Corbyn's neglected question

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.

Comments

[cjcjc]

Better macro and training, sure.
But a national investment bank? Really?
(I assume this is not infrastructure investment that is meant.)

[e]

Why would you be so sure he wouldn't thank you for saying he’s echoing New Labour? Commentators who would have us believe his agenda is alien to UK labour – not a consequence of knowledge and experience? Perhaps.

[Daniel]

Meanwhile the Adam Smith institute is arguing for more slums XD

https://www.adamsmith.org/blog/planning-transport/britain-needs-more-slums

[Blissex]

«His critics read this as him wanting to roll back the international division of labour. That’s inefficient»

His critics if they be sell-side Economists may well argue like misunderstanding the different between productivity measured in money and measured in physical terms: only falls in productivity measures in physical terms would be inefficient; anything else would just be redistribution via labour arbitrage.

Example: a UK worker takes 1h costing £8 to make 10 widgets, a chinese worker takes 2 hours costing £2 each to make 10 widgets.

The international division of labour has halved efficiency, but also doubled per-pound productivity.

«As Adam Smith famously noted, it is the division of labour that boosts productivity.»

But taking a factory in the UK an moving it to China while halving labour costs is pure labour arbitrage, it involves no productivity increase and no difference in the division of labour; and because the chinese workers are likely to be less well trained and experienced, physical productivity will likely sharply decline.

Using A Smith's arguments about physical productivity to justify labour arbitrage is not quite right.

«the benefits of that division of labour have been distributed unevenly.»

They have (net) benefited very poor foreign workers and affluent or rich UK employers and rentiers, and cost a lot to UK workers, especially those working in industries that were unionized.

«In other words, he wants to sacrifice a bit of static efficiency to gain some dynamic efficiency.»

I guess most people understand that he wants to sacrifice a slice of labour arbitrage to gain quite a bit of distributional change and physical static efficiency.

[Blissex]

«But a national investment bank? Really?»

As 2008 demonstrated in effect nearly all UK notionally private banks are barely-disguised "sponsored banks" by the BoE and the government, as the BoE and the government provide essentially all the capital to the banking system.

And indeed the barely-disguised "sponsored banks" of the UK have been behaving for decades as "national investment banks", "investing" fantastic amounts in very risky highly leveraged lending to middle and upper class speculators in south-east and London properties, as ballooning their rents and prices has tory policy since 1980.

This really amazing graph from an article by prof. Steve Keen shows how much "national investment banks" like RBS or LLoyds etc. have put at risk by implementing government policy as to which "investments" to fund:

https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.png

[rogerh]

'Better macro policy, a national investment bank, better training and so on.'.

I can see it now, stuffy rooms in Whitehall filled with bearded professors wearing tweed jackets plus elbow patches. Add in Ministers jockeying for departmental largesse and we are headed straight back to ground nut schemes and atomic power too cheap to meter.

Landon-Lane and Robertson speak of international links, therein lies the rub. Any fool can build a semiconductor plant or a car factory anywhere in the world if they have the cash, a concrete slab, electricity and a road. Any government can see the dynamical economic advantages but those advantages tend to go to those who have an enthusiasm for working cheaply and have a semi competent government. The rest is globalisation.

The operative phrase is work cheaply. For historical reasons and due to high housing costs the UK and similar nations cannot compete on price unless transport costs predominate. The obvious response is to work smarter in whizzy new industries or in old profitable industries like finance.

But a couple of snags, a patent application or research report travels the world at light speed. Everyone is out to grab any whizzy new industry, older Western nations are desperate to replace rust belt industries. One or two decent sized factories will satisfy a great deal of market. For example at one time there were hundreds of light bulb factories spread across Europe, now very few and even Asia has only a small number. Does not absorb all that much labour.

Then the rate at which science is turning up new monetisable discoveries seems to have slowed. No Time Machine or Trans Galactic Transporter factories on the horizon. Perhaps some difficult struggles with pharmaceuticals, but the market there is poor or sick people.

Which leaves the traditional finance industries. But again, any fool can run an insurance company or a stock market. In principle these are easily replicable businesses although some declare that at the highest level there are unique skills located in specific locations. A definite maybe.

The next approach is education, a 'good thing', as a political nostrum, it sends messages of getting ahead. But I question how realistic it is to use education to revive an economy without some sort of 'pull' factor. We have an education system designed to produce an elite and then the rest of us. Montessori and Eton works well for a few thousands but does that approach scale?

[Mike W]

rogerh,

I like your argument and its engineer, flow chart, style. In that spirit could I say:

If we start at para 3: 'The operative phrase is work cheaply. For historical reasons and due to high housing costs the UK and similar nations cannot compete on price unless transport costs predominate..'

Then move down to para 6: 'Which leaves the traditional finance industries. But again, any fool can run an insurance company or a stock market. In principle these are easily replicable businesses..'

Is it not the case that a flow arrow should actually now flow back 6 to 3 in a horrific, eternal loop of domination by the, non -industrial, parasite, house price inflating banking sector?

If you agree, could I suggest that there is one group of our Eatonian, Oxbridge, rentier masters that actually know the final bit of your flow diagram.

That is, of course banks are just a balance sheet exercise and there are millions of accoutants in the UK who could set you up one (and then offer their services as Finacial director of course). Any idiot could run a bank too: assuming the government is behind you to bail you out.

But there is actually one more flow box down - inventing debt requires in the end, a debt collector. If you are inventing debt on an international scale then a Glasgow lone shark will not do. So this is what our dimwit masters have in store. Finance jobs for the 10% - Miltary/industrial complex jobs for another 15% - and gig serfdom for the rest.
'Empirical evidence' you may ask. On most folks thinking the new UK carriers are just white elephants no use against a first class power. On the above... Well lets just call them: HMS City of London and HMS Canary Wharf. Policy for the next 50 years old chap, don't you know?

[Blissex]

«So this is what our dimwit masters have in store.»

I would not call them "dimwit", so far they have awarded themselves and their supporters around 3-4 trillions of capital gains and probably around 0.5-1 trillions of extra rents over the past 30 years, almost entirely at the expense of those on median and below median working incomes, and in particular northerners.

[Blissex]

«dynamical economic advantages but those advantages tend to go to those who have an enthusiasm for working cheaply and have a semi competent government. ... historical reasons and due to high housing costs the UK and similar nations cannot compete on price»

But the "Britannia Unchained" book and plan solves the problem very simply: low wages and long workdays, high rents and doubling up. The models are Hong Kong and Dubai, with their unlimited supplies of desperate asian and african peasants, willing to do anything for a job and risk their lives too.

Every economic problem can be solved with cheaper labour and higher rents.

The usual suspects have already proposed "Free Enterprise Zones" for the post-brexit "dividend".

[Wahiba]

Division of Labour is commensurate with economies of scale. Advancing current techniques are reducing the scale economies substantially to the extent that vertical manufacturing can be the most sensible approach. Support your local makers and reduce transportation costs.

[rogerh]

I am just as keen as anyone to see a resurgance in the fortunes of the ordinary UK worker. But I doubt either the Tories or Labour have much ability to swim against global forces. On the one hand the Tories are stuck with housing and BTL and links to forces that want a cheap compliant workforce. On the other hand Labour is stuck with having implacable enemies in the right wing press, not many friends in business and no obvious ability to run anything.

The pathway looks to be a long slowdown in the value of wages for most. For a long time our economy will be propping up the somewhat over rewarded middle and upper level workers in order that housing debt can be sustained. Eventually, after 50 or so years we might become competitive, but that looks a rough road.

Manufacturing leverages the work of ordinary people. But everyone wants a slice of the manufacturing pie because ordinary people are in abundance everywhere, so big competition for that sector. Hence a tendency for low wages. Nice to bring manufacture back to the UK. Public housing and more concrete and tarmac will be key to this approach.

Then there is education. Most people would like their kids to get a good education for the selfish reason it helps them get ahead, get one of the few decent paying jobs. But educating humans is not a linear process, more put in does does mean more output. There look to be social and genetic reasons and probably the fact that humans were never designed to be geniuses. A related tendency is for humans to partition into like minded groups with a tendency to seek advantage for their group. This tendency is visible and compensates some from the limitations of being human. Selfishness reigns.

These influences are not unique to the UK, their downside is visible in the USA and in Europe whilst the upside is visible in Asia. This looks to be a long running tidal movement with many fits and starts along the way.

[djb]

is it efficient to have involuntary unemployment and underemployment and have inadequate aggregate demand

is monopoly power and monopsony preventing maximum efficiency from being achieved?