Productivity Drives Living Standards

America’s remarkable gains in living standards over the past 240 years are the direct result of higher output per hour of employment. Too few Americans fully grasp the link between productivity and prosperity. To see that connection, let’s look first at the country’s most dramatic example—farming.

Farming – the ultimate example of productivity growth driving standards of living:

There were 28 million civilian workers in the U.S. in 1900. Of these, a staggering 40% (11 million) worked in farming. The leading crop was (and still is) corn. At that time, 90 million acres were devoted to producing corn, with a yield of 30 bushels per acre, for a total output of 2.7 billion bushels annually.

Then came the tractor, and steadily, one innovation after another revolutionized planting, harvesting, irrigation, fertilization, and seed quality. Today, we devote only 85 million acres to corn. However, yields have improved to more than 150 bushels per acre, for an annual output of 13-14 billion bushels.

Increased yields, though, are only half the story: The huge increases in output have been accompanied by a dramatic reduction in the number of farm workers. Today, about three million people work on farms. That is only about 2% of our 158-million-person workforce.

It’s easy to look back over the 116-year span and realize how incredibly beneficial agricultural innovations have been—not just for farmers but, more broadly, for our entire society. The productivity gains achieved in America have delivered awesome benefits to society. A similar story has played out in dozens, if not hundreds, of other industries. That’s the reason our citizens, as a whole, have enjoyed—and will continue to enjoy—major improvements in their standard of living.

Productivity gains are widespread, but benefits are not shared equally:

To these improvements, though, there are offsets. First, the productivity gains achieved in recent years have disproportionately benefited the wealthy. Second, productivity gains frequently cause upheaval: Both capital and labor can pay a terrible price when innovation or new efficiencies upend their worlds.

We do not need to shed any tears for the capitalists (whether they be private owners or an army of public shareholders). It’s their job to take care of themselves. These owners may experience windfalls from good decisions, and they should not be spared the losses that result from bad decisions. In America, gains from winning investments have far more than offset the losses from clunkers.

A long-employed worker faces a different equation. When innovation and the market system interact to produce efficiencies, many workers may be rendered unnecessary, their talents obsolete. Some can find decent employment elsewhere; for others, that is not an option.

The answer in such disruptions should not be to regulate or restrain productivity improvements. The solution, rather, is a variety of safety nets aimed at providing a decent life for those who are willing to work but find their specific talents judged of small value because of market forces. The price of achieving ever-increasing prosperity for the great majority of Americans should not be economic devastation for the unfortunate few.

(Adapted from Warren Buffet’s Letter to Shareholders)