Archive for the ‘Productivity’ Category

The Scientist’s Paradox

September 13, 2007

Scientists collaborate to increase their productivity.

Scientists compete for recognition.

While scientists are competing for recognition, that recognition comes from the very people they are competing against!

So science presents us with the curious paradox of an enterprise that is simultaneously competitive and cooperative.

— Extracted from The Wisdom of Crowds by James Surowiecki

What economic incentive is there to form decentralized organizations?

August 20, 2007

Adam Smith wrote a seminal book in 1776 called The Wealth of Nations. It is a classic, laying the foundations for most of today’s economic ideas. Smith’s ideas are deeply ingrained into western societies.

Division of labor is central to Smith’s thesis. Division of labor leads to high productivity. By focusing one’s efforts on a single task, one develops a talent for that task and become very productive. The greater the productivity, the greater one’s wealth.

Division of labor is consistent with one’s self-interest.

Conversely, when a person attempts to perform many tasks he masters none, is inefficient, has low productivity, and is unable to attain wealth. This is not consistent with one’s self-interest.

Division of labor results in a society that does lots of trading (if a person produces only one thing, he must trade for the other things he desires or needs). This creates a highly interconnected, interdependent society.

Today there is much excitement about decentralization. In a decentralized organization there is no one in charge, everyone is independent.

“Units of a decentralized organization are by definition completely autonomous … In decentralized organizations, anyone can do anything … Any and every activity is within anyone’s job description.” [1]

In a decentralized organization each person is not focused on a single task; rather, each person is a jack-of-all-trades. Smith would argue that this leads to low productivity, which leads to low wealth, which is not consistent with one’s self-interest.

So I wonder: what economic incentive is there to form decentralized organizations?

[1] The Starfish and the Spider by Ori Brafman and Rod A. Beckstrom

The Most Persistent of all Economic Delusions is the Belief that Machines Create Unemployment

August 14, 2007

“Among the most persistent of all economic delusions is the belief that machines on net balance create unemployment.

The belief that machines cause unemployment leads to preposterous conclusions. Every technological improvement must cause unemployment. The logical conclusion would be that the way to maximize jobs is to make all labor as inefficient and unproductive as possible.

Let us see exactly what happens when technological and labor-saving machinery is introduced.

Example: a clothing manufacturer learns of a machine that will make men’s and women’s overcoats for half as much labor as previously. He installs the machines and drops half his labor force.

This looks at first glance like a clear loss of employment. But the machine itself required labor to make it; so here, as one offset, are jobs that would not otherwise have existed.

It is likely the labor employed to build the machines is less than the labor cut by the manufacturer. So there is still a net loss of employment to be accounted for.

The machine was a large investment, so it takes several years for the machine to pay for itself. After the machine has produced economies sufficient to offset its cost, the clothing manufacturer has more profits than before.

The manufacturer must use these extra profits in at least one of three ways:

  1. He will use the extra profits to expand his operations by buying more machines to make more overcoats; or
  2. He will invest the extra profits in some other industry; or
  3. He will spend the extra profits on buying things for himself, e.g. buy a new house or a new car.

Whichever of these three courses he takes, he will increase employment.

The manufacturer, as a result of improved production has profits that he did not have before. Every dollar of the amount he has saved in direct wages to former overcoat-makers, he now is able to pay out in indirect wages to the makers of the new machines, or workers in another industry, or to the makers of a new house or car. In any case, he gives indirectly as many jobs as he ceased to give directly.

But the matter does not rest at this stage. The manufacturer competes with others. Due to competition the price of overcoats drops. The savings are passed along to the consumers. The consumers now have more money to spend on other things, which results in more employment.

In brief, on net balance machines, technological improvements, automation, economies and efficiency do not throw men out of work.

The central lesson is that we should try to see all the consequences of any economic policy – the immediate effects on special groups, and the long-run effects on all groups.”

Economics in One Lesson by Henry Hazlitt

P.S. It is fascinating to see how interconnected things are, how a change has an effect that ripples outward to things that you cannot anticipate, i.e. unanticipated consequences.

Enhancing Productivity by a Division of Labor

July 17, 2007

Maximum productivity is achieved when a task is divided up into sub-tasks and individuals specialize in a sub-task.

Consider the task of making a pin.  This task can be broken up into these 10 sub-tasks:

1. One person draws out the wire.

2. Another straightens it.

3. A third cuts it.

4. A fourth points it.

5. A fifth grinds it at the top for receiving the head.

6., 7., 8. Making the head requires two or three operations.

9. Putting on the head is a peculiar business.

10. To whiten the pins is another.

A person performing all these sub-tasks could make perhaps 20 pins in a day.  Thus 10 persons produce 200 pins in a day.

When each person performs only one sub-task, the 10 persons working together can collectively produce 48,000 pins in a day.  By dividing up the labor there is a 250-fold increase in productivity.

— Extracted from Wealth of Nations by Adam Smith