Bank of England chief economist Andrew Haldane was named today as chair of the UK government’s Industrial Strategy Council and mandated to focus on the apparent stagnation in productivity in the British economy.
He’s well qualified for the job, with a masters’ degree in economics and almost three decades’ experience working at the central bank.
The Industrial Strategy Council’s being set up by the UK’s Business, Energy and Industrial Department which was created after Prime Minister Teresa May became prime minister in July 2016.
Haldane’s qualifications for his new role were partly based on a speech he made in March 2017, named Productivity Puzzles, in which he explored explanations for signs UK productivity growth is slowing.
“Whether in supporting living standards, or in shrinking their distribution, tackling the global productivity puzzle is among the most pressing public policy issues today,” Haldane said.
The speech said there were five main possible reasons for slowing productivity growth:
- Mismeasurement
- The effect of financial shocks
- Benign monetary policy that is allowing inefficient companies to survive
- Slowing innovation
- Obstacles to technological diffusion to less-innovative firms.
All indeed seem plausible, but there’s a sixth factor.
The rise of service industries is invalidating conventional measures of economic activity.
As Economics2030 explains, services are intangible goods that lack physical characteristics and are, by definition, non-measurable. Statisticians instead use analogues to measure them, including the revenue of firms selling services and the cost of inputs used in public agencies that don’t generate income.
The problem is that the prices attached to services bear no relationship to the value created in service interactions.
For example, the subjectively-assessed satisfaction derived by both buyers and suppliers in restaurants can change radically without it being reflected in prices. Who knows what the value actually is in the interaction between teachers and pupils, doctors and patients and police officers and the owners of homes they protect? And what about the millions working at home to support families without payment? These don’t even figure in national income statistics.
Likewise, the effectiveness of people creating value in services is influenced factors that have no clear connection with the wages they earn or the prices charged for what they produce. In all sectors of the economy, the morale and productivity of workers can be affected by unmanageable factors, including the weather, whether their favourite soccer team is doing well or what’s on television tonight.
So it’s certain that the difference between value creation and measures of economic activity will grow as the proportion of people working in services does. Trends since 1978 suggest that the number working in tangible good production will fall towards zero by the middle of the century. That means GDP data are going to become increasingly meaningless.
Sensibly, in his 2017 speech, Haldane played down the extent to which single or several reforms can make to the data sets upon which productivity calculations are based.
This is now likely to change. The Industrial Strategy is a key element of the programme of the British Conservative government and its deemed success (or failure) could influence the result of the next general election in the UK, which is due in 2022. Haldane’s going to have to come up with something.
But it’s not only the Conservatives that are falling for questionable evidence productivity is slumping.
Labour’s also focusing on the issue.
The truth is that the pursuit of productivity in advanced economies where services dominate is a wild goose chase that, at best, will lead to nothing useful.
It’s more likely that yet more unwanted guidance will be showered on those involved in value-creation in services. For public sector service creators, it’s going to be yet more centrally-managed rules and key performance indicators (KPIs) that undermine morale and waste time.
It’s indisputable that increasing value creation wherever it occurs is a good thing. But in services, there’s little that governments can directly deliver. The state should stick to what it’s best at: ensuring the social and physical infrastructure is freely available when it’s required.
Let the value creators get on with value creation.