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Our automated future is brighter than Karl Marx or Mark Carney would ever suggest

Our automated future is brighter than Karl Marx or Mark Carney would ever suggest

Mark Carney, the governor of the Bank of England, hit the headlines at the weekend, claiming that Marxism could once again become a prominent political force in the west.

Automation, it seems, may not just destroy millions of jobs. For all except a privileged minority of high-tech workers, the collapse in the demand for labour could hold down living standards for decades. In such a climate, Communism may seem an attractive political option.

Karl Marx as an economist is a bit of a curate’s egg, good in parts. In the late eighteenth and early nineteenth centuries, it was obvious that the system of factory production was dramatically different to anything which had ever existed, but it was thought that might disappear just as suddenly as it had emerged.

Marx was the first major economist to see that the accumulation of capital in factories represented a new, permanent structure of the economy: capitalism. He developed a theory of the business cycle, the short-term fluctuations in economic growth, which is much more persuasive than the equilibrium-based theories which dominate academic macroeconomics today.

But he was completely wrong on a fundamental issue. Marx thought, correctly, that the build-up of capital and the advance of technology would create long-term growth in the economy. However, he believed that the capitalist class would expropriate all the gains. Wages would remain close to subsistence levels – the “immiseration of the working class” as he called it.

In fact, living standards have boomed for everyone in the west since the mid-nineteenth century. Leisure hours have increased dramatically and, far from being sent up chimneys at the age of three, young people today do not enter the labour force until at least 18.

Marx made the very frequent forecasting mistake of simply extrapolating the trend of the recent past.

In the early decades of the Industrial Revolution, just before he wrote, real wages were indeed held down, as the charts in Carney’s speech show. The benefits of growth accrued to those who owned the new machines. Marxists call this the phase of “primitive accumulation”.

But such a phase has characterised every single instance of an economy which enters into the sustained economic growth of the market-oriented capitalist economies, from early nineteenth century England to late twentieth century China.

Once this is over, the fruits of growth become widely shared.

In fact, Carney’s own charts give grounds for optimism and contradict the lurid headlines around his speech. One is headed “Technology driving labour share down globally”. In other words, the share of wages and salaries in national income has been falling. In the advanced economies, this was some 56 percent in the mid-1970s and is 51 percent now. But all the drop took place before the mid-2000s. If anything, the labour share has risen slightly since.

Similarly, inequality has increased over the past 40 years, but almost all the increase took place in the 1980s. Depending which measure we take, it has either stabilised or fallen since 1990.

The future looks more optimistic than either Marx or Carney suggest.

As published in City AM Wednesday 19th April 2018

Image: Car Factory by Jens Mahnke is licensed under CC0.0
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There’s a difference between priceless and worthless, but economics can’t measure it

There’s a difference between priceless and worthless, but economics can’t measure it

The so-called “productivity puzzle” just does not go away.

The October, employment figures released by the Office for National Statistics (ONS) brings it into focus.

The number of people in work rose to a new record high of 32.1m, with an increase of around one per cent compared to a year ago.

Total output, measured by GDP, continues to rise, but modestly. We do not yet have official estimates for the year to October, but GDP seems to be up by some 1.5 per cent.

Productivity is defined as output per worker, so it is only around 0.5 per cent higher than a year ago. No scientific consensus has yet emerged to explain why productivity growth continues to be so low.

But there is increasing evidence that the rate of growth of output is being systematically underestimated.

The economy cannot be put in a set of scales and measured. Its size has to be estimated, and the ONS uses a wide variety of methods to do this.

The fundamental problem is that the foundations for estimating GDP were built in the 1930s and 1940s, when the economy was dominated far more by manufacturing. Measuring how many things have been produced is inherently easier than measuring services.

The ONS does not stand still, and tries to take account of the massive changes in the economy which have taken place. But the rise of the internet economy brings entirely new problems to solve.

A key one is what the futurologist Alvin Toffler many years ago called the “prosumer” sector.

Traditionally, products are developed and sold by companies, and consumed by, well, consumers.

In the prosumer sector, consumers themselves participate in the production and development of products and services.

A good example is the statistical package R. This is open source, and freely and readily downloadable by anyone.

In recent years, R has become the package of choice for young scientists in a wide range of disciplines around the world. They both use it, and contribute to its development by uploading their own algorithms.

A huge range of routines can be downloaded. Its graphics features are amazing. Software is appearing on it that has the potential to take on commercial giants such as Word and Powerpoint.

It has become a very valuable tool for scientific research, using the word “valuable” in its every day sense of the word. But it is run by a small not-for-profit foundation, so in ONS terms its value is close to zero.

The problem is that R is what economic theory describes as a “public good”.

This jargon phrase applies to anything where anyone can consume it, and where the supply never runs out. No matter how many people use R, it is always available for the next person.

For most goods and services, this is just not true. When I put my swimming towel on the pool lounger, it is no longer available to you.

The prosumer sector creates a lot of output. But economics has not yet solved the question of how to value public goods.

As published in City AM Wednesday 8th November 2017

Image: Vintage Scales by Public Domain Pictures is licensed under CC by 0.0
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Does the productivity gap actually exist?

Does the productivity gap actually exist?

Whoever wins the election tomorrow will have to grapple with what appears to be a fundamental economic problem. Estimated productivity growth in the UK is virtually at a standstill.

The standard definition of productivity is the average output per employee across the economy as a whole, after adjusting output for inflation – or “real” output, in the jargon of economics.

The amount in 2016 was the same as it was almost a decade ago in 2007, immediately prior to the financial crisis.

Productivity is not just some abstract concept from economic theory. It has huge practical implications. Ultimately, it determines living standards.

Productivity is real output divided by employment. The Office for National Statistics (ONS) has a pretty accurate idea of how many people are employed in the economy. They get data from company tax returns to HMRC.

What about output? The ONS uses a wide range of sources to compile its estimates. But these essentially provide it with information about the total value of what the UK is producing.

The ONS has the key task of breaking this number down into increases in value which are simply due to inflation, and those which represent a rise in real output.

This problem, easy to state, is fiendishly difficult to solve in practice. To take a simple illustrative example, imagine a car firm makes exactly 10,000 vehicles of a particular kind in each of two successive years, and sells them at an identical price. It seems that real output is the same in both years.

But suppose that in the second year, the car is equipped with heated seats. The sale price has not changed. But buyers are getting a better quality model, and some would pay a bit extra for the seats. So the effective price, taking into account all the features, has fallen slightly.

Assessing the impact of quality changes is the bane of national accounts statisticians’ lives. The car example above is very simple. But how do you assess the quality change when, for example, smartphones were introduced?

The ONS and its equivalents elsewhere, such as the Bureau of Economic Analysis in America, are very much aware of this problem. But even by the early 2000s, leading econometricians such as MIT’s Jerry Hausman were arguing that the internet alone was leading inflation to be overestimated by about 1 per cent a year, and real output growth correspondingly underestimated.

Martin Feldstein is the latest top economist adding his name to this view. Feldstein is a former chairman of the President’s Council of Economic Advisers, so he is no ivory tower boffin.

In the latest Journal of Economic Perspectives, Feldstein writes:

“I have concluded that the official data understate the changes of real output and productivity. The measurement problem has become increasingly difficult with the rising share of services that has grown from about 50 per cent of private sector GDP in 1950 to about 70 per cent of private GDP now”.

The Bean report into national accounts statistics last year acknowledged these problems. It could well be that there is.

As published in City AM Wednesday 7th June 2017

Image: Smartphone by JÉSHOOTS  is licensed under CC by 2.0
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