Prosperity is not easily won.

It requires individual enterprise
and an overall environment of political stability
and competent economic management.

And even when we appear to succeed
we find that there are forces at work
which actually reduce our prosperity gains.

If you lived on your own in the wilderness, building your own house of logs, cultivating a plot of land for food, never interacting with anyone else, you'd have no need of economics. Economics comes into being as a science when we interact with others, producing for trade, buying and selling goods and services, working together as colleagues, or as employers and employees. Economics is the science which regulates the process of production and trade, which provides money which in turn lubricates the works by permitting exchange without barter, as well as saving and investment. But ultimately we need to bear always in mind that economics is a facilitator, not an objective or even a means to an objective.

The objective is to provide the goods and services we need to survive, to live comfortably, and later in the development of civilization, to provide ourselves with all the multiplicity of goods and services for consumption, entertainment, education, all the trimmings which go to make up a civilized life.

The means to that objective is production. God gives every bird its food, but He doesn't throw it into the nest. In order to consume, we have to produce. Sophisticated production and trade requires collaboration, research and development, investment, all of which may be included under the general title of production. Only then does economics come into the story, as a facilitator of production and trade, saving and investment.

The prime objective, in the simplest of terms – in fact in one single word – is prosperity.

So how do we become prosperous, not just as a static condition, but as an ongoing progression in which each generation – in theory anyway – becomes more prosperous than the previous one. Of course we need to work, and good economic fundamentals are essential. But there is another essential ingredient: productivity. You don't increase your prosperity by working harder. You may get richer, but while you are gaining one element of prosperity, namely money, you will probably be losing in terms of leisure time and possibly even health. Working harder doesn't increase our prosperity, it only alters the makeup.


To increase prosperity we need to work, not harder, but smarter. We need to learn how to make a better product, offer a better service tomorrow at less cost than we did yesterday. Prosperity is productivity. Productivity is prosperity.

And we need to say this again: prosperity is productivity, and productivity is providing a better product or service tomorrow at less cost than yesterday.

The general theory of productivity is that in stable economic conditions it rises steadily all the time. There may be ups and downs, temporary dips or spikes, but the longterm trend is upwards. And this is born out by the fact that, yes, society overall does slowly gain in prosperity through rising productivity. But strangely, indeed perversely, it is also possible for productivity, and thus prosperity, to take a downturn, as we find that mysteriously and inexplicably, we seem to have to run ever harder just to stay where we are. Ever get that feeling? You're not alone.

Why should this happen? Let's first take a look at the positive side of productivity, with some examples at random showing where real gains in productivity have produced real gains in prosperity.

Mainly, productivity increases take place in the area of production, through automation, streamlining of the production process, and so on. Design also plays a part here. Product design must first of all come up with a product that works, that does its job efficiently and undemandingly. But design can make a product cheaper to produce by reducing components, or facilitating assembly steps so that, for example, components quickly click together rather than requiring tedious screwing. Good design helps the consumer too, by making the product easy to clean and maintain.

The cost advantages of moving production offshore to low-labour-cost countries is often mentioned. But less apparent is the improved design which this move necessitates. Think about it. When you, as a factory owner, are making products on the spot, in front of your eyes as it were, any design problems or production glitches can be fixed with a short conference and perhaps a bit of tinkering. But when you are sending moulds and production specifications to some distant land, where low-cost, barely-trained employees expect that all they need to is to put the moulds into the pressing machines, turn out components then click them together, you need to be sure everything's all A-1 perfect before it goes into the packing case and foreign hands. It is a clear and visible fact that design of products made and assembled in low-cost countries has improved, kitchen appliances for example becoming smoother and smarter, simpler to mould and easier to assemble. In other words, it's not just the cheaper labour, it's partly better production-oriented design.

Increasing productivity requires investment in research, design and equipment. But productivity can also be increased, often very considerably, by much simpler means such as re-arranging the workplace to eliminate unnecessary movements, ensuring a smooth assembly path, locating components precisely where they're needed. Even in the home or home workshop, a few minutes devoted to planning the job, getting the right tools and components, having everything in place, finding a comfortable and efficient working position… this can easily pay dividends in making the work flow faster, more smoothly.

In retail too there have been tremendous advances in productivity. First came the move to self-service, allowing customers to browse the merchandize at their leisure then take their selection to a central cash point, rather than tying up sales assistants bringing goods out from shelves and standing around patiently as the customer goes through the selections on the counter. Another major retailing revolution came when Walmart instituted the system of linking their computerized stock records directly with their suppliers, product by product. In this way manufacturers could see in real time when stocks were getting low, and take the necessary action. This would gradually replace the old system in major retail chains, where managers would often run out of an item, and re-order it from a wholesale depot which might itself be out of stock. This interlinking system provides faster turnaround and increases sales, but it also eliminates paperwork and thus reduces costs.

In some cases we don't need to work on productivity, it almost drops out of the blue. The development of microchips does of course require research, but these little miracles almost seem to get smarter by themselves, and they can speed up everything they touch. Computers get cheaper by the month, and more powerful offering faster processing and increased speed. Microchips can speed up and facilitate machines in factories, accounting, stock control, food and beverage control in restaurants, you name it. As far as productivity is concerned, the microchip is a Gift from the Gods.

Human beings are lazy and greedy. But there's an up-side: productivity and yet more productivity. We all want more output for less work, and we find it in the most unlikely places. How do you make food service less labour intensive? The help yourself buffet is one answer, basically eliminating serving staff. And hotels? They're very labour intensive. But here too savings can be made and passed on to the client in the form of apartment-hotels, where you rent a studio or one-bed apartment for a day or a week, preparing your own food in the kitchen unit provided, breakfasting or dining in your own dining area, making your own bed, and cleaning with the use of materials provided in your storage closet. These hotels not only work out cheaper, many prefer the independent living style which they offer.


We tend, when considering productivity, to look only at the production and distribution side, what individual companies can do or are doing. But there's also the 'big picture' of the overall national economy, what we might call the 'collective or national productivity'. Often overlooked in considering productivity is the plain, commonsense fact that if people who want to work and are capable of doing a job are forced to stand around doing nothing, that obviously reduces our overall prosperity. Idleness never created wealth.

In the old Soviet Union and its satellite countries in Eastern Europe, everybody had a job, guaranteed. But their factories were inefficient, their machines old and outdated, work was poorly organized and components either not there when wanted, or more often, not available at all. Everybody had a job, the state made sure of that. But work was unproductive. That indeed, was what brought down the system. The 'Fall of the Wall' in 1990 was not a triumph for democracy and capitalism, rather it was the collapse of a malfunctioning machine.

In the capitalist 'West' by contrast, work is generally productive – for those who are doing it, and admittedly, they're fortunately in the majority. Where the western system falls down is that it requires a permanent body of unemployed to hold down inflation. This represents potentially productive energy going to waste – hardly contributive to overall prosperity. Incidentally it should also be borne in mind that official unemployment figures, like many official statistics, never tell the full story. An accurate definition of the unemployment figure is the number of people who would come forward seeking employment when there is a job for everyone who wants one. Lots of people simply don't register, don't appear in official statistics as unemployed, but in boom times with a high rate of employment, people who would not normally seek work get lured into the economy. As it becomes more difficult to get staff, firms begin tapping previously unexplored sources, finding for example that people with disabilities can work just as willingly and competently as their more fortunate brethren. Mothers can be tempted out part-time too if baby-sitting premises and supervision are provided at factories. And retirees are always willing to put in two or three days a week employment.

While it's pretty obvious that enforced unemployment does nothing to boost a nation's overall prosperity, there can be a hidden, and adverse effect on industrial productivity. For when there's substantial unemployment, workers will oppose any improvement in their factory's productivity if it results in job losses. Way back in the 1070s when the London Underground rail system wanted to automate ticketing, putting hundreds of ticket collectors and checkers out of work, the Unions opposed it, and managed to hold out for a long period. In Switzerland by contrast, a country at that time blessed with full employment, the Zurich Tramways moved smoothly over to automated ticketing; the redundant conductors were instantly and eagerly recruited by local businesses. Unemployment is wasted talent and thus in itself anti-prosperity; worse still, it also discourages productivity-increases among those who are in work and simply want to preserve their jobs.

Everybody working, everybody working efficiently, productively. That's the key to productivity and prosperity. And by and large we manage to achieve that, on a steadily rising graph.

So much for real productivity gains, translating into real cumulative increases in overall prosperity. But there's a negative trend at work too, sapping our prosperity, undoing some of the gains in industrial productivity, claiming an ever-increasing proportion of our hard-earned wages, draining the results of our daily grind.


Let's recap once again: prosperity comes from increasing productivity, producing better goods and services tomorrow at less cost than yesterday. More and better product, for less cost. Got that? Good. So now reverse it. We lose prosperity by managing, somehow, to reduce productivity, by offering the same or less product or service, at a greater cost than yesterday. Less product or service for a higher price. Do we really do that? Oh yes, we do.

Are real estate prices skyrocketing in your town or city? Probably. They are almost everywhere. As notional land and property values go up, and as rents go up, it costs more to offer the same product or service than it cost yesterday or last week or last month. Sip a cup of coffee in a big city, in London or Vienna or New York and it will likely set you back several Pounds or Euros or Dollars. Enjoy that same cup of coffee, made the same way and tasting just as good or better, sitting on a terrace with a fabulous view in a small hill village in Turkey, and it will cost you just a fraction of the big-city price. Why? Because it's not over-burdened with what may be called “non-productive overheads”, charges imposed on a product or service which produce no consumable benefit, which add no usable value. Rental costs over and above the cost of maintenance and capital write-off represent a charge on the product or service for which no real value is obtained in exchange.

The effects of high and climbing urban rents are self-perpetuating. High rents mean high cost of living, which in turn justifies higher wages for city workers which push up costs of urban services yet further. City life can be changed socially too, as the small shops which once added variety and individuality to the neighbourhood scene find that high rents are squeezing them out.

Take for example Britain's famed university town of Oxford, where in 2005 colleges saw the light of capitalism and began to raise property rents at a rate far higher than national inflation. Many local shops which had been in the same High Street location for thirty or forty years plus were forced to close.

In European capitals and major cities like Vienna and Paris, landmark, iconic cafés which have been in the same place for three centuries have been forced to shut up shop as increased rents cannot be met from the already high price of a cup of coffee and a cream cake.

What has this to do with productivity? It's just one example of 'negative productivity'. Productivity means improving value, more output for less cost. When urban rents go up, not because the buildings are new or have been upgraded, but simply because the landlords think or know they can get away with it, that represents an increase in cost without a corresponding increase in added value. When urban real estate goes up it may be good news for real estate agents, but it's bad news for city-dwellers when diversity and quality of commercial life are reduced, and it's a step backwards in terms of productivity and prosperity when shops and services are forced to increase their prices while offering no added value to their customers.

Another fertile environment, ideal for the propagation of inefficiency and negative productivity can be found in government at all levels. Have you ever marveled at the unashamed extravagance of your government, ever considered that while the total tax take at all levels of government might be close on 50% of the national income, government probably delivers only 20% consumable value?

One of the major sources of incentive to develop and improve productivity is competition. Business leaders the world over need to be constantly on the lookout, looking forward to staying ahead by developing new or improved products, looking sideways at what the competition may be doing. It's a matter of permanent concern, an ongoing nagging worry in the back of the mind. Competition keeps them on the ball, ensures maximization of productivity.

In some industries and services competition may not be possible or practicable – electricity supply for example. But while your power supplier may be a monopoly, it's not an enforced monopoly. You can, if you feel badly enough about the way they treat you, switch to gas, or burn oil lamps. Not so with government at any level. It's not just a monopoly, it's an enforced service. You can't opt out of government. OK so your local police and fire service really are a useful, indeed vital service. But what about government at a higher level? From time to time Belgium's fractious, cobbled-together coalitions fall apart, and news items read “Belgium without a government”. So send them all home without pay and save on taxes. No continental European government ever suffered from not having enough laws, rules and regulations. The State of Montana manages very well with a legislature which only convenes every two years. Truth is, we could probably halve the size of national governments and feel no pain, just the pleasure of reduced taxes. So what's going on here? Simple. Professor Northcote Parkinson revealed all in the 1960s with his famous 'Parkinsonn's Law', “work expands to fill the time available for its completion”. One could clone that into another similar law: “costs expand to fill, and probably exceed, the budget available”.

Governments are subject to no competition, nor any real financial discipline whatsoever. There is no incentive to improve productivity – assuming they even recognize the word. That in simple terms is why taxes paid out greatly exceed the value obtained in return.

Which brings us back to the concept of “reverse productivity”, through which we lose prosperity by managing, in various ways, to reduce productivity, giving ourselves less product or service for a higher price. Although our industries and services may be increasing their productive efficiency, improving our standard of living by providing better goods and services at the same or less cost… we still find we're running ever harder just to stay in the same place. Why? Thanks to forces moving in the opposite direction: the greed of property owners who increase their prices simply because circumstances allow them to get away with it, and enforced monopolies like governments which lack any incentive to improve service or efficiency and indeed have every incentive to take life easy.

Prosperity is productivity. Productivity is good design, automated machinery, lean management, and work-flow maximization in industry and services. In that area we do fairly well.

But like filling a bath without a plug in it, negative productivity is denying us productivity's full gains and advantages. A degree of permanent unemployment, inefficiency in monopoly services especially government, and high urban rents which increase the price of every product or service sold as well as the cost of a house or apartment, here our society fails to deliver.

Why is everything we pick up 'Made in China'? Answer: because wages are very low. Why are wages so low? Here there are two answers. The popular one is that Chinese workers live in abysmal conditions. Partly true, yes, but only a very small part. Chinese workers in the better factories are provided with accommodation, free or subsidized meals, child care, and health care. When they go home to their villages for holidays they travel at very affordable prices in fast, clean, modern trains with cheap hot food available. And when they get home to their villages, the cost of living is a fraction of any home in a Western community. The family owns the home and the land neither of which is exorbitantly priced, the local café serves a glass of tea and good wholesome food at very little more than the cost of locally grown materials. The cost of living is low largely because life outside the big cities is not burdened by non-productive overheads.

Nor is local government a burden in smaller communities, where the canny citizens can keep a close watch on their officials. So taxes are low and usefully spent, and there is little or no corruption, not just the hard corruption of embezzlement and envelopes under the desk, but the soft corruption so prevalent in the West, the corruption of over-manning especially in administration, with good pay, expenses and pensions, little work attached and more than ample time to do it.

Productivity, and thus prosperity, goes through a fairly long climbing phase, but then, as the forces of anti-productivity clock in, the graph levels off as gains are cancelled by losses.

The Economics of Prosperity

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