Daniel Freeman is Managing Editor of the Institute of Economic Affairs.
Everyone in British politics, with the possible exception of the Greens, agrees that economic growth is sorely needed.
Since the Great Recession in 2008 real per capita GDP growth in the UK has hovered at an average of 0.5 per cent per year. This is down from an average of 2 per cent in the five decades prior.
These may sound like small differences but a 2 per cent growth rate means you’re getting twice as rich every 35 years. If our current trend rate of growth continues it will take 140 years to achieve the same result.
The tricky question, which is alluding the current government (just as it did its coalition and Tory predecessors) is how to boost growth back up to the levels that were once considered completely normal – and which still are in the US.
Despite the government’s ‘growth mission’ there is little to show for it so far and it seems doubtful that their current track of hoping that a modest liberalisation of planning law will compensate for the negative growth effects of a less flexible market contained in the Employment Rights Bill, higher energy prices and higher tax burdens on business.
Fortunately, the work of the nominees for this year’s Nobel Prize in Economics, who were revealed on Monday, provides plenty of inspiration for how to dig ourselves out of this rut.
As has now become common, the award was split between several economists.
Philippe Aghion and Peter Howitt were given the award for their joint work on the theory of sustained growth through creative destruction. While the other half was given to Joel Mokyr, the hugely influential economic historian, for his work on the role of technological progress in growth.
Aghion and Howitt found that an overly divided market with lots of small firms can often result in less innovation than a more mixed market with a smaller number of firms that are larger.
This is particularly useful in countering the narrative that competition can simply be measured by the number of firms in a market and that fewer firms is automatically indicative of sinister anticompetitive forces. Aghion and Howitt show that often market concentration is the result of firms investing in a new technology and therefore gaining an advantage in a market which benefits consumers so long as they are not establishing higher barriers of entry to keep out competition.
This runs counter to some of the ‘anti-monopoly’ ideas that have become influential on the American left, but have also seduced some on the British right. As Brian Albrecht has written in a recent piece in response to Aghion and Howitt’s Nobel outlines that in business small is not always beautiful, nor is big always sinister.
Joel Mokyr’s work though ostensibly focussed on the 18th century contains if anything more relevant lessons for contemporary politicians.
Mokyr’s biggest contribution is understanding the origins of the Industrial Revolution and the role culture and ideas played in explaining its origins.
Unlike other scholars who emphasise factors in industrialisation that are not really viable today (like colonialism) or geographical flukes like access to abundant domestic coal, Mokyr emphasises the role of enlightenment ideals in creating the environment in which experimentation was encouraged and in which established ideas could be challenged.
In Britain this was combined with a well-developed market for the publication of scientific research and system of apprenticeships that allowed this knowledge to craftsmen and beyond.
Mokyr’s work though it does not ignore the role of education also reminds policymakers of that the economic benefits of education are not inevitable. As he points out in his 2016 book A Culture of Growth 18th century China had levels of male literacy that were not far below that of England as well as producing literally millions of highly educated Confucian scholars. Yet this did not lead much growth in China because the overwhelming focus of education was to provide men who were capable of passing the highly competitive exams for the civil service of which there were only 20,000 positions in 1800. Elite overproduction is certainly not a problem unique to modern developed countries.
In contrast Mokyr finds that one of the key determinants of where early factories were established during the industrial revolution in Britain was the concentration of millwrights – the specialists craftsmen who maintained watermills. By any conventional measures these men were poorly educated by either modern standards or when compared to the gentleman scholars of Qing Dynasty China. But they had the sort of technical skill that in combination with the knowledge emerging from enlightenment era science would combine to make Britain the birthplace of modern economic growth.
But perhaps the most important lesson from Mokyr, and economic history more generally, is that growth is neither inevitable nor (when looking at the broad sweep of history) even the norm. Throughout most of human history sustained per capita economic growth was an extreme rarity. Prior to the industrial revolution temporary improvements in living standards would generally be eaten up by the Malthusian effects of a rising population.
Now Britain having led the world into a new era of sustained economic growth finds itself again in a period of relative stagnation.
But if there is an encouraging aspect of Mokyr’s work it is that the free exchange of ideas and a culture that respects and encourages innovation has allowed the world to break out of stagnation from a far lower basis of development, and there is no reason to think it cannot do so again.
