Productivity in the firm: a critical analysis

(paper presented at “Sala Capretti” conference in Brescia on January 9^th 2004)

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Contents

1)[a1] Macroeconomics definitions. Connections with: mechanization grade, capital intensity, unit labour costs, performances and employment

2) Extension of the concept to the economy of the firm

3) Productivity and labour market

4) Productivity and strategy: detailed connections (productivity) and perspective connections (strategy)

5) Productivity for the manufacturing, commercial and insurance firms, for  banks and service providers

6) Productivity and the evaluation of the firm

7) The “others’” Productivity (clients and borrowers) like a yardstick to set a limit for debt ceiling

8) Productivity as an explanation of the success of an enterprise in analogy with the explanation of the wealth of nations

9) Final remarks

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1) Macroeconomics definitions. Connections with: mechanization grade, capital intensity, unit labour costs, performances and employment

Macroeconomics extensively uses the concept of productivity and other related ratings.

a) Total productivity

It is expressed by the ratio

Total productivity = Output/[(Input) Capital + (Input) Labour]

Where Q is the output  of a good (at the numerator) and K is the capital and L is the Labour used for production (at the denominator). Then, Q/L is defined as the labour productivity, and Q/K the capital productivity. Q/(aL+bK), (a and b are coefficients selected properly) represents the total productivity.

The economist Sergio Ricossa [1] expresses this critical:

«Total productivity…by that we seek to give a productivity  index of all means of production taken  in whole…Then we must conclude that productivity can perform only a poor role in economic theory, and also in practical applications it should be considered with prudence, as a rough indication of complex events that cannot be properly estimated in a sole figure».

The criticism expressed by Sylos Labini [2] is milder and it seems to save the average productivity, even if he denies utility to marginal productivity concept.

b) Labour productivity

The concept is expressed by the ratio

Labour productivity =  Output/ Labour

There is not a relation of cause and effect between numerator and denominator, because they are only disembodied numbers.

Whereas in economics, connections and relations usually hold. For example: labour (by own quality or by technical capital quality), affects the nominator in a proportional or less than proportional or more than proportional way. Therefore it does not seem correct to use the mathematical ratio or its mathematical interpretation. Rather we should represent on the axis both labour and output, expressing such a connection. But in this way, we could lose the concept of productivity, that is a ratio, i.e. a value which gives the measure of a phenomenon.

Putting an effect at the numerator (output)  and a cause at the denominator (labour) we represent this connection as static and final, while it is dynamic; Anyway the meanings expressed by that ratio are certainly more important than those it hides.

c) Capital productivity

Analogously to labour, the capital productivity is calculated by the ratio:

Capital productivity  = Output/ Capital

At the beginning of the twentieth century, Alfred Marshall wrote [3]:«…But there is a clear tradition that we should speak of Capital when considering things as agents of production; and that we should speak of Wealth when considering them as results of production, as subjects of consumption and as yielding pleasures of possession. Thus the chief demand for capital arises from its productiveness, from the services which it renders, for instance, in enabling wool to be spun and woven more easily than by the unaided hand, or in causing water to flow freely wherever it is wanted instead of being carried laboriously in pails; (though there are other uses of capital, as for instance when it is lent to a spendthrift, which cannot easily be brought under this head). On the other hand the supply of capital is controlled by the fact that, in order to accumulate it, men must act prospectively: they must wait and save, they must sacrifice the present to the future ».

This productivity index can seldom be a ratio between physical quantities. On the contrary, it will be usually a ratio between output and capital value. This is why it also assumes the meaning of number of units produced for each unit of value (lira, euro, dollar, et cetera). Then it is necessary to specify that for “capital” we mean the value of fixed capital (manufacturing equipment) that it is included into the assets of balance of a company, net depreciation expenses estimate correctly. We must also specify that correct depreciation can not be that of balance, often affected by accommodating policies and fiscal interferences [4], but it worth adopting the depreciation given by a management accounting directed to the costs. These remarks shall be valid for all the formulas in which is present “capital”  as given.

We may also propose to put at the denominator, in same cases, machine hours, but only in case of fully automatic and self-contained machines. Even if the machines should request the presence of a  worker, there is promiscuity between two factors and we should fall again in a case of total productivity. Furthermore, we may consider the output/machine hours ratio, that also shows the number of units produced really for each hour of machine use; it might be compared with the theoretical datum supplied by the builder, but, then, we would fall again in a performance analysis.

This model is difficult to use in practice. On the contrary, it is used generally in the depreciation of rubbish fixed asset for companies specialized in waste kitchen disposal, licensed by the Authority for a quantity or a cubage predetermined at the moment of issue. This  make it possible to calculate  the depreciation in each exercise in compliance with quantities or volumes discharged in comparison with total authorized.

d) Mechanization grade

In the opinion of L. Pasinetti [5]:

Capital/ Labour

expresses the mechanization grade [6], but for someone it measures, on the contrary, capital intensity, i.d. capital for worker.

If we have the total of fixed assets at the nominator and the number of workers at the denominator, the ratio expresses the fixed capital value that the firm has on disposal for each worker. The link with the concept of productivity is evident: the is more the mechanization grade and the higher could be labour productivity. However the ratio can be deceptive, because, if mechanization grade is large after the completion of an investment cycle, then, once operating, since at the numerator we have a monetary value, the ratio can lower  as a consequence of depreciations, reducing net capital in each financial year. However productivity can also increase, rather than decrease, because workers become more familiar in the use new machinery and equipment, in according to concept learning by doing.Therefore, between mechanization grade and productivity surely some connections exist, but they are neither univocal nor unidirectional and a attention needs the time that occurs for recording, pointing out the time that the investment cycle needs.

We can introduce some hypothesis:

a) if capital increases (numerator) more than labour (denominator), mechanization grade rises. At an extreme case, in an firm fully automated labour goes off output is due only to the capital;

b) if the mechanization grade increases, also the labour productivity should rise, in the short or in the long run. This is put a focal problem, even because the mechanization grade places labour at the denominator. Now, if we assume that the mechanization grade is increased, this is not sufficient to draw a conclusion, because there could be situations (causes) in which:

i) capital is increased, but also labour is rised at the denominator, but less than proportionally;

ii) capital is increased, but labour is steady;

iii) capital is steady, but labour is reduced (workers cutting by trying of turnaround)

e) Capital intensity

There are some authors who write capital intensity as

Capital/ Output

That expresses capital share used up each unit produced

Let us develop the ratio that expresses “mechanization grade”, according to Pasinetti [7]

Capital/ Labour=[ Capital/ Output]/[ Labour/ Output]

The numerator is the inverse of capital productivity and it is equal to:

[1/ Capital productivity]/[1/ Capital productivity]= Labour poroductivity/ Capital productivity

And this is a strategic ratio, because it means that, if capital intensity increases while labour productivity stands still, the ratio capital/labour or mechanization grade han risen. But this is not a good result. It is favourable if the ratio is lower, because it means that, at the same mechanization grade, labour productivity has increased, i.e. output per capita or per worked hour. This observation is linked in any case to the stage of the process of mechanization, because, if we are in start off or in recent start, it can not have influenced labour productivity.

Let us begin now from labour productivity

Labour productivity = Output/ Labour

and let us divide numerator and denominator by capital.

We obtain

Labour productivity= Output/ Labour=[ Output/ Capital]/[ Labour/ Capital]

from this

Labour productivity = [Output/ Capital]*[ Capital/ Labour] = capital productivity . capital  intensity [8]

We can consider that:

a) if capital and output stand still, it means that capital productivity does not change. Then, if we consider capital as fixed, if labour:

§ decreases, labour productivity increases;

§ increases, labour productivity decreases;

b) if output stands still, but capital decreases, then  capital productivity rises, but if labour:

§ remains unchanged, it  leaves unchanged final labour productivity

§ decreases, labour productivity increases.

These considerations may seem tautological algebraically, but the division of labour productivity in its two components  (i.e. capital productivity and intensity) permits to better understand that labour productivity is a complex result, in which capital , even if it is not evident in the synthetic formula, has a crucial role.

Here we can describe further combinations always by using the technique of the partial derivatives or of ceteris paribus, keeping in mind that ceteris paribus (i.e. standing still some variables and changing one only) is not realistic, because variable change at the same time in economics.

Another reflection can be made starting from labour productivity:

Labour productivity =[1/(Capital/output)]*(Capitale/labour)

for that:

Labour productivity=inverse of  capital intensity*mechanization grade

g) Unit Labour Costs (ULC)

A remarkable index for the comparison among economies is the ratio:

Labour cost total value/ Goods and services output

The index points out the influence of labour cost over every unit of product. Since labour represents usually a considerable quota of total product cost, the higher is ULC and the more likely this economy will face problem of international competitiveness. In order to increase its own competitiveness, an economy either can reduce its numerator (clashing trade-union reaction), or can increase the denominator. But to increase the denominator, one must increase productivity usually: this is the strict linkage between ULC and productivity.

The index, if it is used for economic policy decisions, it is useful also for  every  firms, especially when we compare a punctual record with an historical series of the same firm and with the sector data to which firm belongs. For example, an analysis of the ULC between enterprise Alfa and the competitor Beta can have a considerable importance to delineate a growth strategy in markets markets.

We can obtain the reduction of the ULC also when the wage trend (numerator) is slower than inflation rate. The perception of the phenomenon is neither direct nor immediate.

If the inflation is higher and it is bounded within certain limits, then we have a negative effect for the exchange rate (devaluation), that eases even more the export, because domestic ULC will seem below the foreign one(importer countries). But it is a phenomenon to examine, especially if there is a single currency (Euro) or a currency linked to another with a fixed exchange (for example, China with dollar)

h) performance

A correct expression of the performance concept is the ratio:

Real productivity/ Teorical productivity

The performance analysis has some difficulties because the theoretical basis is difficult to determinate. For example, in order to choose which value has to be considered for productive capacity, we have to choose between an abstract measure (100 per cent) or the more likely one (for example: 80 per cent, because nobody can use the 100 per cent capacity, even if he uses the “total quality” method or he makes precautionary maintenances or he retains into the store some dual spare parts for every occurrence). After this choice, the index is useful as a target to reach and also as a consumptive data. The comparison between target and consumptive data let us to fix the increase course yet to obtain.

i) employment

It might seem trivial that increase in productivity causes job loss. But it is not so, even in the case of a productivity increase obtained by maintaining fixed output and by reducing labour factor; in fact, in this case, a reduction that is obtained sometimes by labour saving investments. It should, in fact, be the case of frictional and not structural unemployment. Gary Becher, Nobel prize for economics in 1992, asserts [9]: « I seem that the recovery is truly sound. Above all when we consider the extraordinary march of the productivity, from the half 90 years and also immediately after the recession. Productivity is an essential measure of welfare of a country and it seems right for a prolonged increase. Besides, I will belie too strict connections between productivity and job loss: in a long time, the increase of both these factors happens in parallel, like in 90 years. I do not fear bleeding of manufacturing jobs: this decline is in progress from 60 years, it is a long time trend to advantage of services. And when I speak of services I am not referring to fast foods, but to skilled jobs, to software, computers, biotechnologies, finance…»

The position of american economist W-J. Baumol is not different when in “Productivity and american leadership ” he claims at page 15: «…First, we are warned that rapid increase in labor productivity (the adoption of labor-saving methods) will destroy jobs, even in the long run. Second, and perhaps somewhat inconsistently, it is argued that if an economy’s productivity growth lags behind that of other countries, it will lose jobs to foreign workers, its industry will suffer, and its balance of payments will be subject to chronic deficits (these last alleged consequences of lagging productivity are sometimes referred to as “deindustrialization”. As we shall show next, the data do not support any of these conclusion.)».

2) Extension of the concept to the economy of the firm

To speak about expansion of the productivity concept from macroeconomics to economics of the firm, may seem a contradiction for those who claim that economics is one. We can agree that the more social life becomes complex, the more it demands more organization and specialization. But specialization must never lose the connections with mother branch and with the common denominators. Fortunately, for the productivity concept the specialization did not create separations and the concept that is valid for macroeconomics it is also extensible  to economics of the firm. But if it is not possible to consider them separations, however it is necessary to look for some adaptations in the application of this unique concept to specific sectors or to individual enterprises. The productivity concept deals with a connection among physical quantities (for example: for labour productivity, physical output and number of work hours),  but this presents the drawback that (in macroeconomics as in  microeconomics) it is not possible a comparison between physical quantities only, because sectorial data aggregation imposes recourse to monetary values (for example: at the numerator output should be expressed in monetary terms only, while at the denominator number worked hours in year by all workers should available). But productivity concept is always the same in any case.

For business economics the productivity is, like in macroeconomics, represented by the ratio between output in the period at numerator and quantity of production factors at the denominator. Given that productivity is generally related to labour, it is equivalent to the ratio between output and number worked hours. As we can see simplicity is apparent, because the choice of the variable problem cannot be easily solved for the multiproduct enterprises – i.e. the most of them. In fact, being only a physical index lacking of the equalizing but also deceptive monetary veil, this index  reduces all output in a unic virtual product. This simplification needs a case to case solution for each enterprise. For example, in a steel industry producing iron and steel  rolled sections, differing only by diameter, it is easy to reduce whole to a unique product by adding various material quantities produced; on the other side, in a car industry, that produces various models different per segment (utilitarian, average and high) internal analyses are necessary, to set conversion reports of the models to a unique base model. For example: the average car is 1,8 times the utilitarian and the high model 2,5 times the utilitarian. These conversions are not easy for the enterprises which have not an accounting due system for cost analisys. But also for the denominator we have difficulties. The choice between workers and hours number entails opportunity analisys, moreover we must choose between the number of all workers or the amount worked hours by each of them and only those who are productive.

Certainly these difficulties are not insuperable and enterprises equipped with advanced systems of relevation have solved these kind of problems, so productivity becomes a useful index.  Even if there are some controversial about choices, the enterprise should keep the such choice over time, so that comparison between productivity data occurs on homogeneous bases.

But, there are some cases that labour productivity is a meaningless data and it is the case of those sectors with high capital intensity frequently associated with a fixed ratio between labour and capital over time. In these cases, output, once completed the investment, can vary independently from labour. For example, this is the case of an enterprise that builds and operates a pipeline or a distribution system gas, a power line or a transmission net or distribution of average-low voltage. They cannot calculate the labour productivity in proportion to net kilometres, that are fixed, nor calculate productivity in proportion to m³ of gas transmitted or kilowatt-hour passed into the net because those have not any connection with the used labour.

Moreover, often productivity is confused with performance and two index are treated like synonyms [10]. Many authors consider performance only regarding financial phenomenons (performance of a credit instruments, et cetera). But the performance, contrary to productivity, is not a ratio between output and input; on the contrary, it is a ratio between real productivity and abstract productivity [11]. For example, in theory we can obtain a productivity of 4% with respect to an abstract or target productivity of 5%. Performance is 4/5. Again, we know that equipment cannot be exploited at more than 80%, while in the year tanked into consideration it has been used only at 60%: the performance is 6/8.

Advantages of performance analysis are several, but the most important is the determination of the use of productive capacity. That means, in case of underutilization, it is necessary to investigate if such phenomenon comes from internal causes (disorganization) or from external causes (trend of general or sectorial business cycle). The result of analysis is linked to corporate strategy. For example: setting a strategy of investment when productive capacity is underemployed, without improving output, will to take only to financial tensions [12].

From the examples of the followuing schedule we can infer some considerations

Factor of production	Time 1	Time 2
Capital	100	hypothesis i	hypothesis ii	hypothesis iii
		120	120	100
Labour	200	205	200	180
Output	3.000	3.000*	3.000**	3.000
Labour productivity	15	14,63	15	16,67
Capital productivity	30	25	25	30
Capital intensity	0,0333	0,04	0,04	0,0333
Mechanization Grade	0,5	0,585	0,6	0,556

Some considerations are worth noting: first of all, ouput has been fixed at 3.000. Therefore:

§ the hypothesis i) the adopted strategy has failed;

§ the hypothesis ii)the adopted  strategy has failed;

§ the hypotesis iii), if the labour productivity has increased, there has a link between mechanization grade and labour productivity. However, we do not know if the increase of labour productivity has been adequate to the strategy; to test this it is necessary to know the business plan and the studies on the deviations from target.

3) Productivity and labour market

All production factors are complementary among themselves and they operate in a dialectical connection (even if they belong to a same person, who must always operate in a “what if” game, sensitivity). Sometimes they could be also in contrast.

We have economic increase only if a balanced dialectics between the factors occurs, so that each does not eliminates other in the distributive process, i.e. the output allocation. If a factor is left with inadequate or without remuneration, it is lost, damaging also the others.

The dialectics can be set in a free market or by intervention of institutions (at two extremes there is minimal state of Nozick or government control) or by something in between (like in Italy). But there is no growth without a development of the institutional systems, i.e. without development democracy.

Productivity is a condition for economic growth, but even as a parameter in the distributive process, especially between capital and labour. And just on this point a very important question is set: what are the connections between labour productivity intended as Output/n° employed (or worked hours) and allocation of result In fact:

a)      every factor contributes to the product;

b) labour productivity increases, if also the capital (technical) rises, i.e. a reduction of the number of employeed or an increase of ouput occur (given labour fixed). It is necessary to specify that we are dealing with labour productivity, because capital productivity should decrease, at least initially, for the increase of the capital use.

So, in this ratio there are also external variables. P. Samuleson-W. Nordhaus write [13]: «Somewhat more than one-half of the growth in output in the United States can be accounted for by the growth in labor and capital. The remaining growth is a residual factor that can be attributed to education, innovation, economies of scale, scientific advances, and other factors…»

The opposition between output and allocation is one of the most common mistakes in economics. Economic process is one and not divisible in stages. While we produce, we consume and, if consumption (i.e. demand) lowers over productive process, then the entrepreneur is compelled to take it into account, in accordance with his capacity to get analysis and previsions. Allocation is income allocation, i.e. of new produced surplus, because if it was allocation of capital it should exhaust the production source. The problem of income distribution entails a dialectical development. “Fair” distribution do not exist, because “fair” is a metaphysical concept. If we would like to be concrete, we should affirm that allocation is dialectical. In case, we must impose the condition that allocation dialectics has to create the smallest possible disorder, if  it develops inside predetermined general rules, into an institutional  compulsory even if democratic schema, like we can observer for the right to strike in public services sector.

Thus, considering that distribution comes in accordance with historical rules (for example: basic wage or minimum wage), we must consider that it is intended like a cumulative value, and is composed by two parts: a) the base or income. For example, collective agreements that are stipulated every a fixed a number of years and until a new agreement enter into force, the rules of the previous agreement are still in force; b) allocation of the growth of the  base of reference.

We can consider that part b) can be linked to the trend of productivity, since we think that productivity likely results in profitability, consequently its growth can cause income growth.

Given that, productivity becomes a criterion for allocation of  surplus and dialectic about allocation introduce an assessment of merit. Obviously trade unions will state that productivity growth is due to labour, while enterprises will be enrolling this merit to capital and organization. But this dialectic, if it is founded on the index of labour productivity f(x)/x neglect to capital productivity effects. Nor is useful to state that growth of “profitability” is due to an increase of total productivity, because total productivity is a complex and unreliable concept. It should be necessary to know any partial contribution of “sectional productivities” (here partial derivatives); but also a model that expresses the phenomenon of each components should not solve problem, because total productivity increase is not the sum of partial productivities. This phenomenon is always unic and can be hardly divided in pieces.

As already we have observed, the increase in productivity is the cause of the profitability of an enterprise. From here the question: to whom goes the merit? To whom must be assigned the surplus? This problem is not different from that of allocation, but the impossibility generality at national level leaves to each firm the use of parameter “productivity” for integrative agreement or production bonus. Although the close linkages between workers and single enterprise, certainly more marked than general associations and trade unions, dialectic is not absent and, that, sometimes, there are also strike company. Anyway the important is that free market wins and that the merit of good performances are not only of one part (capital or labour). Capital and labour are complementary, like fuel and motor: if one of two wants, the vehicle is stopped.

4) Productivity and strategy: detailed connections (productivity) and perspective connections (strategy)

The analysis of the linkages between productivity and strategy needs also the performance analysis and needs to formulate hypothesis of internal and external analysis. All this can be done by considering that strategy entails a target of a new market placement. But perhaps also a plan limited to the consolidation of present positions can be considered strategic.

Anyway, the combination of productivity and performances is essential for management policy.

First of all, we can analyse directly the performances and it considers autocritically internal causes. For example, if we see that enterprise makes an utilization of manufacturing capacity only of 60%, we can analyse if the cause is an internal lack of organization or external (i.e. business cycle). In each case, we is not recommendable to start an investment policy. If the cause is internal, it is necessary to order out the organization; if it is external it is a serious mistake to invest when we expect permanence of cycle weakness for a long time (the winning strategy is to invest on the eve of  release from the tunnel depression, to be set in the moment of recovery, not certainly in beginning of a depression). We have an exception when we note that low performance is not due to lack of organization, but to the conditions of  fixed capital technology that prevents some appropriate interventions on reorganization, except the replacement of fixed capital by new investments. For example: in a iron equipment, the steelworks (furnace) can be a bottle-neck. In such cases, it is necessary to proceed with substitutive investments to recover performances and to increase the productivity.

We can also examine the linkage between labour productivity and capital productivity. First of all, we note that an investments policy in fixed capital worsen, at the beginning, capital productivity. A recovery and the final overcoming is expected after new fixed capital will be running at full capacity.

Similarly, the labour productivity grows if the denominator is reduced, i.d. the labour is reduced. But it grows also without reducing the labour, when:

Ø new investments in fixed capitals are made, especially those that allow the labour to express its potential. It is a synergy capital-labour, that produces a multiplicative effect maximizing the final result (profitability). But, if in presence of new investment, the labour does not express higher synergies, the final result will not be the maximum, but only a better result. It is worth noting anyway that merit of the growth of the overall productivity is only due to capital. Here is the meritocratic problem before examined;

Ø the enterprise start a reorganization, aimed at rationalizing existing human resources by obtaining a better employment by more motivation of workers and so by improvement of the efficacy;

Ø the enterprise invest in riqualification of labour forces,  training course, et cetera.

The analysis of productivity can be sectional in groups of companies. For example, a group or a single enterprise but organized through operating departments (an industrial plant for each department) should survey the productivity for each single plant, especially if defensive or expansive organizational strategy is meant to distinguish plant by plant. In pathological cases the productivity analysis plant by plant is necessary both in case of turnaround and in case of transfers or when some “jewels” (plants with high productivity) need to be found because of their higher desirability for sold.

As we have noted the productivity is normally a consumptive index and it expresses how things were in a certain period (i.e. at closing of a certain financial year). But these data can be also useful for the projections. Any way the moment is which a firm is is an important factor for such interpretation. For example, if the investments cycle is concluded and the complementarity with other assets is consolidated, at least from the penultimate financial year, it is unlikely to think about a further growth. If instead the investment cycle is at the beginning and the complementarity-homogenization process with the other assets is far to realization, we can suppose that, unless to have made some wrong technical choices of investments, the actual productivity of X can become DX with D>1.

But we can assume that the productivity has been nested in a strategic plan. For strategy I mean: «… a global program formulated by a management through the setting of purposes and means, that involves a general reorganization of the enterprise, such that, after realization, generally in the middle-long run, this will reach a positioning on the market, different from that should be meeted by maintaining previous position » [14]. Now we must recognize that a enterprise without any strategy is like a ship that sails with no destination, maps or compass: likely it is destined to a  failure especially if it is sailing far from the coasts. First we have to specify that here the strategy concept is applied to industrial and not financial processes. Neither a bank has only a financial strategy. But what is the meaning of “to develop a strategic plan”, in which the expansive target of a new market placing must be put? It means to put, in many cases (and I do not say “all”, because in business economics this adjective substantivized do not exist), the target of the growth of the present productivity. Then, productivity becomes a instrument to achieve strategic target.

Productivity analysis needs a further important consideration on its correct interpretation. For example, if after the increase in capital we note a reduction in its productivity, we can draw wrong conclusions. Actually, if we stop to think at the purely algebraic expression of the ratio and we note a reduction as a consequence of the increase of the denominator, we can forget about the necessary time for the entry in operating of the new investments. Obviously, at the beginning, a reduction of the productivity index will occur, but the correct interpretation is not over punctual rerecord, but over perspective data and here the analysis can  use the trend, in parallel, of the performance index measuring its progress toward a theoretic target. The true problem of productivity analysis is its linkage with time or with “time reaction”, until the investment is running regularly. A strategic plan or any business plan cannot ignore the reaction time and, after investment, the possible deviations between real timing and the theoretical schedule: it can be considered as a sort of performance index of the time.

The success of many enterprises and economies can be explained just by the reaction time to the projects.

Regarding entrepreneurial strategy we can focus on the answers to these questions:

Why we make globalization?

Why we delocate?

Why there are industrial districts?

What is the difference between mature sectors and high-tech?

can be put on productivity analysis, because we woo higher productivity in a location with another for drawing more positive institutional situations. Still this choice must be founded on analysis of long run, because the costs of displacement can be higher than immediate savings. In these analysis a serious business plan is decisive.

5) Productivity for the manufacturing, commercial and insurance firms, for  banks and service providers

Ø For the manufacturing enterprises productivity index is made by the ratio between output expressed with tangible quantities at the numerator and preferably, the worked hours at the denominator or, sometimes, workers number.

Ø For the commercial enterprises calculation is generally made by ratio between added value and the number of workers. Sometimes, someone opt to put  sales at the numerator, but in that case, more than a productivity index we obtain the sales per capita.

Ø For the service sector, generally, productivity is more difficult to calculate, because there are few tangible assets and many monetary values, that instead of shading light on everything, as we could think, create even more confusion on the interpretation of the data. Thinking about a multiutility in the public services sector, if it sells gas we could link m³ sold with work hours, or, if it sells electric energy, the Kwh with worked hours [15]. In seems easy but it is not. Because we should distinguish between the enterprises characterized of high absorption of energy and the domestic users. For example, if an enterprise sells 20 million of Kwh per year to 20 firms, it needs just one worker who takes care of relations, if it sells the same quantity to 20 thousand domestic users  it needs a more than proportional number of workers. The same reasoning holds for gas and for water distribution. We can think about an urban company for transportation: passengers use vehicle even if bus is not confortable and the driver has a sharp touch.

Ø For the banks, productivity is calculated by the ratio between “earnings margin” and labour cost [16].

Ø For insurance company the construction of a productivity index depends on sector specifications. These ratios can be considered productivity indicators: insurancens premiums/n° employees or n° agents.

As we can note, in addition to methodological difficulties for adapting the ratio to the different kinds of activity,  there are also difficulties in the preparation and treatment of data. But productivity is not incalculable or useless. It is a question of tools and capacity of interpretation. On the other side the western economies are becoming more services economies and than production economies.

6) Productivity and the evaluation of the firm

Despite productivity and efficiency are frequently confused, their meaning is sharply different [17]. Efficiency is a rational use of the resources or production factors aimed at reducing the waste and dissipations to a minimum. It is obvious that the more is the efficiency and the more is the productivity and, indirectly, the greater can be final low costs, i.e. the enterprise profitability; but, we must also notice that efficiency is not a index, but sectoral target, a specific organizative strategy, whose the result influences productivity. Then, between efficiency and productivity exist a linkage, they are, respectively, cause and effect, and productivity does not imply: neither efficiency nor profitability, even if it can be one of the conditions, at least for profitability of  characteristic activity[a2]. Financial cost and financing sources of assets do not cause a direct fall-out effect on the profitability. EBIT has to used instead of Earning. In the abstract and  assuming the interchangeability between two factors, conducting an analysis focussed on productivity we can choose between labour and capital, and, in a further analysis, to evaluate an enterprise in a more projective way.

Also the existence of internal labour contracts tied to productivity is an element to consider for the enterprise evaluation. An enterprise characterized by a high labour productivity should have, ceteris paribus, an higher value. Anyway depreciation cycles have to be taken in consideration, by considering that, without new investments, fixed capital decreases for consequence of depreciations, also maintaining efficiency and performance unchanged. Not only depends labour productivity on investment policy and on mechanization grade, but also – and in certain cases above all – on enterprise organization. However organization (layout included) cannot be calculated in formulas.

As for as enterprise evaluations we still have to observe that the adoption of the income criterion considers indirectly also the productivity index. In fact, by discounting futures income flows, we include, among others, also productivity and we obtain a present value (***), that is influenced by productivity. But productivity remains hidden or implicit and to know the weight that can have over the income flows it is necessary to do further analysis. The knowledge of productivity is directly revealed by a business plan, because of its function as development target which does necessary  point out productivity like a sectional target to realize within the plan.

7) The “others’” Productivity (clients and borrowers) like a yardstick to set a limit for debt ceiling

Under the hypothesis that in an manufacturing or service enterprise, productivity indexes are not taken into consideration, we do not have to renounce to estimate the productivity of the “others”, those with contract of borrowing is signed. The problem has a little matter for insurance companies, but for manufacturing, services commercial and bank companies, the estimation of the productivity of the “others” can be a pretty important fact to create opinions, at least for two reasons: a) if the enterprise considered is fighting to attain market shares by price-wars, the knowledge of the productivity of competitors can be an important element to understand if we have some positive chances to reach success; if a manufacturing or service firm or a bank plans to expand the existing loan lines to a customer, it should include into the evaluation parameters for credit limits also the productivity trend of the customer. If it is static or even descent, it should not receive the credit, because a not-growing productivity is not a index of greater chances to recover the loan and if bank or supplier needed to reduce the bank or trade credit for internal financial policies, they could find some difficulties.

We have already noted that productivity is not profitability, but a connection between the two indexes exists and generally in the same direction, even with different path of growth. Obviously, profitability is the one related to firm’s core business. In presence of  financial speculative transactions, the general profitability of an enterprise should incorporate active or passive balances coming from financial speculative activity and, then, the connection between profitability and productivity could change. However, using the profit to pay his debt, a debtor with a low or decreasing productivity will find some difficulties to pay his debts.

Anyway, if it is true that the lenders do not make any  evaluation of productivity  indexes of of its borrowers, it is also true that borrowers do not use to get noticed the increases of own productivity.

We should conclude, on the point, that is a question of general culture.

8) Productivity as an explanation of the success of an enterprise in analogy with the explanation of the wealth of nations [18]

The productivity growth is, in my opinion, one of the fundamental causes to explain the wealth of nations and the gap between rich countries and poor countries. If productivity does not growth, it is difficult that real GDP can increase.

P. Krugman writes [19]: «The right answer however, is that to a very good approximation the rate of the growht of the U.S. standard of living equals the rate of growth of U.S. productivity-period».

The explanation for the trend of growth of an individual enterprise it is not different. The experiences of the last years seem revealing in that regard and economic history already shows that net profitability increase, in absence of an increasing trend of productivity, can be obtained by financial way. But that is a very deceptive  phenomenon  almost always temporary and plenty of risks of trend inversion, to which follow openings of high financial losses. However, even if the positive result of the financial element should persist for a long time, it should be necessary a continuous productivity monitoring of the core business, the one directly related to the corporate purpose , to find out if the real productive process does not have static or negative trends. If an enterprise, after long period of high liquidity, invests in bonds instead of machinery and equipment replacement, could find out that it has an earning made up bond coupons and bank interest but an industrial account negative. At the moment of the sale, the assets will be so contracted and obsolete – i.e. productivity so limited – that buyers would pay a price slightly greater than liquidity plus bonds. Practically the manufacturing enterprise does not exist and goodwill dispersed. Thinking on an evaluation of such enterprise based on the EBITDA, we shall draw a conclusion not devoid of economic logic.

9) Final remarks

If it is true that productivity is an economic phenomenon, it is as much as true the existence of considerations that go further to economics. As a confirmation – should it need –  of the fact that this subject belongs to spirit sciences and not nature sciences, following the famous distinction of Dilthey.

We start from economics and we declare that productivity growth made earning increased. If this growth is equally distributed – but I would rather say “smartly” – it contributes to achieve the target of a greater freedom. In philosophy we distinguish between “freedom from” and “freedom for”. The first (“freedom from”) is that obtained by a person who passes the threshold of the basic needs, under which he must renounce to her own freedom. It is easy to talk about freedom if you are not hungry. Let us think to maxim that to do a revolution it needs at least 2 thousand calories for day. When this subjection by hunger is surpassed, we can think to “freedom for”, i.e. a purpose freedom. Let us think to aphorism “primum vivere deinde philosophari“.  Thus, if productivity permits with the smart allocation to reach a “freedom from”, then productivity becomes an healthy target.

If productivity is a target in a continuum, then this freedom can be conquered with all positive also negative effects well known from social psychologists. Thinking to the american target of “more and more”, you can easily enter in a continuous stress condition, that drives to an alienation form, perhaps not different from the little man moustached personified by Charlie Chaplin in the film “Modern times“. Such little insane man, confined during all his life to a fordist assembly line, can be a marxist criticism to capitalism. But in what the rosin Stachanov is different? Private capitalism the first, state capitalism the second. What is the difference? Capitalism is not the enemy of the man. The enemy of the man is the man. Some has tried to solve the dilemma: made labour a play moment. But the whole is reduced to a infantilism form, because it is not possible to pass life in the pushchair. So, despite the illusory conquests of 35 hours for weeks, it reappears, under new forms, the biblical curse, that we read in the Genesis: « You shall work with the sweat of the forehead », replaced with a more modern: « You shall work with the cold sweats of the stress ».

Pietro Bonazza

 

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