How to bury the lede: Nick Crafts on the postwar British productivity failure

27 11 2017

Nick Crafts (born 1948), who is a very senior and respected economic historian at the University of Warwick, has published a new paper on the postwar British productivity failure. It examines why productive grew at a slower rate in the UK than in similar Western European countries in the three decades after 1945, which were, of course, a period when the UK remained, for various reasons, outside of the EEC.

Abstract: British productivity growth disappointed during the early postwar period. This reflected inadequate investment in equipment and skills but also entailed inefficient use of inputs. Weak management, dysfunctional industrial relations, and badly-designed economic policy were all implicated. The policy framework was partly the result of seeking low unemployment through wage restraint by appeasement of organized labour. A key aspect was weak competition. This exacerbated corporategovernance
and industrial-relations problems in the British ‘variety of capitalism’ which sustained
low effort bargains and managerial incompetence. Other varieties of capitalism were better placed to achieve fast growth but were infeasible for Britain given its history.
Keywords: competition; productivity; relative economic decline; varieties of capitalism

In my view, the most interesting and policy-relevant part of this paper appears at the very end. Prof. Crafts has effectively “buried the lede” by tucking this information down near the end, where he writes that the main features of the postwar period of British economic history were

 

ineffective competition policy, nationalization, and protectionism including remaining outside the EEC. This exacerbated problems of corporate governance and industrial relations inherent in the British ‘variety of capitalism’ as the economic rents that were generated helped to sustain low effort bargains and managerial incompetence.

(Bolding added by AS)

This paper builds on Craft’s earlier estimate (2016) that joining the EEC raised the level of UK GDP by about 8 to 10 per cent through increasing the volume of trade and strengthening competition. You can also read his short piece on what history says about Brexit here.

 

 

 

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What does Yanis Varoufakis want?

2 03 2015

That’s the title of a great blog post about Greece’s current finance minister.

By training, Varoufakis is not an economist, but a mathematical statistician. And similar to many academics who migrated from the ‘hard’ sciences to economics, Varoufakis has built a career on ridiculing economists’ inferior abilities in math and statistics. Also economists’ too simplistic belief in the miracles of the markets, their tendency only to see positive sides to technological progress, and the idea that to do economics is to build simple mathematical models, is derided by Varoufakis in witty and rhetorically gifted prose. At the same time, Varoufakis has been employed by economic faculties for some twenty-five years, in which he hence felt like an “atheist theologian ensconced in a Middle Ages monastery.”

The whole blog post is well worth reading, even if you are less fascinated by Yanis Varoufakis than I am.





John Turner on the Post-2008 Crisis in the Discipline of Economics

4 10 2013

Professor John Turner, who is a financial historian at Queen’s University Belfast, has posted some interesting thoughts about the post-2008 crisis in economics. The 2008 GFC hasn’t exactly discredited mainstream economics, but it has caused people to ask some tough questions about the limitations of this intellectual tradition.

Five years after the collapse of Lehman Brothers, economists are still picking over the corpse of the financial system in an attempt to understand why the financial crisis happened. Some simply blame capitalism. Such a view is naive at best. For others,and I include myself in this camp, there probably wasn’t enough capitalism. In this op-edRoman Frydman and Michael Goldberg, extremely insightful economists, point the finger of blame elsewhere – the discipline of economics. Economists had totally the wrong economic models in their toolkit – they had models which assumed that the economy works in a mechanistic way, much like a complex piece of machinery. This reduces economics to an engineering problem. But at its heart, economics is a social and political science. The real issue for me is not whether economists had the wrong models (they quite obviously did), but why did they have the wrong models.

Read more here.

The film Inside Job is about the complicity of the economics profession in the policies that led to the GFC. The film talks about possible conflicts of interest and advances a sort of theory of disciplinary capture which is analogous to the regulatory capture often associated with the financial sector.  In regulatory capture, the industry being regulated exerts undue influence over the regulatory body, perhaps through revolving door recruitment. In disciplinary capture, key members of an academic discipline are persuaded to advance  a set of arguments that is congruent with the industry’s PR and lobbying campaigns.

Personally, I don’t think that disciplinary capture explains the more fundamental problems in mainstream economics, which go well beyond the few economists with close ties to Wall Street. I think that the problems in the discipline of economics are much deeper and are rooted in the rational actor to which mainstream economists subscribe. As many people have shown, this model does a poor job of accounting for the behaviour of investors in particular historical contexts. Investors and other participants in capital markets are actually more altruistic than the rational actor model suggests. That was certainly the conclusion I reached in an article that was published earlier this year. That article examines the extent to which  political views of turn of the last century British investors influenced the global allocation of British capital. Much of the existing literature on pre-1914 British investment overseas dismisses the possibility that the pattern in Britain’s capital exports was significantly affected by imperial patriotism. This article suggests that imperial sentiment did indeed influence the destination of British capital exports; at least some British investors were willing to accept a lower anticipated rate of return because they valued the psychological satisfaction of investing in territories that happened to be part of the British Empire.





I fail to see the point of professional economists

9 06 2011

The entrepreneur Luke Johnson has a column in the Financial Times. Yesterday’s column was particularly amusing, as he bashed pretty much the entire economics profession. The opening sentence was “I fail to see the point of professional economists”. It went downhill (or uphill, depending on your perspective) from there.

Here are some of his pearls of wisdom:

“And the most dangerous economist of modern times is surely Alan Greenspan, the former head of US Federal Reserve who cheered America over a cliff.”

“Give me the company of artisans who create tangible things, like the bakers and chefs with whom I work in my restaurant companies. They might lack some of the rhetorical finesse of the economics commentators we read or hear through the media – but their practical skills are of vastly greater value to society than the pseudo-science espoused by Krugman et al. ”

Johnson also wrote: “The fact that most economics textbooks barely mention entrepreneurs – and when they do they miss the point – shows that most “dismal scientists” are out of touch and unversed in the real workings of marketplaces.”

Actually, this last point is a good one indeed.

Although other academics certainly study entrepreneurship, most economists do not.  Indeed, I wrote something about this a few months ago. The following is from a piece I wrote on the intellectual precursors of Joseph Schumpeter, who helped to pioneer the academic study of entrepreneurship in the 1940s.

Given that their teachings had massive implications for business, it is striking that early economists in the English-speaking world rarely spoke about businessmen as a class, let alone particular firms, when analysing the economy. Instead, they dealt with abstractions such as the laws of supply and demand, balance of payments, equilibrium, and comparative advantage. The apparent expectation was that market forces would “naturally” bring different factors of production together and then transport goods to where the price was highest. Nowhere in The Wealth of Nations is the function of the entrepreneur directly discussed, an omission that was repeated in the works of most English-speaking economists of the nineteenth century. [1]

Alas, market forces can only really operate with the aid of flesh and blood human beings. It appears that writers on economic topics in the French speaking world were much more aware of the importance of the individual entrepreneur. Jean-Baptiste Say (1767-1832), a French economist, discussed the role of the entrepreneur in creating value by shifting resources into faster-growing parts of the economy.[2] The word entrepreneur entered the English language very slowly: when the Say’s works were translated into English in 1836, the translator decided to render “entrepreneur” as “adventurer”, a term reminiscent of the investors who had “adventured” or lent money to the Hudson’s Bay Company.[3][4] John Stuart Mill (1806-1873), further refined the concept of the entrepreneur in his 1848 Principles of Political Economy. Mill provided a much clearer distinction than either Cantillon or Say between true entrepreneurs and those  business owners (such as shareholders of a corporation) who assume financial risk without actively participating in the  management of a company.[5] Despite its use by such an influential thinker as Mill, English-speaking economists did not really pay that much attention to the category of the entrepreneurs until the 1940s. According to the Oxford English Dictionary, the most common meaning for entrepreneur in the nineteenth century was “one who ‘gets up’ entertainments, esp. musical performances”.[6]

Mill, it should be noted, devoted just a few pages in his massive tome to the concept of the entrepreneur. At no point in this book did Mill mention the inventor  James Watt (1723-1819) or any of the other entrepreneurs whose innovations were dramatically transforming the world around him.

An economics textbook published by Frank Fetter in New York City 1904 referred to “enterprisers”, but did not really explore entrepreneurship in great depth, confining its discussion to just a few pages out of six hundred.[7] Moreover, this book was unusual in that it spoke about “enterprisers” at all, which is one of the reasons why Fetter has been called “a forgotten giant.”[8]  The economic profession’s  collective sin of omission in this era is striking given that captains of industry such as Rockefeller had then made themselves into  household words in the United States, which was by now the world’s most advanced economy. Despite the visibility of the surnames of particular entrepreneurs such as Ford, Heinz, or in Canada, Eaton in their own homes, early twentieth century economists were simply not that interested in entrepreneurs. Nor did they pay much attention to the reasons why the old-style market economy characterized by  a large number of tiny family firms had been transformed by the rise of the Big Business, that is the emergence of vast impersonal corporations owned by absentee shareholders and managed by salaried executives. Totally committed to their aprioristic approach, English-speaking economists preferred to focus on thought experiments and deductive reasoning about how people would behave in a given circumstance.[9]


[1] Charles A. Tuttle, “The Entrepreneur Function in Economic Literature,” The Journal of Political Economy 35, no. 4 (1927): 504.

[2] Evelyn L Forget, The Social Economics of Jean-Baptiste Say: Markets and Virtue (London: Routledge, 1999).

[3] As the translator noted in a footnote, “the term entrepreneur is difficult to render in English ; the corresponding  word, undertaker, being already appropriated to a limited sense. It signifies the master-manufacturer in manufacture, the farmer in agriculture, and the merchant in commerce ; and generally in all three branches, the person who takes  upon himself the immediate responsibility, risk, and conduct of a concern of  industry, whether upon his own or a borrowed capital. For want of a better  word, it will be rendered into English by the term adventurer” .Jean Say, Traité d’économie politique.  A treatise on political economy  or The production, distribution, and consumption of wealth. By Jean-Baptiste Say. Translated from the fourth edition of the French, (Philadelphia, Grigg & Elliot., 1836), 78.

[4] N. S. B. Gras, “Capitalism-Concepts and History,” Bulletin of the Business Historical Society 16, no. 2 (April 1, 1942): 24.

[5] Bert Hoselitz,  “The Early History of Entrepreneurship Theory, Explorations in Entrepreneurial History”, 3,no. 4 (April 15, 1951), pp 193-220

[6] Second edition, 1989; online version November 2010. <http://www.oed.com:80/Entry/62991&gt;; accessed 17 February 2011. Earlier version first published in New English Dictionary, 1891.

[7] Frank Fetter, The principles of economics : with applications to practical problems (New York: Century, 1904), 265-272.

[8] See blog post by Prof. Jefferey Herbener, http://mises.org/about/3231. Accessed 14 February 2011.

[9] Geoffrey Martin Hodgson, How economics forgot history: the problem of historical specificity in social science (Routledge, 2001).