Productivity is pretty much everything
As Paul Krugman has been known to remark, productivity isn’t everything but in the long run it’s pretty much everything. The average productivity of labour in an economy is the determinant of average wages in that economy:
“Wages are determined in a national labor market”…(…)…”Finally, and most importantly, it is not obvious to non-economists that wages are endogenous. Someone like Goldsmith looks at Vietnam and asks, "what would happen if people who work for such low wages manage to achieve Western productivity?" The economist's answer is, "if they achieve Western productivity, they will be paid Western wages" -- as has in fact happened in Japan.”
The importance of all of this on two stories in the newspapers yesterday:
Tens of billions of pounds in additional funding will be required to keep public services running this year because of a collapse in productivity that experts blamed on weak management and working from home.
Public sector productivity fell 1.3pc in the three months to September compared with the previous quarter, according to the Office for National Statistics (ONS). This compares with a 0.1pc increase in output per hour across the economy over the same period.
It means productivity in the public sector is 7.4pc below pre-pandemic levels, compared with a 1.6pc increase in the equivalent economy-wide measure.
Leave aside those costs required to gain a static level of public services in the face of such a fall in productivity. That is - also - a fall in average productivity across the entire economy. Thus that lowers wages across the entire economy. For wages are determined in a national labour market, the determining being done by the average level of productivity in that national market.
This is also true at the other end of the global economy:
People focused on Davos may not have heard about the success of organisations like Fundación Paraguaya, which is working with families to help end poverty, or Maono Africa, which has been educating women and girls in Kenya. These innovative and critical perspectives, which hold the key to progress, weren’t present because localisation wasn’t on the agenda at Davos.
Grassroots leaders like myself know that the world’s “big problems” are only fixable when we tackle them from a local perspective – yet community-based organisations are vastly underfunded, and need support. If the WEF wants to see real change, it must put the work of community leaders at its centre, and those in attendance must be willing to shift funds and decision-making power directly to the people leading this critical work.
Ending poverty works the same way. Increasing the productivity within that Kenyan economy is what will reduce poverty in that Kenyan economy. For it is that average labour productivity within Kenya which determines the average wage rate in Kenya.
So, yes, it’s not people blathering at Davos which matters, it’s that micro-scale activity within the Kenyan economy which does. Every installation of a sewing machine instead of the hand wielded needle and thread, every replacement of a shovel with a JCB, every killing off of unproductive bureaucracy, each and every single such action works to raise wages in Kenya.
Just as every movement to a more productive state workforce in Britain will raise British wages. Simply because that’s how the world works.
Productivity indeed isn’t everything but in the long run of determining the average standard of living it’s pretty much everything.
Which does leave us with the question of how do we increase the productivity of the state workforce here in Britain? We’d open the bidding with fire half of them and see what happens - but that is just us being somewhere between jocular and provocative. We’re entirely open to other solutions but we do insist that the problem is as described. British wages are low because too much of British labour is employed in low productivity endeavours. That’s just a truth and the one to be grappled with.
Book Review - In Defence of Capitalism
“One of the most important books in decades defending capitalism… Adam Smith would have been impressed - and proud.” - Steve Forbes
A second recession within 20 years, rampant inflation, increasing dependency on food banks. You can understand why Anti-Capitalist ideas are making a resurgence into the mainstream. But is capitalism to blame for all these problems? Would outcomes be better under communism, or other non-capitalist systems Dr Rainer Zitelmann thinks not.
The outcomes due to capitalism have consistently been better than those of opposing economic ideologies and in his new book ‘In Defence of Capitalism,’ Dr Rainer Zitelmann explains how common misconceptions provide people with a misconstrued view of Capitalism.
Zitelmann works through these arguments explaining where the beliefs have originated from. Before then explaining how this is not the case, or at the least not a fault of capitalism. He starts with the idea that capitalism is responsible for hunger and poverty. While poverty and hunger do exist in capitalist societies, the idea that it is capitalism's fault, or that it would be better under different systems is incorrect. As the World Bank just pointed out, China’s free market reforms helped raise 800 million people out of poverty.
Carrying on from this he examines one of the most egregious examples, the practice of comparing the current economic systems to purely theoretical utopias, whether pro free market or anti-capitalist this is simply ridiculous. Surely it makes sense to compare apples to apples? Even then, comparing ideological hypotheticals serves little purpose due to the pure number of different variations, and the nature of them being, well, hypothetical.
The reality, which the author goes to great lengths to demonstrate, is that no matter the variation of communism or socialism, nations driven by ideologies dedicated to abolishing private property have and will continue to fail.
The important distinction Zitelmann claims is that ‘Capitalism is not a system devised by intellectuals, it is an economic order that has evolved organically’. That is not to say the current system is perfect, but it is no accident we are where we are now. And the journey is not over, capitalism will continue to evolve and adapt.
To end, the book shares and analyses the most comprehensive survey about people's perceptions of capitalism across both developed and developing nations. Confirming that the beliefs addressed throughout the book are not fringe ideas, but have altered the perception of capitalism on a mainstream level, to the point where only 14% of people in the UK believe that ‘Capitalism has improved conditions for ordinary people.
This book is, as the title suggests, a comprehensive defence of capitalism. And no matter what side of the isle one finds themselves on, it provides useful insight into historical facts on issues which many have assumed to be foregone conclusions. Making it an important and interesting book well worth the read.
We really do hope that policy isn't being made on this basis
There is that idea that government includes all the really bright people - those Rolls Royce minds - and therefore we’d be better off leaving all the difficult stuff to them. Now, we don’t know whether this is in fact government making this mistake but mistake it is:
China dominates the global semiconductor market but officials have been increasingly concerned about the national security implications of this.
No, not really. In fact, not actually at all.
Taiwanese companies account for 50% of the semiconductor world market.
Others put it closer to two-thirds, not one-half.
Now yes, we are all supposed to agree with that One China idea (what is it, four or five systems now? Tibet, Hong Kong, Macau and Taiwan all having differences) but let’s keep that where it belongs, in that diplomatic lip service. In economic terms Taiwan - and therefore the nexus of the global semiconductor industry - is not in that part of China run by the CCP. Which is presumably what people might worry about.
The importance of this?
Britain to challenge China with £1bn subsidies for computer chip makers
The decision comes amid a growing unease over Britain’s reliance on Chinese made components
Please, please, do tell us that we’re not about to spend £1 billion because the Foreign Office wishes to be polite to Beijing - a perfectly acceptable thing to do of course - and we’ve all forgotten that this really is, only, the Foreign Office being polite to Beijing.
Energy starts at home
At the end of last summer, with war in Ukraine still raging, the talk was of eye-watering energy price surges and power cuts, particularly in Germany, with its heavy dependence on Russian oil and gas. But now, Germany aims to reduce its Russian energy usage to almost nothing by year-end, delaying its closure of nuclear plants, cutting its energy usage, even reopening coal-fired power stations.
Meanwhile, the cross-border supply and storage of gas has been improved. The US now supplies nearly a third of Europe’s Liquid Natural Gas (LNG), and Europe has bought up supplies from round the globe, shipping them to new floating terminals in the North Sea. Now the gas price is down to pre-war levels.
A lot of this, however, is just a quick, emergency fix. Ukraine tells us the need to have a robust energy policy, and a flexible one, able to withstand interruptions in different energy sources. And it has taught us the need for investment in that.
But energy investment is a long-horizon activity. It can take 7-10 years to get your money back. So, investors need policy certainty — just the opposite of what our politicians are providing. There are frequent and unpredictable changes in taxation, like ‘windfall taxes’, for example. And equally unpredictable changes in regulation, such as price caps.
Then there is the general tendency of politicians to see one fad after another as our single energy solution. From coal we went to postwar ‘atomic power’, then cheap oil from the Middle East, then, after OPEC, North Sea gas (the proceeds of which we used to expand welfare dependency), then wind and solar, then fracking, then hydrogen, batteries and now fusion. Each new energy minister (and there have been a lot of them) seems to have their own fad. How is anyone to invest long-term in such a fickle policy environment?
Plainly there is a huge need for more electricity generation. Think of all the power needed by millions of electric vehicles, including buses, trains and even planes. We may even be manufacturing more as we wean ourselves off uncertain China. And we need more interconnectivity too. We need to route our energy around unknowable future events like wars, accidents, and policy stupidities. France might even need UK supply when its nuclear reactors need replacing soon.
To generate on that scale, we need investment, which means policy certainty. No stop-start tax, price and regulatory changes. And to make that generation robust against changing events, we need to have a wide mix of energy sources. Not a dash to one source, then another. Not just renewables — wind power, for example, is volatile and so needs back-up from other sources — but gas, nuclear and fracking as well, leaving open the option of new technologies if they work out, such as small-scale nuclear and fusion power. And a mix of competitive suppliers too — using nuclear technologies from the US, France and Japan, for example.
And new generation will need greater vision on land-use planning. Large-scale generation projects provoke large-scale NIMBYism. But they are appropriately national rather than local decisions. They are about national energy security, which must take priority. And if that means compensating unhappy locals, we should. Huge discounts on their future energy bills, perhaps? The prospect of energy diversity and security must surely be worth that.
So here is - an attempt at least - at sorting out the NHS
This may work, it may not, but it is at least an attempt to sort out the actual problem:
Robots will be deployed to help clear NHS waiting lists and decide who gets seen first.
Pilot schemes have begun using automated calls to assess patients waiting for operations and prioritise their urgency.
One major company said the NHS is now looking to use automatisation in about 100 areas, including helping to clear backlogs and speed up the handling of referrals.
As we’ve pointed out before a standard claim about the NHS is that it has a different inflation rate than the rest of the country - than the rest of the world perhaps. This is because the NHS is less good at increasing productivity than the rest of the country - the world perhaps.
As we’ve also pointed out before the solution to this is to apply extra effort to improving productivity in the NHS. As is well known it is competition and the markets which generate the competition which improve productivity. So, more markets and competition to make the NHS better.
The act, rather than the process, is that very automation above. Yes, services find it much more difficult to increase productivity than manufactures (thank you, Dr. Baumol). The answer is, where possible, to turn a service into a manufacture at which point productivity improvement becomes easier. Robots and ‘bots (the latter usually referring to software, the former to physical machines) are one of those acts of automation. As was - in our oft-used example - aspirin, which automated the previously used comely maiden wiping fevered brows with a cool damp cloth.
So, full marks to the act being attempted here. To increase NHS productivity by automating more of it. We do though need to still keep ahold of the other point. That the system which increases the number of such attempted acts is markets and competition. So, we need more of those to encourage more such acts.
There is another issue of course. Which is that it’s only competition - attempting the same task in different ways at the same time - which allows us to work out which method works better. We automate one part of the NHS in one particular manner, measure that against the parts unreformed and then decide whether it’s a good idea or not. For experimentation is competition, isn’t it?
A certain confusion about lithium batteries
Two little stories that reflect a certain confusion about lithium batteries:
Europe could end its reliance on China for electric car batteries by 2030 but only if it keeps pace with Joe Biden’s $369bn (£298bn) green subsidy spree, experts predict.
We’re sure that’s possible. For it always is possible to make something domestically and more expensively. The question is, why would we?
Why not, umm, save the $369 billion to make our lives better in other ways and just buy the batteries from China?
We’re also told that we don’t, in fact, have to have so many of those lithium batteries:
By 2050 electric vehicles could require huge amounts of lithium for their batteries, causing damaging expansions of mining
That’s true, obviously. We’re certain that it’s not important, even as it is indeed true:
483m tons of lithium
That, apparently, is the annual required amount to give the US a battery powered car fleet if current suburban lifestyles, cars people desire to drive and so on are maintained. As we pointed out a decade back the total stock of lithium available to humanity, the Li content of the lithosphere, is:
2,850,000 billion
This being The Guardian of course they’ve got confused with numbers. 483m is not million, it’s mille. We can check this:
If Americans continue to depend on cars at the current rate, by 2050 the US alone would need triple the amount of lithium currently produced for the entire global market,
Current production is around 100,000 tonnes. Or last year’s was at least. So that 435m tonnes is 435,000 tonnes, not 435 million (we can check this another way. There are 300 million-ish cars on the road, 435 million tonnes would require each to use 1.5 tonnes of lithium when in fact it’s more like 10 to 15 kg but agreed, that’s about the stock, not the annual consumption).
Using 0.000000015 percent of the total supply looks pretty feasible to us. We might have missed a zero there of course.
In order to avoid this apparently we should decide instead do this:
The largest reduction will come from changing the way we get around towns and cities – fewer cars, more walking, cycling and public transit made possible by denser cities – followed by downsizing vehicles and recycling batteries.
We should radically change our entire civilisation instead of digging a few more holes in the ground. Well, maybe we should at that, this also being something we can test. Chesterton’s Fence and all that. So, when Ford released the Model-T, the first affordable and personal transport system, what happened? The world flocked to buy them. That is, humans like suburbs, being able to get around them, that personal and autonomous mobility. Not to mention the sometimes claimed greatest effect of the automobile, upon virginity rates at marriage. Courting can be done in the back seat of the bus but it is more difficult.
Effectively the demand here is that the Model - T itself, that ability to go where and when one wished, was the mistake which must now be rectified. And we should do this because? Well, because:
Four mineral operations in Australia, two brine operations each in Argentina and Chile, and two brine and one mineral operation in China accounted for the majority of world lithium production
To avoid lithium caused holes in the ground rising from 11 to 33 then and therefore we should redesign every American city, abandon the suburbs and cut off the working and middle classes from free mobility.
Hmm, they’ve not really made their case, have they? Or, perhaps, they’re just a bit confused?
Payal Sampat, mining program director at Earthworks, said: “The findings of this report must jumpstart policies to invest in robust, accessible public transit systems that advance equity, reduce pollution and get people where they need to go.”
Or perhaps that’s the problem. An inability to distinguish between where people need to go and how, when and where they’d like to go?
Baby steps to Growth
In the Prime Minister’s first speech of 2023, one of his 5 pledges was to grow the economy. A newly-launched Conservative caucus called the Conservative Growth Group (CGG) has suggested ways for this to happen.
One promising avenue suggested by the CGG relates to reforming the childcare system. It's indisputable how important childcare is. It makes it easier for parents (particularly mothers) to work and progress in their careers.
As all new parents will know, childcare in this country is very expensive. The UK has the fifth most expensive childcare system in the world, with single parents on an average income spending 47.65% of their earnings on full time childcare. Even two-parent households on average incomes are still spending 23.82% of their combined earnings.
This is not a new problem. The Exchequer has previously invested money into various childcare schemes, but these subsidy schemes are complex and inflexible. The Free Early Education Entitlement Scheme which provides up to 15 or 30 hours per week of free childcare for all 3-4 year olds in England, is an example of good intentions resulting in dysfunctional policy.
The scheme can only be used with an approved childcare provider and for only 38 weeks a year — the equivalent of school term time — so parents seeking childcare through holiday periods aren't able to do so. Parents also have to pay the additional costs of meals and nappies. They also have to wait until the term after the child’s 3rd birthday to access the scheme, so what do parents do until their child is 3? Quit work and sacrifice career development to provide childcare they can't otherwise afford? This is all before even considering the lengthy waiting times for actually accessing childcare; if you intend to get your child into childcare at a reasonable time, you are advised to sign them up while you're still pregnant.
Clearly, childcare needs reforming along with many other parts of our public policy that are restricting economic growth. The CGG rightly suggests that rather than subsidizing childcare through the inflexible schemes we have now, it is time to move beyond our ‘one-size-fits-all’ approach. One example of how this could be achieved is providing tax reliefs to parents so they have the freedom and flexibility to pay for the childcare they want, where they want and when they want. Ultimately, this won’t cost the taxpayer a penny and is a much more effective solution for new parents and the childcare crisis.
Another beneficial policy we often raise here at the Adam Smith Institute is relaxing staff:child ratios to improve access to care and reduce costs for households who struggle with rising prices. Indeed, in the UK, with our current 1:4.5 average staff:child ratio we are the highest in Europe. Economic analysis suggests that if we reform our staff:child ratio to 1:9, the cost of childcare could more than halve.
Critics of this policy naturally turn towards the view that adapting our strict staff:child ratios would reduce the quality of the service but in reality this is not the case. What impacts the quality of childcare the most is not the staff:child ratio but the education of the staff, which has become a prominent issue due to staff shortages that have meant finding qualified workers is much more difficult.
Ultimately, change is needed, childcare is far too expensive and it’s significantly reducing the UK’s growth rate. The CGG’s suggestions for change are welcomed and should be taken into consideration, not just on childcare but on other pro-growth policies they suggest.
The terrors of illegal waste dumping
It is entirely true that the polluter should pay. That does though, unfortunately, rub up against the fact that some people are willing to break the law. Especially when easy money might be had by doing so. This is the problem which we face here:
‘You should gaze at your bins in horror’: the massive crime scandal behind the UK’s rubbish
Mafia types are taking over waste disposal:
But Mobuoy is only the beginning. “It’s not just there, it’s everywhere,” says Taylor. “There are massive illegal dumps all over the UK.” From low-level criminals offering to take waste away on the cheap then dumping it on illegal sites, right up to organised crime operations infiltrating legitimate waste disposal companies and gaining contracts, the result can be top-to-bottom criminality that then meets in the middle.
The cause of all of this is not hard to divine. We demand more recycling, to the extent that we demand the recycling of things where it is cheaper to dump than to recycle. Not an obviously sensible economic idea but that is what we currently do. We also insist - through the landfill tax - that there are substantial costs to shoving waste into a safe, managed and monitored hole in the ground. Therefore more people dump, more cheaply, onto fields and into unsafe, un-managed and un-monitored holes in the ground.
Yes, yes, what people should do but what is actually done? We’ve raised the costs of legal waste disposal. Therefore there is more illegal waste disposal. This should be no more surprising than dawn coming some hours after dusk - in fact, just as with that analogy, we’d be surprised if it didn’t happen.
Given that we can work out what is causing this despoilation of the countryside it’s therefore possible to grasp how to reverse it. Make it cheaper to dispose of waste legally and safely. Licence many more landfill sites - we dig up enough sand and gravel each year to make holes larger than required - and thereby reduce the price. Stop taxing legal disposal thereby making it more expensive than illegal. Stop insisting that uneconomic recycling is done. And then we’re done, mission accomplished.
We could, of course, carry on doing what we’re doing, ramping up the incentives for illegal dumping. But in the name of our verdant shores and green and pleasant land let’s not do that, eh? Instead, stick rubbish in safe and secure holes and actually solve the problem.
Let Northern Ireland do its own thing
Brussels thinks the UK should be grateful that they are allowing Northern Ireland to be an honorary member of the EU. It certainly helps Northern Irish trade with the south of the island and the rest of the EU. But self-centred as Brussels is, they cannot, or pretend not to, grasp that the word “union” is just as important for the United Kingdom. Under the Northern Ireland Protocol, which Boris Johnson signed allegedly to get the rest of the deal done, Northern Ireland is more united with the EU than it is with the UK. How anyone who actually read it could think it would get a positive deal for the UK is beyond me.
The UK negotiators concede bits and pieces, such as allowing the EU full, but unreciprocated, access to UK trade IT systems but the reality is that the Westminster amateurs are playing the Brussels professionals and making no progress whatsoever. That suits Brussels and they may be waiting for Sir Keir Starmer’s even more amateurish team to take Westminster’s seats. Vain hope: the civil servants will be the same and so will their certainty that Westminster knows best.
The DUP have made it clear that they will not allow Stormont to function unless the new protocol complies with the DUP’s “seven tests”:
No new checks of any sort on goods being traded between GB and NI, excluding pre-Brexit checks on livestock and goods moving onwards from NI;
Compatibility with the Act of Union which says all parts of the UK should be on equal footing when it comes to trade;
Avoiding any diversion of trade where NI customers are forced to switch to non-GB suppliers;
No border in the Irish Sea;
NI citizens to have a role in any new regulations which impact them;
No new regulatory barriers between GB and NI unless agreed by the NI Assembly, and
Honouring the 'letter and spirit' of NI's constitutional position as set out in the Good Friday Agreement by requiring upfront consent of any diminution in constitutional status.
You might think that, being aware of that, the Westminster negotiating team would include the DUP, or at the very least consult with them as negotiations proceeded. Oh dear me no! Mr Cleverly and his team are only concerned with how to “sell” whatever deal they do to Belfast politicians once the deal is done.
It is common sense that the home side playing against top class professionals should muster the best team it can. Conceding dribs and drabs without reciprocal concessions is simply weakness and so is failing to include your toughest players. No matter how good the deal Messrs Sunak and Cleverly bring home, Northern Irish politicians are not going to welcome something they had no part in.
John Major may not have involved the rebels in his 1991 Maastricht’s negotiations but his was such a brilliant performance that the other EU leaders applauded. No signs that anyone will be applauding the Sunak/Cleverly performance.
In one respect, delay may help the DUP but only if they can maintain a political majority in Stormont. The protocol is up for renegotiation anyway in 2025 under Protocol Article 18(5), if there is a democratic majority for that, but it would clearly be better to conclude something sooner.
The way forward should be for Westminster to stop fantasising that they are making progress and making unreciprocated small concessions, which the DUP will not recognise anyway, but invite the DUP, or a Stormont cross-party team of MLAs, to come up with a joint solution. Ultimate authority would remain with London and Brussels but, frankly, if all Ireland is happy with the outcome, why should anyone else care?
Britishvolt, such a bad idea government really must fund it
A number of things amuse us about the Britishvolt story. The first is this insistence from all around that the administration and bankruptcy of the project is a disaster. Well, no, because it’s not, in fact, the bankruptcy of the project at all. No one has dropped a bomb, wiping out the physical infrastructure, actually destroying something. What has gone, what is in administration, is the specific legal wrapper - for that’s what a company is, a legal wrapper - for the project.
The idea still exists, the site does, whatever planning permissions have been gained are still there. The project, as and whatever it is, still exists. In fact, the administrators will be selling it off as fast as they can. Anyone who wants it will be able to buy it.
What is gone is that legal wrapper along with the management who didn’t make a success of it. So, it’s not in fact a disaster at all. Whatever value was there is there.
A second amusement is the varied insistences that this was going to be something cutting edge. Not so much really.
The company had been seeking to develop a version of cylindrical 21700 battery cells — an existing product in the market — with better performance and charging speed.
Well, yes, except:
Tesla gave an update on the progress of ramping up 4680 battery cell production.
Leave aside the technological details there and what is being said is that Britishvolt would produce, at some indeterminate time in the future, something well behind the technological curve of what is being trialled and piloted right now.
This is akin to getting that mass production line for the Bristol Brabazon really and properly expanded as the de Havilland Comet takes to the skies.
But by far our greatest amusement is the general insistence that really, government must invest!
The Observer view on the free market thinking that failed Britishvolt
That free market thinking apparently being to allow an idea to be tested, when it doesn’t work then doing nothing about it.
Not for this government, nor any of its predecessors since 2010, the careful planning and collaboration with industry that propels investment in Japan, South Korea, China, Germany and the US. Ministers prefer to keep their hands by their sides and wallets firmly closed, in case they might be accused of a return to 1970s corporatism.
Well, yes, seems sensible to us if we’re honest about it.
For there is no one, absolutely no one at all, in the business of cars, batteries, lithium or even transport who does not know about Britishvolt. The entirety of the global industry of any and all of them will have run their slide rules - conservative lot, accountants and engineers - over the value of the offer and idea. There were a few profferings of minor amounts of seedcorn but no one was willing to step up and commit to financing the idea properly. On the grounds that it’s not a good idea perhaps.
When the experts tell us something is a bad idea we really should listen to said experts, no? When no one will open their wallet for an idea or project much the same is true. Even, that if it can’t be privately financed - in the middle of a roaring mania for the sector under discussion, with global corporations committing billion upon billion to the general field - then perhaps it shouldn’t be financed at all?
Which does leave us with that headline as the lesson to be learned. Some - as with The Observer here - think that Britishvolt is simply just such a bad idea that government must fund it.
Which isn’t we submit, the way to run a railroad. And on the subject of railroads about HS2…….