Thursday, September 28, 2006

Is Productivity good or bad? (Part 1)

Generally, when people talk about “Productivity”, they are referring to the amount of goods and services the nation or economy produces per hour. In recent times, the dues given towards a higher productivity rate has often been overrated. In part, this is due to human nature thinking that anything that is going up must always be beneficial or advantageous. In today world of the “New Economy” – a term coined in the late 90s – the productivity miracle depended to a fair degree, on a blind fate.

In theory, when businesses produce more per worker, they increase profits and raise wages which will in turn allows worker to spend more to drive the economy upwards when they feel richer. Indeed, with the emergence of new technology, it helps spur productivity to yet another level.

When productivity increases, it means there is more supply to cater to the existing demand. Whatever that are produced must be absorbed by the consumers. If productivity increases to a level where demand cannot catch up, there will be a big problem. Businesses will have to reduce their prices to clear stocks.

Many believe spending on new technology gives an edge against their competitors. However, when a technology that is readily available to the market, everyone can buy the same thing. In the end, the only one who benefit is the consumers. If a business intention of capital expenditure is to increase profit, in this case, many in recent times, did not achieve this aim. To the contrary, when business sink billions into technology willy-nilly, more capacity becomes excess capacity and as supply swamps demand, profits plunge. This cannot be any much truer for those who operate in very competitive market. This is precisely what happened in the late 90s when prices of computers plunge – Intel, Dell and so on have been forced to cut prices.

Every now and then, productivity level of the country will be published. In a world where productivity is greatly influence by technology, the figures given is only a very rough gauge at best – often figures are revised due to counting errors. So what are these counting errors? The problem is it is very difficult to assess the value of the new technology. Until it is set to profitable employment, a computer is just a piece of furniture. Like a piano, its utility depends on the individual. He may play “The moonlight Sonata” or simply “Happy Birthday.” So like most on Wall Street, a rosy picture is often painted. The new economists simply estimated the value of technology produced by the new economy by assuming all individuals studied at Juilliard.

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