What is productivity? And, why does it matter?

By: Robert F. Abbott

When Phil hires a new helper for one of his construction projects, he first watches to see whether or not the newcomer has the right attitudes and habits to keep him as an employee. And, if the newcomer meets expectations,' Phil introduces him to his philosophy about work by telling him the woodcutters story.

Two woodcutters who are working together for the first time, set off in the morning to cut down trees. One woodcutter works very hard, and aside from a couple of breaks, works steadily all day.

The other woodcutter, though, seems to take many more breaks, at least one every hour. So the first woodcutter expects he'll have cut down many more trees by the end of the day.

But, when they quit for the day, the first woodcutter finds, to his surprise, that the second woodcutter has done more, despite taking all those breaks. And, in his frustration, the first woodcutter wonders out loud how the second woodcutter did it.

The second woodcutter couldn't help but hear the first woodcutter's question, and replies, "Yes, I take many more breaks, but every time I take one, I sharpen my axe."

Phil uses this story of the woodcutters to explain his ideas about productivity, and he doesn't relate it to the productivity which economists refer to in their statistics.

Phil thinks of productivity in a very immediate way: how many nails you can drive in one hour, for example. The economists are talking about the same thing, only they're talking about it as the sum of many millions of businesses and organizations, so they're talking about productivity in an abstract way.

Whatever the case, productivity simply refers to the amount of value you can get from labor, land, or capital (invested money). As we'll see in the next section, Phil's income goes up when he (and his helper’s) productivity goes up.

Increasing productivity across a whole nation is also good news. It means everyone in society becomes more prosperous, that everyone (or almost everyone) will have more money to spend or save.

Increased productivity can also mean lower prices. For example, if carpenters and home building companies increase their productivity, then house prices will go down. Generally speaking, though, consumers, owners of businesses, and workers in those businesses all share productivity gains.

And what about people without job? Well they often gain, too, because when businesses owners and workers make more, they pay more in taxes. In turn, that makes more money available to governments for social programs.

Having heard all that, you may be skeptical, thinking your prosperity hasn't gone up much, if at all. But you'd be wrong. Productivity has gone up, and gone up a lot over the past two hundred years, and especially over the past 50 years.

It may be invisible to most of us, but productivity is one of the silver bullets that have given us our prosperity and so many of our choices.