Why Ritchie is wrong. Again.

So we\’re told that social democracy is the only way to go now that we\’ve come to the limits to growth. And that Baumol\’s Cost Disease (which, amazingly, he actually gets right, or right enough) means that the State will have to expand.

However, two slight problems with his analysis.

The Guardian’s reported that Ed Miliband has said:

What has social democracy been about in Britain and in Europe perhaps since Tony Crosland? It is about tax and transfer social democracy. Crosland said ‘use the proceeds of growth to make society better and fairer’.

It was, I agree.

And it isn’t any more. That’s obviously true. That’s not because of the financial crisis. That’s because we have reached the limits to growth. It is not possible to exploit our planet at the rate we have been and survive as a race. Whatever the reason we come to accept that, it’s a fact.

It\’s not a fact that we have reached the limits to growth. Even Herman Daly, he of the steady state economy, doesn\’t say that. That\’s because as well as being an ecologist fruitcake Daly is an economist. Thus he knows, as Ritchie does not, what economic growth is. An increase in GDP (or GNP, GNI, GDI, any of the variants).

GDP is the value of goods and services produced.

So, let us, arguendo, agree that we have in fact reached the physical limits to growth in the making of stuff. We could even go further and agree with the Deep Greens, that we must place tight limits on the amounts of natural resources that can be abstracted from the biosphere. Even, if you really want to, go really deep Deep Green and say that we must abstract no new resources at all, simply live off what we can recycle.

Does this mean an end to economic growth?

No, of course it doesn\’t. Arguendo, again, we can accept that this severely limits the amount of stuff that can be produced. It doesn\’t though particularly limit the amount of services that can be produced. And it places no limit at all upon the value of what can be produced. The value can increase through the advance of technology: in two different ways.

1) We can find methods of using less of that limited stuff in each unit of what physical stuff we do make. Take, as they\’re rather fashionable things to worry about right now, the gold and tantalum coming from the Congo. Thirty years ago we layered that gold onto computer connectors like an ageing trollop slathering on the make up. 200 nm thick wasn\’t unusual. It would be a very high end component today that has more than 2 or 3 nm.

So, out of our available and recyclable gold we can make 100 times the computer boards that we could 30 years ago. Tantalum is a similar story. Around the turn of the millennium capacitors on mobile phone boards used perhaps a gramme of Ta each. Now they\’re perhaps 5 or 10 milligrammes. We can make many more capacitors out of the sweated misery of a militia oppressed Congolese. We have had, clearly and obviously, economic growth as a result of technology advancing even if we were to say that resource use must be limited, or even that abstraction of resources must cease entirely.

2) We can invent new things to do with our limited supply of resources. Invent, say, aspirin. As anyone who drinks knows this is an addition of value.

And this is what Daly himself says about it all. That we have indeed come to the limit of the resources we can abstract but this does not mean the end of economic growth. A steady state economy is one in which resource use is static but economic growth continues as technology advances.

Thus any argument that begins with \”we have reached the limits to growth\” is wrong. And any argument that depends upon the statement can safely be dismissed out of hand. For even if it were true that we had reached limits to the amount of physical stuff we can transform, we have not reached the limits of how to transform and thus add value. And as GDP is a measure of value added, as we continue to find new ways of adding value thus we continue to have increases in GDP: economic growth.

So that part of the argument is complete cock.

Then there\’s this, which is also complete cock but for a different detailed reason even if the same overall one: that Ritchie simply doesn\’t understand economics.

This is where we are now. As a matter of fact real wages in many parts of the private sector have risen over the last 30 or 40 years because of increases in productivity because that sector is fundamentally focused upon producing products or commoditised services that can be easily packaged and sold using technology. On the other hand, a great many of the services supplied by the state, whether they be healthcare, education, support for those in need, one-to-one advice, and so on, cannot be enhanced in this way. You cannot teach a class a 50 minute lesson in 30 min and you cannot do a 10 min consultation with a patient in 7 min without some significant compromise on the quality of service supplied occurring. Productivity gains in a great many of the activities undertaken by the state will therefore always, and inevitably, be low.  The claims of those who argue that these services are inefficient as a result and should be privatised as a consequence are just absurd: they’re simply done in real time one to one, and that’s a fact that will not change unless, of course, we want lower standard services (which privatisation does, invariably, deliver as a result).

He\’s got part of Baumol\’s work right. The Cost Disease part. But he\’s entirely ignorant of the other part, the work on invention and innovation. Invention, using Baumol\’s terminology, is the creation of spiffy new things. There\’s not a lot of difference between public and private, planned and market, government and corporate, performance in invention.

Innovation is the spread of these spiffy new things out through the economy so that people can do old things more spiffily, do spiffy new things. Here, public, planned and government perform abominably. Corporate and private don\’t matter all that much: it is market that works best. That constant struggle to find new ways of doing things, new things to do, from which one can gain filthy lucre on which to gorge, is the best thing we\’ve ever found to produce innovation.

And of course, innovation is what leads to productivity growth and thus that economic growth that yes, even within strict resource constraints, we can still have.

All of which leads us to, and I\’m sure you\’ll be incredibly surprised about this, exactly the opposite conclusion that Ritchie has reached. Yes, many essential services are currently supplied by the State. Yes, increasing productivity in services is more difficult than it is in manufacturing. And markets increase productivity better than planning or government does (there are sensible and serious economists (Krugman, P) willing to assert that the Soviet Union, as an example, did not manage to increase factor productivity at all in its entire existence. All growth came from the consumption of more resources.).

Therefore we must convert the current planned, government, provision of services into market based provision (with government financing if you so desire) because that is the way we know how to increase innovation, thus productivity and thus make our children richer than we are.

Oh, and innovation in services? Remember that aspirin, boon of the drinking man? That replaced the comely maiden bathing your forehead with a damp cloth as a cure for a hangover. Innovation in health care by converting a service into a manufactured product. Happens all the time that sort of thing. Which is fortunate, given the shortage of maidens in our modern society. And the desire of many to have the no longer maidens doing a different form of servicing quite possibly during or after the drinking but before the hangover.

It is precisely and exactly Baumol\’s Cost Disease that means we desire market based provision of such services.

Which is the opposite conclusion that Ritchie came to but then you knew that was going to happen right from the start, didn\’t you?

 

16 comments on “Why Ritchie is wrong. Again.

  1. “That’s because we have reached the limits to growth”

    If we’ve reached the limits to growth in output (real GDP), then more government spending is entirely pointless. It will either cause inflation or crowd out private spending, 1:1, fiscal multiplier is -1. End of story. Game over.

    Richie has shot himself in both feet with a bazooka.

  2. Does he think services have reached peak efficiency, that there is no waste in provision of service?
    That 10 minute consultation will take the consultant 10 minutes. But what about the time said consultant is not doing that, what nonsense is he engaged in that can be eliminated. What about the 7 staff who support him directly? Are they all doing valuable work, all the time.

    We could probably halve spending on public services if we could get efficiency up, as shown in studies by John Seddon, but govt does not want to hear this, becuase they want to retain central control for themselves.

  3. Oh an amen to marksany.
    Last time I was involved with our wonderful NHS I could have organised a 100% productivity increase in the department then & there.
    “If you keep proper records you wouldn’t have to ask me the same questions over again. The answers are the same as last week. I haven’t changed sex in the interval.”

    Anyway, that lot confirms my suspicions on Murphy. He’s farming his audience & sponsors. It’s all bollocks. He just puts pseudo-gobbledegook around what they want to hear & peddles it back at them. Shrewd scam. Wonder if I could pull one myself?

  4. And anyone who’s had a course on flogging double glazing or dodgy insurance will know what I mean in that last para. (can’t you just see yourself answering the door to that chubby face with it’s briefcase full of glossy brochures)
    Technique number 3 in the ‘How to Sell” section: Ask the punter about their hobbies & interests & explain HOW OUR PRODUCT is especially suited to ENHANCE & IMPROVE their enjoyment of it. Sign ‘ere Missus.

  5. No, no, you aren’t getting it at all. This is actually more of the “expand the public sector” argument that RM must make to keep his paymasters happy. He’s arguing for vast increases in public sector employment to expand state provision of services. He wants more people engaged in “facilitating the well-being of others” – paid for by the State, of course, no private sector provision please! – and fewer engaged in making “stuff” for people to buy. I’m puzzled as to how such a huge increase in public spending when the economy as a whole is (according to him) at zero growth can be achieved without crowding out the private sector, but there you go.

  6. The people who say that we’ve reached the limits of growth are pretty much of the same mind as those who say that science has found everything and there is no need for scientists any more – in other words nutters.

  7. You cannot teach a class a 50 minute lesson in 30 min and you cannot do a 10 min consultation with a patient in 7 min without some significant compromise on the quality of service supplied occurring.

    Funny, because the first time I used a private hospital I was quite surprised to find that a 30 minute consultation took 30 minutes. Up to then I had only used the NHS and had assumed that a 30 minute consultation consisted of a docter half-listening for 30 seconds before rushing you out the door with a ‘scrip in your hand.

  8. Cannot see why services as a whole should show less productivity growth. Communications services are pretty different in the UK to when there was only a British Telecom line or a letter. What about home entertainment or viewing sport? Some pretty sensational productivity gains there aided, as it usual, by hardware.

    Compare this with public sector education, for instance. Half the school history teachers could usefully be replaced by showings of Simon Schama/ Michael Wood television series with pupils monitored by CCTV. But no. And every university student in the country could be receiving interactive lectures from the top professors in the subject instead of the local PhD student . But no.
    Such choices are merely decisions to refuse productivity gains, which is not the same as gains not being available.

  9. What outsider says. There are hundreds of examples of this. Including stuff with huge productity gains potential (healthcare, education, local transport are some of the first to come to mind) as well as stuff that is currently having a negative impact on wealth (diversity advisers, lot of the bureaucrats) and for which no longer providing the services would result in an immediate positive effect on general productivity

  10. If there is an attempt to restrain any growth by any means outside a national range the logical act is to take out your sword and behead the nation trying to restrict you.
    When you have one foot on the corpse of the restrainer you can grow all you want.

  11. “You cannot teach a class a 50 minute lesson in 30 min”
    Actually you can. According to US research the best teachers can do a year and a half’s curriculum in one school year and still leave time for cheeky questions.
    As for service productivity in hospitals, WTF is a triage nurse for?

  12. Dear Mr Worstall
    Every time I log on to your excellent webpage I see an irritating message telling me “Fantastic! This is not a joke! You are our 1.000.000th visitor! You could win these prizes …”

    Now I am not a mathematical genius but I can see that if I had been the millionth visitor yesterday, I can only be the millionth visitor again today if nobody else has visited, and the number of previous visitors has somehow decreased by one.

    I conclude that either:

    Your site has been invaded by malware from (to judge by the “millionth” notation) somewhere in Europe. Please remove it.

    or:

    You are knowingly taking money from a transparently fraudulent source: which can do your reputation for integrity no good at all. Again, please remove it.

    Tim adds: It’s either Google or Guido as those are the only ads I run. Not much I can do about either.

  13. Thats almost as good as his own readers tearing him to bits for being thick. How ignorant does a person get? and then I ask how dumb is someone when shown the errors they beat the drum harder. Even after the complete destruction of his own argument he then says that he can argue lawyers hollow and knows exactly what he is talking about. Really? I didn’t know it gets this bad.

    http://www.taxresearch.org.uk/Blog/2012/01/13/limited-liability-is-permeable-after-all-shareholders-can-now-pay-for-a-companys-crime/

  14. “You cannot teach a class a 50 minute lesson in 30 min”

    Maybe, but you can increse the class size.
    Is this not an increase in productivity?

    Or not teach them live at all by recording the lesson and lettting anyone who wants to watch it whenever they need it. If I can watch the same lesson twice with an input from the teacher just once then surely this also in an increase in productivity?

  15. “You cannot teach a class a 50 minute lesson in 30 min”

    I have just finished a free online course at Stanford on machine learning. Each week there was about an hour of video lectures. There were of the order of 50K people enrolled. There would have been very little extra cost involved in having 100K students enrolled. Likewise The Khan Academy.

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