Maybe Investment, R&D; Get Too Much of the Concern

Few indicators of future business activity are more closely watched than the amount of money earmarked for capital investment, and research and development.

But maybe, some folks are now saying, the attention is a bit overdone.

The widespread, almost automatic assumption made is that money spent on new plants and equipment and in developing new products is an investment that returns itself many times over.

Economists, political leaders, academics and others watch these items for other reasons as well. Such spending, for example, supposedly shows the level of confidence in the future, and it is equated with more efficient production.

Now comes an authority on productivity who cautions against falling in love with such expenditures. Not that they are unimportant, says C. Jackson Grayson Jr. But, he says, let us not lose our perspective.

Grayson, probably best remembered as chairman of President Richard Nixon’s price commission, has been studying productivity issues for the past decade, mainly as chairman of the American Productivity Center in Houston. Among other activities, he also served on President Jimmy Carter’s Commission on the Agenda for the ‘80s and was a member of President Reagan’s National Productivity Advisory Committee. Productivity is his specialty.

From that background, he issues what is likely to be considered an almost sacrilegious criticism: “Capital investment is not the principal cause of productivity growth nor of its slowdown.”

Result Versus Source

With Carla O’Dell, vice president of the productivity center, Grayson has written “American Business: A Two-Minute Warning,” a volume examining the sometimes surprising relationship between capital investment and productivity.

Such spending hardly correlates with increased productivity, for example. As they point out, U.S. productivity growth declined from 1965 to 1978 while capital investment increased during the same period.

In fact, they say, “capital investment may well be the result of growth, rather than its source--better growth prospects attract more investment.”

They observe, for example, that investments in human capital, though not as often examined as physical investments, are especially important in improving quality and production. Can anyone deny that quality education doesn’t pay off?

Those who place great faith in dollar amounts also might be misguided in another respect. Grayson and O’Dell observe that “there is a difference between the volume of capital investment and the productivity of that investment.”

Where, for example, is it more evident than in government that throwing money at a situation does not necessarily improve it?

In this respect, the authors call attention to a concept that might not be correct for these times: Why do we still believe that long production runs, greater volume, big factories and automation mean greater productivity?

They observe that “the best American and Japanese firms have shown that it is often more productive to focus on less, not more: small batches, small inventories, and flexible, simple machines.”

They have a special message for politicians and government officials:

“Among the more important things government at all levels could do are improve education, privatize more government services, improve the collections and reporting of competitiveness statistics, improve productivity in government and cut the budget deficit.”

That, not just money, is bound to improve productivity, they say.