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 / Winter 2006 / Issue 45(originally published by Booz & Company)


The Productivity Riddle

Joseph Schumpeter’s theory of entrepreneurship (popularly known as “creative destruction”) proposed that firm-level volatility and aggregate productivity growth are positively correlated: The faster companies come into and go out of existence, the better it is for the economy as a whole. But suppose that better management has developed through a more evolutionary process — in which the greater competition in product markets leads to the gradual selection of managerial processes that ultimately increase productivity? Then restructuring and experimentation may be most important within large, relatively stable firms. A decline in firm-level volatility could turn out to be associated with aggregate productivity improvements of the sort we have seen recently in the United States. A recent study by economists Steven Davis, John Haltiwanger, Ron Jarmin, and Javier Miranda supports this view. (See “Volatility and Dispersion in Business Growth Rates: Publicly Traded Versus Privately Held Firms,” 2006.) The study suggests that a kind of cooperation between managers, entrepreneurs, and investors, with the flavor of “nondestructive creation,” would generate better performance for many firms and for the economy as a whole.

If management matters so much, how do we foster better management skills, avoiding hype and focusing on the learning and evolution of genuinely successful practices? Economists have largely ignored this issue in the past, as have policymakers. And even business managers have treated their own skill sets as too much of a black box, without fully investing time or attention in improving their capabilities. Management practice needs a bigger spot on the agenda, not just in business schools, but in boardrooms and government councils. That’s where the leverage may lie for making productivity improvement less of an ongoing riddle and more of a deliberate and reliable aspect of any enterprise.

Reprint No. 06402

Author Profile:

Glenn Hubbard ([email protected]) is the dean and Russell L. Carson Professor of Finance and Economics at Columbia Business School and a research associate of the National Bureau of Economic Research. He was chairman of the Council of Economic Advisers under President George W. Bush from 2001 to 2003.
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