David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.
Michael Porter—corporate strategy guru, author, and professor at Harvard Business School—is worried about America’s competitiveness. We’ve been losing ground since around 2000, he says, long before the housing bubble burst. "Virtually all the net new jobs created over the last decade were in local business—government, healthcare, retail— [that are] not exposed to international competition." Meanwhile, the U.S. economy has failed to create many jobs in the big, strategically important, globally competitive industries.
Porter and his colleagues at Harvard Business School have taken a new look at national competitiveness, one that raises deep questions about our economy, our businesses, and our politics. He and his team explained their ideas in a series of interviews in Harvard Magazine.
Porter and his colleagues boldly redefine what it means for the United States to have a competitive economy. Jan Rivkin, who heads the strategy unit at Harvard Business School explains: "U.S. competitiveness [is] the ability of firms in the U.S. to succeed in the global marketplace while raising the living standards of the average American."
This approach to measuring national competitiveness spans the partisan divide. Conservatives usually focus on how well corporations are doing, and liberals usually focus on the living standards and how income is distributed. Rivkin’s definition takes a "both/and" approach rather than an "either/or" approach. An economy can’t succeed if companies don’t want to locate there, or if they can’t operate profitably there. But at the same time, an economy isn’t successful if most of the people in it experience a stagnant or declining standard of living. Both kinds of success are important, and each depends, in part, on the other.
Real vs. Fake Productivity?
For an economy to stay competitive, productivity needs to increase continuously. Productivity needs to rise fast enough for firms to make more money each year. And it needs to rise fast enough for workers to earn more, on average, each year. This sets a high bar.
Rivkin’s idea challenges the conventional wisdom of how we measure productivity. In conventional terms, the productivity of an economy is simply the total value of all that it produces divided by the total cost of all the inputs used in production (including labor, materials, and capital). This formula implies that when wages fall or are cut, productivity increases. While this may be true for an individual company, it’s not true at all for a national economy.
To discuss the productivity of a national economy we need to distinguish "real" productivity from "fake" productivity. Real productivity measures how much actual dollar value someone can produce through their work effort. Fake productivity measures how much an employer can drive down wages by negotiating, offshoring, outsourcing, etc.
If an economy delivers gains in fake productivity but not real productivity, that simply means that money has shifted from one group in that economy (mostly workers) to another group (mostly managers and investors.) Such gains do not increase the total size of the pie. Past a certain point, fake productivity gains actually shrink the pie, because lowered wages prevent people from giving their children the education they’ll need for a well-paying job.
Many leading companies understand the difference between real productivity gains that are real and those that come simply from wage pressure. Tom Kochan has researched this. He’s a professor at MIT’s Sloan School and he codirects MIT’s Institute for Work and Employment Research. Kochan cites Southwest Airlines as an example. Their "business model is not to compete on the basis of lowest labor cost but [on] keeping … productivity high by turning their planes around more rapidly." Southwest has been highly profitable while paying good wages and being among the "100 Best Companies to Work For" in the United States. Other leading companies use similarly enlightened strategies.
Policy Solutions for Real Productivity Growth
Michael Porter and his team propose a broad range of policy solutions to boost the real productivity of the United States. Again, they take a "both/and" approach, integrating some ideas traditionally supported by the left and other ideas supported by the right. They call for investing in better education at all levels, particularly in leading more young people toward the STEM fields. They call for regulatory reform and tax simplification. They call for intensified support for advanced research. And they challenge compensation structures that encourage excessive risk-taking in ways that boards can’t monitor adequately. This analysis is an important step forward. It can help us identify practical solutions that can win broad public support.