[OPE] Productivity and wealth creation

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Mon Jun 09 2008 - 13:42:34 EDT


The FT mentions about Britain that:

The value-added scoreboard, produced by the Department for Innovation, Universities and Skills, measures the wealth created by companies by calculating the cost of goods and services bought in from their sales revenues. The 800 largest UK companies added 646bn in value in 2007, up 9.6 per cent on 2006. The amount of value-added rose faster in other large countries last year, but UK-based companies dominate the league table of the top 750 European wealth-creating businesses. UK groups generate almost a quarter of the region's value-added. British companies are also more efficient at creating wealth. Last year they converted 100 spent on labour and equipment into almost 194 of value-added, compared with 142 for German companies and 157 in France. The government report also shows large companies pay out a higher proportion of their value-added in dividends and interest than their Continental counterparts. But the proportion of the wealth they create that is invested in sustaining and developing their businesses is lower than in Germany or France.  http://www.ft.com/cms/s/0/f5a04ef6-358d-11dd-998d-0000779fd2ac.html   http://nds.coi.gov.uk/environment/fullDetail.asp?ReleaseID=369894&NewsAreaID=2&NavigatedFromDepartment=False
The Department's argument is this case is not about productivity, but more correctly, about wealth creation (net additions to wealth) which the concept of value added was originally intended to measure. Actually, the formula for value added given by the Department is not quite accurate. It is stated as:

Operating Profit + Employee costs + Depreciation & Amortisation/impairment

But it should really be not "operating profit" but "operating surplus on production, before deduction of company income tax" since the gross operating profit included in value added excludes profit items thought to be unrelated to production, and includes certain imputations and additions. Furthermore, depreciation in value added is not actual depreciation charged but economic depreciation, and it includes certain costs associated with the maintenance or installation of fixed equipment thought to be an item of value added (it may include certain insurance costs). Normally, gross value added also includes indirect taxes paid by business less subsidies received. Finally, the compensation of employees item of value added also includes real or imputed social contributions to government payable by employees in respect of employment (as well as stock options of corporate officers).

Since, in the UK, financial activity represents a large chunk of GDP while employing a proportionally rather small fraction of the employed labour force, you might well ask what "value added" really means then. Is the net gain of financial activity a "net addition to wealth" or really a "transfer of wealth"? In UNSNA accounts, a somewhat ambivalent view of the banking sector is taken, and a "nominal bank charge" is included. It is not difficult to show that the real gross profit income of financial institutions typically exceeds their value added, part of this income not being regarded as production income.

The bankers themselves are well aware of the controversy about their economic contribution:

"Goldman Sachs calculates that financial services account for only 4.1% of direct UK employment, only one percentage point above Germany and France. While 'financial and business services' are now credited with comprising up to 30% of UK GDP, Goldman says only 7-8% of this is financial. And most financial business is aimed at supporting local production, with only 15% of banks' turnover coming from wholesale financial dealing with the rest of the world." http://www.financeweek.co.uk/cgi-bin/item.cgi?id=5683&d=11&h=24&f=254
Clearly what conclusions you draw depends on the definitions used, and if for instance GNP (GNI) data is used instead of GDP data then a considerable amount of net factor income (mostly profit) is added to the financial sector.

The general effect of "financialization" is growing pressure for the disbursement of short-term profits, but this, as Jan Toporowski also notes in his books, is typically at the expense of longterm fixed investment, something which is acknowledged by the DIUS. Quite possibly the Department is correct in claiming that more value added is created in the UK relative to inputs purchased than in Germany or France, but to make that comparison more accurately, a few more adjustments of the data would probably be appropriate. If, for example, we exclude the FIRE (Finance, Insurance and Real Estate) sector from the total value added, the statistical picture becomes different. Obviously, the international comparability of the data should also be qualified.

"Lies, damn lies and statistics" thundered Benjamin Disreali. This does not mean however that statistics are necessarily lies, but rather that with plenty statistical information available, you can always find a comparison that favours your case or disproves someone else's. So, to understand a relationship correctly, you really need to look at all the valid statistics available for the case, and that can be quite a challenge, I can tell you that now because in the past I tried. The beauty and appeal of statistics (especially since prices are quantities) is that they suggest an exactitude associated with scientific evidence, but they might at best only indicate very approximate proportions, if that. To construct trustworthy measures for the concept you have in mind, takes a lot of work, and even then can be stated only with appropriate qualifications.

As I have mentioned before several times, a problem with often-cited macroeconomic statistics such as GDP is that they focus on production income, regarded as the primary circuit of income, but if property income and transfer income broadly defined strongly increases, relatively and absolutely, production income understates a country's total income actually received by a large margin - that aside, it says nothing much of course about the distribution of that income, beyond stating a very approximate division between labour income and gross profit income.

Jurriaan



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