Opinion: Carolina Critic

No. 161: The Power of Productivity: Liberals Wake Up to Reality

“Watch the pennies and the dollars will take care of themselves,” Benjamin Franklin said. We might, in a similar vein, explain the key message of William Lewis’s book The Power of Productivity by saying, “Watch the productivity and prosperity will take care of itself.” The way to watch the productivity, he concludes, is for government to stop obstructing it.

What makes The Power of Productivity so interesting is that it wasn’t written by a right-wing economist. The author isn’t an economist by training at all. Lewis is a physicist who became a partner in the international consulting firm McKinsey & Company and founded the McKinsey Global Institute. He had the ear of officials in the Clinton administration, especially Labor Secretary Robert Reich, and contends that presentations by his McKinsey team were responsible for altering the course of Clinton’s economic policy away from regulation and toward markets. Therefore, the book cannot be dismissed by liberals as the scribbling of a dogmatic free-marketeer.

Lewis, as noted, is not an economist, but he has figured out one of the key tenets of sound economic analysis — you have to look at the micro level if you want to know what causes some nations to prosper and others to remain stagnant economic backwaters. Referring to macroeconomics, he writes, “It’s like trying to understand our physical universe using only the telescopes of astronomy. Any real understanding comes from studying how the tiniest particles in the universe interact in the depths of massive stars.” His McKinsey team therefore spent 12 years in minute analysis of a dozen countries ranging from the most prosperous to the exceedingly poor. This remarkably clear book explains their findings.

One of the most basic lessons of economics is that people must produce in order to consume. With that truth as a starting point, Lewis proceeded to ask what some countries are doing right, and others are doing wrong. Paying no heed to the “conventional wisdom,” some of his main conclusions are:

• If poor nations take care of their production problems, then (and only then) will the capital they need for modernization flow in;

• Education is not immediately important — since workers learn most of what they need to know on the job, pouring resources into formal schooling is unnecessary;

• Distorting markets to achieve “social equity” is a bad idea;

• Today’s big governments in poor countries are a great handicap that today’s rich countries did not have when they were at a similar stage of development;

• Consumers are the only political force that can stand up to producer interests, big government, and the technocratic, political, business, and intellectual elites.

Lewis provides a wealth of detail about the countries he studied. Brazil, for instance, is a nation divided between an affluent, “first world” sector and a larger, desperately poor “third world” sector. The big cities gleam with modern buildings, but they’re ringed by miles of pitiable slums. Most of the nation’s commerce is carried out in the third-world sector, which is beyond the reach of taxing authorities. The problem that creates is that in order for the state to collect the money it needs for its prodigious expenses, taxes must be high on the relatively small number of “formal” businesses. The high taxation prevents them from expanding.

Here we get back to the theme of productivity. Formal businesses are far more efficient than informal, “off the books” ones. They use economies of scale to produce more consumer value for the resources used than informal businesses can. The trouble is that the heavy burden of taxation wipes out their competitive advantage. Thus, big government keeps most of the Brazilian economy stuck with the same kinds of businesses as existed 300 years ago.

Lewis also gives us a fascinating chapter on Russia. While communism has been officially buried, its ghost haunts the country at every turn with market distortions that are ruinous to economic progress. Resources remain trapped in inefficient enterprises that have changed little since the Soviet era, because of the fact that local governments order unproductive firms not to shut down.

This book could have a lot of influence in a “Nixon goes to China” sort of way. Liberals who read it might have to admit that a lot of the interventionist policies they clamor for to “protect” people from the effects of free-market competition are terribly myopic. Most liberals have a big psychological investment in the supposed evils of capitalism, but this devastating indictment of anti-market policies could cause some to reconsider.

George C. Leef is executive director of the Pope Center for Higher Education Policy.