More on the Productivity Conundrum

"Plans are nothing; planning is everything."
-Dwight Eisenhower

Why it is so important for productivity to grow briskly

So much capital is misallocated these days, and that continues to drive down trend GDP growth. For those of you not familiar with the term misallocated capital, let me briefly explain what it is. The term is used by economists to describe capital that is deployed without having any impact on productivity, i.e. capital that is deployed unproductively.

In October of last year, I wrote an Absolute Return Letter called The Productivity Conundrum, and I listed five reasons why productivity growth continues to be lacklustre despite all the benefits we reap every day from the digital revolution:

1. Ageing of society at large, as older workers are less productive than their younger peers.

2. The rising cost of servicing the elderly in society.

3. Excessive indebtedness in all economic sectors and the rising cost of servicing that debt.

4. The rising cost of producing the energy we need to spin the wheels every day.

5. The fact that the savings freed up by the digital revolution have not been re-invested in reskilling the workers affected to a higher level but have instead been pocketed by capital owners.

Productivity agents 2-4 all have to do with the rising amount of capital being deployed unproductively – capital that could, and ideally should, have been used to enhance productivity. All that misallocated capital is holding back GDP growth, and it is a topic close to my heart, as I believe a return to the productivity levels we enjoyed in the early years of the digital revolution, when the internet was first introduced, is key to respectable GDP growth going forward.

Economic growth is so important if we want to stand a decent chance of coming out of the current debt crisis without too much damage, as we simply cannot service all the debt we are saddled with unless GDP grows briskly.

Productivity in a historical perspective

Before going any further, let me remind you of one of the most fundamental equations in economic theory:

∆GDP = ∆Workforce + ∆Productivity