The Lie of Gross Domestic Product
The way we measure production is fatally flawed.
In fact the way we look at work is fatally flawed.
In traditional service and manufacturing, managers are tasked with keeping men and machines busy. If the ‘plant’ is busy then it must be productive. The busier it is the more productive it is.
Typically this means running large batches of product in shifts which produce large amounts of inventory which are then stored in the hope a customer will buy them.
The Toyota Way
But about fifty years ago a revolution in manufacturing started at a company called the Toyota Motor Corporation. A unique combination of individuals came together to develop a system that became known as the “Toyota Way” or Lean.
The men at Toyota realised that measuring utilisation was a poor substitute for measuring outcomes. By this measure, if you but the world’s hardest worker in a the world’s worst process he will be incredibly busy. But will he be productive?
Inherent in every business process are three types of work: tasks that add value for the customer; those that are necessary but add no value and those that are totally unnecessary. The goal of Lean is to maximise the first, eliminate the last and optimise the middle.
Toyota have been doing this for fifty years and they think they might have reached about 10–15% value in their processes; the remaining 85% is waste. The rest of us, sadly, they believe are stuck at somewhere between 2–5% value in our processes.
The key lies in deciding what adds value in your process and what doesn’t.
They call it “having eyes for waste”.
Once you have “eyes for waste” you see it everywhere you go. From the waiter who takes three trips to the kitchen to bring your coffee in the morning, to the pointless and unproductive meetings you are forced to endure at work, to the traffic jam you get stuck in on your way home at night. Waste is all around us and we all suffer because of it.
So what is the alternative?
Lean is slowly creeping into Western thinking, lead by the manufacturing sector and followed closely by healthcare and at a distance by the service and non-profit sectors. In government and primary production it is non-existent.
John Shook was one of the first westerners to truly understand Lean.
He was responsible for helping to translate the concepts of Toyota’s Lean Production System to the American workforce of General Motors NUMMI plan in Southern California. NUMMI was a failing plant that GM gifted to Toyota in exchange for them teaching GM the ‘Toyota Way’. So the story goes, NUMMI went from GM’s worst performing plant to it’s best in a single year.
Going to the Gemba
John Shook went on to found the Lean Enterprise Institute with Jim Womack and recently authored a book called “Gemba Walks”.
Gemba is a Toyota term which can be best translated as ‘the place where the work happens’. Going to the gemba is an integral part of Lean — you can’t manage from the balance sheet, you manage from the shop floor, which is where productivity starts and ends.
In “Gemba Walks”, Jim argues that the universal measure of economic productivity, Gross Domestic Product, is fatally flawed.
Consider for example a manufacturer that makes ‘widgets’.
The production of widgets adds to GDP.
But the widget is badly designed and doesn’t work for customers so the manufacturer needs a service and support desk to handle all the complaints he gets from customers — and this adds to GDP too. In fact the widget is so bad, the company is forced into a product recall and must replace tens of thousands of widgets in the market at their own cost — and this too adds to GDP.
And finally the poor customers who persevere with the inadequate product suffer a loss of productivity in their own lives that forces them to work harder — which also ‘adds’ to GDP.
So in truth, we do not measure value in our economy with GDP, just activity.
A Sustainable Future
In the new sustainable world there is a much greater focus on the efficiency of production as we start to consider the detrimental side-effects of production that have been ignored by traditional management and economic theory. We can’t be content with simply measuring activity and assuming that all that activity produces valuable outcomes without costly side effects.
What we should be measuring is Gross Domestic Value.
That is the sum total of products and services that actually benefit the end-user.
How could do we measure this?
To measure this we first need to measure Gross Domestic Waste. That is the waste inherent in producing the value, the elements of production that are either totally unnecessary or necessary but do not benefit the customer.
Therefore, Gross Domestic Value = GDP — Gross Domestic Waste.
And think what a fascinating measure that would be? Imagine comparing Australia’s GDV per capita to India’s or China’s or to Germany or Japan? And measuring both GDW and GDV gives us choices in efficiency — to reduce GDW or to increase GDP. And it is directly applicable to every organisation which can measure it’s own value and waste.
But we should realise that measures of Gross Domestic Waste are already with us : the carbon tax, for example.
No one really wants to pay for the pollution inherent in producing electricity to light our houses, the steel in our cars or the Vegemite for our sandwiches; but to ignore the consequential costs of production is to ignore the true cost to society and the world. The carbon tax is a fumbling attempt to respond to the uneasiness in society that our current practices are unsustainable.
In “Gemba Walks”, Shook quotes a source which points out that of the 10% GDP growth achieved by China in 2004, three percent was expended trying to deal with the environmental and human damage created by the other seven percent!
Some will argue that GDP alone is not a measure of productivity, to it you need to add a denominator like “hours worked” or “per capita”. This produces a comparative ratio, but because you still have the same numerator in GDP, you still have the same problem — double counting specious ‘production’ that adds no value to society.
What does it matter that we work harder to produce more if that production is channelled into products and services that add no value to individuals or society?
If we’re going to measure our output let’s make sure we’re measuring the right thing — let’s make sure we’re measuring the value we add to people’s lives, not the work.
Originally published at www.nickjenkins.net on February 18, 2017.