RALEIGH — I ran across some interesting research today that suggests that increases in productivity, once thought confined largely to the manufacturing sector and difficult to achieve in services, may actually have been more rapid in the service sector in recent years. This has important implications for public policy, in that it calls into question an old, pessimistic assumption about the difficulty of controlling costs in service industries such as education and health care. But it also speaks to a more basic set of issues that often lead policymakers astray.
True economic progress is, to a large extent, predicated on improvements in productivity. Without such improvements — without increases in the amount or value of goods produced per unit of labor — much of daily life would consist of a series of zero-sum games in which one person’s gain is another person’s loss. Redistribution can only make your slice of the economic pie larger by making someone else’s smaller. But productivity makes both slices larger by baking a bigger pie.
These truths about the benefits of productivity might seem self-evident. But plenty of political demagogues, economic cranks, and philosophical nitwits have misunderstood, ignored, or willfully misrepresented the role of productivity in social progress.
Self-styled “populist” politicians, for example, complain about income inequality and consider those who build businesses and earn high wages to be at least suspect, if not villainous. Yet for the most part, entrepreneurs and professionals earn high wages because their work is highly productive. Encouraging such individuals to be as creative, as industrious, as productive as they can be is good for everyone who seeks to consumer whatever they are producing. If you want your slices of pie to be plentiful and tasty, it would be foolish to fire the pastry chef just because he makes more money that you do.
Economic cranks, including pathetic Luddites and trade protectionists, contend that increases in the productivity of labor create unemployment. This is true only if you are near-sighted to the point of blindness. Sure, if new technologies or techniques allow 10 chefs to produce as many pies as 20 chefs used to produce, that would seem to leave 10 chefs looking for new jobs. But in the real world the productivity gain means that the labor costs associated with pie-making will be lower, either inducing consumers to buy more pies than they used to (thus restoring the demand for the 20 chefs, now producing twice as much) or leaving consumers with more money to spend on other goods they desire, perhaps the cakes and cookies the former pie-makers can now prepare. In reality, productivity gains increase real average wages by increasing the quantity and quality, or reducing the real price, of the goods and services that workers want to buy.
Philosophical nitwits think that these positive-sum games may seem plausible but are in fact impossible. A famous saying, for example, is that it is impossible for a community of individuals to make themselves richer by doing each other’s laundry. Wealth comes only from manufacturing goods and selling them to other people far away, the argument goes. But of course, in the real world individuals would have no incentive to simply do each other’s laundry. There is no productivity gain, no increase in quality or reduction in price, associated with such transactions, and their potential cost would prevent them from occurring. What actually happens is that those who are particularly good at doing laundry, or who have already invested in the needed equipment and supplies, take in other people’s laundry. The launderers’ customers then gravitate towards producing other goods or services for which they enjoy a productivity advantage. Through this process, everyone is made better off.
Importantly, this is true even in situations where person A is better at a specific task than person B, but the latter ends performing the task. For example, say you are better at baking pies than I am. That doesn’t necessarily mean you should bake me a pie. What if you are even better at making ice cream than you are at baking pies? Given a limited amount of time and effort in our collective part — and the notion of scarcity is at the heart of economics — we’re both better off if you make the ice cream and I make the pie. We both get to eat a tasty dessert at the lowest possible cost.
It’s time to stop squabbling over the size of our plates, cursing our hunger, and fighting over the last remaining crumbs. Let’s just focus on what really matters: more and better baking.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.
p.s. Just to be clear, the above discussion is purely theoretical. I’m not really a dessert eater. Now, if you were really good at making spicy sausages. . .