Stumbling and Mumbling

Technical regress

There's a fascinating TV series on now about modern social and economic history. I refer of course to the re-runs of Brookside on STV Player.

One thing this shows is how many opportunities there in the 80s were for workers to top up their wages by stealing from their employers, either by putting their hands in the till or by nicking stuff to sell to their friends. The closure of such opportunities thanks in part to technical change might help explain increased inequality and the Easterlin paradox, as I discussed here.

But there's something else. In one episode the post arrives at breakfast time. Today, this is unheard of. What a poverty-stricken city could achieve 40 years ago is now not possible even after decades of IT improvements. What we have here is technical regress.

Of course management of the Royal Mail and Post Office has long been indistinguishable from dogshit, but this regress is not confined to the postal system. The UK has lost the ability to build train lines. The BBC is less able (or willing) to make high-brow TV programmes whilst much of its current affairs output has become unwatchable. Water companies have become unable to maintain clean rivers. Construction productivity in the US has fallen since the 1970s. Academic research has deteriorated. And Cory Doctorow has described how platforms have become enshittified.

Lest this sound like an old man's nostalgia, I'll point to ONS data. These* show that there are many industries where gross value added per hour worker is lower now than it was in 2007, among them mining, pharmaceuticals, construction, water and wholesaling. In this sense, technical regress has been widespread.

All this alerts us to the fact that supply shocks are not just rises in the costs of raw materials due to wars. They can take the form of companies becoming less able to do things.

Some economists have long scoffed at this. Brad DeLong has called it the "great forgetting" theory of recessions. But I think there's something to be said for it.

For one thing, organizational capital is brittle; it can be destroyed by bad management, which is one reason why so many once-good companies get into trouble.

What's more, such declines and failures don't merely mean that capital and labour are swiftly redeployed at more efficient companies. Economies don't move seamlessly from one happy equilibrium to another. Instead, as Banerjee and Duflo point out in Good Economics for Hard Times, they are sticky: adjustments are slow, so technology shocks can lead merely to stagnation rather than to faster growth.

This is especially the case when, as Xavier Gabaix has shown (pdf), some companies are so big that their getting into trouble is itself a macroeconomic event, or if those companies are hubs, or key members of networks (pdf).

You can read the financial crisis as a form of technology shock - banks became less able to produce credit - and that had spillovers onto the general economy. Or the inability of TransPennine "Express" or Avanti West Coast to run trains has spillovers onto productivity generally as people can't get to work or meetings or are stressed out if they do. Or the failure of large department stores such as Debenhams leads to depressing high streets and shopping malls, causing less custom for other shops.

Now, you might reply here that a lot of these examples aren't so much of technical regress as of bosses degrading quality to get a bigger slice of the pie at the expense of workers or customers. In some cases, yes. But this merely reminds us that the production process is not merely a matter of solving constrained optimization problems as the neoclassical fairy tale says, but is also a location of class struggle.

All this should be troubling for mainstream economics. It means (some?) downturns are not merely fluctuations in demand which are ameliorable by monetary or fiscal policy but are instead the result of company- or industry-specific supply shocks. The fact that recessions have been almost all unpredicted is, I suspect, consistent with this.

This is not just an economic issue. It's a political one. Keynesian economics offered social democratic governments the possibility of controlling economic growth without having to interfere in capitalist management of workplaces. That option, however, exists only if recessionary threats come only from demand shocks and if productivity continues to grow thanks to capitalist dynamism.

Such conditions, however, are now absent. Which means we must take an interest in what Marx called "the hidden abode of production". We must take seriously the possibility that managerialism can no longer raise efficiency and that, as Michael Roberts says, there is a case for "giving workers democratic control of production and services and ending the autocracy of grotesquely overpaid chief executives and shareholder power."

This should not be so radical. Basic economics says that if a resource is scarce we should try to economize on it - and quality management is very scarce.

There is, of course, little evidence that the Labour party is thinking along these lines. Evidence-based policy-making has fallen out of fashion now that the evidence shows that capitalism isn't working.

* Yes, these. Suck it up, FT style guide.

Economic growth: who loses?

Labour's promise to "secure the highest sustained growth in the G7" is so far a mere aspiration without a detailed plan to achieve it. It is like a man claiming to want to become a great guitarist without practising or studying - and just as impressive and as likely to succeed.

The party promises to correct this omission in coming months. I would hope that one question it answers is: who is it going to hurt?

I say this simply because even mainstream policies to increase economic growth would undermine many vested interests and ideas. For example:

 - Nimbys. Economic growth requires more liberal planning laws - be it to enable universities to build more laboratories, to get us more wind or solar farms, or of course to build more houses (which itself could raise productivity). That's going to hurt nimbys. Westlake and Bowman's idea for street votes on new developments might mitigate a lot of this hurt - by ensuring residents benefit from such developments - but it won't appease all the die-hard nimbys.

 - Land-owners. Most economists, I suspect, agree that we need to tax businesses less and land-owners more: Westlake and Bowman, for example, advocate replacing business rates with a land tax. Whilst this would encourage business formation and expansion and help solve the problem of high streets being blighted by closed shops, it would of course hit commercial property owners.

 - Financiers. Westlake and Bowman also advocate eliminating the tax deductibility of corporate interest payments to end the bias towards debt financing (and by implication the bias against equity finance). That'll hurt some lenders. So too would a state investment bank aimed at supporting start-ups, simply because it would create more competition. And of course, one effect of higher trend growth would be higher real interest rates - the two are correlated - which would raise the costs and dangers of all leveraged strategies.

 - Monopolists. The UK has some of the highest energy costs in Europe, thanks to lax regulation of our privatized industries. This squeezes economic growth in exactly the way David Ricardo described 200 years ago; if we are spending all our money on economic rents, there's less to spend on other things and hence less revenue for genuine entrepreneurs. Pro-growth policies would therefore either cap energy prices or tax away the profits of energy companies.

 - Incumbent companies. Economic growth requires fiercer competition, not least because productivity increases come not so much from existing firms upping their game but from new companies starting and efficient ones expanding. This in turn requires tougher competition law to help new start-ups or to break up large inefficent firms such as BT.

 - Some workers and employers. We might be close to de facto full employment: the sum of the unemployed and those outside the labour force wanting a job is close to its lowest since records began in 1992*. This means that if Labour really wants to create significant numbers of good jobs in the green economy, care sector, housebuilding or wherever it will have to destroy some others. This of course is what "fiscal responsibility" means: cutting some spending or raising taxes to pay for other spending priorities means cutting jobs and businesses. The question is: which jobs and businesses does Labour wish to destroy? It shows no interest in this question.

 - Brexiters. One of the few big, quick ways to raise growth would be to rejoin the single market. Which would of course outrage Brexiters and the right-wing media: liberalizing migration policy would have the same effect. The more intelligent of these might also oppose economic growth because they know that stagnation breeds reaction and illiberalism and so feeds their agenda.

Nothing I've said here is terribly left-wing. I'm not talking about radical pro-growth policies such as economic democracy, income redistribution or universal basic income but merely bog-standard orthodox economics. And yet even such mainstream policies would upset a lot of vested interests. Indeed, there's little evidence the voters want economic growth: they voted against it in 2010, 2015, 2016, 2017 and 2019.

Any serious economic policy must be aware of this opposition to growth, and be prepared for the fight.

The challenge here is not an intellectual one. Most economists roughly agree what type of policies we need to raise growth, even though we differ upon the relative importance we'd attach to them or to just how effective they'd be. But politics is not about intellect, and raising growth is not merely a technocratic exercise. Instead, it's about power. Would Labour have the power to face down anti-growth interests? Can it mobilize countervailing forces to them? If stronger growth is to be any more than an idle aspiration, it must be serious about these questions. A purely top-down managerialist ideology cannot be sufficient.

* That phrase de facto is important. Labour isn't wholly fungible, and there'll always be some unemployment simply because of mismatches between labour supply and demand. What matters is whether the unemployed have the skills or health to do the jobs Labour wants; it is improbable that people suffering from long covid will quickly be able to work on building sites, for example.