The productivity of public capital [Does this qualify as an oxymoron?]

  • Posted on: 27 January 2013
  • By: Gene Balfour

The term ‘productivity’ is often assumed to apply mainly to labour.

The term ‘capital’  appears synonymous with “investments made”.

In business, ‘ROI’ stands for “return on investment”. A businessman, contemplating an investment decision, will rely heavily on the prospect of an acceptable ROI in making that decision. In some circumstances, the businessman may even have several options to weigh for investing capital and will  compare these based on their prospective ROI.

 An investment decision may require several ‘inputs’, or “factors of production”, in order for the investment to achieve its ROI. For example, investments in computer systems are considered "capital investments", and are normally made in order to leverage greater, more profitable  ‘outputs’ from labour in the production process. In this case, the various 'inputs' would include the money spent on the equipment, the salaries & benefits paid to the employees, as well as the cost to train the employees on the new productivity-enhancing technology. Each of these inputs could be separately labeled as: return on capital [ROC], return on training [ROT], and return on employee compensation [ROEC].

 In government, the concepts of 'profit' and 'loss' rarely come into play when considering investment decisions. The ROEC remains fixed under the terms of union contracts and everyone receives the same level of position-related compensation irrespective of individual employee performance. The ROT is never discussed or measured. and along with the capital spending, they are simply assumed to be the cost of running a government operation. In essence, the ROC is of little interest to public managers - they are more interested in increasing the size of their budget for the next year than measuring productivity returns from past capital spending.

 Why do these different views of investments exist between business and government? Do government leaders not expect greater productivity with investment such as these, or do they simply pay lip service to these concepts when addressing these topics with citizens [ as they sometimes do] .

 Of course, this conundrum is not new and these difference are unlikely to ever change without substantial changes in our democratic institutions and the governance of their operations.

 However, by contemplating the "productivity of public capital" , it reinforces the Ontario Libertarian Party's belief that much of government operations should be privatized. One thing is clear: the productivity of public capital spending will never match the productivity of private capital spending.