Transcript John Van Reenen: What determines productivity?

00:00 If you can increase the rate of productivity growth, you can increase the size of the economic pie and that leaves more money to spend on peoples wages or incomes or even on public spending if you want to spend in that way.

00:23 My name is John Van Reeenen, I’m a professor of economics. I’m particularly interested in productivity and the reasons for productivity differences across countries and across firms. People care about their wages, they care about what they can buy, they care about their standard of living. All those things really, in the long run, are driven by productivity. There’s a huge variation in the level of productivity across different countries. Even when you look within a country, in a very narrow industry you see enormous productivity differences between different firms.

00:55 The two main fundamental causes of productivity variation are to do with technology; innovations, the diffusion of new innovations, and also management. If you think about how economies grow rich: new technologies come along, different firms adopt those different technologies, but another really important factor is how those new machines and new types of capital are being used–that’s a management problem. There’s been a lot less work on looking at the effect of management as it’s a lot harder to measure.

01:25 The standard way that economists look at the world in terms of thinking about productivity is that competition will kill off the laggards and enable the more efficient firms to expand and get larger, and that’s a powerful force–creative destruction it’s sometimes called. But that competition process doesn’t happen immediately. That will depend on things such as the skills of the workforce and managerial skills in the firm. Other factors which are important include your openness to foreign direct investment.

01:58 So a great way of spreading new ideas is being open towards other firms investing in your economy. Many countries are reluctant to allow foreigners to enter their industries or take over their firms. This is also a barrier to the spread of new technologies and the spread of better management practices.

02:15 We’ve done things where we actually have a clinical trial of management practices, where we give some firms help and training to improve their management, and compare that to other firms what we don’t give that. And we found that the firm’s which actually got improvements to their management practices had very large increases in their productivity and their company performance. We’ve also found that there are systemic factors which drive management such as competition and skills. And finally we found that if you look at the differences of productivity across countries about 30% of those differences are due to different management practices in those different countries.

02:51 One solution, the textbook solution, is just let the market sort the problem out by increasing competition, and there’s a lot to be said for that by removing barriers to competition, but that can take a long time. So, I think there’s a set of other policies one could use in addition to competition. One set of policies might be to speed up the rate in which better management practices are adopted in different parts of the economy. For example, by improving the kind of skills and human capital, the role of universities and business schools. Another group of policies to be thought of are openness to imports. So, a very good way of getting new ideas in the economy is to allow foreign direct investments.

03:37 What are the key takeaways for students? So one is to look at the data, looking just at theory is never going to be enough. You have to think of as many tools in the policy toolbox to use. So, competition is certainly one of the important tools but there’s many other tools.

03:52 The role of the economist is not just to provide theory but also to find evidence of those those theories. I mean, often the problem is people think they know how the economy works and when you actually look at the data you find things which are very different from that.