Productivity growth and classical economics


I wasn’t going to bother with the story because its title was so ridiculius – Britain’s Productivity Decline Is the Worst in 250 Years – as if you could measure productivity going back even sixty years. But what they show in the chart is true enough, and about which I have been writing quite a bit. The Keynesian “stimulus” has been a disaster everywhere it has been tried, with the example here the UK. To compound their idiocies, this is what they wrote:

Productivity was almost 20% below its pre-2008 path in 2018 — the worst slowdown since 1760-1800, as the Industrial Revolution took hold. The present-day malaise may have been caused by the end of the information and communications technology boom, the financial crisis, and Brexit.

And the authors are, of course, part of the mainstream and at its very heights:

It’s a “shockingly bad” performance, said Nicholas Crafts, who co-authored the paper with Terence Mills, researchers at the University of Sussex and Loughborough University. The findings will published by the National Institute Economic Review on Feb. 6.

Productivity is here measured as output per hour worked. If the government diverts production from the private sector to its own public agenda, you inevitably get a vastly diminished level of value-adding production, even though employment continues to increase because the real wage adjusts. Why people cannot see this is amazing to me, but here is yet more evidence of just how out of it economists now are. That the period in question is the period following the GFC ought to have been a clue, but Keynesians – i.e. modern macroeconomists – are notoriously clueless.

Let me again mention the cover description for my next book:

‘Classical Economic Theory and the Modern Economy’

Steven Kates

Economic theory reached its highest level of analytical power and depth in the middle of the nineteenth century among John Stuart Mill and his contemporaries. This book explains classical economics when it was at its height, followed by an analysis of what took place as a result of the ensuing Marginal and Keynesian Revolutions that have left economists less able to understand how economies operate.

Chapters explore the false mythology that has obscured the arguments of classical economists, clouding to the point of near invisibility the theories they had developed. Kates offers a thorough understanding of the operation of an economy within a classical framework, providing a new perspective for viewing modern economic theory from the outside. This provocative book not only explains the meaning of Say’s Law in an accessible way, but also the origins of the Keynesian revolution and Keynes’s pathway in writing The General Theory. It provides a new look at the classical theory of value at its height that was not based, as so many now wrongly believe, on the labour theory of value.

A crucial read for economic policy-makers seeking to understand the operation of a market economy, this book should also be of keen interest to economists generally as well as scholars in the history of economic thought.

My book is premised on the belief that a modern economist is incapable of understanding what’s wrong with modern economic policy. This paper proves it all once again.

If you are looking for some serious pessimism try this

Two articles about a pretty bleak economic future driven by the usual combination of leftist ignorance and envy. The first is on Impoverishment: America’s New Normal. It’s not just America’s but will be shared out among the formerly first world economies of the once free-market West.

The defining American middle class is devolving toward poverty. The 1970’s brought an undeniable economic retreat: the disappearance of the traditional middle class housewife into the workplace. A declining standard of living was heralded as a feminist triumph. The linked map illustrates the accelerated middle class economic decline since the 2008 financial crash; today, 20% of American families include no workers and most Americans receive government benefits….

Rather than awaiting recovery, the people and even more, the government, need to learn again what is needed to survive in a world where others have risen up to compete. Until then, impoverishment seems likely to be the new normal for America and for similar reasons, for much of the rest of the world as well.

That was the good news story. There is then this second article. Let me start with the final para which is not as farfetched as you might like to think although it goes a step or two too far even for me. But who’s to say this is not actually possible:

For us Westerners, living standards equality with the Third World appears inevitable, probably within the next 20 years. The only question is whether emerging markets will in turn acquire Western “barnacles,” thereby reducing the entire planet’s living standards to a level at which the Industrial Revolution might just as well never have happened.

Well, we will still have our TVs and iPhones so there will be something. But it will not be the kind of flush economic security that we were all once so used to. Our political and economic understanding is so pitiful and we are driven by a short-term shallowness that is terrifying if you have the kind of vision discussed.

U.S. productivity growth declined from 2.8% per annum in the period 1948-73 to 1.8% per annum in 1974-2010 to 0.6% per annum in 2011-15 – almost entirely owing to regulation rather than to public sector bloat, which has increased only moderately since 1970. However the EPA and other big regulatory agencies date to the 1970s, and coincide eerily with the end of the post-war U.S. productivity bonanza. Monetary policy, by distorting the free market’s asset allocation process, undoubtedly bears part of the responsibility for the further post-2011 slump in productivity, but there’s no question the Obama administration’s thirst for regulation has made matters worse. Only in retrospect will we be able to allocate blame accurately between the two factors.

As well as a bloated public sector and excessive regulation, there are other ways in which rich countries increasingly diverge from the free-market ideal. Infrastructure projects’ costs are outrageous in modern Western economies, a large multiple in real terms of their costs 50 or 100 years ago.

That’s not because we have got less efficient at laying concrete or building bridges. It’s because of the tangled mass of regulations on safety, environmentalism, workforce and other matters, none of which are costed properly, each of which adds substantially to the expense and delay in building infrastructure, and the combination of which is devastating.

There’s quite a bit more which you might read for yourself. This last bit is something I also agitate about but how few now have any idea what he is even talking about.

Finally the ultra-low interest rates of the last 7 years have sapped Western savings (a tendency exacerbated by generous welfare systems). With savings inadequate, the capital endowments of Western economies have shrunk and have also been diverted into unproductive speculation and asset investment. Anyone who thinks the current level of London house prices does anything at all for the true wealth and productivity of the British economy is living in economic dreamland.

We may find it all unravelling more rapidly and more comprehensively than anyone is currently prepared to believe. And because of the way our political systems are designed, there will be not a thing anyone will be able to do.