According to data on advanced economies from the Organization for Economic Cooperation and Development, the most productive 5% of manufacturers increased their productivity by 33% between 2001 and 2013, while productivity leaders in services boosted theirs by 44%.
Over the same period, all other manufacturers managed to improve productivity by only 7%, while other service providers recorded only a 5% increase.
From Wall Steet Journal via Arnold Kling, who comments:
When intangibles hardly matter, then capital and labor ought to be about equally productive across all firms. When intangibles matter a lot, then productivity differences will widen.
Kling has some great thoughts on intangibles. Look for a more thorough post later. For now, I want to discuss the rise of intangibles on organizational design for the DOD.
Intangibles are investments which cost money and provide important benefits, but the benefits are hard to measure (e.g., software, platform design, supply chains, training, etc.). As we move into a more information and technology dominant environment, we should expect more value to be derived from intangibles. This often creates winner-take-all effects.
Kling seems to think that the divergence in productivity between service firms is a fact of life; its a natural result of the rise of intangibles. It’s not like the firms boosting productivity 44% could probably have done so without all the other firms who haven’t improved much at all. It relies on a competitive process of filtering. We should expect, and tolerate, a divergence of outcomes.
In the DOD, we often squash redundant projects or organizations. But this is a mistake, because most will be ineffective, and almost all the gains will come from a smaller number that only became that way because of the process of competition under expectations of big returns.
As we move into a world more dominated by intangibles, defense organization will have to tolerate redundancy and the competitive rivalry that comes from it. If we squash divergence of outcomes, then we squash innovation and productivity gains.
Here is an MR post on this topic.
Perhaps the better question is whether intangibles inevitably lead to diverging productivity, or whether innovation can be diffused better across organizations. My guess is that intangible investment is hard to get right and easy to get wrong, so we have to have some filtering process that removes the bad and selects the good. You can’t expect to set up one organization and get it right, you have to tolerate redundancy and selection.
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