Category: Science policy

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)”

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.

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).

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

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.

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”

What’s happening to the economy of the USA? Is change accelerating, are we entering a new industrial revolution based on artificial intelligence and robotics, as the techno-optimists would have it it? Or is the USA settling down into a future of slow economic growth, with technological innovation declining in pace and impact compared to the innovations of the twentieth century? The last is the thesis of economist Robert Gordon, set out in a weighty new book, The Rise and Fall of American Growth.

The case he sets out for the phenomenon of stagnation is compelling, but I don’t think his analysis of the changing character of technological innovation is convincing, which makes him unable to offer any substantive remedies for the problem.

The Rise and Fall of American Growth. The average annual growth of total factor productivity – that part of economic growth not accounted for by increased inputs of labour and capital – over each decade leading up to the given date (14 years in the case of 2014). Data from R.J. Gordon, replotted from figure 16-5 of his book The Rise and Fall of American Growth.

The basis of the stagnation argument lies in the economic growth statistics. Put simply, the greatest period of economic growth in US history was in the mid-20th century. Continue reading “Institutions of innovation, ecologies of invention: what’s missing from the stagnation debate”

The World Economic Forum at Davos provides a reliable barometer of conventional wisdom amongst the globalised elite, so it’s interesting this year that, amidst all the sage thoughts on refugee crises, collapsing commodity prices and world stock market gyrations, there’s concern about the economic potential and possible dislocations from the fourth industrial revolution we are currently, it seems widely agreed, at the cusp of. This is believed to arise from the coupling of the digital and material worlds, through robotics, the “Internet of Things”, 3-d printing, and so on, together with the development of artificial intelligence to the point where it can replace the skill and judgement of highly educated and trained workers.

A report from the FT’s Izabella Kaminska of one session – Davos: Historians dream of fourth industrial revolutions – captures the flavour nicely. I’m struck by her summary of the views of the historian Niall Ferguson – “The fourth industrial revolution, Harvard’s Niall Ferguson notes, is distinctive because of its exponential rather than linear pace, not only changing what and how we do things but also potentially who we are.”

This succinctly summarises conventional wisdom, but almost every word of this statement is questionable or wrong.

Why do we talk of a fourth industrial revolution? Continue reading “The fourth industrial revolution – this time it’s exponential!”

This post appears on the blog of the Campaign for Science and Engineering, as part of a series in the run-up to the UK government’s comprehensive spending review arguing for the value of science spending. As with my earlier pieces, supporting statistics and references can be found in my submission to the BIS select committee productivity inquiry, Innovation, research, and the UK’s productivity crisis (PDF)

Stagnating productivity is one of the biggest problems the UK faces, and it’s the most compelling reason why, despite a tight fiscal climate, the science and innovation budget should be preserved (and ideally, increased).

It’s clear that the government regards deficit reduction as its highest priority, and in pursuit of that, all areas of public spending, including the science budget, are under huge pressure. But the biggest threat to the government’s commitments on deficit reduction may not be the difficulty in achieving departmental spending cuts – it is the possibility that the current slowdown in productivity growth, unprecedented in recent history, continues.

Over many decades, labour productivity in the UK (the amount of GDP produced per hour of labour input) has increased at a steady rate. After the financial crisis in 2008, that steady increase came to an abrupt halt, since when it has flat-lined, and is now at least 15% below the pre-crisis trend. The UK’s productivity performance was already weaker than competitors like the USA, and since the crisis this gap with competitors has opened up yet further. If productivity growth does not improve, the government will miss all its fiscal targets and living standards will continue to stagnate.

Productivity growth, fundamentally, arises from innovation in its broadest sense. The technological innovation that arises from research and development is a part of this, so in searching for the reasons for our weak productivity growth we should look at the UK’s weak R&D investment. This is not the only contributory factor – in recent years, the decline in North Sea oil and a decline in productivity in the financial services sector following the financial crisis provide a headwind that’s not going to go away. This means that we’ll have to boost innovation in other sectors of the economy – like manufacturing and ICT – even more, just to get back to where we were. R&D isn’t the only source of innovation in these and other sectors, but it’s the area in which the UK, compared to its competitors, has been the weakest.

The UK has, for many years, underinvested in R&D – both in the public and the private sectors – compared to traditional competitors like France, Germany and the USA. In recent years, Korea has emerged as the most R&D intensive economy in the world, while China overtook the UK in R&D intensity a few years ago. This is a global race that we’re not merely lagging behind in, we’re running in the wrong direction.

In the short term of an election cycle, it’s probably private sector R&D that has the most direct impact on productivity growth. The UK’s private sector R&D base is not only proportionately smaller than our competitors; more than half of it is done by overseas owned companies – a uniquely high proportion for such a large economy. It is a very positive sign of the perceived strength of the UK’s research base, that overseas companies are so willing to invest in R&D here. But such R&D is footloose.

Much evidence shows that public sector R&D spending “crowds in” substantial further private sector R&D. The other side of that coin is that continuing – or accelerating – the erosion of public investment in R&D that we’ve seen in recent years will lead to a loss of private sector R&D, further undermining our productivity performance. The timescale over which these changes could unfold could be uncomfortably fast.

These are the short-term consequences of the neglect of research, but the long-term effects are potentially even more important, and this is something that politicians concerned about their legacy might want to reflect on. The big problems that society faces, and that future governments will have to grapple with – running a health service with a rapidly ageing population, ensuring an affordable supply of sustainable, low carbon energy, to give just two examples – will need all the creativity and ingenuity that science, research and innovation can bring to bear.

The future is unpredictable, so there’ll undoubtedly be new problems to face, and new possibilities to exploit. A strong and diverse science base will give our society the resilience to handle these. So a government that was serious about building the long-term foundations for the continuing health and prosperity of the nation would be careful to ensure the health of the research base that will underpin those necessary innovations.

One way of thinking of our current predicament is that we’re doing an experiment to see what happens if you try to run a large economy at the technology frontier with an R&D intensity about a third smaller than key competitors. The outcome of that experiment seems to be clear. We have seen a slowdown in productivity growth that has persisted far longer than economists and the government expected, and this in turn has led to stagnating living standards and disappointing public finances. Our weak R&D performance isn’t the only cause of these problems, but it is perhaps one of the easiest factors to put right. This is an experiment we should stop now.