Capitalism

Neoliberalism Was Supposed to Make Us Richer: Three Reasons Why It Didn’t

How neoliberalism contributed to the productivity slowdown

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By Chris Dillow

Chris Edwards says the privatizations started by Thatcher “transformed the British economy” and boosted productivity. This raises an under-appreciated paradox.

The thing is that privatization isn’t the only thing to have happened since the 1980s which should have raised productivity, according to (what I’ll loosely call) neoliberal ideology. Trades unions have weakened, which should have reduced “restrictive practices”. Managers have become better paid, which should have attracted more skilful ones, and better incentivized them to increase productivity. And the workforce has more human capital: since the mid-80s, the proportion of workers with a degree has quadrupled from 8% to one-third.

Lplong

Neoliberal ideology, then, predicts that productivity growth should have accelerated. But it hasn’t. In fact, Bank of England data show that productivity growth, averaged over 20 years, has trended down since the 1970s.

Why?

It could be that neoliberal reforms did give a short-lived boost to productivity. I’m not sure. As Dietz Vollrath says, economies are usually slow to respond to a rise in potential output. If there had been a big rise in potential output, therefore, it should show up in the data on 20-year growth. It hasn’t.

Another possibility is that the productivity-enhancing effects of neoliberalism have been outweighed by the forces of secular stagnation – the dearth of innovations and profitable investment projects.

But there’s another possibility – that neoliberalism has in fact contributed to the productivity slowdown.

I’m thinking of three different ways in which this is possible.

One works through macroeconomic policy. In tight labour markets of the sort we had in the post-war years, employers had an incentive to raise productivity because they couldn’t so easily reply upon suppressing wages to raise profits. Also, confidence that aggregate demand would remain high encouraged firms to invest and so raise capital-labour ratios. In the post-social democracy years, these spurs to productivity have been weaker.

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Another mechanism is that inequality can reduce productivity. For example, it generates (pdf) distrust which depresses growth by worsening the quality of policy; exacerbating “markets for lemons” problems; and by diverting resources towards low-productivity guard labour.

A third mechanism is that neoliberal management itself can reduce productivity. There are several pathways here:

– Good management can be bad for investment and innovation. William Nordhaus has shown that the profits from innovation are small. And Charles Lee and Salman Arif have shown that capital spending is often motivated by sentiment rather than by cold-minded appraisal with the result that it often leads to falling profits. We can interpret the slowdowns in innovation and investment as evidence that bosses have wised up to these facts. Also, an emphasis upon cost-effectiveness, routine and best practice can deny employees the space and time to experiment and innovate. Either way, Joseph Schumpeter’s point seems valid: capitalist growth requires a buccaneering spirit which is killed off by rational bureaucracy.

– As Jeffrey Nielsen has argued, “rank-based” organizations can demotivate more junior staff, who expect to be told what to do rather than use their initiative.

– The high-powered incentives offered to bosses can backfire. They can incentivize rent-seeking, office politics and jockeying for the top job rather than getting on with one’s work. They can crowd out intrinsic motivations such as professional pride. And they can divert (pdf) managers towards doing tasks that are easily monitored rather than ones which are important to an organization but harder to measure: for example, cost-cutting can be monitored and incentivized but maintaining a healthy corporate culture is less easily measured and so can be neglected by crude incentive schemes.

– Empowering management can increase opposition to change. As McAfee and Brynjolfsson have shown, reaping the benefits of technical change often requires organizational change. But well-paid bosses have little reason to want to rock the boat by undertaking such change. The upshot is that we are stuck in what van Ark calls (pdf) the “installation phase” of the digital economy rather than the deployment phase. As Joel Mokyr has said, the forces of conservatism eventually suppress technical creativity.

All this is consistent with the Big Fact – that aggregate productivity growth has been lower in the neoliberal era than it was in the 1945-73 heyday of social democracy.

I’ll concede that this is only suggestive and that there might be another possibility – that the strong growth in productivity in the post-war period was an aberration caused by firms catching up and taking advantage of pre-war innovations. This, though, still leaves us with the possibility that slow growth is a feature of normal capitalism.

Originally published at Stumbling and Mumbling.


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  • teledyn

    What about Piketty’s thesis, that the so-called growth post ww2 was nothing more than a catch-up of losses due to two disastrous world wars, and as such the 70’s renormalization is only our return to the 2 centuries old 1.8% growth rate?

    • Crossover

      Piketty’s proposition would make sense in a post-70’s world of “sufficient” or excess demand where the same pattern in productivity would emerge. Otherwise there is no way to tell if he’s right, because the turn to neoliberalism has taken its toll on aggregate demand as well.

  • Duncan Cairncross

    As an engineer (retired) that spent a lot of my career improving productivity I can’t be surprised by this
    90% of productivity improvement came from implementing ideas from “the ranks” – in fact I can’t think of anything useful that came down from the top
    People used to be keen to improve things – there was enthusiasm for making things better
    But since the 70’s all of the profit from the work of the 99% has been hoovered up by the 0.1%

    This has taken a few years to percolate into the general unconsciousness – but it has – people don’t expect to benefit from improvements any more

    I do not think that I would get anything like the same buy-in nowadays

    • Rory Short

      Makes sense, those at the coal face, face the circumstances which stimulate innovation. But why go through the hassles of innovation if there is no reward in it?
      The current economic system, which is geared to suck money up the economic pyramid, does not foster innovation.

  • Jordan

    It’s quite inappropriate, in my opinion, to call what happened over the past 30 years “neoliberalism”.

    There has been nothing really, and I mean REALLY, liberalized.

    This article specifically refers to the UK, but in Europe it’s even worse; all the governments increased the public debts, increased the welfare, implemented suicidal immigration policies, increased regulations and increased taxes with few exceptions.

    What is the liberalism that you’re talking about?

    I see a new form of keynesianism, which goes hand in hand with the large corporations, I see money being printed as if there’s no tomorrow, with the consequent inflation exported to the third world, I see the bogus issues of global warming and renewable energies receiving huge incentives from government and draining resources from other sectors where productivity would be more rewarding and bring more benefits and jobs….

    In other words, I still see that governments’ interventions does nothing but altering the correct function of the markets, disrupting with their policies the correct allocation of resources to increase the general wealth.

    Another fallacy of this article, in my opinion, is that it totally disregards the demographic changes that the world has seen over the past decades, with immigration, and with the explosion of population all over the world.

    Nevertheless, the poverty rate has been reduced to level never seen before, in percentage, and the past few decades have performed the largest growth rates ever seen in human history.

    My conclusion is that neoliberalism, at least the little part of it that left unharmed, did work fine, in spite of governments’ intervention; without it, it could have been even better.

    • Duncan Cairncross

      I jumped off the 100th floor and I’m dropping past the 10th floor – no problems so far
      This is what you are saying?

    • Paul May

      “bogus issues of global warming and renewable energies”–strong evidence on why these are bogus, please. Without this strong evidence we can’t really give your arguments any weight.

    • Paul May

      Also: the liberalism being talked about is Milton Friedmann’s economic neoliberalism–to liberalise the market by outsourcing everying possible and reducing market restrictions and regulations.

      Ie, anti-Keynes.

    • Strlngerbell

      I thought comments on Evonomics were supposed to be in English? I’m not fluent in Hyperbole, can someone translate the above comment for me please?

    • Rory Short

      Global warming and renewable energies are not bogus issues they are very real. Renewable energies would reduce the threats posed by global warming. Their uptake would of course turn the fossil fuel companies assets into stranded assets which they don’t like even if it would mean increased chances of survival for ourselves and other organisms that evolved so that they, and ourselves, survived during the Holocene.

    • Michael Brown

      1,000,000% spot on comment, Jordan.

      “ONE OF THE FUNDAMENTAL MYTHS BEING PROMULGATED IS THAT the banking industry was deregulated during the Bush administration, and that this was a major cause of the financial crisis. Nothing could be further from the truth. The regulatory burden was increased significantly during the Bush years. In fact, regulatory cost was at an all-time high (until the current period) during the peak of the bubble (2005– 2007). Banks’ operating statements reflect this cost increase, as does the multithousand-page increase in various government regulatory documents. Government spending alone (excluding costs that the industry incurred and that must be paid by the companies being regulated) on financial regulations (not company bailouts) increased, in adjusted dollars, from $ 725 million in 1980 to $ 2.07 billion in 2007. The financial industry was not deregulated, it was misregulated.”

      Allison, John A.. The Financial Crisis and the Free Market Cure

      (A book not exactly required reading by the people who espouse the views put forth on this site, I understand; but the author was the CEO a successful bank for decades and it is hard to argue that he doesn’t know what he is talking about.)

    • Merrill Holt

      If you don’t think that the last thirty years cannot be called neoliberalism, then you clearly have not done your homework. neoliberalism != liberalism. Go study a bit and then come back to comment.

  • Andy White

    Where to start???

    Neo-liberalism or conservatism has been an absolute failure for reasons which seem quite obvious, when you prioritise profiteering at the top what happens is that you create companies that funnel their wealth to the top of the organisation as opposed to investing in the long term health and interests of the organisation, the work force or the customers to the detriment of the company itself.

    The push for efficiency has been misguided as it has been focused entirely on reducing costs at all costs, rather than investing in projects, training, staff, products or anything else that would actual help the business grow (and contribute into the real world / main street economy, with the knock on growth that brings as well as public good will) companies have become ever more “penny pinching” the notion of skimming off the fat that Thatcher talked about took away the healthy working grease that kept productivity growing.

    The drive for paying managers more, and stopping paying for “expert skills” in the lower ranks stripped many companies of experienced staff who were good at their jobs, and able to provide genuine on the job training to new recruits, the pushing of these people into management often took them away from their actual skill sets and fields of competency and created a layer of management that wasn’t actually good an managing and often felt uncomfortable/unconfident as such were simply poor. This concept also had a huge disadvantaging effect in terms of “idea theft”, where as previously ideas where something that people talked about and shared for the benefit of the company, they became ways for the unscrupulous to seal and take credit for other peoples thoughts and ideas in the desperation to “get ahead”.

    The replacement of skilled professionals with “contractors” also had a significant impact in terms of quality of service on a number of levels, most significantly was that they had no loyalty to companies that hired them nor any responsibility for the end product, often they would take on projects and agree to the stipulations that mangers put forward irrespective of if the demands of management where possible or not.

    The idea that good management or rank based hierarchies are bad for companies is counter intuitive nonsense, good managers know when to “relax” and let workers work, it’s bad and poor managers who micromanage, and rank based hierarchies give a sense of cohesion as well as the pay bumps that climbing them brings.

    In terms of companies probably the worst change that neoliberalism and the anti-union practices brought was the devaluing of workers the work force and resultant disenchantment that turned highly functional organisation that had workers engaged and invested in the concept of a job for life (and hence an active two way commitment with their employers) into a mass of embittered paycheck slaves watching the clock. The stopping of training, ending of apprenticeships all had severe impacts.

    —————————————————-

    When it came to the local and national economy the drive for “efficiency” at all costs had a simple effect it stopped companies from being community wealth generators, The trickle down replaced rising tide that social democracy had been promoting and unsurprisingly to anyone who has studied John Maynard Keynes, the New Deal or any Enlightenment era philosophy of economics from Adam Smith on.

    It was only those who bought into the twisted ideology of Ayn Rand and her take on Nietzsche’s concept of the ubermensch that believed that selfish greed and chopping away the roots of economic prosperity was a good idea.

  • jothwu

    What is “normal capitalism”?

    Is it capitalism as defined by the one percent who have the political clout to rig the economy in their favor or is it the capitalism we accept as inevitable?

    http://jothwu.blogspot.com/2017/02/blaming-capitalism.html

    • Rory Short

      ‘The people’ have to work continuously to ensure that society benefits everybody. Any imbalance in the flow of money will only get worse as those benefitting from the imbalance strive to maintain and increase it. In my view capitalism is the impeding of the flow of money within an economy by accumulation instead of the money circulating.

  • Marcos Taranta

    Hi, can you explain why during the 70’s (Reagan Era) the average wage of workers raised instead of falling, which in the case of neoliberal politics of Reagan + Friedman should fall?

    • Ramone

      Ronald Reagan was first elected in 1980 and re-elected in 1984. The 1970s was not the “Reagan era”.

      • Marcos Taranta

        Ok, sorry for the mistake.
        But still, the average and minimum wage on USA hasn’t suffered by the neoliberal economic policies of the Reagan / Friedman era, how come?

        • worker

          If the average and minimum wages in the US are your benchmarks, I strongly suggest you have a look at wage spreads and levels of enfranchisement in many less wealthy nations. In direct reply to your question, I’d suggest it’s hard to further reduce nearly nothing before people take to the street with pitchforks; I’m amazed folks in the US will work three menial jobs just to keep heart and soul together, and still believe it’s the best country in the world, and that anyone can be president etc. etc.

          • Marcos Taranta

            I gree, it is insane.
            But still, for me its obvious that during the reagan era because of neoliberal politics the average and minimum wage would stagnate or won’t rise like the previous years.

  • RMGH

    As a former “innovator”, the problem is simply one of motivation. There is no MOTIVATION to innovate because no one wants to pay for said innovation. Why should I – or anyone for that matter – work 60+ hours a week in a laboratory with a doctorate that took 7 years (full time) to complete with a post-doc’s…ahem…salary of bout $40k w limited benefits? Chances of landing a “real job” after all that are slim and people are often stuck in post-doctoral hell for a decade. By then they are in their 40’s and have about 10 years of work left in them before they are downsized because they are too old. The life of an innovator should not include a vow of life-long poverty.

    R&D is tough. Basic research is even tougher. The nature of the beast means you walk down 99 blind alleys before you get to one that might hit pay dirt. That slog is the price of INVENTION which is followed by innovation. They are not the same and you need the first to get to the second. There are no shortcuts. And the slog is not a profit- making affair.

    Since I acquired my doctorate, the NIH and NSF budgets have been slashed. Scientists from my generation either have a spouse with a “real job” or are independently wealthy. All the while, the talking heads and monied elites are clanging the alarm bell about a nonexistent STEM shortage.

    Meanwhile, back in the real world, in hospitals around the world, we are staring down the barrel of gun called antibiotic resistance. Soon we will be in a post-antibiotic era where simple surgeries will again become life or death affairs. Want that knee replacement? Too bad. How about that heart valve? Not happening. All because the risk of death to post-operative infection will soar because our arsenal of antibiotics will be ineffective.

    So why isn’t big pharma or biotech interested in this issue? Simple. It’s not a money maker. We used to rely on the PUBLIC SECTOR (academia) for such situations. But that’s now on life support and a lot of the scientists who could have addressed this issue have been forced out of the field. So now a lot of people will DIE because everything has been reduced to the value of a dollar.

    No answers here. Only the observation that when you reduce EVERYTHING to the value of money you end up with nothing of real worth.

    • Rory Short

      Absolutely!

      • Dick Burkhart

        I’ve had your “holder history” idea for a long time. The greatest benefit be that the government could then control the creation of all money, cutting out a lot of financial scams and waste. And the government could choose to issue new money to public banks for needed infrastructure and R&D and the like, so that most private banking could only loan existing money on deposit. All forms of speculation would be knee-capped, resulting in enormous savings.

        • Rory Short

          Absolutely Dick, but with fiat currencies, modern IT and smart phone Apps the Government needs only to supply the system that would allow the individual, who was short of enough money to make a purchase, to trigger the production of the amount of new money they needed to complete the purchase. The new money is recorded against the individual as non-interest paying debt and settled as and when the individual earns money. There would need to be a limit on the amount of new money debt any individual can carry at any point in time. That is all. The amount of money in circulation would naturally be the amount that is needed. Neither government or any other institution would have any legitimate reason to be producing new money. Money would fulfill its proper purpose, to facilitate the, exchange of goods and services, and once the new money debt was settled the new money would have gained its backing value and could then legitimately be used for investment purposes. Money system induced inflation would cease. Govt would no longer need to try control inflation through interest rates, interest rates for borrowing would be set through competition in the market.

  • I appreciate the measured tone of the hypotheses in this piece. Too bad the hed doesn’t match them.

    The arguments for why neoliberalism has led to poor management seem at least plausible in the short run, for some firms, but there is not explanation for why they would continue in the long run, once the problem was identified.

    • Strlngerbell

      Its actually quite simple to identify the problem. Neoliberlaisim begets neoliberal outcomes.

  • roboser

    The Thatcher privatisation agenda was mainly about ideology and politics. The politics aspect is that State owned utilities do not spend enough on capital expenditure since this inevitably requires increasing taxes or public debt, and stable pricing.
    Under privatisation the state does not have these pressures and, more significantly, price increases to generate the necessary funds are shifted to the private operator.
    This is why in practice government owned utilities tend to be run down and do not provide an adequate service. Mrs Thatcher was shrewd enough to understand the conflicts in owning and operating railways etc. I doubt productivity was a consideration.

    • Rory Short

      That makes sense. We have an up and down crisis with the State owned Electricity utility in South Africa because maintenance and investment in increased generating capacity have been lacking. It is funny that one, actually wasteful, expenditure that governments are always prepared to make is warfare.

  • Rory Short

    Any economic view of the human community needs to take the following into account.

    Every child born has potential and it is in the community’s best interest to try to provide the best possible enabling environment for this to be realised. In my view any economic theory that does not promote this view is fundamentally flawed.

  • Red Wine Please

    I’m not convinced the problems are the result of neo-liberalism.Neo-liberalism is just another ineffective tool to mitigate the impact of the third (70’s) and fourth (now) industrial revolutions that are impacting mature countries and rapidly progressing emerging ones: Abundant and inexpensive energy, instant communications, automation, inexpensive and efficient transportation, robotics, and AI.

    Keynesian fiscal handouts or regulatory protectionist measures to keep non-productive and expensive labor employed are not solutions either. Only a delaying tactic.

    Humans are getting expensive, obsolete, or redundant in most industries. Lifetime employment except in government and other protected industries, is dead. No pensions, only 401K’s and IRA’s. Even China’s Foxcom, maker of the iPhone, has demonstrated it wants to replace it’s 100’s of thousands of workers with robots. It’s not a coincidence that the US economy has rolled over from a manufacturing to a service economy. AI and robots is only going to increase that rate of change.

    As mentioned in other replies, mature industries are reluctant to invest long term in R&D due to short term stock price impacts.

    I have no solutions. I’m riding the same train as everyone else. However, maybe we should look back at history for impacts and possible mitigating solutions. Consider the change that machines did to agriculture and the impact it did between generations, and current tech within the same generation.

    A simple example will drive home where we are going. Will Watson make the doctor, the nurse, or the parent more productive and effective in diagnosing illness and prescribing solutions for a child’s illness? The answer in order of increased productivity and effectiveness: parent, nurse, then doctor. Doesn’t this mean the doctor will NOT get an increase in compensation due to Watson. And the parent will gain the benefits from Watson at almost no cost.

    Why? The marginal cost to IBM of distributing Watson’s knowledge to a parent is almost zero!

    That’s where we are heading.

  • Dick Burkhart

    Of course neo-liberalism was bad for growth, for the reasons listed and more. But don’t forget that the post WWII era was, quite literally, fueled by decades of cheap oil. Combine that with New Deal economics and politics that prevented today’s horrendous waste of resources on the rich, and you have formula for amost guaranteed high growth. Neo-liberalsim is all about the greed of the elites, who wanted to keep growing their wealth when limits-to-growth set is to slow it down for economies as a whole. That is, the only way they can do it, is to exploit the rest of us. The result: Donald Trump and bigger disasters to come, as working people, justifiably, lose faith in the system, but don’t know what to do (so they turn to the double talk of tyrants).