Savings, Capital, and Productivity Improvement

Drawn into the stream of undefined illusion
Those diamond dreams, they can't disguise the truth
--Level 42

Productivity is the amount of output produced per unit of input. Improving productivity is critical to organizations because the more output generated per costly unit of input, the greater the economic value (and profit) created.

Improving productivity is critical to society as well. As more output is generated per unit of scarce economic resource, more wealth is created and conditions of scarcity are reduced. Improved productivity is inextricably linked to higher standard of living.

There are two strategies to improve productivity. One strategy is to make extant production processes more efficient. This approach to improving productivity requires relatively small amounts of capital. The focus is on rethinking how current processes should be configured so that less resources are needed to produce a certain amount of output.

Because it involves existing processes, this productivity improvement approach is the most common one employed by managers. It requires less investment and is usually perceived has being less risky. When managers seek to improve productivity, they usually start here.

The other strategy for improving productivity is to create new production processes. This approach requires large amounts of capital because economic resources must be acquired and allocated toward something new. It is often associated with entrepreneurial ventures seeking to do something radically different from the status quo.

Because it involves creating new processes, this productivity approach is less commonly employed by managers. It requires more investment and is usually perceived as more risky. When managers seek to improve productivity, they usually entertain creating new processes only after they have exhausted efforts to make extant production processes more efficient.

It can be argued that managers have been exhausting efforts to make extant production processes more effiicient for decades. They are approaching that point in time where significant improvement in productivity can only be achieved by radically altering production processes.

There is a problem, however. We have been saving progressively less of our incomes. Household + government saving as a % of GDP is negative. As such, little capital is available for major productivity improvement projects.

Our declining capital base is stunting capacity for major advances in productivity (and in general standard of living) from here.