Answer to productivity "puzzle" is low investment

Andrew Smithers
Financial Times [In Letters], 7th June 2016


Sir,
Productivity is not, as you claim, “the puzzle that baffles the world’s economies” (FT Editorial, May 30). It is caused by low investment, which is essential to make technology effective. Productivity is not lower in China than in the US because good technology is unknown but because the capital stock is much lower. Equally US productivity does not reflect the use of the best technology. The average company is less productive than the best and cannot catch up without more investment.

Mervyn King, the former governor of the Bank of England, recently and correctly wrote that the main reason for the disappointment over productivity “ . . . is that there has been a sharp fall in the growth rate and perhaps even the level of the effective capital stock in the economy” (The End of Alchemy. Money, Banking and the Future of the Global Economy).

Failing to recognise that poor productivity is the result of low investment is very damaging, as it deflects attention from why investment is so low.

The reason, as I explained in “Executive pay holds the key to the productivity puzzle” (FT, May 29 2015), is that the bonus culture rewards chief executives who keep investment down. We are not going to solve this problem until we recognise the low investment causes poor productivity and consider how to change the perverse incentives that cause low investment.

Andrew Smithers
Founder, Smithers & Co,
London W8, UK


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