This raises a paradox. Legend has it that in the 50s and 60s British workplaces were staffed by Fred Kites and Red Robbos and managed by bumbling amateurs. And yet our productivity grew faster then than it has in an age of quiescent unions and better-qualified – and better-paid - bosses. As Julian Birkenshaw of the London Business School points out "We have known what "good management" looks like for decades, and enormous sums have been spent on programs to help managers manage better." This knowledge and investment, however, has not led to any better productivity growth than we had in the dark ages of the 50s and 60s. Why not? I'd suggest three reasons.
First, any improvement in management quality has been offset by slower technical progress. In the post-war years, firms had a lot of catching up to do in the form of introducing new equipment and better techniques. Productivity could therefore grow quickly simply by picking the low-hanging fruit. In recent years, however, this has been less possible because, as Tyler Cowen of George Mason University argues, there's been a slowdown in the rate of (monetizable) innovations. It's no accident that slower productivity occurred at the same time as firms built up cash piles rather than invested in equipment; both reflect a lack of innovation.
Secondly, productivity growth depends not just upon management practices but upon macroeconomic conditions; Verdoorn's law tells us that productivity grows quicker when GDP grows quicker. And, for reasons we needn't investigate here, real GDP grew quicker between 1947 and 1973 than it did between 1987 and 2007 - by 2.9 per cent a year compared to 2.6 per cent.
Thirdly, education alone does not eliminate bad management. Research by Stanford University's Nick Bloom and the LSE's John van Reenen has found that there is "a long tail of extremely badly managed firms." A big reason for this is that market competition is simply not strong enough to drive out bad performers. And it is competition that drives productivity up, not good management. Richard Disney of the University of Nottingham and colleagues have found that 90 per cent of total factor productivity growth comes from external restructuring, the closure of less efficient establishments and entry of efficient ones.
This means that without competition, management does very little to raise productivity. One reason for this might be the Dunning-Kruger effect; the same stupidity that causes people to be bad managers also causes them to fail to see that they are incompetent, and so they don't change. Another reason is that poor managers are often very good at office politics, and so don't get replaced by better ones.
We hear a lot about workers needing incentives to work. But managers need incentives too. And the incentive that matters is not a big pay packet, but the threat of losing one's job. Where competition is weak, so too are incentives.
And herein lies my concern. All three of these factors – low innovation, poor macroeconomic conditions and weak competition – are likely to persist, unless there are some big and surprising changes. Slow productivity growth – if not as slow as we've had in the last four years – might therefore be here to stay.
