Politicians in developed countries are still obsessed with growth without realising that growth is history because as our incomes have grown, we consume fewer material items and more services, and the chance of productivity growth in services is limited, even with AI. The question is, when will politics begin to reflect this new reality?
This is the audio version:
And this is the transcript:
Economic growth? Forget it. That's what I'm telling you to do because that's what you need to do, because economic growth is history. Let me explain why.
Despite the fact that all our politicians in the UK, and in most countries across Europe, and in the USA, and elsewhere, are obsessed with the idea that growth is going to pay for our futures, it isn't, and it can't, and it won't.
It might pay for the futures in some countries in the world who have yet to reach our stage of supposed economic development because they consume fewer material goods than we do and, therefore, have the capacity to both make and consume more material items. But in countries like the UK, the USA, and the whole of Europe, the capacity to consume more goods is reaching its limit.
And that's not because of climate change, although obviously that has an impact. It's because we've had enough. And by enough, I mean we consume sufficient, and we don't want to consume more. And this data is very clear from the patterns of consumption that we can see within the economy.
As people's incomes grow, the proportion of their spending on the consumption of material goods falls.
As a matter of fact, there is a limit to the amount of food that you can consume.
There is a limit to the number of cars that you can own.
There is a limit to the amount of furniture that you require.
There is a limit to, well, almost everything that is material. Because we just can't keep dedicating our time to consuming material goods.
But we can consume more education, more healthcare, more entertainment, more socialising, and so on.
So as we get richer, we consume very much more in the way of services than we do in the way of goods. And as the population as a whole gets richer, very obviously, that means that an economy becomes more service-orientated and less production-orientated, and we have seen this trend in the UK and most other so-called developed countries in the last 40 to 50 years.
It's obvious that not only do we make less, but as a proportion of our national income, we consume less.
Now, I'm not saying that means we actually consume less in total because that has not been true. We have consumed more in total, but as a proportion of our national income, we consume less.
And as we tackle, as we should, the problem of poverty, and we lift people out of it, as we should, this will become even more obviously apparent, because the richer we make those who are in need, the less they will spend on material goods as a proportion of their income as well.
So, this problem is only going to get worse in terms of declining demand for goods in proportion to total economic activity as we tackle the problem of inequality, as I hope we will, but what does this mean for growth then? The problem with growth and our obsession with it is that whilst it is relatively easy to create growth, when we consume more things, it is very much harder to create more growth when we consume more services, whatever they might be - as I say, healthcare, education, entertainment, going out for meals, whatever.
The point is, that as we produce more things, a single person can have more and more equipment that they can be given to control. And, as a consequence, in proportion to their labour cost input, the amount of goods produced rises. And that is what productivity growth means. And productivity growth is what has driven most of economic growth to date.
But, when we look at services, productivity growth is very much harder to create. A doctor sitting in front of a patient is going to take 15 minutes for a 15-minute appointment, if that is what you might get, whether or not they are paid more or less, and whatever the situation might be with regard to the patient's well-being. By and large, a patient who's been told they can have 15 minutes will take 15 minutes. Productivity gains inside medicine are, therefore, very difficult to secure. Sure, we can put more equipment in the hospital, but very often that will actually simply require that we put more people in the hospital to use it, because if we use equipment to treat people, inevitably, somebody is going to have to explain what is going on to the patient, manage the equipment the patient is being subject to, whatever it is, and so on.
And we can say the same in education. You can put 30 people in a classroom, and you will get reasonable outcomes in secondary education. If you put 50, you will actually get significantly worse outcomes, even though productivity looks to be better. Actually, we find this when we get to higher education as well. Putting 600 people into a university lecture room does not necessarily improve educational outcomes. So, productivity gains in services are very hard to secure.
And that's also obviously true with regard to entertainment. There are a certain number of people who are required to make a television programme, for example. You can try doing it with AI, but people will notice. And anyway, someone actually has to manage the output, come what may.
And this is true with regard to leisure. If you are going to a restaurant, you are going to need somebody to take your order. You are going to need somebody to cook your food. And I can't see how AI is going to change very much of that for a very long time. In other words, productivity gains in services are going to be low.
And the amount of productivity gain that we can get as a consequence of consuming more is also going to be low because, as a proportion of income, the amount of stuff that we want is going down. Therefore, growth is economic history. We're not going to get it.
So, those politicians who are basing all their assumptions on the idea that because we once had two per cent annual economic growth, we can, therefore, have it now are making a false assumption. They are extrapolating something that cannot be extrapolated because there has been a change, and the change is that our incomes have reached the point where we consume services and not goods and therefore, the extrapolation no longer holds good.
We are not going to see growth of the scale that we did up until the time of, broadly speaking, the global financial crisis in 2008 because the opportunity to do so no longer exists.
It is a simple, straightforward statement of fact that this is true in the UK, the USA, continental Europe, Australia, Japan, and other countries where the consumption of goods is going to decline as a proportion of income even before we take climate change into account.
In that case, what is going to happen to economic policy that is based upon the assumption of growth? Simply, and straightforwardly, that policy is going to fail. Because the growth will not be delivered. The politician who promises that will fail, and the narratives that are built around the fact that we can be made better off by increasing productivity in the production of goods that will then increase our income into the future, is false.
We have to look for other criteria of success. And that other criteria of success will be how much do we enjoy and how are we benefited by the services that are available to us? And this is particularly important for those who are looking at the balance between the state and private sectors because many of the services that we want which would improve our lives the most, are in the UK at least, provided by the state.
We want more education and better-quality education.
We want and even expect, better healthcare.
We want better social care.
We want better palliative care, and there's hardly any of that right now.
We want better management of our environment.
Many of those things are actually services. And as a consequence, what we want, if our well-being is to be improved, is not more, in the sense of a higher level of achieved growth, but better quality, and until the government understands that it is quality and not quantity that matters when it comes to the economy, they are going to mismanage it.
We are in a new economic era where the quality of services will define our well-being. The quantity of goods that we consume will not do so to the extent that it did in the past. This is the new economy. What is government going to do to deliver what we need?
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I understand what you are saying, and agree with that which you state and the questions that you pose – but do we (in the UK and elsewhere) have politicians who can and will?
An excellent riposte.
We might need a different breed.
There are about 1700 people killed each year on the UK roads.
The Government estimates each death costs it about £2 million from what I remember.
Plus of course there is the resultant damage to vehicles, infrastructure, buildings etc etc that has to be made good.
Now if we were to reduce the number of road deaths by 50% which is what we have achieved over the last 20 or so years we might end up with a drop in GDP but I don’t think even the undertakers would regard this as a bad thing.
Spot on – great video. You’re ahead of most politicians on this one except Greenies. I am often flabbergasted by ‘how much stuff’ people collect. We’ve hit the high of consumption and need to stop collecting stuff – homes are bulging.
My son has moved home and I’ve had to help clear out with visits to the local refuse site. Just stop at one and view the vast flow of waste into the collecting bins, much of which is quite ‘new stuff’. I note the most active ‘stuff dumpers’ I see are retired.
What we purchase now has a limited life span, this is a feature, and built into modern consumerism. As you state tackle it by focusing consumption on more health care, lifetime education etc.
Try hiring a builder or roofer for example and ask them to use ‘long lasting stuff’. No, it hits their margin and future work prospects. I, for one, have had endless trouble getting roofers to work to spec and to adhere to the published British Standards which only I seem to have read. I failed.
Much to agree with
I’m in overall agreement. But, I would gently challenge your proposition that “stuff”, as a whole, has a limited lifespan – although buying dirt-cheap gadgets will undoubtedly lead to excessive waste.
I have items that are over 40 years old and still perfectly functional. I would suggest that another of Richard’s bête noirs is the real culprit – the advertising industry that is, somehow, able to convince swathes of people that perfectly functional clothing, furniture, items of technology, etc need to be replaced on a regular and on-going basis.
Much to agree with
Amen to that.
From my experience as a developer, working on S.106 acquisitions from the private sector into the social sector, cost cutting on recommended manufacturing specifications – authored particularly by quantity surveyors who seem to rule the roost – is rampant in the construction industry because I’ve refused to accept hundreds of them over the years.
But then again, BREXIT, inflation, austerity and high interest rates have only made this propensity worse, and they are the fault of stupid governments.
The thing is, building stuff is notorious because of the risk because you can never know what you are going to find as you dig, plus also it takes so long to realise the output and things happen.
There must be a better way.
Thinking about it, another Economist called Richard, Richard Douthwaite mad a number of very pointed observations about the value of GDP as a measure of wellbeing.
The Growth Illusion was one of his books and well worth a read
Agreed
It is on my shelves
Top left on the videos
If it is mainly thought even on the Left that ‘growth’ (in the money supply) is needed before taxes are taken/public services can be improved then they’ll keep going on about it. Fiscal policy incentives for those important sectors mentioned would be a start!
“… growth is history because as our incomes have grown, we consume fewer material items and more services, and the chance of productivity growth in services is limited, even with AI”.
If you are right, it will happen; whatever we want. The problem here reminds me of an observation by China’s most profoundly effective and transformative modern leader, Deng Xiao Ping; who experienced both triumph, and suffered during the Cultural Revolution. Once asked about his late success in life, he wisely said that it is a lot easier dealing with going up in the world, than it is going down. In a world built on growth it will be a lot easier living with it, than it will be experiencing the other side of the coin. I have lived long enough to be confident that we have not the slightest idea how to do degrowth at scale (it will be extremely difficult to do and almost certainly done badly), nor am I convinced it is imminent. What I see in Britain is a country still relying on decaying Victorian infrastructure, a dreadful, past its use-by date housing stock, and relying on investment in shot-term assets (even buildings are designed for the relatively short term); all badly in need of radical, urgent transformation. The renewable revolution requires engineering and industrial investment on a massive and complex scale (tidal, for example that needs large scale experimental investment for small immediate return – insufficiently provided in the private sector alone). “Services” in many key areas will rely on prior investment of that kind.
Richard, if Scotland ever becomes independent, could that be one of the countries where growth would be possible?
Why would you want it to be when that would conflict with net-zero?
This analysis does mean that the theory of the government multiplier needs revisiting. Previously we have been told that every extra £1 spent by the government increases GDP by much more than that, sometimes by a factor of 4+ if spent by the NHS, due to said multiplier effects.
The experience of the developed economies with their government’s higher spending and their anaemic economic growth indicates that we’re not going to break out of that malaise and into a new surge of higher incomes all round.
We’re just going to have to get used to less.
You do realsie that there is more to life than ‘stuff’, don’t you, and most of what we want is bestprovided by government now?
You give the impression that you are trolling. I will be watching…
Maybe the problem is that the current measure of GDP used by our elected leaders, fails to measure the things that are important to the vast majority of the population. As you say, things like adequate government services in the form of medical treatment, education, road maintenance, maintenance of public assets, and other similiar things.
So, how about we change the methodology away from things that are produced, and more towards the things that matter. For example the number of public libraries for 100k people, the number of public toilets per 100k people, the number of working teacher positions per 100k people, the number of GPs per 100k people, the number of public bathing spots that are pollution free every day of the year, and so on.
After all, middle managers only ever seem to allocate resources to items that are measured. Change the things that we measure, and get a figure for “growth” that reflects a our sense of wellbeing.
We need leaders not managers (not that they are doing much of a job of that either).
Remember the words of Bobby Kennedy about GDP too.
Much to agree with, but no one has yet delivered a definitive alternative, and I am aware of at least some of the efforts being made.
This seems to me to be true in a general way although the more granular picture will throw up areas of growth and areas of decline. Those economies which are often described under the umbrella term of the Global South are still on the rise as you mention and will want and need some input from the Global North. Also, security of supply may see the rise of some production in advanced economies if only to reduce the stranglehold that China has on manufacturing. Industries associated with the drive to net zero will no doubt grow as will the recycling of solar panels, batteries, etc at their end of life. The government, I read, is now considering the re-nationalisation of the steel industry. There will also be losers of course both exporters abroad and a significant proportion of domestic production. There is a lot to shake out in this period of change and as John Warren comments it is not going to be pretty.
Is not growth based on consumption a completely false premise anyway, after all you can only eat a cake once.
Maybe growth should be based on what me make that’s not for domestic consumption and services but for expanding our future in technologies, medicines, creativity and making the planet more sustainable with everyone on par both economically and socially.