The growth genie is not under government control

MS Copilot’s idea of a mysterious genie

What do British Prime Ministers Sir Keir Starmer and Liz Truss have in common? The Labour leader defines himself as a complete contrast to his disastrous predecessor but one. But both made economic growth central to their political programmes. If that leads to a focus on economic efficiency, then this is doubtless a good thing. But the truth is that we are keen on growth as a way of avoiding hard choices.

Recently, writing in the Financial Times, the Oxford economist Daniel Susskind pointed out that economic growth has become the universal panacea for politicians, but that the political focus on it is comparatively recent. Indeed I think the political focus on growth statistics, including in the BBC news, is overdone. The voting public does not pay much attention to the statistical updates. The balance between income and expenses, the ability of governments to fund public services and welfare, and the state of the job market – these impact much more directly on peoples’ lives. All of these are supposed to be driven by growth, and yet the relationship is complicated. Nevertheless growth drives so much of the conversation amongst political elites that we need to ponder it.

But, as Mr Susskind points out, economic growth is poorly understood. Growth emerges from the actions of millions of individuals all working to their own priorities. Attempts to drive economic development (much the same thing, but with a longer history of political focus) by government fiat has led to some of the worst man-made disasters in history. Mao Zedong’s policy of collectivisation and the “Great Leap Forward” in China in the 1950s led to the biggest mass starvation event in history, followed by utter stagnation. Conversely Deng Xiaoping’s reversal of Mao’s policies in 1978 led to the most astonishing and important period of economic growth and development in world history. The simple act of letting farmers grow what they wanted and sell their produce on the open market boosted food production several times over.

Attempts to understand growth and develop policy have tended to focus on the supply side of the economy. That includes Mr Susskind – who homes in on innovation, which improves productivity. Sir Keir talks of investment doing much the same thing, and also the creation of more houses to allow people to move where the jobs are (or at least I think that’s a large part of why he includes housing in his growth agenda – although in truth he has shown little evidence of a grasp of economic policy). Ms Truss’s idea was to reduce taxes to provide businesses and workers with greater incentives to work harder.

But this misses something: the demand side matters too. There’s no point in producing more products or services if people don’t want to consume them. Mao’s strategy in the Great Leap Forward was to produce more iron in village smelters – but there was little use for the poor-quality metal that resulted. There is an underlying assumption that people will always consume more if they can – they are simply limited by the income they can earn from working. Of course economists know things aren’t as simple as this. People with higher incomes tend to spend a lower proportion of their income (leading to the rather more complicated question about saving, investment and growth). People may choose leisure, such as early retirement, which limits the supply of labour and often restrains demand.

And then, when you think about it, things get more complicated still. Once people have enough money to meet their basic needs, they often want to spend the surplus to signal social status. By and large this is done by buying things that are not made efficiently (hand-stitched bags, etc.) or services that require prodigious amounts of labour (personal trainers rather than fitness classes), reducing economic efficiency.

And then what about sustainability? Intensive farming delights economists because it maximises productivity. But it kills the soil, making it harder and harder to use it to produce anything of worth – and requiring ever more inputs of fertilisers, etc, which in turn create further environmental damage.

A further complicating factor is that the growth of the information economy means that the relationship between demand and supply is more complicated. Demand for information (including such things as music and video entertainment) can be met with little impact on production.

All of this raises two questions. The most obvious is whether growth is actually such a good thing. This is the basis of Green scepticism of growth. People’s basic needs must be met, of course, but beyond this we need to think about quality of life and sustainability. There are plenty of people whose basic needs aren’t being met, even in advanced economies like Britain’s – but dealing with poverty looks to be much more a problem of income distribution than the aggregate income across society. The United States has the largest income per head of any major economy – and yet strikingly high levels of poverty too. But economic efficiency is a good thing, provided proper account is taken of “externalities” (environmental damage, etc.). In principle it gives people more choices over their lives. Inasmuch as growth is simply our society becoming more economically efficient, then it is a good thing. If it destroys the planet or merely speeds up a treadmill of drudgery and pointless competition, then not so much.

The second question is more interesting. What if people, through the revealed preferences of their freely-made choices, don’t actually want growth? Growth is a popular idea, provided somebody else does all the work. But perhaps you would just like a nice place in the country and watch the world go by, rather than set your sights on ever more possessions or a frenetic succession of “experiences”. Growth, or the potential for it, emerges from the zeitgeist. In 1978 China, with so many people on the edge of starvation, it is easy to see why this zeitgeist was massively positive for growth. But in 2020s Britain?

Actually in 2024 Britain there are signs of a positive zeitgeist for growth – as many people complain about the cost of living. Sir Keir’s government may well be fortunate for a year or two. But the zeitgeist could turn – and we’d be back to swimming in treacle. And that would pose awkward questions for the sustainability of public services and the social safety net. Politicians and the public need to be focusing on these hard questions, and not just hoping that the growth genie will make them go away.

4 thoughts on “The growth genie is not under government control”

  1. It is understandable that democracies need political doctrines that resist an undue growth in the public sector, both because public sector workers are also voters pushing for more public sector employment, and also because the public at large may pressurise for too much welfare expenditure at the expense of investment. However, in the hands of the Conservatives, this requirement has taken the form of a questionable doctrine that private sector firms are the essential wealth creators who must not be ‘crowded out’ by the public sector. Examples of the resulting austerity harming UK output are legion. Sick people cannot work; and so NHS waiting lists reduce the workforce. Lorries – and traders going about their business – are stuck inefficiently in traffic jams; adults are expensively locked up in prison when judicious expenditure on child and youth services could reduce the crime rate; the Land Registry is imposing large costs on its private sector customers; firms cannot expand when they are efficient because there are no houses for the extra workers, and inadequate state support for their training; and so the list goes on.

    On an alternative view, the public sector’ should be recognised as a contributor to GDP. Correctly understood, voters’ revealed preferences for a good social security safety net and adequate public services would translate into a demand for a greater GDP; or, as this post correctly says, for a greater economic efficiency, with some of the gain being taken as leisure if that is the adult population’s revealed preference. Society could also afford the extra costs of regulating ‘bads’ such as carbon emissions. In present circumstances, is there not much to be said for such a view?

    1. You touch on an important point – though I don’t think it helps to ask whether the public sector is a contributor to or a drag on growth. The public sector is clearly part of gdp, and we should ask how efficient it is, given that spending is not directly related to demand, as expressed through a market. What is clear though is that a well-ordered society has much less need for public services and a safety net (one could take Japan as an example). There is probably general agreement on that. The left suggests that additional investment is needed in order bring about that well-ordered society, and that in due course demand will decrease. The right suggests that public service workers are a political constituency that has a big interest in is own perpetuation, and so conspires to ineffective at actually solving problems (in particular by forever focusing on short-term crises I would add). Both are right. I think a more effective public sector is a critical component of improving society in a low-growth world – with effectiveness defined in terms of creating that better ordered society, with little crime and people looking after their own health much better.

  2. You make good points such as : ” There’s no point in producing more products or services if people don’t want to consume them.”

    I’d perhaps put it that if people don’t have the buying to consume them. As you say no-one is going to invest if they don’t have enough paying customers to justify the investment.

    I wouldn’t want to be investing in a restaurant around where I live at the moment, for example. No-one seems to be going out much. I sense a recession might hit any time soon especially if interest rates stay above inflation.

    Rachel Reeves wants growth but I don’t know how she thinks she’ll get it. Growth means an increase in GDP which means someone somewhere will have to spend more. As far as I know there are only three possible ways:

    1) Governments themselves will have to spend more. She’s ruled this out as we all know.

    2) The Private Domestic Sector will have to spend more. Usually this is done by reducing interest rates to encourage less saving and more borrowing. Possibly there is some scope here but there is a lot of private debt still in the economy which is weighing on aggregate demand.

    Going back to the previous point why would anyone want to invest unless their customers had more money to spend?

    3) The overseas sector will have to spend more buying up our exports. We’ve not done very well in this regard for as long as I can remember. I can’t see us doing any better in the future.

    So I also can’t see this Government doing any better than the previous Tory government.

    1. I share your scepticism. Reeves seems to be banking on an improvement in investment, funded from savings (pension funds are a target) and overseas investors – through improvements in investment climate. In the medium term the hope is that this will lead to higher productivity and so higher wages. But it’s a stretch. But allowing above-inflation payrises in the public sector (if that’s what she does) I think shows that she has more grasp of the basics than her predecessor. I guess the hope is that higher wages help drive higher productivity. Squeezing public sector workers was going to lead nowhere.

Comments are closed.