Jeremy Corbyn’s speech this morning raises a big question in economics that won’t get the attention it deserves: is there a trade-off between static and dynamic efficiency?
Corbyn wants to use government procurement policies to “build things here again that for too long have been built abroad” and objects to the decline of UK manufacturing and growth in cheap imports.
His critics read this as him wanting to roll back the international division of labour. That’s inefficient, As Adam Smith famously noted, it is the division of labour that boosts productivity. Pushed to an extreme, this mentality leads to North Korea or to Mao's ruinous backyard blast furnaces.
Now, these critics might not all be wholly sincere. Many of them have been silent about the fact that capitalism itself has greatly slowed down the international division of labour; world trade growth has been much weaker since the 2008 crisis. And not all them are sufficiently awake to Dani Rodrik’s point that the benefits of that division of labour have been distributed unevenly.
Nevertheless, they do have a point. Corbyn’s plan looks inefficient in static allocational terms.
There might, though, be a defence of it. It’s that supporting manufacturing might provide opportunities for future productivity growth that would otherwise be lost. “A lack of support for manufacturing is sucking the dynamism out of our economy” says Corbyn, giving the example of how cuts to subsidies to solar power have cut UK-based innovation in the sector. And he speaks of developing “the virtuous cycle, where the success of one industry or company helps others.”
He’ll not thank me for saying this, but he’s echoing New Labour here with its enthusiasm for endogenous growth theory – the idea that success breeds success, that innovations and productivity gains today lead to more gains tomorrow.
In other words, he wants to sacrifice a bit of static efficiency to gain some dynamic efficiency.
The case for doing this isn’t purely economic. It’s plausible that the decline of manufacturing and rise of finance is one factor (of several) behind job polarization – the decline of half-decent jobs for diligent but unacademic people. This polarization, one could argue, has unpleasant social effects.
Insincere as many of his critics are, however, I fear they might have a point. Endogenous growth theory cuts both ways: if success breeds success, so failure breeds failure. The UK’s longstanding weaknesses in manufacturing – a lack of vocational skills, poor management and the consequent lack of animal spirits – might well condemn us to continued failure. And Corbyn – like most politicians – is I fear insufficiently heedful of a point made (pdf) by Landon-Lane and Robertson, that national policies might (within reason) be unable to do much to raise growth.
You might, however, draw another inference from such scepticism – that it shows that we need radical and broad-spectrum policies to try to raise growth: not just UK-biased government procurement but also better macro policy, a national investment bank, better training and so on.
I’ve an open mind on whether this can work. But Corbyn is at least asking the question, Which is more than can be said for the government. If Corbyn’s critics want to be more than tribalist gobshites, they would engage with it seriously.