Neoliberalism has failed to boost productivity. Social democracy has a better record

Productivity growth was higher from 1945-1972 than under Thatcherism

 

Chris Edwards says the privatizations started by Thatcher ‘transformed the British economy’ and boosted productivity. This raises an under-appreciated paradox.

The thing is that privatization isn’t the only thing to have happened since the 1980s which should have raised productivity, according to (what I’ll loosely call) neoliberal ideology.

Trades unions have weakened, which should have reduced ‘restrictive practices’. Managers have become better paid, which should have attracted more skilful ones, and better incentivized them to increase productivity.

And the workforce has more human capital: since the mid-80s, the proportion of workers with a degree has quadrupled from eight per cent to one third.

Neoliberal ideology, then, predicts that productivity growth should have accelerated. But it hasn’t.

In fact, Bank of England data show that productivity growth, averaged over 20 years, has trended down since the 1970s.

Why?

It could be that neoliberal reforms did give a short-lived boost to productivity. I’m not sure. As Dietz Vollrath says, economies are usually slow to respond to a rise in potential output. If there had been a big rise in potential output, therefore, it should show up in the data on 20-year growth. It hasn’t.

Another possibility is that the productivity-enhancing effects of neoliberalism have been outweighed by the forces of secular stagnation – the dearth of innovations and profitable investment projects.

But there’s another possibility – that neoliberalism has in fact contributed to the productivity slowdown.

I’m thinking of three different ways in which this is possible.

One works through macroeconomic policy. In tight labour markets of the sort we had in the post-war years, employers had an incentive to raise productivity because they couldn’t so easily reply upon suppressing wages to raise profits.

Also, confidence that aggregate demand would remain high encouraged firms to invest and so raise capital-labour ratios. In the post-social democracy years, these spurs to productivity have been weaker.

Another mechanism is that inequality can reduce productivity. For example, it generates (pdf) distrust which depresses growth by worsening the quality of policy; exacerbating “markets for lemons” problems; and by diverting resources towards low-productivity guard labour.

A third mechanism is that neoliberal management itself can reduce productivity. There are several pathways here:

– Good management can be bad for investment and innovation. William Nordhaus has shown that the profits from innovation are small. And Charles Lee and Salman Arif have shown that capital spending is often motivated by sentiment rather than by cold-minded appraisal with the result that it often leads to falling profits.

We can interpret the slowdowns in innovation and investment as evidence that bosses have wised up to these facts. Also, an emphasis upon cost-effectiveness, routine and best practice can deny employees the space and time to experiment and innovate.

Either way, Joseph Schumpeter’s point seems valid: capitalist growth requires a buccaneering spirit which is killed off by rational bureaucracy.

– As Jeffrey Nielsen has argued, “rank-based” organizations can demotivate more junior staff, who expect to be told what to do rather than use their initiative.

– The high-powered incentives offered to bosses can backfire. They can incentivize rent-seeking, office politics and jockeying for the top job rather than getting on with one’s work. They can crowd out intrinsic motivations such as professional pride.

And they can divert (pdf) managers towards doing tasks that are easily monitored rather than ones which are important to an organization but harder to measure: for example, cost-cutting can be monitored and incentivized but maintaining a healthy corporate culture is less easily measured and so can be neglected by crude incentive schemes.

– Empowering management can increase opposition to change. As McAfee and Brynjolfsson have shown, reaping the benefits of technical change often requires organizational change.

But well-paid bosses have little reason to want to rock the boat by undertaking such change. The upshot is that we are stuck in what van Ark calls (pdf) the ‘installation phase’ of the digital economy rather than the deployment phase. As Joel Mokyr has said, the forces of conservatism eventually suppress technical creativity.

All this is consistent with the Big Fact – that aggregate productivity growth has been lower in the neoliberal era than it was in the 1945-73 heyday of social democracy.

I’ll concede that this is only suggestive and that there might be another possibility – that the strong growth in productivity in the post-war period was an aberration caused by firms catching up and taking advantage of pre-war innovations.

This, though, still leaves us with the possibility that slow growth is a feature of normal capitalism.

Chris Dillow is an economist and author of The End of Politics. He blogs at Stumbling and Mumbling, where this article first appeared. Follow him on Twitter CJFDillow

See: Reading George Orwell can help close Labour’s class divide

8 Responses to “Neoliberalism has failed to boost productivity. Social democracy has a better record”

  1. Michael WALKER

    Any article on productivity that does not discuss in great details the huge changes brought on by the largescale adoption of automation in production and office work is worthless.
    Take the car industry. In the 1970s and before car bodies were built by assembling steel panels on jigs, clamping them together and manually welding them. Today that is entirely automated.
    Ditto the manufacture of almost everything. Ditto the management and operation of warehouses.

    Once you have made those major changes in productivity, the next changes are incremental – faster robots – so the productivity growth slows.

    Unsurprisingly enough, the article does not mention that…

  2. Mir Mohammad Ali Khan

    Everything will be better for there environment prospectus.

    Regards
    Mir Mohammad Ali Khan

  3. Andy Wallace

    Michael Walker’s comment suggests that we should have seen major leaps in productivity in the 1980s onward. That was when technologists were exploring the power of microprocessors and digital storage and recall, and were designing industrial automation. I don’t see this in the overall graph, what I see is a fairly steady decline. Which suggests that leaps in specific industries were overtaken by a catastrophic fall in the rest of business.
    Walker talks of productivity growth slowing, but the real graph shows a steady fall since the oil-hike stagflation of the ’70s right through the banking crash. Yes, all the way through the Thatcher transformation and the neoliberal heyday. It’s about a bit more than technology – it’s the economy, stupid.

  4. John

    It’s worth noting that, with the decline in manufacturing, productivity itself has changed. Where before, production will result in a physical good, today most of out GDP (an overwhelming amount, in fact) is based on financial services; few if any of which result in a physical product.

    It is perhaps not surprising to see a decline in productivity, as the focus shifts away from easily-automated industries to less-easily automated services.

  5. Stephen Smith

    If you can’t dazzle them with brilliance, baffle them with bullshit.

  6. John Reilly

    To see how successful an economic system is for ordinary people (like me) it is, IMHO, far more useful to focus in the growth in per capita GDP. Any idiot can see, from the graph below, how successful capitalism has been in terms of raising living standards in the period of so-called “neo-liberalism”….

    http://www.tradingeconomics.com/united-kingdom/gdp

  7. Andy Wallace

    I see my comment of yesterday failed your moderation process. I’d be grateful if you could explain why.
    Regards
    Andy Wallace

  8. BarryS

    John posted “To see how successful an economic system is for ordinary people (like me) it is, IMHO, far more useful to focus in the growth in per capita GDP. Any idiot can see, from the graph below, how successful capitalism has been in terms of raising living standards in the period of so-called “neo-liberalism”….”
    Does the distribution of wealth matter? 95% of income gains are going to just 1% of the population.
    If the bottom 95% were experiencing income growth, they might believe in neoliberalism. As it stands, most Brits have seen their incomes stagnate or decline.

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