American productivity and the law of diminishing returns

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Christian Peterson, CMT®    Investment Analyst
Christian Peterson, CMT®
Investment Analyst

While it seems counter intuitive, there is no doubt that America and the West are living through a period of meager productivity.

Factories are becoming automated, software is revolutionizing, and in some instances replacing¸ professional services like accounting and law, and anyone who has been to a grocery store lately has noticed that some of the cashiers have been replaced by self-check-out lanes.  It certainly seems like we’re getting more done with fewer labor inputs.  And then there is that cultural and economic phenomenon called Silicon Valley, a place teeming with energy, ideas and a passion for creating what are known as “disruptive technologies” that revolutionize the way we work, play and go about our daily business.  Just think of how many tasks, from paying bills to arranging a business meeting, can be done from your phone!  Yet the data is undeniable.  Productivity gains began tapering off in the latter half of the 20th century and have all but disappeared here in the 21st.

And so the question of productivity, why we have less of it and how to get more, becomes one of paramount importance.  And that brings us to an article we saw this week in the New York Review of Books. Written by Edmund S. Phelps, a Nobel Prize-winning economist, it addresses the social and cultural impediments to increasing productivity.

The crux of Mr. Phelps’ argument is that Western economies have lost their dynamism because innovation is confined to an ever-narrowing coterie of elites.  In the 19th and 20th centuries you could find people from all walks of life solving problems and creating new technologies.  He uses as examples George Stephenson, inventor of the steam engine, who was illiterate.  John Deere, inventor of the cast-steel plow that “broke the plains” was a blacksmith. Isaac Singer, developer of the sewing machine, was a machinist with no formal education and Thomas Edison, who also had no formal education.  There was, we could say, a “democratization” of new ideas and inventions that is missing today.  Instead we have Silicon Valley, which is the very definition of an aristocracy, creating the digital and virtual environments the rest of us unquestioningly mold our social and work lives within.  With our experiences so heavily mediated by digital technology, our expectations, thoughts and behaviors become confined to those that can be accommodated by the technology we use.  Although we are often admonished to “think outside the box” as an impetus to innovation and invention, it’s an inescapable fact that the box we’re thinking outside of exerts its own ineluctable influence on the outcome of our efforts.

Another aspect of this “mediation” of our experiences and expectations can be seen in how heavily programmed childhood has become.  If you are of a certain age, doubtless you remember that the vast majority of your time was spent in unstructured play in which adults were entirely absent.  Many of us can remember “pick up” games of baseball or football in a local park or abandoned lot.  We learned all the rules of the game, how to resolve disputes and adapt to random circumstances, like an irregularly shaped playing field or not quite enough players to make a full squad, with no formal input from adults.  In short, we grew up in an environment that inculcated independence and original thinking.  Starting in the 1980’s, that changed.  Parents became increasingly involved in their child’s life to the point that opportunities for unstructured play have virtually disappeared.  Whether its sports, the arts or any other endeavor, children are under the constant supervision of adults who instill a deference toward authority and a strict adherence to the rules

Mr. Phelps also points to the ability of entrenched interests, whose power has risen enormously over the past three decades, to stifle innovation with regulations that make it harder for new businesses that might threaten the privileged position of incumbents to gain access to the “free” market of ideas and inventions.  Small businesses and civically minded politicians decry the burden of over-regulation and point their finger at myopic and self-interested bureaucrats in the state and Federal government for the regulatory mess that is holding back small businesses.  They often fail to see the hand of Big business in the proliferation and intractability of these regulations.

There are, of course, economic and technological reasons for the lack of productivity gains in Western economies.  One quite compelling argument is that our economies are currently so productive already that new innovations can only increase productivity marginally – we are bound by the law of diminishing returns.  But we are reminded here that, at root, culture is what drives economies to be dynamic and innovative and so we cannot ignore the changes that our culture has undergone over the past half century and the effects those changes are having on our ability to provide for our own economic well-being.