit with a disturbance like this. The one country you can be pretty certain will not suffer from this is China. So again, it's… But they still have nothing… I mean, they are buying oil from Iran. Yeah. But they've got one and a half years ready.

[00:20:33] One and a half years in storage. Okay. Yeah. Okay. Right. If this is going on in a year and a half, they're in the same boat as everybody else, of course. Well, I've got a feeling there's going to be some pretty dramatic Chinese drilling going on pretty soon and pipe building because… I mean, part of the whole Chinese ethos comes out of the Opium Wars.

[00:20:52] And for those that don't know, the Opium Wars were fought by British and American and French troops to force the Chinese to continue importing opium from mainly English producers of opium in India. It was a war of drug dealers making sure the drug deal was forced upon the Chinese population. So this humiliation and insult that China experienced at that time is one reason why they're very skeptical about the West. They don't… And they…

[00:21:21] The West is doing what China expected it to do and not because of any response to any provocation by China. The one subtext that you can try to explain where this stupid war came from is a belief they could cripple the Chinese economy that way. Now, the Chinese response, a bit like the Iranian response, if you cut off our supply chains from overseas, we're going to build domestic capability.

[00:21:43] And I can see China deciding it's got to have means to reach the oil that it still needs without relying upon shipping chains where the Americans can harass them, but also move as fast as they can to nuclear and solar and wind and remove their dependency on oil in the first place. And this will accelerate those objectives in China dramatically. We'd hope that we'd all be the same, wouldn't you?

[00:22:11] And by the way, just on that, you know, that ability to adapt and, you know, Iran seemingly seems to be able to keep surviving even though it's been copy-bombed. And there was a piece in the, just as an aside, a commentator in the FT last week saying that, you know, why are we surprised that we have excluded Iran from the world economy for so long? Why are we surprised that they've found other ways to survive? Not through the traditional channels. Yeah.

[00:22:38] And so here we are saying, well, okay, we are going to deny you those established channels through blockades and the like, but we've been denying them through sanctions. So you've already found work around some more of this. So why are we surprised that you're showing all this resilience? It's just naivety in the extreme, isn't it? But let's get back into the situation and maybe, you know, China is showing the way the rest of the world might operate. Yeah. So let's look at Europe, for example.

[00:23:05] If Europe did manage to become a little bit more self-sufficient or a lot more self-sufficient in energy, but also was on-shoring rather than off-shoring. So it was doing stuff in a less efficient way. But it would, over time, pick up on that productivity. If it had more energy, it would be able to make those productivity gains to such a point that it would be operating as efficiently as it was when we were working on an international scale, but without the risk of geopolitics getting in the way. Yeah.

[00:23:34] And that's what we're finding now. It means globalization was a trap. And countries which we excluded from the global system have learned how to be sufficient on their own. And like in China, we're seeing an incredible rate of productivity increase over there, not because workers are working harder, but because they're designing machines to do things which workers used to do and where the machines can use far more energy to do it and can do things far more effectively.

[00:24:03] So the belief that productivity is our problem, it's really a lack of investment that's been our problem and lack of capital formation. So all the arguments that the neoclassicals talk about are efficiency and there's this abstract concept.

[00:24:22] It's actually something you build into your machines and you want to have as much capital formation as possible to replace old machines with new machines that are more effective, using more energy and using energy more effectively. That's how you get the increase in productivity. The exhortations that the Western economists are doing and politicians to their workers might as well be, you know, magicians or witch doctors.

[00:24:50] Well, it is in the extreme, isn't it? When you get government departments saying that we need to drive productivity, which means we've got to make people work harder. So we're going to demonstrate how it's done. We're going to cut the budget from this department by 30 percent so that this department will have the same output for 30 percent less input without any of that investment in the ingenuity to be able to deliver that. We're just going to make people work, you know, 30 percent harder, which, of course, is just not going to happen.

[00:25:17] I mean, it's just like such a naive approach to the whole thing. It is. There's no sense of reasoning in any of that whatsoever. No, there's not. It's like people are 30 percent lazy. I don't think people are. I think people are working, you know, as stressed as hell at work right now. And that's the trouble. You know, we've made a stress workforce is not a creative workforce. So, yeah, there's all sorts of ways in which we're what this crisis is really doing is exposing the myths of mainstream economics.

[00:25:47] Because all these myths about, you know, labor productivity and working, you know, smarter, not harder, yada, they're all bullshit. The real if you want to increase your productivity, you produce machines that can handle larger amounts of energy. That's what you do. You need your engineers to be designing those things. The workers basically become inputs to the machine. They're not, they can't work harder or faster than the machine itself allows.

[00:26:16] So it's really what you do in terms of improving your machinery over time. And, you know, you've got to be investing to be doing that. And that means high levels of capital formation, which the West has not been achieving for 30 years. Right. And you need smart people as well. So those machines could be designed in a better way. So it's not just a question of the energy which is input into them. You know, there might be ways that through processes you might be able to create a more efficient output, for example.

[00:26:43] And that takes human brain power as part of that. So you need good education. You need smart people working on all of that as one of the inputs as well. But if you get all of that right, I mean, this could be good for places like Europe, couldn't it? And this is a long way down the track because there's so many things to counteract. But if you had the energy to be able to meet that demand, you know, you had more green energy, those resources,

[00:27:10] you've got the brain power to be able to create more efficiency with those machines that are creating those outputs. Then in theory, once you've gone through all of that, you should be more efficient than you were before because you've cut out the time that stuff is spent sitting on a boat out at sea. You are closer to the market. You are more responsive to the market, to local demand.

[00:27:34] And all of those should be arguments for greater productivity than before, you know, greater productivity through localization rather than globalization. Yeah, and globalization has always been an error. It was put across as being comparative advantage. You know, we specialize in what we're good at. They specialize in what they're good at. We do services. They do manufacturing. It was all garbage. The only thing it actually did was exploit low wages.

[00:27:58] Now, what China has done is turn that low wage exploitation into a dramatic capital formation exercise. And they've benefited very well from that globalization. But in terms of Western economies, wherever you measure the rate of economic growth since globalization became the obsession of mainstream thinkers, mainstream economists as well, greater productivity has declined.

[00:28:27] So if you take a look at the period from 1945 to 1975, which I regard as the pre-neoliberal period, not really Keynesian because it was bastardized Keynesianism that was practiced. But in that period of time, when you had unions and government regulations and all this sort of stuff that the neoclassicals say slows down growth, the rate of growth of output was of the order of, say, 2.5%, 3% per annum in America.

[00:28:55] Since they've got rid of all those terrible regulations, growth has now risen by minus 1%. Okay. In other words, they've cut the rate of growth. The rate of economic growth between 1945 and 75, if that had been sustained between 1975 and 2025, per capita incomes in America would be 45% higher. So rather than achieving a higher rate of growth through globalization and deregulation,

[00:29:24] we've actually achieved a lower rate of growth. Because what's that's taken away to some extent is the pressure on firms to industrialize, to develop new technology. Because why develop new technology if you can screw the workers and pay the workers less wages? You get more of the income distribution out of the economic system. You're giving the workers less. Who needs to make more productivity? It's actually the...

[00:29:49] Where it is, you said the alternative is smart machines producing stuff of high value created by people on higher wages that can afford to buy those things. Yeah. That's where your growth comes from. And that's what China has been doing for the last 40 years. Yeah. Although they're not doing a great job of getting their local people to buy it. They're still very much export driven, but that's the map. Even so, the export component of the Chinese economy is lower than most Western economies.

[00:30:18] So again, it's a myth that they're relying upon just to one exports. And by the way, you've never been shopping with a Chinese girlfriend in Shanghai. Wait till you do. Okay. The whole idea that that goes consume. I'm sorry. Ironically, they're buying stuff in the West though, aren't they? Because that's seen as... Well, they buy stuff which has been made in China and badged with the Western badge on top. West, right. Okay. You buy your Gucci. Yeah. Yeah, yeah. Or your Gucci ripoff. Yeah, yeah. All right. Okay. Well, so the roadmap's there.

[00:30:48] So the problem is that we're not recognizing the roadmap. So we're talking short-term efficiencies. So we're saying what we need is we need to drive productivity up because that's where we're going to get growth. And we're looking at labor for that rather than looking at machinery and energy and initiatives that are going to drive greater efficiency from the use of that energy and those machines and doing it locally. Yeah. And the brain power involved in all of that.

[00:31:15] And that is a short-term loss because you can't do it overnight and you are moving stuff on shore that you might have been getting, you know, a greater efficiency from energy use overseas. And machinery overseas. So what you've got to do is say short-term loss in productivity while we develop this capability on shore. But what we're going to use is this thing called – now here's a – what about this is an idea? An industrial strategy. Oh, no. You can't have one of those.

[00:31:45] What's the thing like that? God said in the Bible in Chapter 37 of Botes 2 that one cannot have industrial policy. Just ask Peter Hegseth to read it out for you. Or Donald Trump. He can quote the Bible at you. Yeah, I know. Yeah. It's mad. Having a plan. But, I mean, all of that makes logical sense. And the idea that you are going to get productivity driven by improvements in labor productivity. I get it.

[00:32:12] Just grind people, make the bastards work that little bit harder is just such a fallacy, isn't it? It's crazy that some people would even think that. But we've got the answer here. That's why people listen to this podcast. In their droves, Steve, because we solve the world's problems. There we go. We'll catch you next time. Thank you. Okay, man. See you then. Bye. The Debunking Economics Podcast.

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