OCW042: Productivity

Impacts of Productivity on Output

Productivity, or the efficiency of production, is important because it can drive increases in output and improvements in living standards.

Learning Objectives

Develop a model to measure productivity

Key Takeaways

Key Points

  • Productivity is generally measured as the ratio of the total output to total input.
  • In an economy, higher productivity leads to higher real income, the ability to enjoy more leisure time, and better social services, such as health and education–all leading to higher living standards.
  • Surplus value refers to the difference between returns and costs. The higher is surplus value; the more productive is the process.
  • Small differences in productivity between countries can compound, leading to large differences in prosperity in the long run.

Key Terms

  • Surplus value: The part of the new value made by production that is taken by enterprises as generic gross profit.
  • productivity: The state of being productive, fertile, or efficient; the rate at which goods or services are produced by a standard population of workers.

Defining Productivity

Productivity is a measure of the efficiency of production. Productivity is a ratio of production output to what is required to produce it (inputs). The measure of productivity is defined as a total output per one unit of a total input.


Productivity: Productivity is a measure of the efficiency of production.

In order to obtain a measurable form of productivity, operationalization of the concept is necessary. In explaining and operationalizing, a set of production models are used. A production model is a numerical expression of the production process that is based on production data (i.e., measured data in the form of prices and quantities of inputs and outputs0.

Production Income Model

There are no criteria that might be universally applicable to success. Nevertheless, there is one criterion by which we can generalize the rate of success in production. This criterion is the ability to produce surplus value.

As a criterion of profitability, surplus value refers to the difference between returns and costs, taking into consideration the costs of equity in addition to the costs included in the profit and loss statement as usual. Surplus value indicates that the output has more value than the sacrifice made for it; in other words, the output value is higher than the value (production costs) of the used inputs. If the surplus value is positive, the owner’s profit expectation has been surpassed.

Impact on Output

When there is productivity growth, even the existing commitment of resources generates more output and income. Income generated per unit of input increases. Additional resources are also attracted into production and can be profitably employed.

At the national level, productivity growth raises living standards because more real income improves people’s ability to purchase goods and services (whether they are necessities or luxuries), enjoy leisure, improve housing and education and contribute to social and environmental programs.

Over long periods of time, small differences in rates of productivity growth compound, such as interest in a bank account, and can make an enormous difference to a society’s prosperity. Nothing contributes more to the reduction of poverty, increases in leisure, and to the country’s ability to finance education, public health, environment, and the arts.

Productivity Gains from Software

New ways of developing and using software have led to higher efficiency and productivity through greater interaction between users.

Learning Objectives

Explain how collaborative software increases productivity

Key Takeaways

Key Points

  • Collaborative software, or groupware, puts computers in the center of communications between groups of workers, managers, and technicians. This way of working has produced major gains in productivity since it was first introduced.
  • Examples of collaborative software include document sharing, shared calendars, instant messaging, and web conferencing.
  • In agile software development, solutions arise through collaboration between self-organizing, cross-functional teams. It involves adaptive planning and flexbile responses: tasks are broken into small increments with minimal longer-term planning, and responses evolve to problems as they arise.
  • The values espoused in the Agile Manifesto focus on people and functionality, rather than rigidity, documentation, and planning. It is thought that better, more useful software can be developed with these values.

Key Terms

  • Collaborative software: Computer software designed to help people involved in a common task achieve goals.
  • Agile software development: A group of software development methods based on iterative and incremental development, where requirements and solutions evolve through collaboration between self-organizing, cross-functional teams. The basic idea behind the agile method is to develop a system through repeated cycles (iterative) and in smaller portions at a time (incremental), allowing software developers to take advantage of what was learned during development of earlier parts or versions of the system.

Collaborative Software

Collaborative software was originally designated as groupware and this term can be traced as far back as the late 1980s, when Richman and Slovak said, “Like an electronic sinew that binds teams together, the new groupware aims to place the computer squarely in the middle of communications among managers, technicians, and anyone else who interacts in groups, revolutionizing the way they work. ”

Collaborative software has produced major gains in productivity. The definition of an office has dramatically changed as an individual is able to work efficiently as a member of a group wherever there is a computer (or an iPad, or iPhone, or Blackberry).


Software: Collaborative software has produced major gains in productivity.

Examples of the major gains include:

  • Document sharing (including group editing)
  • Group calendars
  • Instant messaging
  • Web conferencing

Agile Software Development

Agile software development is a group of software development methods based on iterative and incremental development, where requirements and solutions evolve through collaboration between self-organizing, cross-functional teams.

It promotes adaptive planning, evolutionary development and delivery, a time-boxed iterative approach, and encourages rapid and flexible response to change. It is a conceptual framework that promotes foreseen interactions throughout the development cycle.

Agile methods break tasks into small increments with minimal planning and do not directly involve long-term planning.

Iterations are short time frames (timeboxes) that typically last from one to four weeks. Each iteration involves a team working through a full software development cycle when a working product is demonstrated to stakeholders. The development cycle includes:

  • Planning
  • Requirements analysis
  • Design
  • Coding
  • Unit testing
  • Acceptance testing

This approach minimizes overall risk and allows the project to adapt to changes quickly. Stakeholders produce documentation as required.

An iteration might not add enough functionality to warrant a market release, but the goal is to have an available release (with minimal bugs) at the end of each iteration. Multiple iterations might be required to release a product or new features.

According to the Agile Manifesto:

Through this work we have come to value: individuals and interactions over
and tools; working software over comprehensive documentation; customer collaboration over contract negotiation; responding to change over following a plan. That is, while there is value in the items on the
, we value the items on the left more.

Productivity Gains from Hardware

Productivity improving technologies lower traditional factors of production of land, labor capital, materials, and energy.

Learning Objectives

Outline the progression of productivity improving technologies in the 20th century

Key Takeaways

Key Points

  • Productivity gains were not just the result of inventions, but also of continuous improvements to those inventions which greatly increased output in relation to both capital and labor compared to the original inventions.
  • The technology of building mills and mechanical clocks was important to the development of the machines of the Industrial Revolution.
  • Machine tools–which cut, grind, and shape metal parts–were another important mechanical innovation of the Industrial Revolution.
  • The evolution of hardware has allowed computing to become widespread due to its low cost and effectiveness. Microchips are now used in everything from greeting cards to missile defense systems.

Key Terms

  • cloud: Regarded as an amorphous omnipresent space for processing and storage on the Internet; the focus of cloud computing.
  • Industrial Revolution: The major technological, socioeconomic, and cultural change in the late 18th and early 19th century, resulting from the replacement of an economy based on manual labor to one dominated by industry and machine manufacture.

Productivity Improving Technologies

Productivity improving technologies are technologies that lower the traditional factors of production of land, labor capital, materials, and energy that go into production of economic output. Increases in productivity are responsible for increases in per capita living standards. Since the beginning of the Industrial Revolution, some major contributors to productivity have been:

  1. The spinning jenny and spinning mule greatly increased the productivity of thread manufacturing compared to the spinning wheel.
  2. Replacing human and animal power with water power, wind power, steam, electricity, and internal combustion greatly increased the use of energy.
  3. Energy efficiency in the conversion of energy to useful work.
  4. Infrastructures: canals, railroads, highways, and pipelines.
  5. Mechanization of both production machinery and agricultural machines.
  6. Work practices and processes: the American system of manufacturing, Taylorism or scientific management, mass production, assembly line, modern business enterprise.
  7. Materials handling: bulk materials, palletization, and containerization.
  8. Scientific agriculture: fertilizers and the green revolution, livestock and poultry management.
  9. New materials, new processes for production and dematerialization.
  10. Communications: telegraph, telephone, radio, satellites, fiber optic network, and the Internet.
  11. Home economics: public water supply, household gas, appliances.
  12. Automation and process control.
  13. Computers and software, data processing.

Productivity gains were not just the result of inventions, but also of continuous improvements to those inventions which greatly increased output in relation to both capital and labor compared to the original inventions. Productivity also arises from developing economies of scale, despite that not actually being a technology in its own right.

Industrial Machinery

The most important mechanical devices before the Industrial Revolution were water and windmills. Just before the Industrial Revolution, water power was applied to bellows for iron smelting. Wind and water power were also used in sawmills. The technology of building mills and mechanical clocks was important to the development of the machines of the Industrial Revolution.

The spinning wheel was a medieval invention that increased thread making productivity by a factor greater than ten. Later in the Industrial Revolution came the flying shuttle, a simple device that doubled the productivity of weaving. Spinning thread had been a limiting factor in cloth making, requiring 10 spinners using the spinning wheel to supply one weaver. With the spinning jenny, a spinner could spin eight threads at once. The spinning mule allowed a large number of threads to be spun by a single machine using water power. A change in consumer preference for cotton at the time of increased cloth production resulted in the invention of the cotton gin. Steam power eventually was used as a supplement to water during the Industrial Revolution, and both were used until electrification.

Machine Tools

Machine tools, which cut, grind, and shape metal parts, were another important mechanical innovation of the Industrial Revolution. Before machine tools, it was prohibitively expensive to make precision parts, an essential requirement for many machines and interchangeable parts. Perhaps the best early example of a productivity increase by machine tools and special purpose machines is the Portsmouth Block Mills. With these machines, 10 men could produce as many blocks as 110 skilled craftsmen.

Historically important machine tools are the screw-cutting lathe, milling machine, and metal planer (metalworking), which all came into use between 1800 and 1840. However, around 1900, it was the combination of small electric motors, specialty steels, and new cutting and grinding materials that allowed machine tools to mass produce steel parts.

Productivity Gains From Computer Hardware

Computer hardware is the collection of physical elements that comprise a computer system. Computer hardware refers to the physical parts or components of computer (objects you can touch), such as a:

  • Monitor;
  • Keyboard;
  • Printer;
  • Chip;
  • Hard disk; and
  • Mouse.

The history of computing hardware is the record of the ongoing effort to make hardware faster, cheaper, and capable of storing more data.

The Rapid Increase in Productivity

Early electric data processing was done by running punched cards through tabulating machines, the holes in the cards allowing electrical contact to incremental electronic counters. Tabulating machines were in a category called “unit record equipment,” through which the flow of punched cards was arranged in a program-like sequence to allow sophisticated data processing. They were widely used before the introduction of computers.

The first digital computers were more productive than tabulating machines, but not by a great amount. Early computers used thousands of vacuum tubes (thermionic valves), which used a lot of electricity and constantly needed replacing. By the 1950s, the vacuum tubes were replaced by transistors which were much more reliable and used relatively little electricity. By the 1960s, thousands of transistors and other electronic components were being manufactured on silicon semiconductor wafers as integrated circuits, which are universally used in today’s computers.

In 1973, IBM introduced point of sale (POS) terminals in which electronic cash registers were networked to the store’s mainframe computer. By the 1980s, bar code readers were added. These technologies automated inventory management. The Bureau of Labor Statistics estimated that bar code scanners at checkout increased ringing speed by 30% and reduced the labor requirements of cashiers and baggers by 10-15%.

Computers did not revolutionize manufacturing because automation, in the form of control systems, had already been in existence for decades. Although they did allow more sophisticated control, which led to improved product quality and process optimization. Today’s servers and mainframes are capable of processing enormous amounts of data. Moreover, this type of processing power has become much easier to obtain through cloud computing services.


Intel CPU: Hardware advancements, such as the CPU, greatly increased productivity for many areas of society.


Productivity Technology: The introduction of the spinning mule into cotton production processes helped to drastically increase industry consumption of cotton. This example is the only one in existence made by the inventor Samuel Crompton. It can be found in the collection of Bolton Museum and Archive Service.

Source: Business