Productivity: Still Going Up
“Productivity in the United Stales,” writes SUMNER H. SLICHTER,“has been growing faster and faster, and the fact that it is far higher than in any other country suggests the need of revising some widely accepted ideas.” A foremost American economist, Lamont Professor at Harvard University, Mr. Slichter is the author of What’s Ahead for American Business, which was published last year under the Atlantic-Little, Brown imprint.
by SUMNER H. SLICHTER
MOST Americans would probably be surprised to discover that productivity in the railed States is growing faster now than it was a century ago. They have uncritically gained the impression that our economy was more dynamic when it was young and that, as it has been getting older, it has been losing vigor. Many radicals have proclaimed that capitalism is decaying, and many conservatives gloomily assert that it is being ruined by bad public policies. Both the radicals and the conservatives are wrong.
Output per man-hour is growing more than three times as fast today as a hundred years ago. The increase in the rate of growth has been fairly steady. Between 1850 and 1880, output per man-hour increased 28 per cent; between 1880 and 1910, about 74 per cent; between 1910 and 1940, about 83 per cent. Between 1940 and 1950, the annual rate of increase was one fourth faster than between 1910 and 1940 — large enough to double output per man-hour in thirty years.
Productivity has also been growing faster in the United States than in most other countries. Since the disruptions of the First and Second World Wars have affected recent figures, let us go back to the pre-war period. Between 1880 and 1910 real output per occupied person increased 38 per cent in France, 38 per cent in Germany, 48 per cent in Britain, and 53 per cent in the United States. Sweden, however, was an exception. It increased output per occupied person faster than did the United States.
Why is output per man-hour in the United Slates growing faster and faster, and why is productivity rising faster here than in nearly all other countries?
There are three principal reasons: competition in this country is becoming more pervasive and more intense; industry is becoming better managed; and, most important of all, industry is making more and more use of science and technology. All these developments are more pronounced in the United States than in other countries.
The rise of big business has created the widespread illusion that competition is gradually giving way to monopoly. But, although there are plenty of spots where more competition is needed, study of the history of our economy will show that it has gradually become more competitive. Furthermore, it is more competitive than the economies of Europe where cartels flourish.
The pioneer communities of a hundred or more years ago were too small and isolated to have stiff competition. Transportation was slow and expensive and there was often only one bank, one grain elevator, one cattle buyer, one lumber yard, and perhaps only one general store in a community. The mail-order business, which had its rise in the last quarter of the nineteenth century, brought muchneeded competition into thousands of small communities and gave farmers and others the chance to buy goods at well below the prices asked by local merchants.
Developments during the last fifty or sixty years have introduced more and more competition into the economy. The establishment of rural free delivery in 1896 and of the parcel post in 1913 increased the effectiveness of mail-order competition. The automobile, the truck, and good roads gave people a choice of towns in which to shop or borrow money and gave the farmer a wider choice of markets in which to sell his hogs or his crops and made him less dependent upon local middlemen.
The great growth of chain stores, a development of the last fifty years, has been particularly important in making retailing more competitive and also in stimulating competitiveness in many branches of manufacturing. Chain stores operate on the assumption that demand is substantially expansible and that more money can be made by selling at low margins than at high ones. Furthermore, chainstore policies are centrally determined for all stores in the chain. Hence, the local store managers are not restrained by the various local social and economic pressures which temper competition among the retailers in a community.
Competition in retailing continues to grow. The grocery store invades the field of the drug store; the drug store, the fields of the book store and even the hardware store; the variety store, the fields of the drug store and the hardware store, Before the war, the average grocery store carried around a thousand different items; today it carries from 3000 to 4000. Chain stores, mail-order houses, and department stores have also stimulated competition in manufacturing. By offering new manufacturers easy access to big markets, large retailers have made it easier to start new factories.
Competition in the durable goods industries is being made more vigorous by the growing importance of the replacement market — the part of the demand that comes from buyers who are replacing worn-out or obsolete goods with new. Today, more than half of the demand for automobiles and refrigerators is replacement demand. More and more manufacturers find that their stiffest competition is from their own output of five, ten, or fifteen years ago. If the present product is sufficiently superior to the models of a few years ago and if present prices are attractive, replacement demand will continue large. The growing competition between the output of this year and the output of several years ago is one reason why it is wrong to assume that competition is not vigorous when sellers are few.
An important stimulus to competition comes from the progress of technology, which steadily increases the number of materials, processes, and articles that compete with one another. Aluminum, plastics, plywood compete with steel and with one another; paper with cloth; tin and paper with glass; welding with forging and casting; the telephone with the telegraph; the automobile and airplane with the railroad; natural gas with oil and coal; frozen food with canned food.
Signs of the growing competitiveness of the economy are the drop in profit margins and the drop in the degree of concentration in many industries. The years 1929 and 1950 were both boom years. In the year 1950, however, despite the scare buying touched off by the Korean war, corporations made 5.4 cents profit per dollar of sales in comparison with 6.1 cents in 1929.
A drop in the degree of concentration in an industry is often a sign of greater competitiveness, since it means that smaller firms are increasing their share of the business at the expense of the large. George J. Stigler, Professor of Economics at Columbia University, has listed a number of industries in which the leading producer now does a much smaller share of the business than fifty years ago. This is true of agricultural implements, where the International Harvester Company, though much larger than fifty years ago, now does 41 per cent of the business instead of 85 per cent; of cans, where the share of American Can has dropped from 90 per cent to about 50 per cent; of copper smelting, where the share of American Smelting and Refining has dropped from around 90 per cent to 31 per cent; of corn products, where the share of the Corn Products Refining Company has dropped from about 80 per cent to less than 50 per cent. A sharp drop in concentration has also occurred in biscuits, explosives, leather, liquor distilling, meat packing, newsprint, petroleum, rubber products, railroad cars, sugar refining, iron and steel, and tobacco. Of course, an increase in concentration is also often a sign of competition — the stronger rivals taking business from the weaker.
A SECOND major reason why productivity per man-hour has been growing faster and faster is the improvement in the management of industry. This is attributable to the increase in professionally trained managers and to the development of a body of knowledge about the art of management. Both of these changes have come in the last forty or fifty years, and in both of them the United States has led the world.
The rise of professional management is roughly measured by the increase in schools of business administration of college level. In 1900, there were only three such business schools in the United States — the Wharton School and the schools at the University of California and the University of Chicago. In TL940, there were 110 collegiate professional schools of business, with an enrollment of over 100,000. In addition, more than 400 four-year colleges giving bachelor’s degrees permit students to concentrate in the field of business administration.
It has been fortunate that, as industry in the United States has become older, the direction of enterprises has tended to fall into the hands of professional managers instead of second or third generation members of the family of the founder. In Europe the operation of industry has been substantially affected by the large proportion of family-owned concerns that are managed with great conservatism by descendants of the founders, who are more interested in keeping the property that has been acquired than in adding to it. Someone has described family-owned enterprises of Europe as managed like trust funds. Furthermore, the family-trained administrators learn the business from the inside, where the emphasis is upon the importance of doing things in certain ways which long experience has shown to be “best.”
In the United States family-owned businesses are less numerous than in Europe because sons of successful business founders do not consider it a duty to carry on the family business. Hence, many family concerns become transformed into publicly owned corporations under professional management. Even when a concern remains in the family, it may be managed by a professional administrator or by a member of the family who has gone to a business school. In the schools of business administration emphasis has always been, not upon what experience has shown to be “best,” but upon change — upon the possibility of improving methods and upon the necessity for adapting policies to a changing environment.
Closely related to the rise of professional management has been the development of a body of knowledge about the art of administration. During the last half century, research on methods of management has virtually revolutionized the art of administration. Most of the research in this field has been done in the United States. The transformation in the art of management is reflected in the rapid rise of staff departments; the development of methods of selecting and training employees, of setting standards, and of cost control; the establishment of policy committees to which is assigned the responsibility for making studies and recommendations in selected areas of policy, such as wage policy, product-development policy, marketing policy; and, most recently, the development of better methods of communication with employees.
BY FAR the most important reason why output per man-hour in the United States has been growing faster and faster is the increasing use of science and technology by industry. This development has attracted little notice even from economists, but during the last thirty years industrial research has become a major influence in shaping the course of our economy.
The growing importance of science and technology is indicated by the increase in the number of physicists, chemists, and engineers. In 1900, there was one engineer to every 250 industrial workers; today, there is one to every 60 industrial workers. The number of chemists in the country is doubling every fifteen years and the number of physicists every eight years. The number of scientists, technicians, and engineers in industrial and governmental research laboratories was nearly four times as large in 1947 as in 1930, and total expenditures on private and governmental research (not counting the large outlays on atomic energy) were seven times as large.
At present the expansion of research is being seriously limited by the shortage of scientists and engineers. This shortage has been aggravated by the bad personnel policies of the armed services, which caused the training of many scientists and engineers to be interrupted during the Second World War and again during the Korean war. But despite the shortage of personnel, the professional research staffs of private industrial laboratories have increased from 57,000 in 1947 to 70,000 today.
Technology has been stimulated in the last twelve years by the tough problems presented by the requirements of the military. The military demands far more from the experts than commercial customers would ever dare ask. Sometimes the military demands great lightness, sometimes unprecedented accuracy, sometimes extraordinarily small parts, sometimes resistance to heat or great pressures, sometimes adaptability to quick and large changes in temperatures. These are not new demands but they are different in degree from commercial demands, and efforts to meet them produce new “know-how.” This know-how becomes available for civilian production.
No other country, with the possible exception of Russia, approaches the United States in the use of science and technology. The United States turns out about three times as many engineers a year in relation to population as does Britain. A British group studying industrial research in this country has estimated that, after allowance for difference in population, the United States is spending seven times as much as Britain on research in science and engineering. The British group attached considerable importance to the many engineers in the United States holding administrative rather than technical positions in industry. The technical training of these men, points out the British group, causes them to introduce into industry “an enthusiasm for seeking new and improved methods.”
Russia, however, appears to be now rivaling the United States in the number of scientists and technologists being trained and in the use of technology. The precise enrollment in Russian technical institutes of university grade and the outlays for research and development are not known, but they are very large, The number of students graduating each year in the physical sciences and engineering may be greater in the Soviet Union than in the United States.
Can the United States continue 1o raise output per man-hour at an increasing rate? The prospect is good that it can, at least for several decades, because each of the three principal influences that have made productivity rise faster and faster will continue to be strong. Our economy is likely to gain in competitiveness because each addition to the accumulated fund of technical knowledge increases the points of competition in industry. Furthermore, rapid progress in methods of administration seems certain to continue.
But the great reason for believing that America can raise output per man-hour at an increasing rate for at least a few more decades is the prospect that, industrial research will continue to grow rapidly for some time to come. There are several reasons for this prospect. One is that the military demand for research will be large and compelling. Another is that industrial research is contagious and tends to spread itself because each concern that engages in it compels its competitors to engage in it also. Still another reason is that part of the gain in knowledge consists of improvements in methods of investigation which make new knowledge easier to acquire. Finally, research will be stimulated by the enormous stake that business now has in increasing replacement demand. With about 40 million passenger automobiles in service, for example, the automobile industry can obviously afford to spend large amounts to make these old cars obsolete.
But can the number of scientists and engineers be increased fast enough to make possible a rapid growth in industrial research? The amount of unused talent in the United States is considerable because we do an indifferent job of discovering and developing young people of exceptional ability. For example, a recent study of Minneapolis school children shows that among the 9 per cent with the highest intelligence quotients less than half entered college! These results may not be typical of present-day high school students, but the wastage of ability is still large. And among college students there are many whose abilities and ambitions are not stirred because they fail to come into contact with particularly stimulating teaching. A few hundred more exceptionally capable teachers would greatly increase the number of able graduate students.
We need to develop ways to discover young men and women of exceptional ability in the high schools and colleges and to encourage them to do advanced work. All the sciences and arts need more able and well-trained men and women. If the number of advanced students increases, the physical and biological sciences and engineering will undoubtedly get their share. Furthermore, the military services should cease interfering with the training of scientists and engineers because, in a long-run contest with Russia, scientists and engineers are just as important as generals and admirals. The armed services have an obligation to discover which draftees have an exceptional aptitude for science or technology and to order these men while in uniform to continue their studies.
It will not be easy to increase rapidly the recipients of advanced degrees because the men and facilities to train graduate students are limited. In 1949-50, the number of doctorates given in physical and other basic sciences was 1643; in the biological sciences, 509; in the earth sciences, 181; in the applied physical sciences, 417; in the applied biological sciences, 472. Within the next ten years, the country should plan to double the number of able persons receiving advanced degrees in these fields.
CAN the economy of the United States generate new demand as rapidly as it increases its producing capacity? If output per man-hour grows at the rate of nearly 3 per cent a year, demand will need to grow at a little more than 3 per cent a year because the labor force is expanding. It is a compliment to the extraordinary productivity of the American economy that many people fear that it will turn out more than it can sell. This fear is not fell about most economies of the world.
Increases in demand during the years immediately ahead will be harder to achieve than during the last five or six years. Since the end of 1945, there has been an enormous increase in debt. Corporate debt has grown from about $85 billion to around $145 billion, and noncorporate private debt (mainly personal debts) from around $55 billion to about $115 billion. The larger the volume of outstanding debts, the larger, of course, are the annual repayments. These repayments tend to limit the demand for goods. In addition, demand will be limited by the large premium payments on private pension plans. These plans have been growing rapidly in recent years, and the annual premium payments now exceed benefit disbursements by $1.8 billion to $2.0 billion a year.
Although debt repayments and premium payments under private pension plans may limit the demand for goods to some extent, they will probably not prevent demand from growing by the needed 3 per cent or more a year. There are several areas in which outlays for goods will increase rapidly. For example, state and local governments have a large backlog of needs. The great increase in the number of children of school age will require many additional schools; more than half of the country’s major highways are over fifteen years old and are inadequate to meet the 50 per cent increase in the number of cars and trucks of the last twelve years. The consumption of water has been growing rapidly, partly because of the increasing use by industry and partly because greater domestic use has been encouraged by the increase in water heaters and in the number of cars to be washed and by the growing vogue of gardening. Most cities have neglected to expand their water supplies to keep pace with the growing demand.
The expenditures for durable consumer goods will also continue to rise. America has made a pretty good start toward becoming a nation of two-car families. The percentage of car-owning families owning two or more cars increased from 4.8 in 1948 to 11.1 in 1950. As people move to the suburbs, as the proportion of women at work continues to rise, and as incomes grow, the proportion ot two-car families will increase. It is a mistake to judge the future demand for durable consumer goods by looking at a list of things which people bought five or ten years ago and which are now owned by nearly all families — such things as refrigerators, vacuum cleaners, washing machines, or radios — because new kinds of durable consumer goods are constantly being brought out. Only about 2 per cent of the wired homes have dishwashers, air conditioners, clothes driers, or waste disposal units, and only 9 percent have freezers.
The principal reason for expecting the demand for goods to keep pace with the supply is the continued expansion of industrial research. Industrial research increases the demand for goods in two ways. In the first place, it raises the capacity of industry to offer consumers new and better goods. This tends to increase the proportion of personal incomes spent for goods. The decline in thrift in the last century is probably due in large measure to the availability of automobiles, radios, and other durable goods.
In the second place, industrial research raises the capacity of industry to discover new investment opportunities. Those opportunities increase the spending by business concerns. With personal thrift kept low by new and attractive goods, part of the many investment opportunities created by technological research will probably be financed by credit. The use of credit to finance some investment opportunities helps make each new round of expenditures a little larger than the last round. The great upsurge in industrial research during the last twenty or thirty years, therefore, is increasing the demand for goods as much as it is increasing the supply of goods.
The fact that productivity in the United States has been growing faster and faster and that it is far higher than in any other country suggests the need for revising some widely accepted ideas. I have already suggested that it requires rejection of the radicals’ view that capitalism is decaying and the conservatives’ view that it is being ruined by bad public policies. An economy which supports such a thriving and rapidly expanding technology, which is fast improving its methods of management, and which is steadily developing new points of competition is certainly not decaying. Many public policies have bad economic consequences, but they cannot be regarded as disastrous — not as long as productivity grows so rapidly.
The great productive superiority of the United States requires revision of the widely accepted idea that Europe is ahead of the United States both in thinking about social and economic issues and in dealing with them. Now it looks as if the United States were ahead of Europe and had been for many years. Both the United States and Europe, of course, have serious shortcomings in their thinking and their policies. Each has taken too narrow a view of its problems — Europe has concentrated too much upon social reform and the redistribution of wealth, while the United States, until recently, has concentrated too exclusively upon increasing production. But Europe has put second things first and the United States has put first things first. Europe has made the mistake of becoming engrossed in how to divide up income before it has learned very much about the art of turning out goods. The solutions to social problems that can be achieved without enormous increases in production are quite limited and unsatisfactory.
During the last twenty years the United States has become greatly interested in the distribution of income and has rapidly expanded arrangements for taking care of the unfortunate and the misfits. Today the quantity of income distributed on the basis of need is over ten times as large as in 1929. Furthermore, the share of all personal incomes distributed on the basis of need is over 6 per cent compared with 1.5 per cent in 1929. It is desirable that the United States continue to attempt to make its economy more humane and to take better care of the needy and unfortunate.
But even the United States, which can better afford to pay attention to the possibilities of redistributing income than can countries where production is lower, should not lose sight of the fact that the possibilities of increasing welfare by raising output far exceed the possibilities of increasing it by redistributing income. This country, with its unrivaled facilities for increasing both the output of goods and the effective demand for goods, can double the average per capita income in another thirty years or less. No scheme of redistributing income can expect to achieve the good that would be accomplished by doubling the income of everyone.