How big should the UK manufacturing sector be?

Last Friday I made a visit to HM Treasury, for a round table with the Productivity and Growth Team. My presentation (PDF of the slides here: The UK’s productivity problem – the role of innovation and R&D) covered, very quickly, the ground of my two SPERI papers, The UK’s innovation deficit and how to repair it, and Innovation, research and the UK’s productivity crisis.

The plot that provoked the most thought-provoking comments was this one, from a recent post, showing the contributions of different sectors to the UK’s productivity growth over the medium term. It’s tempting, on a superficial glance at this plot, to interpret it as saying the UK’s productivity problem is a simple consequence of its manufacturing and ICT sectors having been allowed to shrink too far. I think this conclusion is actually broadly correct; I suspect that the UK economy has suffered from a case of “Dutch disease” in which more productive sectors producing tradable goods have been squeezed out by the resource boom of North Sea oil and a financial services bubble. But I recognise that this conclusion does not follow quite as straightforwardly as one might at first think from this plot alone.

UKSectoralMFP

Multifactor productivity growth in selected UK sectors and subsectors since 1972. Data: EU KLEMS database, rebased to 1972=1.

The plot shows multi-factor productivity (aka total factor productivity) for various sectors and subsectors in the UK. Increases in total factor productivity are, in effect, that part of the increase in output that’s not accounted for by extra inputs of labour and capital; this is taken by economists to represent a measure of innovation, in some very general sense.

The central message is clear. In the medium run, over a 40 year period, the manufacturing sector has seen a consistent increase in total factor productivity, while in the service sectors total factor productivity increases have been at best small, and in some cases negative. The case of financial services, which form such a dominant part of the UK economy, is particularly interesting. Although the immediate years leading up to the financial crisis (2001-2008) showed a strong improvement in total factor productivity, which has since fallen back somewhat, over the whole period, since 1972, there has been no net growth in total factor productivity in financial services at all.

We can’t, however, simply conclude from these numbers that manufacturing has been the only driver of overall total factor productivity growth in the UK economy. Firstly, these broad sector classifications conceal a distribution of differently performing sub-sectors. Over this period the two leading sub-sectors are chemicals and telecommunications (the latter a sub-sector of information and communication).

Secondly, there have been significant shifts in the composition of the economy over this period, with the manufacturing sector shrinking in favour of services. My plot only shows rates of productivity growth, and not absolute levels; the overall productivity of the economy could improve if there is a shift from manufacturing to higher value services, even if productivity in those sectors subsequently grows less fast. Thus a shift from manufacturing to financial services could lead to an initial rise in overall productivity followed eventually by slower growth.

Moreover, within each sector and subsector there’s a wide dispersion of productivity performances, not just at sub-sector level, but at the level of individual firms. One interpretation of the rise in manufacturing productivity in the early 1980’s is that this reflects the disappearance of many lower performing firms during that period’s rapid de-industrialisation. On the other hand, a recent OECD report (The Future of Productivity, PDF) highlights what seems to be a global phenomenon since the financial crisis, in which a growing gap has opened up between the highest performing firms, in which productivity has continued to grow, and a long tail of less well performing firms whose productivity has stagnated.

I don’t think there’s any reason to believe that the UK manufacturing sector, though small, is particularly innovative or high performing as a whole. Some relatively old data from Hughes and Mina (PDF) shows that the overall R&D intensity of the UK’s manufacturing sector – expressed as ratio of manufacturing R&D to manufacturing gross value added – was lower than competitor nations and moving in the wrong direction.

This isn’t to say, of course, that there aren’t outstandingly innovative UK manufacturing operations. There clearly are; the issue is whether there are enough of them relative to the overall scale of the UK economy and whether their innovations and practises are diffusing fast enough to the long tail of manufacturing operations that are further from the technological frontier.

The Utopia of the Machines

What would a society and economy look like if it was comprised, not of flesh and blood humans, but of disembodied emulations of human minds, some occupying robots of all speeds, shapes and sizes, others completely disembodied, running in simulations of virtual reality in city-size cloud computing facilities? This is the premise of a sustained exercise in futurology by the economist Robin Hanson, in his recently published book “The Age of Em”.

This vision is underpinned by Hanson’s confidence that economic growth is destined to accelerate, driven by technological progress in computer power and nanotechnology, together with his transhumanist conviction that technology will bring about irreversible and far-reaching changes in the human condition.

But his vision, radical though it may seem, is tempered by conservatism in two respects. Unlike many transhumanists and singularitarians, he is deeply sceptical about the possibilities of creating artificial general intelligence. This is interesting, given that Hanson’s technical expertise, before becoming an academic economist, was in the field of AI. Secondly, he is remarkably confident about the applicability of his current understanding of social science to the dramatically changed circumstances of his vision of the future, which implies a degree of constancy of human nature even in the face of dramatic changes in its material circumstances.

While Hanson may be sceptical about the possibility of hand-coded artificial general intelligence, he is not sceptical enough about the idea of mind uploading. I’ve described at length why I think, with some confidence, that it will not be possible any time soon to simulate the operation of a human brain with enough fidelity to constitute a meaningful emulation of the mind (in my e-book Against Transhumanism, v1.0, PDF 650 kB – the most relevant chapter of which appeared on this blog as “Your mind will not be uploaded”). Rather than summarising a long argument I’ve made elsewhere, here I’ll just pick out a few key points.

The first is to stress that the basic unit of computation of the brain is not the neuron, or even the synapse, it is the molecule. This means that Ray Kurzweil style back-of-the-envelope comparisons of the numbers of neurons in brains with the future numbers of transistors in microprocessors, as extrapolated from Moore’s Law, are wrong by multiple orders of magnitude.

The second concerns the question of the correct level of coarse-graining at which it is sufficient to simulate the brain’s operation. To faithfully simulate the operation of a microprocessor, one doesn’t need to worry about what its individual atoms and electrons are doing, because there is a clean separation of the underlying solid state physics from the operation of the higher level components of the circuits, the transistors. It is this separation of levels that allows us to model the operations of the circuit at a level of digital abstraction, in terms of ones and zeros and the operation of logic gates. This doesn’t happen by accident; it is a product of how we design integrated circuits. The brain, however, is not the product of design, it is the product of evolution, and for this reason we can’t expect there to be such a digital abstraction layer.

A final point that is worth stressing arises from Hanson’s description of his “ems” – mind emulations – as fully formed individual consciousnesses capable of learning and changing. This means that the process of “uploading” a consciousness from a flesh and blood brain to a digital simulation needs to involve not just creating a snapshot of the brain in molecular detail at the time of “uploading”, difficult enough though that is to envisage. Because in the operations of the brain, there are no firm distinctions between hardware and software – the processes of learning and development involve physical changes at both the molecular and physiological levels. So constructing our our emulation would not just need a map of the connectivity of neurons and synapses and details of their molecular configurations at the moment of “upload”; it would need to incorporate a molecularly accurate model of brain development and plasticity, a task on an even greater scale.

The other strong claim of Hanson’s book concerns the predictive power of current social science. His argument is that our understanding of human nature and the operations of human societies – based largely on economics and evolutionary psychology – is now sufficiently robust that, even given the radical changes implied by human minds becoming unshackled from their fleshly bodies, meaningful predictions can be made about the character of the resulting post-human societies. I don’t find this enormously convincing.

One issue is that Hanson often is simply unable to make firm predictions; this is commendably even-handed, but somewhat undermines his broader argument. For example, he asks whether “ems” will be more or less religious than fleshly humans. It depends, it would seem, on how much importance em society attaches to innovation. “So if the innovation effect is important enough, ems will be less religious; otherwise, they’ll be more religious.” I imagine he’s not able to rule out the possibility that their degree of religiosity remains about the same, either.

One argument that Hanson makes considerable play of is a dichotomy in value systems associated with forager communities and farmer communities. He argues that modern societies have moved away from the communitarian values of farming societies back towards the more individualistic values that he believes characterised forager societies. On this basis, having argued that, for many ems, farmer-like values will once again be more favoured, he predicts that these ems will tend to prioritise self-sacrifice, patriotism and hard-work.

This general line of argument has a long pedigree, essentially following the Marxist principle that it is a society’s mode of production which determines the superstructure of its institutions and values, with a more recent gloss from evolutionary psychology. The specific farmer/forager dichotomy will seem problematic to many on empirical grounds, though. How do we know what forager values actually were? Very few forager societies survived in any form into historical times, that handful that did may have been influenced by surrounding farmer communities, and what we know about their values is mediated by the biases of the anthropologists and ethnographers that recorded them. Most of what we know about foragers and hunter-gatherers necessarily comes from archaeology, which unavoidably deals in the material remains of vanished cultures. The archaeological study of prehistoric mentalities is fascinating and current, but methodologically difficult. The early tendency was to argue on the basis of analogies with historical forager communities, now recognised to be problematic for the reasons we’ve just seen, while the nature of what remains to be studied naturally and inevitably biases archaeologists towards materialist explanations.

Even if one accepts a correlation between a society’s mode of production and the character of its predominant social institutions and values, it’s not at all clear in which direction causality runs. There’s a fashionable (and to me pretty convincing) line of argument from economists like Daron Acemoglu that the quality of a society’s institutions is a prime determinant of their economic success. Meanwhile a dominant strain of thinking about the origins of the historical transition to an industrial economy puts ideals and values ahead of materialist explanations such as the availability of fossil fuels. In the latter argument I’m personally much more in the materialist camp, but I find it difficult to reject the idea that the economic base of a society and its values and institutions must co-develop, rather than one simply being determined by the other.

If the empirical underpinnings of the forager/farmer polarity are dubious, its applicability to Hanson’s hypothetical future seems even more difficult to justify. The question that has to arise here is why one should believe that the opposition is strictly binary. There’ve been many different ways in which economies have been organised in the past – the slave economies of antiquity, feudal systems, nomadic pastoralism, capitalist industrial societies, state socialist economies, and so on – and it’s easy to argue that each has been accompanied by its own particular package of institutions and values. Given the massive scale of change Hanson is anticipating in his post-human economy, it’s difficult to see why we shouldn’t expect the emergence an entirely new package of values, which to us would probably seem very alien, rather than a reversion to a set of values supposed to be appropriate to some previous historical state.

So how should one read “The Age of Em” – what genre of writing should it be ascribed to? In my opinion it doesn’t succeed as a straight work of non-fiction; the technical underpinnings of its premise are not credible, and the social science bases of its speculations, interesting though they are, are not, to my mind, robust enough to sustain the weight of argument erected on them. On the other hand, it is clearly not by itself science fiction. It’s certainly an impressive exercise in world-building, which, with the addition of plot and character, would have the potential to make a spectacular series of novels.

But it occurs to me that the book might best be thought of as a Utopia, in the sense of Thomas More’s original. Stylistically, one can see the relationship, in the travelogue-like tone of the writing, dispassionate but not at all unsympathetic to the inhabitants of the strange world he’s describing. And there’s an ambiguity about what a reader might take to be the purpose of the exercise. What is described is a world which to some readers, perhaps, might seem admirable and enviable. It’s a world in which the vicissitudes and distractions of the flesh are absent, and as described by Hanson it’s a competitive world, meritocratic on the basis of pure intellect and character. Since the basic social unit consists of multiple emulations of a successful individual, readers who identify themselves with one of the “uploads” can imagine themselves surrounded by people just like them.

Or perhaps we should read it, as some have read More’s Utopia, as a satire on current society. What, we might ask, would a description of an economy completely decoupled from the needs and desires of flesh-and-blood human beings tell us about our world today?

Even more debate on transhumanism

Following on from my short e-book “Against Transhumanism: the delusion of technological transcendence” (available free for download: Against Transhumanism, v1.0, PDF 650 kB), I have a long interview on the Singularity Weblog available as a podcast or video – “Richard Jones on Against Transhumanism”.

To quote my interviewer, Nikola Danaylov, “During our 75 min discussion with Prof. Richard Jones we cover a variety of interesting topics such as: his general work in nanotechnology, his book and blog on the topic; whether technological progress is accelerating or not; transhumanism, Ray Kurzweil and technological determinism; physics, Platonism and Frank J. Tipler‘s claim that “the singularity is inevitable”; the strange ideological routes of transhumanism; Eric Drexler’s vision of nanotechnology as reducing the material world to software; the over-representation of physicists on both sides of the transhumanism and AI debate; mind uploading and the importance of molecules as the most fundamental units of biological processing; Aubrey de Grey‘s quest for indefinite life extension; the importance of ethics and politics…”

For an earlier round-up of other reactions to the e-book, see here.

How cheaper steel makes nights out more expensive (and why that’s a good thing)

If you were a well-to-do Londoner in mid-to-late-18th century London, 1 shilling and sixpence would buy you a decent seat for a night out at the opera. Alternatively, if you were a London craftsman – a cutler or a tool-maker – the same money would allow you to buy in a kilogram of the finest Sheffield steel, made by Benjamin Huntsman’s revolutionary new crucible process. A reasonable estimate of inflation since 1770 or so would put the current value of one and six at about ten pounds. I don’t get to go out in London very much, and in any case opera is far from my favourite entertainment, but I strongly suspect that £10 today would barely buy you a gin and tonic in the Covent Garden bar, let alone a seat in that historic opera house. A hundred pounds might be more like it as a minimum for a night at the London opera now – and for that money you could buy not one, but a hundred kilograms of high quality tool-steel (though more likely from China than Sheffield).

This illustrates a phenomenon first identified by the economist William Baumol – in an economy in which one sector (typically some branch of manufacturing) sees rapid productivity gains, while another sector (typically a service sector – such as entertainment in this example) does not, then the product of the sector with low productivity will see an increase in its real price. Continue reading “How cheaper steel makes nights out more expensive (and why that’s a good thing)”

Innovation, research and the UK’s productivity crisis

My article on the UK’s productivity slowdown has now been published as a Sheffield Political Economy Research Institute Paper, and is available for download here. Here is its introduction/summary:

The UK is in the midst of an unprecedented peacetime slowdown in productivity growth, which comes on top of the nation’s long-standing productivity weakness compared to the USA, France and Germany. If this trend continues, UK living standards will continue to stagnate and the government’s ambition to eliminate the deficit will fail. Productivity growth is connected with innovation, in its broadest sense, so it is natural to explore the connection between the UK’s poor productivity performance and the low R&D intensity of its economy. More careful analyses of productivity look at the performance of individual sectors and allow some more detailed explanations of the productivity slowdown to be tested. The decline of North Sea oil and gas and the end of the financial services bubble have a special role in the UK’s poor recent performance; these do not explain all the problem, but they will provide a headwind that the economy will have to overcome over the coming years. In response, the UK government will need to take a more active role in procuring and driving technological innovation, particularly in areas where such innovation is needed to meet the strategic goals of the state. We need a new political economy of technological innovation.

SPERI-Paper-28-Innovation-research-and-the-UK-productivity-crisis cover

UK productivity – still no sign of recovery

The UK’s Office of National Statistics today released the latest figures for labour productivity, to the end of 2015. This shows that the apparent recovery in productivity that seemed to be getting going half way through last year was yet another false dawn; productivity has flat-lined since the financial crisis, with the Q4 2015 value actually below the peak achieved in 2007. This performance puts us on track for the worst decade in a century. Poor productivity growth translates directly into stagnating living standards and lower tax revenues for the government, meaning that, despite austerity, all their efforts to eliminate the fiscal deficit will be in vain.

As this is perhaps the most serious economic problem currently facing the UK, it’s good to see the issue becoming more widely discussed. It’s an issue I’ve been thinking about for some time; my post on the political implications of the productivity slowdown, as revealed by this March’s budget and its aftermath, is here: The political fallout of the UK’s productivity problem. Last summer, I wrote a series of blogposts exploring the origins of this productivity slowdown. I’ve written a draft paper based on a substantially revised and updated version of those posts:

Innovation, research, and the UK’s productivity crisis (1.4 MB PDF).

quarterly productivity Q4 2015

Labour productivity: output per hour. ONS Labour Productivity Dataset, 7 April 2016.

“Against transhumanism” – a round-up of reactions so far

It’s about three months since I released my free ebook “Against transhumanism: the delusion of technological transcendence”, and I’m pleased to see from my log files that since then it’s been downloaded more than 10,000 times (many of these may, of course, be repeat customers, or indeed sentient bots roaming the web looking for laughs).

I’m grateful to many people for recommendations on blogs and twitter, and I should give special thanks to Dale Carrico, whose original suggestion it was to put the e-book together, and on whose own arguments chapter 5 in particular draws heavily. A review from transhumanist Giulio Prisco finds a surprising amount to agree with, and some interesting comments below the line.

There was a generous review from the economist Diane Coyle: The future is multiple, not singular; she describes the book as “a brief, compelling demolition of the idea that digital technology is hurtling us towards a ‘singularity’”.

The e-book was the subject of an interview with Russ Roberts on EconTalk, which over the course of more than an an hour covered transhumanism, brain uploading, the concept of emergence in physics, economics and biology, and the economics of technology and innovation more generally. There my insistence on the importance of government intervention for radical innovation collided with my interviewer’s position favouring small government and free markets.

Finally, the online magazine Demos Quarterly published a dialogue between me and Zoltan Istvan, the American writer, futurist, philosopher and transhumanist who is running for US President under the transhumanist banner in the 2016 election. Here’s an extract from my opening statement:

“Technological progress isn’t inevitable, nor is the direction it takes pre-ordained. Transhumanism as a movement appropriates the achievements that technology has made already, and uses these to give credibility to a series of future aspirations that aren’t so much extrapolations of current trends, but the fulfillments of ancient human desires. People have longed for a transcendent world of material plenty and everlasting life for millennia, and these wishes don’t become any more likely to be fulfilled by being dressed up in a new language of science.”

Here’s the link to the e-book (Note added 6/4/2016 – this version is a smaller file than the original version, with thanks to Seb Schmoller for optimising the PDF)
Against Transhumanism, v1.0 (PDF 650 kB).
Against_Transhumanism_1.0 cover

Steel and the dematerialisation (or not) of the world economy

The UK was the country in which mass production of steel began, so the current difficulties of the UK’s steel industry are highly politically charged. For many, it is unthinkable that a country with pretensions to be an economic power could lose its capacity to mass produce steel. To others, though, the steel industry is the epitome of the old heavy industry that has been superseded by the new, weightless economy of services, now supercharged by new digital technologies; we should not mourn its inevitable passing. So, is steel irrelevant, in our new, dematerialised economy? Here are two graphs which, on the face of it, seem to tell contradictory stories about the importance, or otherwise, of steel in modern economies.

USA_steel_per_dollar_GDP
The “steel intensity” of the economy of the USA – the amount of steel required to produce unit real GDP output (expressed as 1000’s of 2009 US dollars).

The first graph shows, for the example of the USA, the steel intensity of the economy, defined as the amount of steel required to produce unit GDP output. Continue reading “Steel and the dematerialisation (or not) of the world economy”

The political fallout of the UK’s productivity problem

It’s been an interesting week in UK politics. On Wednesday the Chancellor of the Exchequer delivered a budget against the backdrop of an economic situation much worse than it seemed last November, at the time of his Autumn Statement. At the heart of the bleak economic news was disappointment about productivity – the Office of Budgetary Responsibility (the OBR) downgraded its forecasts for future productivity growth; as a result their forecasts for tax income went down, so to meet the government’s self-imposed targets on deficit reduction further spending cuts had to be pencilled in. Among those spending cuts were cuts to the allowances to disabled people – the political fall-out from which we’re still seeing.

FER+March2016+exp fit+v2
Labour productivity according to the successive Office of Budgetary Responsibility’s Economic and Fiscal Assessments for the years indicated, showing estimates of productivity up to the time of publication of each report (solid lines), and predictions for the future (dotted lines). The dotted line is best fit to the post 2009 trend, representing 0.6% annual growth. Data for 2010-2014 from the October 2015 OBR Forecast Evaluation Report, for 2015 and 2016 from the March 2016 OBR Economic and Fiscal Outlook.

The media focus has shifted to the political soap-opera of ministerial resignations and recriminations, but we shouldn’t forget the story of the productivity disappointment, because that’s at the heart of what’s happened. To see why, take a look at my graph, which shows how the government’s optimistic predictions for productivity growth have repeatedly been dashed. Continue reading “The political fallout of the UK’s productivity problem”

An international perspective on the productivity slowdown

Robert Gordon’s book “The Rise and Fall of American Growth” comprehensively describes the fall in productivity growth in the USA from its mid-twentieth century highs, as I discussed in my last post. Given the book’s exclusive focus on the USA, it’s interesting to set this in a more international context by looking at the data for other developed countries.

My first graph shows the labour productivity – defined as GDP per hour worked – for the G7 group of developed nations since 1970. This data, from the OECD, has been converted into constant US dollars at purchasing power parity; one should be aware that these currency conversions are not completely straightforward. Nonetheless, the picture is very clear. On this semi-logarithmic plot, a constant annual growth rate will produce a straight line. Instead, what we see is a systematic slow-down in the growth rate as we go from 1970 to the present day. I have fitted the data to a logistic function, which is a good representation of growth that starts out exponential and starts to saturate. In 1970, labour productivity in the G7 nations was growing at around 2.9% annually, but by the present day this had dropped to an annual growth rate of 1.2%.

G7 productivity

Labour productivity across the G7 group of nations – GDP per hour worked, currencies converted at purchasing power parity and expressed as constant 2010 US$. The fit (solid line) is a logistic function, corresponding to an annual growth rate of 2.9% in 1970, dropping to 1.2% in 2014. OECD data.

The second graph shows the evolution of labour productivity in a few developed countries as expressed as a fraction of this G7 average.

Productivity vs G7

Labour productivity relative to the G7 average. OECD data

Both at the beginning of the period, in 1970, and at the present day, the USA is the world’s productivity leader, the nation at the technology frontier. But the intervening period saw a long relative decline through the 1970s and ’80s, and a less dramatic recovery. The mirror image of this performance is shown by France and Germany, whose labour productivity performances have marched in step. France and Germany’s relative improvement in productivity performance took them ahead of the USA on this measure in the early 1990’s, but they have slipped back slightly in the last decade.

The UK, however, has been a persistent productivity laggard. Its low point was reached in 1975, when its productivity fell to 17% below the G7 average. After a bumpy performance in the 1980s, there was a slow improvement in the ’90s and ’00s, but much of this ground was lost in the financial crisis of 2008, leaving UK productivity around 13% below the G7 average, and 24% below the world’s productivity leader, the USA.

It is Italy, however, that has had the most dramatic evolution, beginning the period showing the same improvement as France and Germany, but then enduring a long decline, to end up with a productivity performance as poor as the UK’s.