Neoliberalism & productivity

Chris Edwards says the privatizations started by Thatcher “transformed the British economy” and boosted productivity. This raises an under-appreciated paradox.

The thing is that privatization isn’t the only thing to have happened since the 1980s which should have raised productivity, according to (what I’ll loosely call) neoliberal ideology. Trades unions have weakened, which should have reduced “restrictive practices”. Managers have become better paid, which should have attracted more skilful ones, and better incentivized them to increase productivity. And the workforce has more human capital: since the mid-80s, the proportion of workers with a degree has quadrupled from 8% to one-third.

Neoliberal ideology, then, predicts that productivity growth should have accelerated. But it hasn’t. In fact, Bank of England data show that productivity growth, averaged over 20 years, has trended down since the 1970s.

Why?

It could be that neoliberal reforms did give a short-lived boost to productivity. I’m not sure. As Dietz Vollrath says, economies are usually slow to respond to a rise in potential output. If there had been a big rise in potential output, therefore, it should show up in the data on 20-year growth. It hasn’t.

Another possibility is that the productivity-enhancing effects of neoliberalism have been outweighed by the forces of secular stagnation – the dearth of innovations and profitable investment projects.

But there’s another possibility – that neoliberalism has in fact contributed to the productivity slowdown.

I’m thinking of three different ways in which this is possible.

One works through macroeconomic policy. In tight labour markets of the sort we had in the post-war years, employers had an incentive to raise productivity because they couldn’t so easily reply upon suppressing wages to raise profits. Also, confidence that aggregate demand would remain high encouraged firms to invest and so raise capital-labour ratios. In the post-social democracy years, these spurs to productivity have been weaker.

Another mechanism is that inequality can reduce productivity. For example, it generates (pdf) distrust which depresses growth by worsening the quality of policy; exacerbating “markets for lemons” problems; and by diverting resources towards low-productivity guard labour.

A third mechanism is that neoliberal management itself can reduce productivity. There are several pathways here:

 - Good management can be bad for investment and innovation. William Nordhaus has shown that the profits from innovation are small. And Charles Lee and Salman Arif have shown that capital spending is often motivated by sentiment rather than by cold-minded appraisal with the result that it often leads to falling profits. We can interpret the slowdowns in innovation and investment as evidence that bosses have wised up to these facts. Also, an emphasis upon cost-effectiveness, routine and best practice can deny employees the space and time to experiment and innovate. Either way, Joseph Schumpeter’s point seems valid: capitalist growth requires a buccaneering spirit which is killed off by rational bureaucracy.

 - As Jeffrey Nielsen has argued, “rank-based” organizations can demotivate more junior staff, who expect to be told what to do rather than use their initiative.

 - The high-powered incentives offered to bosses can backfire. They can incentivize rent-seeking, office politics and jockeying for the top job rather than getting on with one’s work. They can crowd out intrinsic motivations such as professional pride. And they can divert (pdf) managers towards doing tasks that are easily monitored rather than ones which are important to an organization but harder to measure: for example, cost-cutting can be monitored and incentivized but maintaining a healthy corporate culture is less easily measured and so can be neglected by crude incentive schemes.

 - Empowering management can increase opposition to change. As McAfee and Brynjolfsson have shown, reaping the benefits of technical change often requires organizational change. But well-paid bosses have little reason to want to rock the boat by undertaking such change. The upshot is that we are stuck in what van Ark calls (pdf) the “installation phase” of the digital economy rather than the deployment phase. As Joel Mokyr has said, the forces of conservatism eventually suppress technical creativity.

All this is consistent with the Big Fact – that aggregate productivity growth has been lower in the neoliberal era than it was in the 1945-73 heyday of social democracy.

I’ll concede that this is only suggestive and that there might be another possibility – that the strong growth in productivity in the post-war period was an aberration caused by firms catching up and taking advantage of pre-war innovations. This, though, still leaves us with the possibility that slow growth is a feature of normal capitalism.

Comments

[soru]

Most such 200 year graphs, you can see historical events like WWII and Thatcher. This is clearly not random noise, but doesn't seem to tie obviously into the historical narrative either.

Maybe it is more to do with globalism; the first peak at 1870 is the start of 'new imperialism'. Imperial lands were for the first time things you could invest in as a regular capitalist (as opposed to a 'venture state' like the East India company). And 1970 is the date when the end of the war in Vietnam made the same true of much of the third world.

[Peter K.]

Exactly.

That's how I've been thinking about productivity. Tight labor marktets and social democratic macro. Unfortunately economists are trained not to think in these terms.

Also since the Reagan/Thatcher revolution, productivity increase have coincided with financial bubbles like the Dot.com tech stock and epic housing bubbles. Massive leveraged ponzi schemes are "increasing productivity" or profits.

http://econospeak.blogspot.com/2017/02/ponzilocks-and-twenty-four-trillion.html

http://econospeak.blogspot.com/2017/02/the-cutz-putz-bezzle-graphed-by-fred.html

[Stewart S]

There is another explanation. The proportion of service industries in the economy has grown rapidly and accelerated with globalisation. It is difficult to squeeze productivity gains out of hairdressers and care workers.

The slowing technical change hypothesis has been proposed many times in the past, e.g. James Galbraith and seems to make more sense than just trying to blame it on capitalism. If it was just neo-liberalism I would expect to see weaker effects in countries with different models. I think that there is too much ideology in your arguments.

[Bekett's Dog]

Do you link any of the productivity slowdown with the 'orthodox' Marxist analysis of the Tendential Fall in the Rate of Profit? The fall begins at the end of the period of productivity growth and has not recovered as the rate of profit hasn't either (depending on which analysis you use).
One of the most plausible explanations for the continued fall even with the moderating factors of neoliberalism is the increase in the moral depreciation of capital. This has arguably accelerated with the information technology revolution. More and more firms seeking to gain advantage by replacing hard and software at greater and greater rates but with no actual increase in productivity (or profitability). This suggests even more technology in an installation phase (possibly an endless one). (On a similar vein David Harvey cites Brian Arthur's analysis that the evolution of technology is often largely driven by trying to solve problems the technology itself has created: better touchscreen phones, more than how we use the existing technology for productive gain.)
Thus, the surplus capital absorption problem is addressed by: rent seeking in property; increasing investment into fictitious capital (novel financial instruments); investment in new technology with little productivity gain, other than by increasing the productivity in the technology sector itself. All of which results in little genuine investment.
I am not sure the economic policy response to this (if you accept the analysis, but don't believe in the imminent socialist revolution)? Two policy elements being to deliberately target higher inflation (as a means of deleveraging debt) and taxing non-productive wealth holding (such as a land tax))?

[Steve roth]

Another possible explanation?

Wealth concentration has been skyrocketing since circa 1980.

The inevitable result: the annual velocity of wealth has been plummeting, from 27% to 18%:

https://fred.stlouisfed.org/graph/?g=cQF0

For pretty obvious reasons: declining marginal propensity to spend out of wealth.

Less spending, less production.

Even while capacity — at least as measured by available labor hours — has steadily increased:

https://fred.stlouisfed.org/graph/?g=cQF1

[aragon]

Of course Neoliberalism does not increase productivity. That's just propaganda as the statistics show.

What happened in the 1970's - The oil crisis, in 1973 and 1979, followed by Thatcherism-Reganomics.

https://en.wikipedia.org/wiki/1973_oil_crisis
But what is economics for?

We can't motive CEO's due to the effects of Maximising Share Holder Value, although some haven't got the message.
https://hbr.org/2017/02/why-we-need-to-stop-obsessing-over-ceo-pay-ratios

We can't motivate workers by treating them as widgets, the Vitality curve is a very bad idea.

Profits from innovation can be huge, Google, Amazon, etc. Although not as big as monopoly profits in a network business (e.g. Microsoft)

Slow growth is the consequence of deliberate concentration of wealth to the already wealthy.

The Golden Era was an era of greater equality at least in the UK. Inequality depresses growth.

The rate of technological change is greater then ever, just look at the device you are reading this on.

Countries with different models (mercantilism) like China?

[Steve roth]

Oops, replace first link with:

https://fred.stlouisfed.org/graph/?g=cQFc

[John H. Morrison]

I found the opening paragraphs hilarious. These days, those arguments can only be parody -- nicely refuted by the rest of the article.

I have noticed a general misunderstanding of "productivity". One way to increase "productivity" is to lay off workers while keeping production unchanged. Overall, that tends to backfire because the workers buy fewer things, but it benefits the firms that do it. (It's "the Prisoner's Dilemma", "the tragedy of the commons", "the race to the bottom", etc.)

If you've introduced a self-checkout system that eliminates ten jobs and replaces them with one job, you've greatly improved productivity.

For reasons like this, I think that "productivity" and "economic growth" should be decoupled.