Why productivity growth is key to creating wealth. Why U.S. productivity growth is slowing and what we can do to increase business and personal productivity.
Topics covered include:
- How productivity is measured and how it relates to GDP, inflation, and living standards
- How productivity growth has led to more food, better health, better housing, and more consumer goods.
- What are potential reasons why productivity growth is slowing
- Evidence that work from home has led to lower productivity
- What individuals and businesses can do to increase productivity
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Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it and how to live without worrying about it. I’m your host, David Stein. Today is episode 343. It’s titled “Why the productivity slowdown could lead to lower living standards.”
I recently got an email from a listener that wanted my opinion on what he described as a curious moral question. He writes:
“I am a surgeon in my 40’s with what most people would consider the ideal job at a huge academic medical center, and at the top of my game. I had always planned to work like I was retired, expecting this career to bring me that interest, fulfillment, and satisfaction and reward that exemplified retirement. But the rapid corporization of our hospitals—not just privatization, but truly focusing on profits and upsides than just to stay afloat has turned my vocation into a job. And while many of our healthcare systems are non-profits, this is of course a tax status and bears little resemblance to what is actually going on. I have found myself planning for a very early retirement, and I’m grateful to your podcast in helping me to this goal. However, there is of course a degree of guilt when I consider that I may cut short 20 years of potential service to others in doing so.
“When I speak to others in hushed voices in the corridors, 95% of my colleagues are feeling the same. Many, however, are not in the position to exit, and so remain frustrated, but that’s another story. My question is this—are there some parts of society that should not follow the Friedman doctrine that the social responsibility of business is to increase its profits? I wonder if the negative feelings we’re seeing in healthcare are the result of an intrinsically humanistic profession falling prey to the need of increased profits. And in doing so, are we ruining the altruism which is essential in civilized society?”
There’s a lot to unpack there, and a number of different directions I could go in this podcast and future podcasts in answering his concerns. In this episode I want to focus on profits, and what leads to profits, and what I believe is leading to some of his frustration with his profession.
Profits and Productivity
Profits: the net income are revenue less expenses. And even if it’s a not-for-profit, they at least try to break even.
The way that profits are increased is to charge or sell more, to spend less, or for a business to allow sales to increase more than expenses. When we produce more output that leads to revenue, with a given level of input, the expenses, the effort—that means the individual or the company has become more productive.
Greater productivity, producing more output per person is what leads to higher living standards. Across the economy, that total output is measured by gross domestic product (GDP). It is the monetary value of all the goods and services produced during a given period. If we take that total output or GDP on a per-person basis, per capita, that is the measure of living standards; the output per person.
That GDP per person is a function of how many hours each person works, and how much output they can produce per hour. For this surgeon, I wonder what the standard is—does he feel like he’s being pushed to produce more surgeries per hour, or is it another type of output, administrative items, that he really knew there would be some as part of his career but has become so oppressive that it’s perhaps not even leading to the type of output that is desired, successful surgeries.
Over long periods of time, the total GDP or economic output is certainly a function of how many workers—if there are more workers working longer hours, that will lead to greater output, greater GDP, greater wealth, greater income. But the way to really increase wealth and income is for workers to be able to produce more per hour worked.
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