Productivity is rubbish. Inefficiency rules. Why Craft Gin is better than United Airlines.

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Anyone who reads the research papers and speeches from the Bank of England will have come across loads of scary reports about the terrible state of productivity in the UK. 

All of the data shows that the UK lags behind most of our competitors in output per capita – British workers are less productive than their foreign counterparts.   Currently we are 18% less productive than the G7 average.

All of this plays into a set of vague and lazy stereotypes about British workers not being as hard working or well qualified as their competitors, stereotypes that have been around for decades, and which are often used to support a political agenda.

This nonsense from Sky follows this idea of pampered British workers and adds in a whole lot of fact free snarkiness about Millenials and snowflakes.  I’ve taken a picture of it so you don’t have to search out the link, and give them your clicks.

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As you may have spotted from my recent posts I believe that a lot of the data we use to calculate productivity is wrong.   The UK has less employment than we think.   I also think that we are underestimating small business manufacturing output (I will come back to this in a few weeks).   

But even if you assume that some of the problem is rubbish data it is hard to explain away a gap that big as data noise.  It looks like something happened post credit crunch that sent the UK in a declining productivity path, with predictably low levels of growth. 

In theory efficiency should improve as inefficient companies go bankrupt and their market share is taken by more efficient ones.  Research however doesn’t support this – since the credit crunch efficient businesses have gone to the wall, and the firms replacing them aren’t as productive.  During the credit crunch we all got a stark lesson at how bad US and UK capital markets are at allocating resources to businesses.  It looks like a lot of reform of banking is still in needed.

This matters hugely, because post Brexit as we strike the Global trade deals that we need to survive British  companies  will be exposed to the full force of international competition.  Even the world most famous Liberal Economist agrees:

“Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker” Prof Paul Krugman

But what if inefficiency or lack of productivity is a feature not a flaw?  What if customers actually prefer inefficient or unproductive businesses over efficient ones?

My business is inefficient, and has very low productivity.  The number of bottles of Gin which each worker produces in Durham Distillery is much lower than Gordons, Bombay Sapphire, or Hendricks.   Most UK Gin is actually made in a small number of massive Gin factories, which produce lots of different brands, with slightly different branding, some of which try and pass themselves off as local craft distilleries.   There are 3 different “Lake District” Gins on the market, 2 of which are made in Warrington.

Even though we work very hard the nature of our product and our production process means that we make fewer bottles of Gin per person than lots of our competitors.   We will never ever be as efficient as the industry average, and frankly we don’t want to be.

The same is true right across the entire food and drink industry; craft beer, artisanal bread and cheese, in fact anything that is “small batch” or “craft” is by it’s nature inefficient and has low productivity. 

Lots of customers actively prefer this, to the extent that big producers try and disguise mass produced products as small batch or local.  Tesco’s recent launch of yet another “Farm” branded range of intensively farmed food is a good example.    

I wrote a few weeks ago about Doctors, hairdressers and why as customers we don’t really want them to be efficient.  We want them to spend time with us, because that is what we value.   Even if we don’t ever meet the craft distiller or artisanal baker we are bought into the idea that we are paying for an individual with skill and talent to make us something which is more valuable than mere mass production.  It honestly doesn’t take Starbucks that long to make a decent cup of coffee, but the rigmarole of the barista is part of the experience.

The same trends are hitting clothes too. The last pair of jeans I bought were made in the UK, rather than mass produced in the far east where labour laws make it easier to exploit workers and environmental protections are weaker. 

Post Credit Crunch we are more and more skeptical about big business, and about the dodgy practices of some big companies.  We value products more when we can see that they have been made to a higher standard, and where we can identify with the producer over mass produced high volume stuff.

At the other end of the economy high productivity/low cost production has been in the headlines for all the wrong reasons.  The best example of the awfulness of productivity this week was United Airlines, who apparently decided that it was OK to actually beat up one of their own customers because he had got in the way of the productive allocation of human resources.  This is an extreme example, but the rest of us will have had experiences of businesses who organise themselves around an efficient and productive workflow which makes no sense at all to customers who find themselves trying to navigate through endless uncooperative departments.

This would explain why productivity declined post credit crunch. As we lost our faith in mass produced, intermediated capitalism we rediscovered our love of small batch, inefficient and local.   We don’t however want to get rid of capitalism, because we like the stuff that capitalism produces for us, and enough of us remember how awful most of Eastern Europe was before the wall came down.  We just don’t want horse meat in our Lasagne.   British jeans companies may not be as cheap as Sports Direct but they are less likely to be doing ghastly things to the people who are making their clothes.

Post Brexit prices will rise as the pound falls, and the bureaucratic cost of doing businesses rises. This is bad news for low price/high productivity businesses who import production from abroad. But is has less of an impact on local producers.  This will make small batch, locally made, unproductive products relatively cheaper against imported, mass produced high productivity industries.     The unlikely end point of Brexit could look like a revival of the craft based William Morris version of Socialism.   The hipsterish new artisans and Edwardian radicals do share a similar taste in facial hair after all.   

It probably won’t improve the customer service of companies like United Airlines though.

References

I haven’t referenced this blog academically, but if you want to read more…

This is Andrew Haldane from the Bank of England’s on productivity

http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech968.pdf

This is a House of Commons Library paper on the same subject

http://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN06492

This is a Bank of England paper which looks at inefficient businesses replacing efficient ones

http://www.bankofengland.co.uk/research/Documents/workingpapers/2014/wp495.pdf

As does this NESTA paper on unproductive entrepreneurship

http://www.nesta.org.uk/sites/default/files/other_productivity_puzzle.pdf

This is a great blog looking at poor management and low productivity

https://flipchartfairytales.wordpress.com/2017/04/04/productivity-and-bad-bosses/

And this is where I bought my jeans from:

http://communityclothing.co.uk/about-us/

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