Productivity measures output per hour of work. Weak productivity suggests that companies may have to hire because they can't squeeze more work from their existing employees --- that is, if demand for a company's products is growing. Productivity growth has been weaker recently, rising 1.5% in 2012 and 0.5% in 2011.
Yes, productivity matters – but it is not everything. Economists are often accused of an obsessive preoccupation with real gross national or gross domestic product, two closely related measures of national output. But promoting GDP at all costs would be an insane objective for long-term economic policy. (Read: Factoryless Goods: Imports Measured as Output in GDP)
GDP would be maximized by opening a country’s frontiers and promoting mass immigration. Maybe some of the immigrants would be unemployed or, in other ways, be a charge on social security. But, so long as there is a net addition to the labor force, the country’s GDP would almost certainly rise, however overcrowded and unbearable the country might be to inhabit.
A less bad approximation might be GDP per worker. But even that borders on the absurd – for it might be maximized by compulsory increases in working hours at the expense of leisure.
A better measure might be GDP per hour worked, often known as productivity. This at least does not foreclose the choice between work and leisure, which as far as modern production methods allow should be left to individual choice.
In the past 20 years, output per hour has grown by an average of 1.5-2 per cent per year in the leading industrial countries. But in the three years to the beginning of 2013 there has been a major reversal. US productivity has on this measure slowed to a crawl of 0.3 per cent growth per year.
Most modern economists concentrate on quantifiable relationships. The most easily quantifiable aspect is the relation between investment and productivity growth. But despite the sermons on the subject, there is little long-term relationship between investment and growth.
It is worth concentrating instead on the incremental capital to output ratio, or ICOR. This measures how much investment is required to produce a unit increase in output. Thus the lower the ICOR, the greater the apparent efficiency of the economy. ICORs are best estimated over long periods to reduce business cycle influences. On this measure, the US and the UK seem, surprisingly, far more efficient than Japan and Germany over a 20-year period, whether one looks at total or just business investment. But in the three years to the beginning of 2013, there has been a dramatic reversal by this measure, too. US ICORs have been lower than those of Japan and Germany, whereas British ICORs have shot up right out of the page.
Looking at intermediate periods, there are fears that the rise in the US ICOR is more than a passing phase and that the productivity of new US capital has halved. Taking into account both productivity trends and the likely growth of the US labor force, it's believed that the current US recovery will soon run into an inflation barrier and that the optimism of mainstream opinion at the US Federal Reserve is misplaced.
The US is by far the richest country in world history, but suppose good advice is not followed? There is nothing wrong with the US economy that a measure of redistribution towards both the less well-paid and public services would not put right. Some suggest this reallocation has gone further than generally realized, but in reality, it still has a good way to go.
The whole idea of "government" is to avoid the “tragedy of the commons”, when individual greed destroys a community asset (Read: Walmart: The Greatest Basis Pointers). The provision of public goods -- such as defense, infrastructure and education -- is the most fundamental raison d'être for good government --- and its citizens should support for it. (Read: Capitalism Requires Government)
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