The Productivity Riddle

Glenn Hubbard has an excellent article in Strategy+Business about the effects of American management on productivity and economic growth. Free registration is required, and this article is worth your time to sign up.

Through the lens of economics, management is, at heart, a choice made by each firm. To alter that choice is costly; when a firm changes management, it requires additional personnel, time, attention, and other resources. The decision makers who lead the firm must trade off these costs against the benefits they expect. That is why, if all other factors are equal, the new management practices most likely to be adopted are those that promise the greatest cost reduction. In capital-intensive companies, these tend to be those practices that most improve the efficiency of plant and equipment. In companies where highly skilled workers are integral to a firm's financial performance, practices related to incentives and human capital will probably be perceived as more beneficial.

If this theory is correct, then in a knowledge-intensive economy, the firms with better practices for process techniques, goal setting, performance evaluation, and human resources management should be found, by reasonably objective observers, to exhibit generally better performance. And indeed that correlation was found in recent research by economists Nick Bloom of Stanford University and John Van Reenen of the London School of Economics.

The article also references The Good Life: How Managers Made the Modern World, and this paper about management practices across firms and countries. If the assertion is true that management has this much power, then whatever is being taught in our business schools will have a significant impact on the future of this country. That's scary.

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