Against Scooby Doo ideology

There's an unspoken and apparently unquestioned presumption at the centre of this government's economic policy. We saw three examples of it this week.

The first came in Starmer's speech at an investment summit where he said:

We’ve also got to look at regulation – across the piece. And where it is needlessly holding back the investment we need to take our country forward…we will get rid of it.

However, the only example he gave of such regulation was how planning restrictions prevent the building of wind farms. That's a good example, but one he gave before the election. In his three months in power he has not, it seems, discovered any more.

The second and third examples are Wes Streeting's proposal to give the unemployed weight loss injections to help them get back into work, and Liz Kendall's idea for job coaches to visit the severely mentally ill in hospital to get them into work. Both echo the 1997-2010 Labour government which saw itself as capitalism's human resources department, ensuring a pliable supply of labour. As Stuart Hall said (pdf), that government "set about vigorously adapting society to the global economy's needs."

What these examples have in common is a belief that British capitalism is fundamentally dynamic and efficient.

Which is doubtful. Growth has slowed markedly in recent years. My chart shows that in the last ten years GDP per hour worked has grown by less than 1% per year. That's only a fraction of what we saw in the post-war "golden age" of capitalism, and close to the lowest growth rate since the long depression of the 1870s. This is despite the fact that governments have spent the last 40 years giving capitalism's loudest voices mostly what they want, such as lower top tax rates and weaker trades unions.

This week's remarks suggest that Labour seems to think this slowdown is because capitalism has been restrained by stupid government or by a defective working class. Which is not much different from the Tories blaming the deep state or bureaucratic class.

Both parties seem to have the Scooby Doo theory of capitalism: "I'd have succeeded if it weren't for those meddling kids."

There is, however, an alternative possibility. It's that capitalism itself has developed forces which reduce growth. I'll list five, though they are interconnected.

First, profit rates have fallen thereby reducing incentives to invest, as documented by economists such as Michael Roberts, Tomas Rotta and Rishabh Kumar. Note that what matters here is not just current profit rates (which are hard to measure because the capital stock is hard to measure) but expected ones. It's reasonable for companies not to invest in new technologies if they fear that future progress in AI or robots will render those investments unprofitable. William Nordhaus famously showed that companies captured "only a miniscule fraction" of the social returns from technological advances between 1948 and 2001 because profits were indeed competed away. Any manager who has learned from this will be loath to invest.

Secondly, David Ricardo had a point: rising rents are crowding out other forms of economic activity. The problem here isn't mere farmland, as Ricardo thought. It's wider than that, as Brett Christophers has shown. We're handing so much money over to owners of prime residential or commercial land, to owners of oil and gas fields, intellectual property and infrastructure that there isn't enough left to create enough demand for dynamic sectors of the economy.

Thirdly, there's Baumol's law. As Dietrich Vollrath says:

Most service industries have relatively low productivity growth, and most goods-producing industries have relatively high productivity growth. As we shifted our spending from goods to services then, this pulled down overall productivity growth. (Fully Grown, p5)

Of course, this could change: in principle, AI and LLMs could make lawyers and accountants redundant. But this is not the world we live in today.

Fourthly, capitalist inequalities - not just of income but also of power - can themselves slow growth. It encourages the rich to invest not merely in increasing aggregate productivity but in methods to protect their privilege and power - be it in guard labour (pdf) such as supervisory staff, technologies such as CCTV or keylogging, or simply lobbying government. It can reduce trust (pdf) which depresses growth by making us loath to invest in risky projects, or by worsening the quality of government policy. A low-wage economy can discourage investment in labour-saving technologies. And big wage differences between CEOs and less senior managers encourage office-politicking and working towards measurable (pdf) targets (such as selling risky financial products) rather than strengthening corporate culture.

Finally, in creating winners capitalism creates powerful groups with a vested interest in maintaining stagnation: incumbent companies wanting to restrict competition; financiers wanting the low interest rates that economic stagnation brings; lawyers and accountants wanting a complex tax system that strangles growth; or landlords opposing new building or property taxes. Why bother investing in new projects if you have a monopoly position with a cushy job and big income? Why should you set up a new company if you have a big salary from a corporate bureaucracy? And why bother competing in a market economy when you can lobby government instead for protection, subsidies and tax breaks? As Joel Mokyr wrote:

Technological progress encounters resistance from various groups that believe they stand to lose from innovation. These pressure groups will try to manipulate the political system to suppress successful innovation….Under fairly general conditions, it can be shown that the single economy will move inexorably to an absorbing barrier of technological stagnation.

All this of course echoes Marx:

At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters.

We might have reached this stage of development. If so, raising economic growth requires more than deregulation and the harassment of fat people and the depressed. It requires instead an attack on rich and powerful vested interests.

The problem is, though, that there is no political debate about this. Questioning capitalism is off the agenda. Faith in it is based more in ideology and wishful thinking than in evidence. Refusing to engage with the left, however, now means refusing to engage with reality.

Comments

[rsm]

Where does our blogger's analysis leave people like me, who are suspicious of growth because it has been correlated with personal tragedy (suicide of a sibling who was doing the neoliberal-prescribed thing of being a highly-paid corporate manager), and suspicious of wind farms because they have reduced the public land I am able to access, while the USA Energy Facts page on the eia.gov website clearly shows a 10% energy surplus in the US?

[Kester Pembroke]

Blissex before you comment here watch this video:

https://www.youtube.com/watch?v=dqwpQarrDwk

[Mick Beaman]

One of your best posts Chris.

[LTR]

Splendid post.

[dilberto]

Capitalism and socialism are two means of managing progressive change (economic growth and development) a process of change which like all change is inherently selective, so the outcome and effects of that process will ultimately be the same for both systems. Where they differ is in the contrasting manner of their management and in their relative efficiency, capitalism uses economic incentives while socialism uses compulsion. Those differing means being reflected in the contrasting nature of capitalist and socialist societies.

Austerity is not really a choice, it is a question of paying our bills or not paying our bills when the creditor is largely ourselves. It is the reality for an economy which has reached the limits of its capacity for growth and is adapting to the effects of the reversal of that growth (secular stagnation). The choice, such as there is one, is whether we accept that reality or refuse to accept it. Extreme economic measures are the result of self interested progressive parties trying to continue that economic growth when its effects are making conditions increasingly intolerable economically and culturally for the bulk of their population.

[Simple Simon]

Thank you for pointing out Marx's prescience regarding the declining rate of profit which is reflected in declining growth in productivity. The rate of profit (on real investments) is to be contrasted with the growth of monopoly rents that is fueling corporate profit growth (all those fetters).

One actually can observe the phenomenon in the stock market where this declining rate of profit is reflected in ever more elevated asset prices and an equally desperate search for sources of growth (Nvidia, anyone?).

I don't think Marx saw the connection but, if he had, he would have made a killing in property as well as stocks.