03 July 2017 6.00pm
Britain's long‑term growth
Speaker: Prof Timothy Besley, London School of Economics
Speaker: Prof Nick Crafts, University of Warwick
The SBE was very pleased to invite two well known figures in the world of economics to debate the future of economic growth, with Professor Nick Crafts and Professor Tim Besley speaking at the July evening meeting - jointly held with the Government Economic Service and kindly hosted by Ashurst.
Listen to our interview podcast with the two speakers here:
and the recording of the meeting here:
Professor Crafts kicked off the debate by talking about Robert Gordon’s 2016 book, “The Rise and Fall of American Growth”. In the book, Gordon argues that total factor productivity has followed an inverted U shape, with the “special century” between 1870 and 1970 never to be repeated. Gordon talks of the Great Inventions in the second industrial revolution (electricity, chemicals etc) but argues that the subsequent ICT revolution has made only a small contribution to productivity.
Professor Crafts’ critique of Robert Gordon’s book begins by noting that there is little quantitative evidence for his contentions. Rather than a “Special Century”, Nick argues that the golden age for productivity was between 1929 and 1950 - when living standards improved dramatically thanks to improved effectiveness of medicines and the associated fall in mortality. Professor Crafts notes that the period would have been even better for productivity had it not been for the Great Depression and Second World War, and concludes that investment in health is a very worthwhile cause.
There are a number of reasons as to why productivity might have slowed despite the innovation in technology. The two major competing explanations are a) that innovations now have a lower economic impact than the past (Gordon’s view) and b) that technology will have a high economic impact but it hasn’t arrived yet (the view of MIT’s Erik Brynjolfsson).
In this respect Professor Crafts argues that other major inventions also took time to impact on growth - steam, for example, took a century to develop sufficiently for it to have its maximum impact, while the equivalent lag for electricity was around 40 years. “Technologies do not come fully fledged on day one”, as Nick points out. Redesigning factories to adapt to new technologies takes time - the question is whether we are better at adapting now than in the past.
Other potential explanations for weaker productivity are mismeasurement of GDP (though Professor Besley notes that GDP has always been underestimated so this is unlikely to be a reason for recent productivity disappointments), declining business dynamism (such as weaker contributions to productivity from the entry of new firms) and overregulation (the evidence for which is dismissed as negligible by Professor Crafts).
While Professor Crafts argues that the slowdown in productivity is real, it is not necessarily permanent. Brynjolfsson thinks it will improve going forward, while Gordon provides little evidence to show that even past great inventions have been good for total factor productivity growth. Professor Crafts highlights the work of Harberger (1998) who argues that total factor productivity growth “mushrooms” progressively via the widespread adoption of technology rather than through any individual great invention. In summary, Professor Crafts argues that Gordon’s book is better on challenging ideas rather than providing hard evidence.
Professor Tim Besley continues the debate by initially quoting Keynes’ concerns about growth discussed in his book The End of Laissez Faire. Professor Besley’s talk centres on four phases of policy thinking. In the first, “normative”, phase he discusses why markets fail and why governments therefore decide to step in. The second phase relates to the “challenge of government failure” - surrounding the reasons of ignorance, incentives and incompetence. The third phase is that “institutions matter” - how to design structures that make democracy work. And the final phase is how the state acquires the “capacity” to intervene competently, both by supporting and augmenting markets.
When writing the economic history of the twentieth century Professor Besley argues that the stand-out observation is the increase in tax revenue raised by governments - from less than 10% in the early 1900s (a level that Schumpeter noted was likely to be an upper limit) to over 40% today (based on a sample of eighteen countries).
Professor Besley identifies two periods over the past 70 years in relation to state intervention. During the period from 1945 to 1980 the state successfully extended its capacity regarding national health and education, though failed in the 1970s economic mismanagement and by nationalising industries. Then, between 1980 and 2008, Britain rethought state capacity with successes seen in the realms of privatisation, openness and competitiveness. The result was that GDP per capita overtook once again that of France, Germany and America.
There has been a consensus post-1980 for privatisation, flexible labour markets, university education, openness and tax/GDP ratios no higher than 37.5% - though we are beginning to see push-back on some of these, such as the resumption of an industrial strategy which had been taboo since the early 1980s.. Professor Besley concludes by stating his concerns that the latest government industrial strategy does not have any well-defined framework. A new analytical-based model of intervention is required when it comes to industrial strategy.