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The Economics of Productivity

Published January 10, 2012

There are massive, non-linear differences in productivity between people. This is best exemplified by the following law: 

Half the output produced by a particular enterprise is produced by the square root of the number of people employed by that enterprise.

For example, 3 out of 9 people employed in a small enterprise do half the work. More surprising, however, is that 30 out of 900 do half the work in a medium enterprise. Amazingly, 100 out of 10,000 do half the work in a large business. This has to be regarded as one of the most disconcerting and disruptive discoveries of the twentieth century.

This means:

1. It is critical to select people in the productive minority, particularly as an enterprise expands.

2. As businesses grow, incompetence increases exponentially, while competence increases linearly.

3. Those who have, get more, while those who do not have, get less. Among economists, this is known as the Matthew principle. The Matthew principle, with regards to capital, ensures that 1% of the population control the majority of the economic assets, and that it is very difficult to mitigate against that distribution.

4. Even small improvements in predictive accuracy in hiring, placement and promotion have disproportionately immense returns, because of the non-linear effects of individual competence.

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