Productivity Gains.

Productivity Gains.

Paul Krugman is a Nobel Prize-winning economist. I don’t agree with everything he says, but he hit the nail on the head when he said, “Productivity isn’t everything, but in the long run it’s almost everything.”

U.S. productivity gains over the last decade are 50% lower than they were, on average, from World War II until 2006.

Economists and government leaders are worried. Productivity is calculated by dividing what a country produces by the amount of labor it took to create those goods and services. When productivity gains look good, workers have more money and living standards increase. The opposite is what we’ve been dealing with since 2008.

Some argue that advanced economies have so many workers in the services industry that it’s hard to accurately measure productivity. They’re not entirely wrong. Measuring the output of factory workers is easy. When Henry Ford reduced the amount of time it took to build an automobile from 12 hours to 90 minutes, the price for a Model T dropped from $850 to less than $300.

Robert Gordon, another smart economist, says the biggest innovation gains are over. He thinks inventions like the internal combustion engine, jet planes and electricity and the productivity gains they offered will not be surpassed by today’s innovations of information technology, robotics and AI. We shall see. Regardless of where you stand in this debate, it’s helpful to translate the macro to your own microeconomic situation.

Ask yourself, “What improvements in your business can help productivity growth?”

Start with the average cost of your services, the average number of minutes of clinical chair time required to provide those services, the associated infrastructure and human capital investments and then the profit per hour. Could you improve the bottom line by 20% by charging less for each client? How many more clients will you need if you charge less or more?

These are the kind of calculations I ran for months in my MBA program. The thinking sounds counterintuitive but the fact that most doctors do not run at capacity and have room for more new patients requires us to think this way and test these scenarios.

This kind of thinking might seem like it’s not the most important right now, but in the long run, like Krugman argues, it’s almost everything.

Worked at Burleson Orthodontics. Attended University of Missouri–Kansas City. Lives in Kansas City, Missouri.

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