Thursday, March 5, 2009

A cure for declining productivity: Promote small-scale enterprise

John Quiggin writes on a theme that he has been going on about for ages, the declining growth rate of productivity and/or innovation. He starts off by pointing: to work by Michael Mandel suggesting that much of the measured productivity growth in the US has been bogus (see also Matt Yglesias on this). I agree, particularly as regards the financial sector.

I agree and I think the implications are profound, if still hard to predict with any accuracy. There has been a huge shift in the location of innovation, with much of it either deriving from, or dependent on, public goods produced outside the market and government sectors, which may be referred to as social production.

My take on this is that we have simply allowed some business firms to grow too large. It is saying something when the bankruptcy or illiquidity of one or two companies can wreak havoc on an entire economy, albeit large ones like that of the US.

The growth of many firms has caused the decline of the small firm, which had been the source, more so than large firms, of
• More mass-based employment
• Most spurts of genuine innovation, and
• Truly market-based competition.

Large firms, particularly those that have an entrenched monopoly, tend to spend a great deal of attention towards:
• Quashing new competition, particularly up and comers who may have genuine ground-breaking innovation that could dislodge their own companies
• Buying off small companies, not for the sake of propping them up, but so that their new innovations never bear fruit and dislodge their own entrenched technologies
• Hamper innovation by making the barriers to entry in the market too high for people who may otherwise have truly remarkable innovation.

It is true that having large firms in themselves caused much productivity improvement in recent years, primarily that which comes from having large economies of scale. But economies of scale is hardly a sustainable source of productivity improvement, let alone ground-breaking new innovation.

It’s time for the pendulum to swing the other way. Greater regulation is needed. Not the kind that will impede innovation. But the kind that takes away barriers to innovation imposed on the market by entrenched private interests.


Namke von Federlein said...

It's nice to see someone talking about productivity!

The impact of productivity on wealth creation, liquidity requirements, employment and the trade balance are huge. It would seem that everybody is so fixated by the corruption of the financial sector that they have lost all perspective on - gee, what's that word - *producing* stuff.

And my pet peeve is this : They are not *consumers*, they're people. Cancer is a consumer.

An economy based on consumption (turning valuable resources into huge piles of toxic garbage in landfill sites, etc) can only become extinct.

I think that everybody is missing the key point - there is so much waste in the current economy that the result of all this will be a huge boost in productivity (and I do not consider unpaid overtime a productivity boost like many governments seem to).

Thanks for a nice blog post!

AlanE said...

An efficient econony cannot exist without small flexible businesses, simple. Our global economy has become inefficient and unstable as a consequence making us more susceptible to bubble driven inflation.