The problem of falling productivity in developed economies is not a mystery, as is often claimed. The root of the malaise is low investment, and a major cause of that is the practice (now ubiquitous in US and UK quoted companies) of “paying executives huge bonuses to reward short-term success”. Investment decisions are determined by management incentives. And it is striking that investment spending by unquoted firms in the US – run by people who own the business, or with close links to the owners – is “twice that of quoted ones”, though the two groups are about the same aggregate size. Business owners worry about “the danger of long-term decline, particularly loss of market share”, and try to moderate the danger by investing to improve future productivity. Managers focused on shorter-term gains, by contrast, sacrifice investment for higher profit margins. The effect in Britain, for instance, is a decline in investment from 26% of GDP in 1990, to 17% today. Far from being just an issue for share-holders, “the bonus culture is a problem for the entire economy”. (Andrew Smithers, Financial Times).
One thing they sacrifice is customer care. The words “customer – customer – customer” should be foremost on their frontal lobes, night and day. This is both Epicurean and common sense. Without their customers these people would be jobless. Yet you cannot speak to these bosses; they hide behind young people, are unapproachable, think only of profit and often refuse to answer correspondence, even. Nor will they invest in training. The more people go to business school the worse the consumer is served, it appears. I wish I could grow apples*.
*Yes, a non- sequitur. But otherwise I would go on and on…and on….and on….!
How could the government encourage companies to increase investment? I would suggest a ban on offshoring jobs and a higher minimum wage- if companies are forced to pay their workers more, then maybe they would increase their productivity accordingly. But apart from that I really don’t know, I’d be open to suggestions. There’s also the problem of higher minimum wages shutting low skilled workers out of the employment market.
The key problem is familiar in history: the failure to consider all the relevant parts of a system. That is, a successful, sustainable economic system must take into account profits, production, distribution and, perhaps, most important, it assumes “domestic tranquility.” If the ONLY driving force is profits, the system will eventually wreck itself and the polity. Incentives to invest in productive activities–e.g.., infrastructure, education, health, etc.–must, to a significant degree, be provided by the socio-political system. I know that’s a bit vague but failure of investment in social goods is, perhaps, the subject of a future blog post?