Productivity and wealth

It is a fact that not all people or nations are equally productive. This fact is often obscured when we debate inequalities of wealth, because many people do not see the link between productivity and wealth. They assume that people or nations are wealthy purely due to arbitrary and random factors such as good luck (they invested in the right stocks) or maybe just being very evil (they just stole all that money): nothing to do with productivity. So the debate about unequal wealth becomes a debate about redistribution and setting things right to make everything fair, with no inquiry into the need for someone to actually produce all that wealth.

​We are all concerned with being paid as much as other people so we can all have the same amount of stuff and feel that life is equal and fair, but we don’t usually worry about the inequality of production, or the fact that some people and nations are far more productive than others. ​​

Production per person in the wealthiest economy, the United States, is something like 15 times production per person in the poorest economies of Africa and South Asia…In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother.

Robert Lucas, ‘The Industrial Revolution: past and future,’ 2003.

​What we worry about is the fact that some people are wealthier than others, but we don’t care if some are working much harder than others – so what, as long as in the final analysis the rewards are made equal? The popular consensus seems to be that we don’t have to be equal going into the game, or equal in the skill of our play, but we darn well better be equal when the trophies are being handed out at the end or we’ll be mounting the barricades and having a good old riot about the unfairness of it all.

To be clear, worrying about inequality is not the same thing as worrying about poverty. Poverty implies living in conditions of deprivation: not enough food to eat, nowhere to live, no education, no healthcare, no shoes on your feet, etc. and that can admittedly be a bit challenging. But inequality is far worse. With inequality, it means that somewhere, out there, lives a nasty capitalist with more money than you have and that is absolutely intolerable.

When you think about it for more than 5 seconds it becomes painfully obvious that inequality is a concern with shaky foundations. For one thing, it’s possible to just ignore those who have more than you and get on with your own life. Sure, it's infuriating when some people spend glorious amounts of money on lavish parties while round the corner is someone struggling to make ends meet, but surely nobody over the age of about 5 is still labouring under the expectation that life is supposed to come with a guarantee that we will all have the same amount of stuff and the same level of partying.

​Some might argue that it really matters if inequality is rising, because it follows logically that the levels of poverty must be growing too. Um, no. It is true that inequality is rising, and is now at unprecedented levels, but although inequality is rising, overall poverty is falling. This is because of different rates of productivity and growth: although the poor are slowly getting richer (yay!) the rich are very quickly getting exponentially richer (oh dear). This means that although the rising tide is lifting all boats, some boats are rising higher than others probably because they were in a more advantageous position to start with. But this does not mean that poverty is increasing.

There is, to be sure, much poverty and starvation in the world [editor: look at the South Sudan for an intriguing study in starvation] but nothing could be further from the truth than the idea that poverty is increasing…the entire human race is getting rich, at historically unprecedented rates. The economic miracles of East Asia are, of course, atypical in their magnitudes, but economic growth is not the exception in the world today: it is the rule.

Lucas, The industrial revolution.
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So it is not poverty, per se, that is worrying us. It is inequality, pure and simple. And while we watch, hawk-eyed and drooling, as income disparity grows, we are completely ignoring what’s going on with productivity. The world’s economies have been growing steadily since the industrial revolution. World productivity was one-third of 1% in the 18th century; it grew to 1% in the 19th century; to 2.4% in the 20th century; and has been growing at over 4% since 1960. Wow! Time to say a bit more about productivity!
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A good place to begin is at the beginning, with the industrial revolution which massively increased the productive capacity of human beings. Nothing noteworthy happened before the industrial revolution except for inventing the wheel, discovering fire, and other banal events that while mildly interesting did not cause a great divide between rich and poor. Even poor people can rub two sticks together to light a fire or attach wheels to a wheelbarrow to get it rolling along. In the agrarian age everyone had pretty much the same lifestyle, the same level of subsistence living, and the same level of income. Back then nobody wound themselves up into a tizzy about inequality.

Living standards in all economies in the world 300 years ago were more or less equal to one another and more or less constant over time…If the living standard was low, it was at least fairly low across various societies. Even at the beginning of the age of European colonialism, the dominance of Europe was military, not economic...

Nothing remotely like the income differences of our current world, differences on the order of a factor of 25, existed in 1800 or at any earlier time. Such inequality is a product of the industrial revolution.

Lucas, The industrial revolution.
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Suppose it to be sheer luck, sheer good fortune, that the first industrial revolution began where it did, somewhere in the heart of Lancashire. Well, that was a long time ago and by now we have a pretty good understanding of how and why it all sparked off. We know what it takes to get going – the relevant economic, institutional and cultural requirements – that would tend towards reducing the disparity in productivity referred to by Lucas. Yet, amidst all the railing about wealth inequalities, here is one question you never see being asked: why are some people, or some nations, more productive than others, and what can be done about that? Why do some nations grow richer, while most remain poor? That question seems to evoke less curiosity than other more lively pursuits such as banker-bashing or Occupying Wall Street. Why trouble yourself with productivity (which sounds a bit dull to be honest), when you could simply wait for your neighbour to be productive and then force him to share his profits?

​One possible answer to the productivity question is that some people or nations are just too lazy and feckless or too timid at best, and that right there we have all the explanation we need for their underperformance. Of course, there will always be idle people at the margins, but that is quite insignificant as an explanation for productivity and wealth. Far more significant is the institutional framework of markets and in particular how competitive markets are. No markets are perfectly competitive, but it’s a long way from saying that markets are imperfect to saying that a country with only the bare bones of a market, encumbered by staggering levels of corruption and waste, should expect to do quite well as long as people are working hard and not being lazy. No. Hard work is not the most important thing - there must be an institutional framework that allows hard work to yield productivity. Markets need not be perfect (nothing in life need be perfect!) but they must tend towards competitiveness. One interesting fact in evaluating competitiveness is how open the markets are: how readily they admit full productive participation rather than the monopolization of resources and opportunities by a few:

Many economists and politicians foster the illusion that great fortunes and poverty stem from the presence or absence of individual skill and risk-taking. Henry George, by contrast, showed that the wealth gap occurs because a few people are allowed to monopolize natural opportunities and deny them to others. If we deprived social elites of those monopolies, the whole facade of their greater “fitness” would come tumbling down. George did not advocate equality of income, the forcible redistribution of wealth, or government management of the economy. He simply believed that in a society not burdened by the demands of a privileged elite, a full and satisfying life would be attainable by everyone.

Cliff Cobb, Publisher’s Forward, ‘Progress and Poverty’ (2006)
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​In that sense monopolies (including those constructed by intellectual property rights) create barriers to productivity, and cause wages to remain depressed despite rising productivity. Henry George’s idea is attractive because it focuses on re-forging the broken link between productivity and wealth – in his opinion the solutions to poverty require expanding the productive capacity of all market participants, not simply redistributing wealth. Or what Lucas said:

Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution...The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.
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​This is particularly important in the Age of the Robot, which we could call the Industrial Revolution 3.0, when technology and the knowledge to work with it will be the deciding factor in who thrives and who gets left so far behind that they might as well be cast on the scrap heap.