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?