Charting America's Future 5 The Politics of Productivity

...In any event, in terms of money for R&D, the United States is a giant who walks with seven-league boots, other nations are, relatively, pigmies To reckon that they will quickly outstrip us because they take two steps when we take one is just plain bad arithmetic The decline in the percentage of GNP devoted to research and development, from 3 per cent in 1964 to about 2.4 per cent in 1978, is not due to any failure on the part of the private sector Business has steadily raised its investment in R&D both in absolute number of dollars and in percentage of GNP Inl960,the private sector invested a sum equal to 1 per cent of GNP in research This sum continued to inch upward until it reached 1 5 per cent in 1972, and that level was maintained through 1978, the last year for which figures are available The drop reflects government cutbacks, mainly in space and defense work In 1974, the Federal outlay was equal to 2 per cent of the GNP, in 1978, it fell to 1 4 per cent The way to intensify R&D is not to puff up the profits of a pnvate sector that obviously has sufficient funds, but to let the Federal government resume the role it once played Whether additional expenditure for R&D would automatically be directed toward improving productivity, as is generally presumed, is another matter It covers a wide range of exercises For instance, research to fight cancer or develop protein-laden plants for tropical countries or explore outer space may be useful, but none of it adds to American productivity Similarly, research to concoct a new breakfast food, mix a new shade of cosmetics or put an extra burp into a bottle of beer may be useful or useless, depending on your taste, but has nothing to do with productivity In short, unless money is specifically allocated for improving productivity, it can be used for all kinds of R&D that does not in any way affect unit output per human unit input Admittedly, when we specifically earmark funds for finding an improved technology to turn out more in less time, the benefits do not invariably redound to us because of the very common practice of employing our discoveries in other countries, often before introducing them at home The Final Report of the National Center for Productivity notes "The United States' R&D lag is aggravated by the transfer of new technology from the United States to other advanced and developing countries 'Turnkey' projects—technology packages which include plant construction, installation of equipment, training of workers, and management and marketing—are said to be competing with U S manufacturing plants in an increasing number of industries ' But assuming that advances in technology are not sold, or rented, to our rivals, and are installed exclusively in U S factories, it does not follow that the improved productivity will mean lower costs and lower prices Consider several crucial cases In agriculture, American productivity leads the world and continues to find new ways to perform more miracles on the farm Yet food prices do not go down or so much as stand still They rise because the price is set by government through parity payments, price supports, destruction of crops, and governmental purchases to remove specific products from the market to keep pnces artificially high Indeed, the more productive we are, the more does the government—ever since 1933—feel the need to intervene to set prices In oil, American refineries are highly efficient, with about a quarter of a million dollars in capital behind each worker But it is not productivity that sets the price—either at the refinery or the wellhead—it is a cartel called opec Otherwise oil could be sold in the United States quite profitably at a fraction of present price In housing, there has been a marked trend toward up-to-date techniques in construction Wages have therefore continued to fall as a percentage of the cost of building a private dwelling Nonetheless, the cost of housing continues to rise because of the soaring costs of finance and land In manufacturing, too, greater productivity will not always lower or contain costs—even if material, hourly wages, interest rates, etc , remain constant For expensive technology is a fixed cost that becomes an inflationary burden when forced to stand idle Take the case of a company that has done the ultimate in productivity and shifted to robotiks Before the robot arrived, the company employed 100 people at $20,000 a year each, to turn out 2 million Gee-gaws annually, the unit labor cost was $1 on each Geegaw Then came the robot that, by itself, does all the work of the previous 100 The company paid $ 1 billion for that mechanical marvel and, expecting it to hve for a thousand years, is amortizing the cost at $1 million a year "Labor" is now 50 cents per Gee-gaw, enabhng the company to lower the price or reap a rich profit Suddenly, the economy dips, reducing the annual demand for Geegaws to 400,000 In its pre-robot days, the company would have cut back its production workers from 100 to something like 20 to adjust to the shrunken market But the expensive machine cannot be fired, and the 400,000 Geegaws cost $2 50 a piece, although productivity is still very high because it takes only one worker, employed for one hour at the legal minimum wage, to press a button to turn on the robot Just as there is no certainty that improved productivity will reduce costs and pnces, there is no guarantee that, if the "bourgeoisie" has more to invest, it will put that capital to work to create?in the words of Marx and Engels...

...more massive and more colossal pro-ductiveforces " Capitalism isn't what it used to be When Marx and Engels discussed its prowess, they were referring to "the productive forces [that] slumbered in the lap ot social labor ' The New York Stock Exchange refers not to "social labor" but to the "entrepreneurial spirit that the market wstem uniquely nurtures ' The spokesmen tor socialism and lor capitalism, respectively, are talking about the same thing as seen through different eyes Marx and Engels speak of the way production is organized, the "subjugation of nature's forces to man, machinery, application of chemistry to industry and agriculture, steam-navi-gation, railways, electric telegraphs, cleanng of whole continents for cultivation, canalization of rivers " The Exchange speaks of the profit motive that drives the capitalist to whip all these forces into action Yet while "the entrepreneurial spirit" once found its primary expression m the production and sale of a product—and in many cases that remains true—there are other ways the entrepreneur can realize profits today There may be (and often is) greater profit in buying and selling land, coins, companies, stamps, horses, Picassos, diamonds, or futures in commodities But in almost all instances these transactions are completely unproductive And as corporate control moves out of the hands of the makers of merchandise to the manipulators of money, the tendency is for corporate funds to flow from investment in making things to speculation in making money A striking example of recent vintage was the switch in the U S Steel Company from investing in modernization to speculation in merger Under the chairmanship of Edgar Speer, the giant steel company had decided to shape up for competition against its overseas rivals The plan was to put $3 5 billion into an up-to-date plant In 1979, when the chair went to David M Roderick, whom the New York Times described as "less a creature of the mill than most of the top executives, having been groomed entirely on the financial side of the company,' he decided to scrap the plan for a new facility Instead, he closed 14 unprofitable plants and began building a cash reserve to acquire some other, more promising, company By November 1981, U S Steel was bidding—to the tune of several billion—to take over Marathon Oil The move undoubtedly seemed sound, in terms of better returns on the investments of U S Steel shareholders But the merger obviously could contribute nothing at all to making U S Steel more competitive against, say, Japan, whose steel productivity rate was about four times that of the United States In short, the profit motive did not drive U S Steel to expand or update, it prompted the company to cut down its operation and to stay with obsolete mills n the light of all the foregoing, it should be painfully apparent that trying to hold down prices by writing laws to enrich the rich on the grounds that they will use their new riches to improve productivity is futile, even counterproductive First, there is no guarantee that any of the new-found wealth will go into Research and Development Second, if it does, there is no reason to believe that this will be directed specifically toward improving productivity Third, there is no reason to believe the new technology will not be used by an American company in an overseas plant or simply sold to competing countries Fourth, improved productivity does not necessarily translate into lower prices Most important of all, if income is redistributed from the "consuming" mass to the " investing" class, the slump in demand will raise costs, not lower them, and particularly do so in precisely those sectors of the economy where heavy and expensive technology has been installed As a final turn of the screw, capital formation—the capitalist cure—would also suffer In the words of Lawrence Chimenne of Chase Econometrics "Continued sluggish consumer spending would directly suppress economic activity and, by holding down profits and operating revenue, would also depress capital formation " What is needed to promote productivity is a redistribution of income and a reallocation of capital A balanced distribution of income would provide the vigorous home market that a "market economy" requires to provide jobs, to lift productivity and—if you please—to help capital formation A targeted allocation of capital would see to it that funds were put into productive efforts (including improved productivity), and not squandered in nonproductive speculation In future installments of this series we will discuss how both could be achieved The preceding pieces in this series were "The Great Debate" (NL, November 30, 1981), "Those New Deal Years (1933?938)" (NL, December 28, 1981), "Undoing the New Deal (1939-1981)"(NL,January25), "Responses-1" (NL, February 8), "The Roots of Stagflation" (NL, February 22), and "Res-ponses-2 (NL, March 8...

...Throughout the colonial period, wages of urban mechanics in America were about double that of their counterparts overseas High wages sparked two trends that relate to productivity First, the well-paid worker provided a domestic market for products—a market that grew so rapidly after the American Revolution that it encouraged mass production, with its turn to division of labor and round-the-clock quantity output Second, high wages drove management to invent labor-saving devices to hold unit costs down The abundant land added an extra spark to these trends The frontier drew away people who might otherwise have settled in urban areas, and thereby overcrowded the labor force and depressed wages Further, encouragement by the Northwest Ordinance and the Homestead Act made America a nation of small farms whose relatively affluent families became the major base of an American market possessing a prodigious appetite for mass produced products selected from mail-order catalogs The scarcity of workers led to another social development that related to productivity—namely, the very early organization of labor as a political force with a passion for public education Since 1619, when some skilled workers (imported from Poland) struck successfully in the Virginia Colony for the right to participate as full citizens in the commonwealth assembly, American workers have used their power, in a labor-scarce society, to win the franchise In the 1820s, dozens of Working-men's Parties were organized in cities of the Eastern seaboard around a multiplicity of local issues, but almost universally around the demand for free public education...

...in 1977, there was one for every 4 5 workers, placing a heavier drag on productivity in a recession In addition, if an employee is on vacation, holiday, sabbatical, or sick leave, that is counted as work time The figure used officially in calculating productivity is not hours worked, it is hours paid Consequently, as employees have won more paid time off the productivity figure has been increasingly understated, a statistical aberration that can—and should—be corrected Yet even where an enterprise does not have to carry idle human overhead, recessions must lower productivity A saleslady who makes 200 sales a dav in good times and onlv 100 a day in bad times is half as productive Ditto the airline pilot who carries 250 passengers in boom periods and onlv 125 passengers in bust periods, and so on dow n the line In applying this elementary logic to the decade 1970-80, we are taking the measure of a stretch that w as depressed bv decree (see "The Roots ot Stagnation," NL, Februan 22) The whole economy was being run well below ca-pacity In the five good years ('72, '73, '76, '77, '78) the Gross National Product was growing at an annual axeiage rate of 5 5 per cent, in the five lean years '71,'74, 75,'79,'80)the GNP fell at an annual average of 9 per cent For the decade as a whole, the growth rate was stunted—as public policy had ordained—and ran at an annual average of 3 3 per cent Not surprisingly, productivity went sluggish, running at an annual average growth rate of 1 2 per cent, less than half the histonc figure With the American economy artificially restrained by successive Administrations since 1970, productivity has lagged well behind its potential Should this self-strangulation continue, while other countnes opt to maximize their capacity, the United States may ultimately fall behind some other nations in productivity But wherever we stand in relation to other countnes, we suffer needlessly high prices because our output per person is far less than it can and should be Abandoning our restrictive policies in the '80s and at long last complying with the Employment Act of 1946, however, would not necessarily maximize productivity—for our own benefit and for competitive purposes in the world market a brisk economy would not by itself insure the renewal of obsolete plants and facilities That would require national policies targeted at updating specific areas That the productivity of sectors of the American economy has fallen behind counterparts in other countnes is not disputed On the contrary, the point has been repeatedly exaggerated to prove the need for cuts in the taxes of corporations and the investing class so they will have the necessary capital to put into Research and Development (R&D) In this connection, it is customary to note that the US devotes a smaller share of its Gross National Product to R&D than do countnes like Japan and Germany...

...5.THE POLITICS OF PRODUCTIVITY The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together...

...KARL MARX AND FRIEDRICH ENGELS The Communist Manifesto, 1848 That statement by two of the staunchest enemies of the market system remains an eloquent tribute to the entrepreneurial spirit that the market system uniquely nurtures...

...office and clerical staff, shippers and packers, sweepers, security guards, etc During a reces-sion when demand may be cut in half, the number of "production workers" can be cut accordingly from 80 to 40, but the mimmum crew of 20 has to be kept on the payroll full time To reckon productivity, therefore, the reduced total output of 500 would be divided by 60, giving an output per hour per person of 8 3—a drop of 17 per cent that has nothing to do with worker diligence or outmoded technology It should be observed, too, that the percentage of supervisors to supervised employees has tended to grow over the years In 1947, there was one supervisor for every 7 3 workers...

...In the decades from 1908-77, productivity moved up at an average annual rate of 2 63 per cent Like compound interest, such increases add to increases The cumulative result is fabulous Between 1907-77, the average worker increased output by 558 per cent, between 1929-77 alone, the increase was about 340 per cent Although the rate has varied from decade to decade—and from year to year—the rise has been continuous at annual averages of 3 per cent for the decade 1908-17,3 4forl918-27, 1.8 for 1928-37, 2.83 for 1938-47, 2.73 for 1948-57, 3.17 for 1958-67, and 1 6 for 1968-77 In the half century from 1927-77, there have been only three moments of negative growth, of an actual decline in output per worker, contrary to the American pattern They occurred in 1930-33, 1946 and 1974 The drop in the 1930s coincided exactly with the Great Depression...

...in 1946 with the first postwar recession, in 1974 with the deepest recession since the Depression All of which strongly suggests that these coincidences were no coincidence Economic stagnation causes productivity to fall How else can we explain why productivity fell by 3.4 per cent in 19329 If we fault the workers, we must conclude that they were lazier or dumber that year, if we fault technology, we must conclude that we somehow lost our 1931 know-how after New Year's 1932 To see the phenomenon purely in terms of manpower and machinepower becomes doubly ludicrous when we note that in 1934—the first year of real recovery—productivity leaped upward by 11 4 per cent (better than four times the historic annual average) Surely our workers did not suddenly become that much more industrious or our technology that much more clever How else can we explain whv productivity tell by 5 per cent in 19467 Surelv the dive cannot be attributed to sudden worker sloth or management stupidity In 1974, productivity fell by 3 percent despite the tact that both in 1971 and '72—when Nixon was lewing up the economy in anticipation of his iselection campaign—productivity had risen by 3.4 per cent The low point of economic stagnation in the '70s was 1974-75 The empirical evidence is clear Productivity follows the "business cycle" In times of stagnation it goes down, in times of recovery it goes up Way back in 1959 Albert Rees, then editor of The Journal of Political Economy, delivered a paper to the American Assembly that succinctly described what happens when the economic plant is run below capacity "The drop in output per man-hour in recessions occurs in part because employers retain more labor than they currently need in order not to lose skilled personnel, or they use labor to do maintenance work that is not reflected in current output Then, too, the labor force cannot be reduced in proportion to output, for certain minimum crews are needed so long as there is any production at all " Here is the way this works arithmetically Productivity is reckoned by dividing the number of man-hours-worked into the total output, so that in a plant where a work force of 100 turns out 1,000 items m one hour, an average of 10 items are produced by each person per hour Now let us suppose that 20 of the 100 persons are what Rees called the "minimum crew "—managers, foremen, maintenance men...

...Who knows—they might even have written a Capitalist Manifesto...

...If Marx and Engels could be so impressed by the achievements of capitalism in 1848, then how much more impressed would they be if they were alive today...

...By the 1830s, that movement was well on its way as workers pushed on for vocational schools, high schools, and—in the Morrill Act?for publicly supported colleges and universities Iron the social fabric woven out of abundant land and scarce labor there emerged an economy with a mass market, mass production, technical innovation, and an educated work force Practically from the outset it was apparent that productivity depends not only on the man and the machine but on the market as well, on the high earnings that stimulate mass production and labor-saving processes That truism has proved its validity throughout our history The story of America's output is one long chronicle of success—with a few setbacks that provide worthwhile lessons on what to do and what not to do to promote productivity...

...THE NEW YORK STOCK EXCHANGE Building a Better Future, 1979 The great historic boast of capitalism has been its Herculean capacity to turn out goods and services Marx and Engels wondered "what earlier century had even a presentiment that such productive forces" could be summoned into action The New York Stock Exchange wonders out loud whether the authors of the Communist Manifesto would not have written a "Capitalist Manifesto" if they had a chance to see those forces in full fruition "Productivity" has in the last decade been the busiest buzz word in the lexicon of those making economic policy If we are hit with rising prices and a loss of foreign markets, it is because of low productivity If we wish to hold the price line, raise our standard of living, penetrate the world market, we need high productivity To go from present low to future high, the prime proposal of those who identify productivity with capitalism is to speed "capital formation" so that business will have the wherewithal to do research and development, to improve the productive process Indeed, this remedy is so commonly advocated that the call for greater productivity has become almost a code phrase for the accumulation of capital During the 1970s, this call grew increasingly urgent as popular articles and learned journals pointed with alarm to the prodigious progress of other countries, such as Germany and Japan, in "output per worker per hour," the formal measure of productivity If the United States did not immediately speed its forward movement, the warning went, it would soon be left behind Hence the need to act quickly to speed capital formation—by lifting costly regulations and by lowering taxes on corporations and on individuals who make up the investing class This line of logic, underlying the big tax bonanza to the economic elite in 1981, is based on a collection of half truths that, taken together to be the truth, turn out to be an untruth While other nations seem to be approaching us in productivity, much of that catchup is an optical (mathematical) illusion, the United States is still way out in front of say, Japan Although we are not as productive as we could (or should) be, this is not due to a lack ot capital but to a maldistribution of national income and a misallocation ot capital resources Finally, high productivity, conducive as it may be to holding down prices, does not necessarily hold down either cost or prices An examination of each of these propositions places in perspective where we are, where we have been drifting, and where we can and should go to maximize worker output It is a simple statistical fact that the United States leads the world in productivity If we assign 100 to the United States to set a standard, then next in line is Canada with 916, France with 847, West Germany with 791, Japan with 63 2, United Kingdom with 55 1, and Italy with 54 3 These figures of the late '70s are constantly changing their ratios, but roughly speaking eight peoplein the United States produce as much as 10 in Germany, and only six in the U S equal the production of 10 in Japan The notion that virtually all the industrial nations in the world—and notably Germany and Japan—are about to pass us by in productivity stems from the incessant repetition that other countries are advancing on this front at a faster rate than we are The implication is that before long they will be leaving us behind Yet consider the case of the young man aged 10, with a brother aged one At the end of one year, having grown at the laggardly rate of only 10 per cent, he is 11 years old, his sibling, having grown at the miraculous rate of 100 percent, is two The younger brother, whose rate ot growth will always exceed that of his older brother, will ot course never catch up, let alone pull ahead Similarly, when United States productivity was at 100 and Japan's was at 25 in absolute terms, 2.5 Americans turned out as much as 10 Japanese The next year, Japan increased its productivity by 10 per cent and the U S improvement was a mere 3 per cent Nonetheless, in absolute terms the U S moved from 100 to 103 and Japan from 25 to 27 5—making the gap between the two countries larger, not smaller By issuing all kinds of graphs based on percentage ofgrowth, rather than absolute differences, a small army of propagandists created the illusion that we were behind when we were—and are?ahead They neglected to note, too, that as productivity rose in Japan and other countries after recovery from the devastations of World War II, their rate of growth in productivity slowed down Setting the growth rates for the years 1973-80 against those for the previous decade—as Ronald Muller has done in his article "Revitalizing America"?shows that Japan's decline was 63 per cent, West Germany's 32 per cent, France's 33 per cent, Canada's 75 per cent and Italy's 80 per cent To recognize that much of the talk about productivity is self-serving hocus pocus is not to say that other countries aren't gaining on the U S Insomeareas, for example steel manufacture, Japan is far ahead of us Should we fail to apply ourselves to spurring overall productivity in this country, we certainly could fall behind in the coming years That brings us to how the United States became preeminent and win, it the present drift continues, it could lose that position The United States holds the lead because it has excelled in evolving the two factors responsible for good productivity workers and machines Better and faster workers turn out things better and faster Smarter and swifter machines multiply the skill and effort of the workers For generations, America has had an educated, energetic working class and a Yankee ingenuity to invent wiser ways to swell output with less sweat (America's foremost position in productivity is often attributed to the Protestant work ethic that extolled labor as a virtue and excoriated sloth as a sin If that usually ill-defined religious impulse were the sole explanation, though, all of Northern Europe, from Finland to Scotland, would be just as productive as the somewhat less Protestant United States) In addition to whatever cultural force was at work in America, the area of the New World occupied by the United States had its special demographic character an abundance of land and a scarcity of labor These two strands intertwined to spin a special thread that runs through America's economic development The land was plentiful because large chunks of real estate were under practically nobody's official ownership The scarcity of labor was largely due to the nomadic character of many North American Indians, who unlike the Aztecs and Incas did not live in structured, stable civilizations that made it easy to incorporate them into a disciplined work force Attempts at enslaving the Indians of the North American continent were generally futile, like trying to bottle the wind The labor shortage led to three developments the raiding of Africa for black slaves, the emptying of Europe's prisons for white indentured servants, the payment of a higher wage in the American colonies than was customary in the Old World...

...The assumption is that if the American nch were ncher, more money would go into modernizing our methods of production But the evidence is far from conclusive when examined closely First, we spend more, not less, than any other country in the world on R&D Second, the percentage the private sector spends on R&D has not gone down for decades Third, money spent on R&D does not necessarily step up productivity in the United States Lastly, making more money available to corporations and affluent individuals does not guarantee that they will put a penny into modernizing outworn operations The notion that the U S is not spending enough on Research and Development is derived from oft-repeated statements such as the following one in the 1978 Final Report of the National Center for Productivity and Quality of Working Life "Since the mid-1960s, the Umted States' R&D effort has been declining relative to that of other industrial nations R&D outlays as a percent ofGNP have been increasing in the USSR and Japan, while ours have declined since 1964 " (Italics mine G T) The statement does not say we are spending less than the other countnes on R&D, or that ourincrease in absolute spending each year is smaller It simply speaks of percentage of GNP When it turns to the "absolute level of R&D expenditures" the same Final Report finds that this country's outlay "remains higher than the combined total for West Germany, Japan and France ' Given that money input is used to measure development output, we ought to come up with more discoveries, inventions and innovations than all our competitors together...