The term “productivity” is used a lot when discussing business results. It's an easy concept to understand when you realize it is reported in some form of output divided by an increment of effort, such as sales divided by wages & benefits. “Profits” over “labor,” if you will.
And this is the crux of the productivity problem. When an employee takes a job, they are concerned about how many dollars they can get for their efforts. A business is concerned with how much effort it can get for every dollar. We start the arrangement with diametrically opposing goals.
America has enjoyed a steady gain in productivity in both the manufacturing and agricultural sectors, nearly doubling in the last 20 years alone.
There are a lot of reasons behind this. Automation, quality improvements and “design for manufacture.” This was a boon as demand grew - not just American demand, but global demand. In fact, demand grew so fast we found that we needed as much help as we could get to keep up. And that came in handy, as it is a lot easier for many people to accept diversity when there is enough work for anybody willing to do it. And, better yet, the earnings of these productive workers further stimulated demand - living up to the Henry Ford maxim that he wanted his workers to be well off enough to afford his products.
But then two things happened. First, profits began to take on unprecedented importance as a measurement of business success. The “bottom line” meant continuously increasing profits and constantly improving ratios, all while meeting the increasingly voracious expectations of a speculative investment community. And, more recently, businesses were supposed to perform this statistical balancing act against the backdrop of a global economic lull.
And therein lies the second problem. As demand flattened or even fell, we didn't need all that output. But, businesses did feel the pressure to prop up their numbers. To keep the productivity equation in balance; if profits weren't always going up, we had to get rid of some of the costs on the “effort” line.
So middle management and production labor gets let go. And those finding their way back into the business of adding value through honest labor are also faced with fractions - like that their new jobs pay a fraction of their old one, or that their family will have to scale back to a fraction of their dreams. These circumstances conspired against a large segment of our workforce, decreasing their spending power, further suppressing demand. Profits drop again. Someone else gets laid off. It's a vicious circle.
The Profit Motive
Years ago I worked for a company that had its European headquarters in Denmark. They ran a great operation, staffed with really smart, hardworking people. During my visits, I came to the conclusion that it was one of the best atmospheres I have ever experienced in a workplace. One little problem - they never made real money.
Like clockwork, our Danish operation finished every year within a few Kroner of break even. One year up a little up, one a little down. It was a conundrum for the American management, who saw the same positive things I did.
The secret was finally cracked when I began to delve a little bit into the Danish culture. It's not an easy task, because it's not just words you have to translate - it's often how the whole concept fit with their psyche and social norms. And that's where the light bulb went on for me. The Danish concept of “profit” loosely translates to “the money you kept from your business partners over and above what was necessary.” What this meant is that the Danes could express good intentions of a “profit” in budget meetings, but when it came to executing day to day business it became an impossible task in the “win - win” world that is Denmark. They specialize in fair deals.
Some might scream that this is “socialist,” but I don't think the average Dane would agree. They are more “collectivist,” or all in it together. It is a stark comparison to the “every man for himself” environment that has developed within the American economy. It makes me wish we had imported a little more than a breakfast pastry from the Danish.
What Is Value?
One of the most read periodicals in the US every year is the annual “How Much Do They Make” issue of Parade magazine. Most of the interest is pure voyeurism. It's interesting to have an idea of what other people are paid, as it is still a taboo subject in so many social and workplace situations. We are a capitalist society and often measure success in net worth, so it figures that people want to know how various versions of the American Dream are compensated.
In a pretty tangible way, the annual Parade survey offers a snapshot of our values. And, at least in casual conversation, I don't feel alone in the opinion that we have lost balance in how we value people's efforts, in particular those who impact the quality of life in our local communities.
Think for a minute about the many fine musicians that perform in area nightspots, receptions and festivals. They'll practice during the week, show up early to set up thousand's of dollars worth of gear, spend the full evening displaying the fruits of hundreds of hours of practice, basically make the evening for everyone involved, then tear down the equipment and head back home - all for less money that my lawyer makes for putting me on hold for 15 minutes. I hope you don't find it to be an extreme opinion, but to me, that's just wrong.
And this set of values is played out across our communities. The helpful librarian, the waitress with the consistently bubbly personality and the efficient oil change technician are doing it on paychecks stretched so thin and budgets so flexible, even a Trojan condom would be impressed.
We codify these values in other ways, such as our tax laws. For instance, money earned by “working” is taxed at rates ranging from 20%-35% of your gross income. On the other hand, income made from passive investments, like stocks, is taxed at the 15% capital gains rate. This makes little sense to me. The most productive thing a person can do is to get up off their duff and make an effort and reward that behavior with a higher tax rate. It's like a penalty for trying. And it is not fair that the sweetest tax deal is basically unavailable to the average person working simply to make ends meet.
And, please, do not lecture me on the concept of the risks that investors take. The crew of guys that recently spent the better part of two weeks scrambling around repairing my roof - they take a risk. A Wall Street trader with a million dollar bet on next week's earnings reports - not so much.
Nobody has ever broken their neck in a stock market fall.
The Social Contract / Where the Jobs Are
The math of productivity is pretty straightforward. The more profit grows and the more the cost of the necessary efforts decrease, the higher resultant productivity. That's the basic principle of our current system. More profit and less labor equal success. As defined by American capitalism, it is impossible for the profit line to be “too much” and equally unimaginable for the labor line to be “too little.” Inherently, fewer future jobs will be built into the equation. How does that sound to you?
Greedy might be the word you are looking for.
Many articles have been written of late asking where the jobs needed for an economic recovery are. And I will tell you that they are often the victims of modern business metrics: as clinical as an MBA case study, supported by a spreadsheet and just in time to pay a multi-million dollar bonus to this year's winner of the CEO lottery.
I have been fortunate enough to do business in nearly 50 countries over the last 25 years. The most fascinating places were clearly those with burgeoning economies, experiencing transformative economic growth. Places like Shanghai, Singapore and Mumbai were just humming with activity.
And that's part of the plan. You will notice right away that every business you walk into seems to have far more people working in it than a comparable American operation. They may have a much narrower job description than their American counterpart, but you would be hard pressed in most instances to make the statement that they weren't taking their roles seriously or that they weren't engaged in productive behavior.
In several discussions over the years, I came to understand this policy of hiring as many people as possible as part of the “social contract” of these cultures. One of our Indian managers nailed it when he said “If an American businessman can eliminate one position and still make the same amount of money, he will tend to do it for the sake of productivity. If an Indian businessman can hire one more person and still make the same amount of money, he will do it for the sake of society.
Success is best when it is shared by all.” And it is really hard to add much to that.
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Nov 17, 2011
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