How To Make The Economy Grow

The Gary Works steel plant in Gary, Indiana, is the largest steel mill in North America. It used to be the largest in the world. A jewel of the manufacturing boom, it employed 30,000 people in 1970 – a third of all jobs in Gary – churning out 6 million tons of steel a year.

Things have changed. The plant today employs 5,000 people, down 83% from its peak. But, remarkably, it produces more steel than ever: 7.5 million tons a year.

Make more stuff with less. Productivity. That’s how the economy grows. Workers figure out new tricks, machines get faster, and the resulting efficiency means people who used to make steel can now make apps and lithium batteries.

Everything about growth revolves around productivity. Economists are rightly obsessed with it, promoting investment and innovation. But there’s a distinction here that makes me more optimistic about our productive potential than most economists would suggest.

There are two types of productivity:

Additive vs. subtractive. Think of the economy like a racehorse. Its owner can invest in a new training regimen and diet, which may make the horse faster. Or it can get rid of the overweight jockey, which may do just as good. My point is that too many businesses, and the economists who size them up, focus on inventing new training routines with little attention paid to the fat jockey. There is so much productive potential within reach that doesn’t require new inventions.

U.S. productivity surged 96% during World War II. Some new inventions helped drive the boom. But there was also the pervasive spirit of, “Alright team, no more nonsense. Let’s just work together and get this done.” Women and minorities, once outcasts of labor markets, were accepted virtually overnight. Age-old grievances between managers and workers were put aside. Economist Robert Gordon writes:

Throughout the war, patriotism and the sense of purpose bonded workers and management together, and workers were more eager to raise efficiency (often in ways that made their lives easier) than before.

The crazy thing is that most of the productive potential unleashed between 1941 and 1945 existed in, say, 1939. It was just suppressed by social biases that weighed on productivity like a fat jockey.

Which raises the question: What parallels exist today? I’d point to the culture of credentialism, which favors workers whose parents could afford name-brand education vs. those with the most skills. Or arbitrary immigration restrictions, which allocates talent based on birthplace rather than productivity. Fat jockeys, all around us.

Or think about poor incentives. Charlie Munger tells the story of FedEx. Years ago, the shipper’s logistics chain was constantly delayed because workers couldn’t transfer a plane’s cargo into a truck fast enough. “They tried everything – moral suasion, threats, you name it,” Munger says. Finally they began paying people by the shift, rather than by the hour, telling workers they could go home when the plane was unloaded. “Their problems cleared up overnight,” Munger says.

Where else do we see this today? Perhaps in Congress, where a politician’s job is to make laws but their incentive is to raise money for reelection. Or in the CEO who genuinely wants to think long term, but is paid with stock options that expire in six months. Some think the 2008 financial crisis wouldn’t have happened if investment banks maintained their traditional partnership structure, where senior management was personally liable for the firm’s failure. Incentives are the most powerful force of economics, and we are systemically bad at managing them. Here again, fat jockeys, waiting to be fired.

A Gallup survey showed 52% of working adults are not engaged in their work, and 18% are actively disengaged. Tom Gardner of The Motley Fool analogizes this as a 10-person canoe where five people aren’t paddling, and two are paddling backwards. That’s the average American company. I also think about the legacy culture caused by historic jobs, nearly all of which were physically demanding and where productivity meant actively doing something. Contrast that to today, where more people work with their head and need time to think, but are still stuck in the culture of productivity being the stuff that happens when you’re active, typing on a keyboard or creating deliverables. The proliferation of meetings – 67% of which the average manager says are unnecessary – is one unfortunate outcome.

The point is that the world is full of low-hanging productivity fruit that doesn’t rely on our ability to invent new ideas. There are smart economists who are pessimistic about our future potential, based on the idea that things like electricity, air conditioning, and cars – the multipliers that drove 20th Century productivity – were so powerful that we shouldn’t expect their boost to be repeated. I buy that. But we underestimate our potential when we only view productivity through the lens of creating new inventions, ignoring how much unnecessary productivity-sapping social nonsense we put up with, but shouldn’t.

New inventions are, and always will be, the top driver of productivity.

But a change in mindset could help all of us.

There is a fascinating bit in the documentary The Emperor of All Maladies, where cancer experts describe how hard it is to get doctors, foundations, and politicians to take prevention seriously, despite knowing how important it is to the war on cancer. Robert Weinberg, and MIT cancer researcher, explained why:

[Prevention is] sometimes overlooked because it’s intellectually not very stimulating and exciting.

Persuading somebody to quit smoking has nothing to do with molecules and genes and cells, so people like me are essentially uninterested in it, in spite of the fact that stopping people from smoking will have vastly more effect on cancer mortality than anything I could hope to do in my own lifetime.

The same thing applies to how we think about productivity. New discoveries are needed and should be cheered. But we shouldn’t ignore the fat jockeys of prevention, whose ability to move the needle is disproportionate to their glamor.

A relentless push toward equality of opportunity. A fanatical focus on workplace culture. An evidence-based approach to incentives. An obsessive drive to get hiring right. These are not small issues. They are, and will continue to be, a key way we grow the economy.