Stumbling and Mumbling

Securonomics vs productivity

"Globalisation, as we once knew it, is dead" said Rachel Reeves this week. Which is a problem for anybody wanting a high-wage high-productivity economy.

I say so for a simple reason: globalization in the sense of faster world trade growth raises productivity.

My chart shows the point, plotting three-year growth in world trade (as measured by the CPB) against UK productivity growth. It's clear that there's a correlation between the two. Of course, correlation is not causality. Some of the link is because the same things that depress one also depress the other - such as the financial crisis and the pandemic. But those events are not the whole story. The pre-crisis slowdown in world trade was associated with slower productivity growth; both grew weakly in the mid-10s; and both picked up in the late 10s.

In fact, we have strong reasons to think that faster world trade growth is indeed one cause of productivity growth (of many!). Productivity improvements “seem to have been the effects of the division of labour” wrote Adam Smith in the first sentence of the first book of modern economics. If you were to emulate Tom Good and try to become self-sufficient, you’d be poorer. What’s true of individuals is true of countries: just look at North Korea for an extreme example.

What's more, stronger world trade means greater competition. That encourages firms to increase efficiency or to innovate more, both of which raise productivity. It also means that managers visit customers and suppliers overseas and so can more easily learn tricks of the trade from best practice overseas.

Globalization doesn't just raise real incomes by raising productivity, though. It also does so by cutting prices thereby making people's wages go further. The deglobalization caused by Brexit, for example, has greatly added (pdf) to UK food bills.

If globalization is dead, therefore, we face a big obstacle to raising productivity and real wages. Which makes it all the more important to look for other methods of doing so.

But, but, but. Reeves is right to say that globalization had a downside: "whole industries were allowed to decline or disappear."

This, however, is what productivity growth is. Productivity does not rise because we become better at doing the jobs we are doing. It does so because low-productivity jobs disappear and are replaced by higher-productivity ones.

A famous paper by Jonathan Haskel and colleagues showed this (pdf). They estimate that during Thatcher's great shake-up of manufacturing "between 1980 and 1992 single establishment firms experienced no productivity growth among survivors." Instead, all the substantial growth there was came because inefficient firms closed, more efficient ones opened, and because big companies shifted output from their less efficient sites to more efficient ones. A similar thing, Haskel has found (pdf), is true in retailing: most productivity growth is due to the closure of old stores and opening of new ones, rather than to incumbents upping their game.

Growth, as Schumpeter said, is a process of creative destruction.

Which means there is a tension between Reeves' two objectives. An economy of high productivity growth is one in which there will be insecurity as low-productivity jobs will be in danger of being destroyed.

Policy-makers can in principle ameliorate this trade-off by having a more generous welfare state to support those whose jobs are destroyed and more active labour market policies to help the unemployed into those better jobs. (Yes, I mean help, not bullying). But Reeves' speech gave no hint of thinking along these lines.

Instead, she emphasises the upside of better jobs:

That means cyber amongst the former coal and steel communities of South Wales, robotics and AI in business hubs in Lancashire’s mill-towns and carbon capture and storage technologies pioneered and applied in the manufacturing landscape of Teesside.

But this still leaves the problem of job destruction. If these good jobs are created, people will move into them from low-wage work. Who then will do those jobs - the care work, the cleaning, the shelf-stacking?

This wouldn't be a problem if we had lots of unemployment or if Labour were endorsing high immigration. But neither is the case: Labour "want and expect net immigration to reduce."

Nor would it be a problem if the low-wage jobs were ones that we didn't want. But this is not so. "Skill" is an ideological construct: fund managers are considered skilled whilst care-workers are not. The "vibrant market" that Reeves wants might therefore move workers away from jobs that need doing.

Of course, the solution to this is to pay care workers more. But the taxes needed to do this will depress aggregate demand and so destroy other jobs.

But not necessarily the right ones. The jobs that need destroying are the bullshit jobs described by David Graeber; the producers of environmental, intellectual and risk pollution; DWP and Border Force staff who harrass benefit claimants and migrants; or those in the bloated financial sector. Job destruction, as I've argued, is not a task which can be left to the market.

It is, however, a question which Reeves is avoiding. Not only is she failing to see that "securonomics" and productivity growth are in tension, but she's not seeing that there must be losers from any serious attempts to raise economic growth - not just employers of low-wage workers, but also financiers and monopolists.

Yes, Reeves is breaking with New Labour in some respects, some of them welcome. But she's also continuing with them in at least one aspect - in not seeing that there are trade-offs and big conflicts of interest in economic policy-making.

Another thing: I'm also wary of Reeves' implicit assumption that we'll create lots of dynamic businesses if only we gave them easier access to finance. Whilst lack of finance is perhaps ones constraint on some firms, I suspect there are much bigger reasons for a lack of investment and entrepreneurship. But that's another story.

No magic money trees

John Rentoul has been mocked for claiming that "the Twitter consensus is that the magic money tree should pay to upgrade our sewage system". Such mockery is right; people think that water company owners should foot the bill. But John is dead right to alert us to the fact that, often, there are indeed no magic money trees.

His argument applies to privatizations. There is often no magic money tree that makes things more affordable in the private than public sector - as we see in water companies plans to make customers pay the costs of investing in the sewage system. 

But that's just one example of a general pattern. The public-private partnerships and private finance initiatives, which New Labour greatly expanded, kept public debt off the books by promising companies who built schools and hospitals big cashflows for many years. But these proved more expensive for tax-payers than ordinary government borrowing would have been, which was why Philip Hammond scrapped them in 2018.

The idea that there was a magic money tree the state could shake to finance schools and hospitals has been refuted. And there was, at bottom, a simple reason for this. Governments can borrow more cheaply than the private sector. Shifting debt from the public to the private sector thus increases borrowing costs. And given that companies are less able to bear high debt than governments - because they can't print their own money or raise tax - it also increases financial fragility, as we saw with the collapse of Carillion.

Another example of what I mean are pensions. It's sometimes said that the pensions triple lock is unaffordable. It's not. If it stays in place, state spending on pensioner benefits will rise from 5.9% of GDP now to just under 8% in 2057-8. This is much less than many European governments - such as in Germany, France Austria or Italy - spend on pensions today.

What's more to my point, though, is that if we don't provide for an income in our old age via the state will we have to do so privately. And it's here that there's no magic money tree. Private pension fund managers charge big fees which compound hugely over time, and they entail big investment risk and longevity risk - risks which the state is better able to carry.

Health care is another example of what I mean. Long NHS waiting lists are forcing people to go private. What people save in taxes by not funding the NHS is thus, for many, offset by paying for private care. Austerity - back door privatization - therefore does not always save money; it merely shifts the cost from the healthy to the ill. Again, there's no magic money tree.

The same applies to talk of reforming the NHS. Of course, the NHS is inefficient, but that's just another way of saying it is a large organization. But the same things that cause it to be inefficient - lack of management skill, vested interests, whatever - also make reform so damned hard. The last major efforts at reforming the system - the introduction of internal markets and Lansley's reforms - were so ineffective they were subsequently reversed. The idea that reform is a magic money tree which can substitute for increased spending is optimistic.

"There's no magic money tree" is usually used as an argument against extra state spending. But it can just as often - and sometimes with more justification - be an argument against privatization.

Now, there are two objections to this. One is that the Treasury's short-termism and failure to see that balance sheets have two sides puts a block upon public sector investment. Privatization gets round this and so is in effect a money tree, a way of releasing investment. This is why Blair and Brown greatly increased private finance initiatives. It's also why privatization began in earnest in 1984: Thatcher sold off BT to prevent big investment in the phone network from showing up in the government borrowing data.

We must not, however, mistake bureaucratic convention and groupthink for economic reality. The reality is that governments can borrow more cheaply than the private sector, and so escaping the maw of the Treasury adds to borrowing costs.

A second objection is that privatization might increase efficiency and so cut costs. But this only works if monopoly is replaced by competition. Which often hasn't been the case. Water charges are 4.3 times as high as they were when the industry was privatized, whilst electricity prices are 5.7 times as high: consumer prices generally are 2.3 times as high. There's little sign here of competition driving down prices.

My point here is simple. What stops us doing good things are lacks of real resources - of capital, labour, technology, materials and managerial skill. It is only if we can create or mobilize these that we can have more or better schools, hospitals, utilities or whatever. If you have a plan for doing this - and maybe some of Labour's proposals to reform the NHS do - then you have an intelligent policy. Otherwise, you are just wibbling about magic money trees. And this is as true of some rightists as of leftists.

What the people want

Years ago, before the Great Forgetting, economists knew that people's preferences often did not originate with themselves but were instead cultivated by producers themselves.

Inspired by Vance Packard's best-selling 1957 book, The Hidden Persuaders, J.K. Galbraith wrote:

Production fills only a void that it has itself created...That wants are in fact the fruit of production wll now be denied by few serious scholars...The even more direct link between production and wants is provided by the institutions of modern advertising and salesmanship. These cannto be reconciled with the notion of independently determined desires, for their central function is to create desires - to bring into being wants that previously did not exist. (The Affluent Society, p 132-3)

This, he wrote, brings into doubt the question of why we should satisfy those preferences:

The individual who urges the importance of production to satisfy these wants is precisely in the position of the onlooker who applauds the efforts of the squirrel to keep abreast of the wheel that is propelled by his own efforts...The fact that wants can be synthesised by advertising, catalysed by salesmanship and shaped by the discreet manipulations of the persuaders shows that they are not very urgent. A man who is hungry need never be told of his need for food. (p132,35)

Not that Galbraith's point was new. Aesop's fable of the fox and the grapes made precisely the point that our wants are shaped by what we believe to be available. As G.K. Chesterton said: "no man demands what he desires; each man demands what he fancies he can get" - a point developed in Jon Elster's superb book.

Nor are our wants shaped only by others' deliberate acts - as Aesop recognised. They are also determined by our peer group as Robert Frank has shown, or by our moods - unhappy people spend more and save less - or even by the weather; in the summer prices of houses with swimming pools and convertible cars are higher.

All of which has led psychologists to fear that what we want is a poor guide to what will make us happy. "People are systematically prone to make a variety of serious errors in the pursuit of happiness" says Daniel Haybron. And Christopher Hsee and Reid Hastie write:

People systematically fail to predict or choose what maximizes their happiness...These findings challenge a fundamental assumption that underlies popular support for consumer sovereignty...namely, the assumption that people are able to make choices in their own best interests.

This poses a question: might a similar thing be true in politics? Certainly, some of Galbraith's near-contemporaries thought so. Peter Bachrach and Morton Baratz argued (pdf) that one aspect of political power was that "some issues are organized into politics while others are organized out":

Of course power is exercised when A participates in the making of decisions that affect B. But power is also exercised when A devotes his energies to creating or reinforcing social and political values and institutional practices that limit the scope of the political process to public consideration of only those issues which are comparatively innocuous to A.

Brexit is an example of this. Before 2015, less than ten per cent of voters thought the EU was the most important political issue, whereas after 2016 half did so. This change was the product of political activity: the people we now call Brexiteers successfully agitated to organize Brexit into politics. The demand to leave the EU was catalysed by salesmanship and shaped by the not-so discreet manipulations of the persuaders.

Such activity might also explain the oft-noted paradox that hostility to immigration is (with some exceptions) greater in areas of low migration. It's because such hostility is manufactured, whilst those with actual lived experience of it can see it to be much less worrisome.

We might be seeing the same thing now. Politicians tell us it is possible to "stop the boats" but don't tell us it's possible to have economic democracy. Is it a surprise, therefore, that voters want one but not the other? It wouldn't be to Aesop, Chesterton, Galbraith or Elster.

In fact, we have stronger reasons to question political preferences than consumer ones. In our everyday shopping we at least sometimes learn from experience whereas in politics this is harder because political issues are sometimes new, and certainly arise in different contexts. Yes some regret voting for Brexit, but - unlike consumer goods - you can't take it back to the shop. And, of course, if we buy shoddy goods we lose money ourselves whereas with a bad vote the costs are spread across everybody, thus diluting our incentives to think carefully.

What's more, there's a powerful emergent process which shapes political preferences - that of adaptation. As Amartya Sen put it:

The deprived people tend to come to terms with their deprivation because of the sheer necessity of survival, and they may, as a result, lack the courage to demand any radical change, and may even adjust their desires and expectations to what they unambitiously see as feasible (Development as Freedom, p62-63)

Kris-Stella Trump has shown how this is true of inequality: the higher is inequality, she shows, the more likely people are to regard greater equality as legitimate. A plan to cut the post-tax incomes of the richest 1% by, say, one-third would seem very radical today - even though it would leave them better off relative to the rest of us than they were in the mid-80s. Such resignation to inequality means there is less demand for redistribution, even without any work by the media.

The converse of this is also true. The rich get an over-inflated sense of entitlement and so their minor peeves - such as not getting the precise type of Brexit they imagine in their fevered dreams - come to dominate political discourse.

So, yes, Galbraith's point does apply to politics. Why then should we make a fetish of what the public wants? Suella Braverman says "the British people want us to stop the boats". But why is this a reason for doing so?

For some thinkers, it's not. Daniel Hausman has argued that it is only rarely the case that there is a good ethical reason to satisfy preferences, and thinkers such as Byan Caplan and Jason Brennan have argued for restricting democracy.

Such a view isn't as radical as it seems. When Margaret Thatcher described referenda as "a device of dictators and demagogues" she was (deliberately) echoing Clement Attlee and Roy Jenkins. Parliamentary sovereignty is a different thing from popular sovereignty.

Thatcher, like her contemporaries in all parties, thought the job of politicians was not so much to sheepishly follow public opinion as to shape it. In her 1975 speech opposing the EU referendum, she approvingly cited a letter to the Evening Standard pointing out that if it had been left to the will of the people. "we would have no Race Relations Act, immigration would have been stopped, abortions would still be illegal and hanging still be in force."

But why have politicians lost that conception of politics and replaced it with the "customer is king" approach?

The mere fact that they seem unaware of these contrasting positions is itself confirmation of Bachrach and Baratz's point, that some questions are excluded from politics.

One possible answer is that we are indeed living in the dystopia described by Alasdair MacIntyre at the start of After Virtue: we've lost the ability to reason about moral and political issues because all we have are fragments of different, contradictory frameworks and traditions.

But there's another possibility. It lies in the fact that our political system is failing. Politicians are regarded with contempt, not least because they have no coherent answers to the failures of British capitalism. In light of this, "parliamentary sovereignty" has lost its appeal. Why not, then, invoke the will of the people?

But of course, the likes of Braverman are selective in their love of this will, being much keener to cut migration than to tax the rich or nationalize utilities. That's of course no surprise: the Tory party exists to support inequality and the status quo. What should concern us is that the Labour party also does so.

Why not celebrate full employment?

To someone of my generation, there's a curiosity about politics today - that the Tories are not making more of the fact that unemployment is remarkably low.

Two facts make this especially strange.

One is that the government has bugger all else to celebrate. As Henry Hill, a Tory sympathizer, says "the Government’s list of achievements is thin." NHS waiting lists are at a record high; real wages have stagnated for 15 years; shit is pouring into our rivers and seas; housing is unaffordable and sometimes uninhabitable; record numbers of people are dependent on food banks; and our poorest citizens are becoming poorer than those of Slovenia or Poland. Given this litany of abject shame, why not highlight the one area where the UK is doing well?

And near-full employment is indeed something to celebrate. Joblessness causes misery and crime (pdf), and can leave lifelong financial and emotional scars. As David Bell and David Blanchflower wrote (pdf):

Increases in the unemployment rate lower the happiness of everyone, not just the unemployed...Unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression.

Which was why, for so long, full employment was considered the prime goal of governments. Back when policy-making was influenced by men of intellect William Beveridge wrote (pdf) that being without work was a "personal catastrophe." "Idleness even on an income corrupts; the feeling of not being wanted demoralizes."

This isn't to say that one of Beveridge's "five giants" - idleness - is completely slain. Although the official unemployment rate is close to its lowest level since 1974 - a remarkable achievement given the nasty terms of trade shock that is high gas prices - there are still almost 1.8 million people out of the labour force who would like a job.

Nevertheless, the total out of work, at just under three million, is near a multi-decade low, and lower than anything reached under the New Labour government - although there are still more people under-employed now than there were for much of the 1997-2010 period.

Of course, it's not at all clear how far this is due to actual government policy. But there's no reason why this should stop the Tories claiming credit for it. A party that blamed Labour for the global financial crisis doesn't scruple about attributing economic outcomes.

Hence my puzzle: why are the Tories so quiet about this?

It could be that their silence is another symptom of their intellectual decline: they have lost the ability to think about economics. But I think something else might also be at work.

Of course, there would be an irony in the party of Thatcher - who denied that governments should have full employment as an objective - celebrating our proximity to its achievement. But the Tories have repudiated Thatcherism in other ways - in leaving the single market; in having the highest tax burden in 70 years; and in having a Prime Minister who wanted to "fuck business". So why not break with her in another way?

You might think it's because there is in fact little to celebrate. Many of the jobs created are low-productivity, low-paid and insecure ones.

In theory, however, full employment should be the solution to this problem.

For one thing, it should boost productivity as companies seek to replace scarce labour. Beveridge applauded "the stimulus to technical advance that is given by shortage of labour":

Where men are few, machines are used to save men for what men alone can do. Where labour is cheap it is often wasted in brainless, unassisted toil.

And for another, a sellers' market for labour-power should increase workers' bargaining power and hence, eventually, real wages.

Which brings us to the issue. There's little sign of either of these mechanisms working right now. The volume of business investment is still lower than it was in 2016. And real wages have actually fallen 2.1 per cent in the last 12 months.

This raises two dangers, one for all of us and one for the right.

The danger for all of us is perhaps that decades of abundant labour has caused bosses to lose the ability to replace labour with capital or to improve efficiency by any means other than brute coercion. If so, then it will be even harder than we think to raise productivity growth.

The danger for the Tories, though, is that workers won't always remain quiescent. We see their fear not only in their hostility to striking workers but also in Huw Pill's assertion that workers "need to accept" that they are worse off and stop bidding up wages*. What Beveridge saw as a benefit of full employment is for them a threat. As Kalecki famously wrote (pdf):

It is true that profits would be higher under a regime of full employment than they are on the average under laisser-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus affects adversely only the rentier interests. But "discipline in the factories" and "political stability" are more appreciated by the business leaders than profits. Their class instinct tells them that lasting full employment is unsound from their point of view and that unemployment is an integral part of the " normal " capitalist system.

Yes, unemployment poses challenges for the left. But it's a bigger problem for the right.

* Pedants might point out that Pill is a Bank of England economist and not a Tory. But as Arnaud Amalric said: "Caedite eos. Novit enim Dominus qui sunt eius."