Another day, another post from people who care about poor people lamenting the fact that poor people are getting richer

IPPR‘s report is significantly less provocative than the post promoting it on Liberal Conspiracy, but I still don’t like the framing. The IPPR argue that challenges from BRIC nations mean that Britain faces some sort of new and particularly challenging economic policy dilemma. [1] Britain’s problems are well documented:

  1. Low and skewed business investment
  2. Weak skills base
  3. Less innovation and lower productivity
  4. Limited presence in emerging markets

There is a long and ignoble tradition in British politics of despairing as our trading partners overtake us in terms of income or technological prowess. The above bullet points from IPPR would need address even without the BRIC economies growing. But, in fact, some of those will be mitigated by the growing wealth of our trading partners.

1) At the end of the nineteenth century the UK was the wealthiest and most powerful country in the world. However, Britain was being overtaken in terms of living standards and productivity by both the United States and Germany.

There were a number of reasons for this. One often overlooked reason for this was that Britain had a lot of accumulated capital in various industries and it just didn’t make sense to ditch it and replace it with shiny new machines from Germany and America. However, the main reason Britain fell behind was technological.

The chemical industry needed vast economies of scale to run successfully, both because it was capital intensive and because the processes were easily scalable so there were massive returns to scale. Germany cartelised this industry creating huge unwieldy firms, but their unwieldyness was offset by their scale efficiencies. Britain’s market was too competitive so no one firm could reach the necessary scales of production or produce high enough profits to take the lead in R&D.

The other leading sector was mass production, especially in cars. The US led in this industry for a couple of reasons. The most pertinent reason being the scale of the American market, which was larger and more homogenous than any other in the world. The technology fit the surrounding market. Nothing like River Rouge would have been economically viable in Britain. No economic policy could have made it so.

 So one lesson we have to learn is that sometimes certain countries will see productivity booms which others won’t. Creating cartels is often not a good idea so British competitive capitalism was a sensible bet ex ante. Likewise, the US had the scale to be the first mass-market, maybe only India and China have the scale to be the first hyper-market. We shouldn’t sweat smallish differences in economic performance, they are inevitable and efforts to “correct” them may only be counter productive.

Adopting anti-competitive practices in the 1940s-70s meant that terrible managers could run companies badly without being forced to stop. The cartelisation strategy which worked so well for Germany decidedly didn’t when adopted under different circumstances. More competition helped restore the British industry to ruder health.

2) A significantly less rosy picture I have for Britain’s NEETS and unskilled. Those jobs will come back. As BRIC countries become wealthier it will make less sense for low productivity jobs to be located far away, there,  from the market for their goods, here. So having an unevenly skilled population in the UK won’t matter, because as poor countries get rich, rich countries will get poor jobs. Not nice, but it mitigates against the worries that we will have an economy of unqualified do-nothings and latte-sipping computer coders.

3) Luckily I have nice news on productivity. A lot of productivity gains, especially in IT has goes unrecorded. The story goes like this. Purchasing a lot of IT supplies, programmes and paraphernalia is expensive, but it is investment and should pay off.

Another thing which is expensive is reorganising firms to take full advantage of potentials for improvements from using your IT investment better. The hiring and firing, the organisation flow diagrams, the endless, endless meetings! Those all go down as consumed resources, not investment. However, they are investment, subsequent IT upgrades will be easy to adopt and new technology will fit into the reworked organisation. This means complimentary investment which accompanies IT projects is often systematically understated.

This is especially true in services where a lot of value is added by the organisation working efficiently. Britain is a very service orientated economy so the good news is our lack of investment has been understated by more than other countries. I would personally like us to move away from finance, but I have to say we have invested in this sector more than official figures suggest.

4) Britain does have limited presence in emerging markets but that is a long-term problem which will affect us immediately only if our trading partners over on the other side of the channel implode. I don’t have the data to hand, so treat this graph from John Ross as illustrative only.

Even developed economies growing slowly add a lot of value. Look at Canada’s 30 million people add nearly as much extra as Russia’s 130 million. In absolute terms Canada is beating on Russia too. Not working in emerging markets is not a huge problem yet. Working there is dangerous, the rewards are uncertain, they culture is alien, the risks are high, and the rewards are not necessarily significantly larger than those available in developed, wealthy, safe countries.

So long as British firms get a toe hold in emerging markets they will do fine, being first mover in economies as fractious and turbulent as those in the developing world is not always an advantage. Benign neglect may well be the best policy towards encouraging firms to expand overseas for the time being.

Sorry this is all a bit of a ramble, but I hope my point is clear. What happens elsewhere in the world matters for all sorts of things, but it probably doesn’t matter ex ante for what good economic policy will be. We might wish in 30 years we had nationalised all Broadband suppliers and heavily subsidised super-duper broadband across the land because it would have produced an unbeknownst productivity miracle. But that doesn’t mean we should do it.


[1] More worthwhile they also point to the disruptive impact that the internet is having in all sectors, but I have nothing to add to what is discussed in their report other than “innovation and experimentation is important so lower barriers to entry where lots of innovation and experimentation is important.”


One thought on “Another day, another post from people who care about poor people lamenting the fact that poor people are getting richer

  1. The interesting thing may well be the interplay between factors 2 and 3 i.e. the effect of IT improvements on manufacturing, such as 3D printers.

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