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Samizdata quote of the day So now we know what Theresa May’s industrial strategy is going to be. It might even be Greg Clark’s. He’s in the report too. The strategy, alas, is one that proves the British state simply cannot learn from past mistakes. Indeed, it seems to consist of doubling down on those errors.
The report shows plainly their inability to realise that our economic problems more often stem not from what government is doing, rather than what it isn’t. The solution, shouldn’t be to dream up more things to do, it should be to stop doing what’s causing the problems.
– Tim Worstall
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A line or two of Tim W’s piece, mentioning productivity, reminded me of a microeconomics question that I’ve never seen explained anywhere. So I’ll ask it here. I’ll state the proposition baldly, though it’s often an unstated assumption.
“Wages can only go up if productivity goes up. Technology boosts productivity. Hence if more capital is invested in technological improvement, productivity will increase and so wages can increase.”
Say what ? Why would investing more capital in technology increase the market reward for the human labourers who use the technology ? Isn’t it a bit like saying that a car company which instals a robot production line will now be willing to pay its suppliers more for tyres and paint ?
Perry, I believe there is a problem with the sentence:-
The report shows plainly their inability to realise that our economic problems more often stem not from what government is doing, rather than what it isn’t.
This is what I think he meant:-
The report shows plainly their inability to realise that our economic problems more often than not stem from what government is doing, rather than what it isn’t.
Lee Moore; My understanding is that a person can negotiate the wage they can get. If their skills and knowledge and perhaps even talent is such that they can ask a lot, then they are in a position to get a lot, presuming their expertise is in demand. That being said, if Tom is 10x more productive than Steve because of technology X, and Tom can operate said technology because of specialized training, etc, then Tom can earn more than Steve but if Tom is merely pressing a button on a super-cool new “tech” machine, and a monkey can do Tom’s job, then he’s not in much of a bargaining position. ‘Just because the “Luddites” were replaced with a lace-making machine, it does not necessarily mean the lace-machine operators will make more money than those who previously made lace by hand. Generally speaking though, if you produce more, ceteris paribus, you will almost certainly create more revenue.
Yes – it is another example of seeing the problem, but then coming up with the wrong solution.
History matters – and (as I was told by someone of this parish) the hero of Teresa May is “Radical Joe” Chamberlain of Birmingham – very much a “positive state” person.
Now that can mean “Progressive but Solvent” the Tom Dewey compromise position in New York State before it was defeated in 1954 – compared to the alternative Tom Dewey and his people were GOOD (the alternative being Progressive spending and regulation with no concern for long term solvency). The issues in the 1954 election really mattered – and that should not be hidden by both candidates, Dewey’s man and the long-term-be-damned Democrat Harriman, both calling themselves “Progressive”.
But I suspect that the Prime Minister is not much like Tom Dewey. Not someone really “into” balancing the budget and avoiding schemes that have no chance of real returns. Indeed by the standards of this degenerate age Tom Dewey would be described as a “free market extremist” and “fiscal conservative fanatic” (which shows you how far the world has fallen – as in his own day he was on the left wing of the Republican Party).
Can the present British situation (endless borrowing to finance imports) be sustained?
Or course not – although the rather nasty Jim Rickards (the “Long Term Capital Management” person who often appears on Mr Putin’s “RT”) may be premature in saying that Britain will collapse at the end of March (the “Death of the Pound” thing he has been pushing on the internet for a very long time smells like one of his self enrichment schemes). By the way Mr Rickards – Switzerland has not had “500 years of peace” (get someone to fact check your books before they are published).
However, “industrial policy” is no solution to coming insolvency.
After World War II Bavaria went from being a society of peasant farmers to one of the most advanced areas on the planet.
What has been the government “industrial policy” in Southern Germany over the last 70 years?
They have-not-really-had-one.
Lee Moore – it may seem paradoxical, but it is not.
The countries that invest in capital equipment most over time – have the HIGHEST wages, and it is because they are providing the employees with the best kit (in the best factories) to do their work, they (the employees) will produce more. Wages (in sane, non union, societies) depend on PRODUCTIVITY.
Contrary to Protectionists – American wages were high NOT because of tariffs, but because of high capital investment.
Why were cities such as Buffalo (now a drug invested wasteland) the most advanced cities on the planet a century or so ago (and I am talking about BEFORE the First World War – America was already greatly in advance of European countries).
Cities such as Buffalo New York were advanced because of law government spending, low taxes, little regulation, and SECURITY OF PRIVATE PROPERTY (unlike the chaos and corruption of Latin America).
This is why a businessman would invest Real Savings (the actual sacrifice of consumption in terms of cash money – gold) in industrial plant in Buffalo New York in say 1913 – and why a businessman would be utterly insane to do the same thing in Buffalo New York in 2016.
And that is why wages were so high in Buffalo were so high (much higher than, say, London or Manchester – let alone Berlin, German wages being much lower than British wages in 1913). Not Protectionism. High Productivity.
Of course there were also cultural factors – work and business achievement being the highest things in the America of the time.
“The business of America is business” as Calvin Coolidge put it.
When building a great business and making a profit was the mark of a hero – before Hollywood and the television networks had made the smears of leftist novels the default position of the culture (although really the education system, the schools and the universities, teach the same cultural degeneracy now).
“Big Business is bad” “the capitalist rich are evil”.
Many businessmen themselves have “internalised” this culture – they behave corruptly because they have been taught that is how a “big businessman” behaves.
The followers of Ayn Rand have a point when they say that the sort of country you want to create should be reflected in education and culture – for education and culture will influence what people do when they grow up.
Sadly American (and general Western) education and culture are dominated by the ideas (second or third hand) of the Italian Marxist Gramsci and the German Frankfurt School (actually more influential in Britain and the United States than in Germany). France has its own thinkers – although equally demented ones.
Perry, one of the perils of representative democrazy is that the party that promises to fix problems is the party that people elect. They ignore the do-nothing party. A lot of people would rather have the government telling them what to do, than take total responsibility for their lives. It’s crazy (hence demo-crazy) but that is the way things happen to be.
This is a brilliant article. I disagree with nothing in it. Unfortunately, I fear that Mr. Worstall is tilting at windmills. The odds of your government (or any government) totally abandoning some sort of “industrial policy” (by whatever name), or permitting unfettered free trade, are zero. Government exists to do, and it can’t abide not doing even when it can be conclusively proven that such would provide the optimal result.
(A side note: I have never before come across the word “nefarity”. Wonderful! Thank you for that, Mr. Worstall.)
Automation not only increases productivity but makes consumer goods more cheaply. This means that whatever you do earn is worth more because you can buy more stuff with it due to said stuff being less expensive. If essentials become less expensive that leaves people with more disposable income which they spend on other things that workers are then paid to produce.
I remember that I used to be quite a fan of US TV show ‘The New Yankee Workshop’ that featured a guy called Norm who showed you how to make stuff with wood. My wife bought me a couple of books based on the show and I made a few of the things featured, a shaker style wall clock and some garden chairs among other things. I got a lot of satisfaction out of making them but had I recorded my time and charged it at my regular work rate, the items would have cost far more than if I had just bought them.
“A side note: I have never before come across the word “nefarity”. Wonderful! Thank you for that, Mr. Worstall.”
I’m not sure that it really is a word. It might be, but very archaic. I read a lot of the Indian newspapers as part of work. And it’s the sort of thing which turns up in Indian English. Not the word itself, but the coining of the neologism. For example, a dacoit is a type of bandit, dacoity is acting like a bandit. So, if we’ve nefarious then we should also have nefarity, to be nefarious is to commit a nefarity.
As I say, I really don’t know if it’s original to me through the influence of reading Indian English or I’ve seen it somewhere and decided to use it.
“Wages can only go up if productivity goes up. Technology boosts productivity. Hence if more capital is invested in technological improvement, productivity will increase and so wages can increase.”
True. GDP = all incomes = all production = all consumption.
So, labour productivity goes up through the addition of capital. That must mean that there’s more production. That must equally mean that there’s more consumption, because what is produced must be consumed. That also must mean that incomes must go up. Simply cannot be any other way.
The bit that is normally left out of this logic is that it doesn’t have to be the workers’ incomes nor consumption that go up. Could be just that of the providers of capital, just to give one example (some say that this is what happened for the first 60 years of capitalism and the IR, I disagree but….). However, it was actually K Marx who got this bit right.
As labour productivity goes up then the capitalists will see that they can make ever more profit from employing labour. Excellent – and as long as there is the reserve army of the unemployed they don’t have to share those extra profits with the workers. They can just hire more of the unemployed people. Profits continue to rise and wages don’t, the capitalists consume all the extra production. Until there is no reserve army.
At which point the capitalists are in competition with each other for the labour from which they can make those excessive profits. And so they do compete with each other to attract that labour from which they can profit. And as there’s no unemployed around they have to do this by raising the workers’ wages.
Two things can stop this, one is continual unemployment. Which is why we observe that wages start to rise as they are now in the US and UK, as both countries are down to “full employment” (ie, we’ve got left those who simply will not work plus frictional unemployment, people taking their time as they move between jobs). The other is monopsony, that is the employer has market power over the wages being paid. This is the same thing as saying the capitalists aren’t competing for the labour, they’re colluding to not compete.
When Marx was talking about monopoly capitalism this is actually what he meant. It wasn’t the one producer of steel at all, it was the one, or the collusion between many, employers of labour. Unfortunately the word monopsony didn’t exist at the time.
One example of monopsony was Stalin’s Soviet Union – the state set all wages and they deliberately set them so as to increase the profits to fund further investment. A more recent example of an attempt at it was the Apple/Google/Adobe et al collusion about engineers’ wages in S Valley. They got off very lightly, we should have come down on them like the proverbial ton of bricks. Because the attempt to create a monopsony (here, actually an oligopsony) violates the very thing which leads to free markets benefiting the worker and connecting wages to productivity.
The end result here is that as long as, and only if, we have competition between employers for the profits that can be made from labour, and that there is no vast pool of useful unemployed labour, then wages will indeed track productivity.
Teh Free Market Rulz!
To expand upon Tim’s point about energy, this is rather good:
http://www.thegwpf.com/electricity-and-the-uks-industrial-strategy/
Is Mrs May the long-lost love child of Harold Wilson? I ask as a previous indication of an industrial strategy adumbrated here indicated:
Why not go the whole hog and talk (as Wilson never actually did say) about the ‘White Heat of Technology‘?
Mrs May has no excuses for her fascist fantasy, she was around 8 years old when this Wilsonian nonsense came out and would have seen the ensuing lunacy unfold.
The sole purpose of existance for Government is to be doing.
Government has to be doing something, anything, and seen to be doing, otherwise people would ask why do we have it?
I try the unilateral free trade argument on people sometimes. I always get back some variation on how anyone exporting anything will suffer because other countries will take the opportunity to impose tariffs and dump cheap goods on us.
To the former, I have to acknowledge at least the possibility that some people will be made unhappy for some time for the sake of the greater good: short term dynamics might be unpopular but long term steady state improvements to wealth will come as people figure out what the best things to do are. But what about the unskilled who can’t retrain to do something more skilled?
And what if dumping means businesses close and then the dumpers put the prices back up? After we have lost the skills?
None of these outcomes seem particularly likely to me, but we need answers that will convince people.
@Rob I’m not sure if dumping has ever led to that outcome: dump goods, collapse industry, raise prices. At least I know of no case where dumping was tried where competition permanently vanished and then prices were permanently raised.
Mal: not permanently, but temporarily it can and has happened IIUC, and that causes real hardship. The question to ask though, why is “dumping” from overseas bad, but the one from one’s own country OK? Doing business means dealing with competition all the time, no matter where it comes from – another neighborhood, another town, or another country.
Collapse competitors to permanently raise prices: China tried it with rare earth metals; it didn’t work, as this article notes that Tim W predicted.
Actually, Alisa, in the US that’s called “predatory pricing” and is treated as an Unfair Trade Practice and is illegal under federal law. The burden of proof is difficult to meet, though.
But as to foreign “dumping”, I view that as a subsidy of our consumers by foreigners. If some government wants to tax its own people to give us lower prices, I say have at it! They’re only harming themselves. And the industry which could be completely destroyed by such a practice, and the skills involved irretrievably lost, is so rare as to be almost non-existent. Once prices return to market levels (or above) new competitors would rush in as long as our own government doesn’t impede them. That’s the way free markets work.
“I’m not sure if dumping has ever led to that outcome: dump goods, collapse industry, raise prices.”
I can think of an example. Someone brought out a rival to the Evening Standard in London in the 1980s. The Standard replied by slashing the price (i.e. dumping) and even reviving the Evening News title. The upshot was that the rival (Eddie Shah?) was defeated and the Standard went back to the old price.
Not Shah but Maxwell
Foreign dumping has a huge impact on the ag sector.
Profit margins are small, so small foreign-government participation can swing huge sales. It’s an all-or-nothing business – you don’t just sell fewer widgets this week than planned, you lose out on the sale of an entire growing season.
If a foreign government participates in dumping into an industry already in a weakened state – as the agriculture sector cyclically finds itself – it can cause huge disruption of the industry base.
Taken as an average over time, foreign ag dumping evens out into lower prices. But used as a well-timed attack, it can drastically weaken a system of production and distribution that works well through every other scenario.
Dumping can also have a dramatic effect on small markets. You may not notice it because 1) governments are pretty keen to stop it, and 2) it will tend to be small markets which are out of most people’s line of sight.
I’ve seen it with plasterboard in NZ. A retraction in the Asian building market led to a large oversupply of plasterboard. The suppliers tried to dump it in NZ, at a price that would have destroyed the local industry. Not particularly nefariously, just to get some money back from it. Unless stopped they would have put local suppliers out of business because the quantities involved would have swamped a small market. Once conditions returned in Asia the price would have gone straight back up. On top of destroying a local industry, for no extra savings in the long term, the Asian stuff wasn’t even particularly good quality. So, except that the government of the day stopped it, it would have lowered the quality and range of goods available on top of the destruction of local industry.
For a while Microsoft were dumping software. They basically gave away a valuable product in certain markets in order to kill all opposition. It worked very well.
Foreign aid can have a ‘dumping’ effect: e.g. hand out loads of free food from overseas and local farmers get reduced returns on their harvests, but for the increase in supply, they would get higher prices (in principle), so may plant less next time round, leading to reduced food supply…
LOL. As a long time Mac & Unix user, I’ve always thought that was a hilarious notion. There’s a bit more to it than that, to put it mildly.
The article says:
The state has learned just fine, thank you.
Any organism seeks its own protection and feeding. The state – made up of the bureaucrats, functionaries, leeches and scolds who gravitate to “public service” – constantly seeks to bolster its own power and influence.
It’s the voters who elect the people who guide the care and feeding of the state who don’t learn from past mistakes.
Alan H., do you not agree that giving away Internet Explorer when all others were charging for web browser software was dumping? It did kill Netscape, though they were savvy enough to create a phoenix egg by open sourcing the code.
No, I dispute that ‘dumping’ is even a thing. As for IE, it was just MS recognising that a browser isn’t something worth charging for. And they were correct, which is why no one pays for browsers to this day, even if Microsoft didn’t follow that logic all the way (which is why no one with any smarts pays for word processors or spreadsheets either).