Baumol says the answer is more markets

Larry Elliott treats us to an analysis of where it’s all going wrong:

Three factors were behind the massive jump in productivity in the middle decades of the 20th century: ideas, investment and the struggle against inequality. Economies only really started to motor when new products were available to the masses through policies that encouraged full employment, collective bargaining and rising wages. Currently, there are plenty of ideas but the other two factors are missing. Until that changes, the global economy will be stuck in its low-growth rut.

As you might imagine there are certain aspects of that we don’t agree with. But the big one there, yes, we do. As Paul Krugman has been known to note, productivity isn’t everything but in the long run it’s pretty much everything. By far the largest determinant of living standards. So, assuming that we want our future selves to be richer, our children too, we desire to increase productivity.

The big question is how to do that of course?

One observation we would make is that what new tech there has been introduced in recent years has been in new fields. There’s been very little - comparatively - change in the way we do old things. Which isn’t how a new technology - this internet, web, AI and so on - is supposed to work. Electricity changed everything, as did steam before it. So, why is there this failure of the new to disrupt the old? We’d put forward the idea that there are too many protections for those old ways of doing things. Say, train unions insisting that guardless, or driverless, trains may not be used even as we know - Docklands light rail for example - that they do in fact work. We’re not being allowed to automate because the current economic set up produces too many of Warren Buffett’s moats to protect the old ways.

The regulatory fightback against Uber/Lyft and so on is another example of this.

We thus need to strip the regulatory state of much of its power in order that the competition from new tech is allowed to eat those old ways.

A more theoretic view comes from Willam Baumol. Many will know of his insistence that services will become more expensive, relative to manufactures, as the economy develops and we as individuals become richer. The mechanism is that average wages - as per Krugman - are determined by average productivity. But productivity is easier to improve in manufactures than services. Therefore, given the labour inputs to each over time, services become relatively more expensive.

This is true, but does need the addition of the other leg of Baumol’s work. What is it that drives productivity improvements? It’s market pressures, competition. Improving productivity in services is not impossible, just more difficult. Therefore we need more market pressures, more competition, in services than we do in manufactures. Which leads us to again insisting that we must strip the regulatory state of its ability to protect the old ways from that beneficial competition.

For example, the NHS is fully - at least - one tenth of our economy. Sweating an increase in productivity out of that will have as much effect on living standards as an increase in manufacturing. Which is also, as it happens, about 10% of our economy.

Assume that the original diagnosis is correct for a moment. We’ve not been getting the productivity improvements we’d like to have had and need to reorganise in order to gain those we could have in the future. The answer is markets, markets red in tooth and claw. For those are what do indeed improve productivity.

Markets with the freedom of entry - you know, free markets?