UK productivity has virtually stagnated since the global financial crisis. In a stagnant economy, economic policy is zero sum. One situation can only be improved by exacerbating another. This is a recipe for conflict. Instead, it is imperative to generate sustainable economic growth.
The decline in productivity growth is not unique to the UK. All members of the G7’s major high-income countries saw a sharp drop in hourly production growth between 2010 and 2019 compared to between 1990 and 2000. However, the UK’s deterioration was the largest, dropping from 2.6% annually to just 0.4%. Cent. Italy was the only G7 economy with low productivity growth in the second half.
An approximate explanation is easy to find. The UK’s average annual total fixed investment was the lowest in the G7 between 2010 and 2018, at just over 16% of GDP. And Italy was also the only G7 country with a low average investment in R & D. New technologies are being incorporated into new machines, so such low investments guarantee almost unproductive growth.
Why has Britain’s growth slowed to crawl? The best analysis I’ve seen of growth determinants is in the “window of opportunity” by David Sainsbury, a businessman who served as Minister of Science under the Tony Blair administration. His views are rooted in the views of early influential thinkers such as Alexander Hamilton and Joseph Schumpeter.
As Sainsbury states, neoclassical economics has no theory of innovation, so there is no theory of growth. He does: It’s driven by innovative businesses. He calls this “capacity / market opportunity dynamic”. There are four conditions for success. Demand for new products and services. Activity-specific technical opportunities; companies that can take advantage of those opportunities. And institutions that can support those companies.
In that case, growth is an evolutionary process characterized by trial and error, uncertainty, economies of scale and scope, network externalities, temporary monopolies, and cumulative benefits. Historical experience confirms that growth is a race to the top. That means taking advantage of new opportunities to create lasting benefits in the productive sector and very high wages.
From this perspective, Sainsbury’s can consider why some countries were financially successful, why others were unsuccessful, and in particular why successful countries were delayed. The final answer is that they are losing in many of the new high innovation, high productivity sectors.
From Germany and the United States to Japan, South Korea and China, the stories of successful compensatory growth in the last two centuries have never done the same anymore. It was about developing new things, and their ability to develop new things. When the economy loses its capacity, it begins to stagnate.
Sainsbury claims that there are four possible strategies for innovation. Support the supply of related factors of production (science and experts). Supports major industries and technologies. Select a specific company / technology / product. He argues that the government should do the second and third, but not the last. It’s better to leave it to bankers and venture capitalists. However, governments can and must fund the development of science and science and other skills, and need to promote some broad industries and technologies.
The economic basis for supporting innovation is that knowledge is a semi-public good. This is not just a theoretical point. In fact, government support has played a central role in the development of almost all basic technologies of the 20th and 21st centuries. However, the government plays a broader and central role in developing all the capabilities Sainsbury’s discusses. This is because almost every important new feature has a public good aspect. As an example, the knowledge that a business develops is embedded in those who may leave to work for a rival business. Again, developing something radically new is often both costly and risky. This also justifies some support.
The UK economy is in danger of innovation and growth. The government has to think about what to do about this. For example, why don’t British companies invest so much? Why is the UK relatively vulnerable in high-tech manufacturing? Which industries and technologies offer the best opportunities for the future? How should university research be linked to business? The country is late. You need to answer these questions.
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