Productivity growth and classical economics

Trade-off

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. This is what the authors of the paper 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 inevitably wasteful 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, which also takes us back to the start of the Industrial Revolution:

‘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. The paper discussed demonstrates yet again how true this is.

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16 Responses to Productivity growth and classical economics

  1. 2dogs

    Population growth causes inequality. The empirical result on that is quite strong.

    Low productivity growth can be a feature of that, as the “invisible hand” ends up preferring solutions that use more labour rather than making that labour more productive.

  2. Driftforge

    If the government diverts production from the private sector to its own inevitably wasteful public agenda

    This notion – that government agendas are inevitably wasteful – is just as indicative of our society’s failure to recognise what is wrong with government as the paper is about our failure to recognise what is wrong with economics.

  3. Roger

    ‘Classical Economic Theory and the Modern Economy’

    Will there be a dumbed down version for politicians?

  4. Tom

    “Record employment has come at the cost of abysmal productivity growth”

    Looks to me the white line in that chart describes the growth in government outlays in the past decade, which have zero productivity or economic benefit and are an added dead weight on the real economy.

  5. MPH

    Also shows you where the ‘growth’ has been – services, which is usually someone paying for something they used to do themselves.

  6. H B Bear

    Taxing people to pour money into the black holes of State education and health cannot be helping.

  7. Pyrmonter

    That attack on Crafts, and implicitly on a dozen other, very able economic historians, including Floud, McCloskey and the cliometricians of modern economic history is unwarranted, bordering on the foolish. This is how nonsense like the work of Hobsbawm gains traction over that of people like of Max Hartwell. Sometimes I wonder, which is the more heterodox: Kates or Kelton?

  8. Tim Neilson

    Bernard Woolley : I don’t think Sir Humphrey understands economics, Prime Minister. He did read classics, you know?

    James Hacker : How about Sir Frank? He is head of the Treasury.

    Bernard Woolley : Well, I’m afraid he’s in even greater disadvantage in understanding economics. He’s an economist.

    [“Yes Prime Minister”]

  9. Spurgeon Monkfish III

    Well, I’m afraid he’s at an even greater disadvantage in understanding economics. He’s an economist.

    Game set and match, Lord Woolley GCMG.

  10. Pyrmonter

    @ Spurgeon

    Sir Bernard was never ennobled in the authoritative Hacker diaries (in the publication of which he assisted the editors, gratefully noted in the foreword).

    He received the GCB, the Knight Grand Cross of the Most Honourable Order of the Bath. It’s rarer, and shows greater distinction than life peerages, which are for sale from the Party Treasurers of whichever party is in power.

  11. Tel

    Taxing people to pour money into the black holes of State education and health cannot be helping.

    It helps add numbers to the tally under the heading “Productivity” if that’s what you mean.

  12. Tel

    Britain’s Productivity Decline Is the Worst in 250 Years

    Ignoring for a moment the weird measurements that go towards “Productivity” and the question of meaningless statistics … both lines in the graph are trending upwards, therefore we have more people working, and per person they are producing more as well. So even on their own terms this “productivity decline” is utter bullshit, nothing has declined.

  13. TFX

    I suggest everyone get used to low productivity growth. Have economists forgotten the Solow Swan model on total factor productivity and the consequent increases in real wages. The technological frontier is not moving very quickly for frontier economies. Robert Gordon from Northwestern University in the US has documented the technological slowdowns in a variety of industries in the US. In Australia, it is well documented for our agriculture sector – a technological frontier industry – has had diminishing marginal returns to research with the consequent lower productivity growth. This is being repeated around the world at the frontiers. Those behind the frontier can catch up, as China is doing, but the future then looks bleak. Solow made the quip that we can see the electronics revolution everywhere except in the productivity statistics. My favourite data points demonstrating this are the average age of when science Nobel prize winners made their discoveries has increased by about a decade since the introduction of the prizes. When they are introduced there were estimated to be 1000 physicists in the world. Now there are estimated to be 1 million physicists and a recent Nobel physics prize paper had over 1000 authors, of which only a maximum of three could be called Nobel laureates. In both cases we have seen changes of three orders of magnitude. People had better get used to much lower real wage increases compared to the past.

  14. Spurgeon Monkfish III

    Pyrmonter – I was recalling the conversation where Humpey and Bernardo explain to Hacker the titles of the various knighthoods, with GCMG being the pinnacle, “God Calls Me God”.

  15. Pyrmonter

    @ Spurgeon

    Indeed. But the Michael and George is for the FCO and commonwealth appointees – so there used to be lots of Australian Ks and a few Gs. It has its origins in the now very obscure protectorate of the Ionian islands. Domestic UK civil servants get the BE or Bath (or, very rarely, the Thistle or Garter)

  16. John A

    Roger #3313567, posted on February 5, 2020 at 10:04 am

    ‘Classical Economic Theory and the Modern Economy’

    Will there be a dumbed down version for politicians?

    Yes, that would only take one sentence:

    “Shut up, and stop spending our money!”

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