October 30, 2024

There is another reason that we are seeing "productivity" creep up more often. As we move towards the federal budget, capital is interested in repeating the words "taxes" and "productivity" because it wants to make sure that workers pay for the deficit. It wants cuts to public spending and taxes so that there is more room for private spending.

Here the "too low productivity" is blamed on the government taxing too much.

On the flip side, our Bank of Canada is talking about company investments and productivity. What they mean here is investment in capital intensity, but what they end up saying is "too few profitable companies" competing.

This is really just a different way of talking about the nonsensical issue of "monopoly" in Canada. Something Canadians love to talk about, but has no basis in reality. There is no evidence of monopoly in most industries. Even sectors with only a few large players are not monopolistic because there no is monopoly price-setting. Every time we actually look, we find no evidence of monopoly price setting, but the myth persists. Because it is convenient.

Large firms are needed to get higher productivity. Here is an example of private capital getting muddled by their "analysis".

On October 25, the neoclassical economists at Desjardins put out a brief where they accidentally rediscovered a Classical Marxist law of capitalism: larger firms are more capital intensive and therefore have higher profit rates. If they had read any Marx (or any classical economic theory at all), they would understand that almost everyone knows that this is true, either through theory or practice.

It is why the Magnificent 7 tech companies are where investment goes, and even partly explains why small businesses fail more often than they succeed. It isn't magic; it is because large firms have higher profitability from investing in higher productivity through larger capacity to expand capital-intensive investments.

If they kept looking at this data they would also find out that this analysis is the basis for the classical understanding of monopoly. Indeed, they would see that there is intense competition between these large firms and discover that there are no (or rarely any) monopolies, only capitals of different size.

What did they do instead because they do not understand this? They correlate Canadian productivity with firm size and say that Canada has too few large companies and low competition, so we need to invest in productive output.

They have blamed the very part of the economy that is actually driving productivity!

This broad misunderstanding of the economy has policy implications.

Balance the quote from Bloomberg here:

As immigration ramped up in recent years, some economists warned that a steady supply of cheap labor was dissuading businesses from investing in technology or equipment that would boost workers’ productivity.

With the quote from the same article from the private banks:

The head of Wealthsimple Inc. called Canada’s productivity problem an “absolute crisis” that will take a major entrepreneurial push to fix.

Private capital wants cheap labour, but it talks about productivity and entrepreneurship, which are at odds. You need large firms investing huge amounts of money into fixed capital, not small start-ups tinkering to increase productivity.

The public central bank wants more large firms, but also has a problem of high interest rates, because high debt prices are not great for capital investment.

One of the reasons productivity is low is because we have huge numbers of new workers dropped into the economy, which means production per worker goes down (in the short term) and the incentive to invest in capital goes down. A one-two punch for "productivity" just in the math of measuring it.

Who gets the blame? Well, it comes as no surprise that, if you listen to bankers, workers are to blame for demanding too high wages and reducing profitability (and therefore investment).

We love to compare ourselves with the USA. We know it doesn't make sense, but we do it anyway.

Relative productivity is a strange thing to measure as absolute productivity values are dependent on the type of economy you have, something that is not "balanced" by market forces. You cannot compare productivity in Canada and productivity in the USA and say anything about that value except that they are different.

But that doesn't stop these reports from being obsessed with the comparison:

The Canadian economy produced 88% of the value generated by the US per hour in 1984, a figure that fell to 71% by 2022, the central bank has pointed out.

Canada does have a productivity issue, but it is not the issue that is outlined by the banks and right-wing politicians.

It is important to remember that capital does not invest in "economic growth", it invests where profitability is highest. It does not invest in "productivity", it invests in companies where profits are sustained. Firms do not invest to drive "economic growth", they compete for market share and profits.

Macro measures (like productivity) are just a emergent property of competition between firms. If we want to change those macro metrics, we have to change the firm-level decisions.

If we want investment and productivity growth in Canada, we are going to have to take a very focused look at industrial strategies. The state is going to have to build productive capacity to make things, add value, employ workers, and create space for automation by building capacity to expand employment making the machines that allow for automation.

The state is going to have to pick winners and play the game better for building and responding to the needs of Canadians, while generating revenue for public spending.

Unfortunately, that does not seem to be on the table. Instead, we are faced with a return to the failed programs of 1990s.

A major lesson we should have learned over the previous 30 years is that we cannot cut spending to drive growth, and we cannot rely on the "magic of the market" to tailor investment to get high productivity. So look for a discussion around the budget that does not advance us, but returns to the focus on "deficits" and blaming the government for the slow economic growth.