Earlier today, mainstream journalists were trumpeting the dawn of a new age of prosperity. For the first time in three years, wages had, they forecast, risen faster than inflation. It wasn’t to be, alas. While inflation had fallen to 2.9% wages had only risen by 2.8%; leaving Britain’s workforce that tiny 0.1% worse off than they had been at the start of the year.
The fact that wages have stagnated for nearly a decade explains why productivity is collapsing, why retailers are going into administration in droves, and why the so-called “internet of things” or “fourth industrial revolution” is not putting in an appearance anytime soon.
At its simplest productivity means producing more outputs (goods and services) for the same or fewer inputs (capital, labour, materials, energy). While productivity gains can be achieved through labour reorganisation (for example, the introduction of production lines in the early twentieth century) most of these gains were made decades ago. At best, changes to workers’ conditions result in minor productivity gains today. Deploying technology (capital) is by far the best means of making productivity gains today. This is why so many journalists have fantasised about a new industrial revolution based around robotics and artificial intelligence which, they believe, will dramatically cut the costs of producing goods and services.
Many of these technologies exist; at least as prototypes. However, as with driverless cars, their readiness is overstated. Moreover, the possible and the impossible are all too often clouded by the proclamations of charlatans like Elon Musk, who seems to believe that the laws of physics – like the laws of motoring –can be broken providing there are no police officers around. Hyperloops, electric haulage trucks and passenger rockets to Mars are simply not going to happen anywhere other than in St. Elon’s PR videos.
However, the real impediment to the technological revolution – and to the more mundane productivity issue – lies on the demand side of the equation. For while economists believe there is a link between productivity and employment, the true link is between productivity and wages. And wages across the developed states have been held down by a combination of offshoring, public spending cuts and anti-competitive practices.
In the global economy that has developed since the 1980s, if wages rise too steeply in one part of the world, it is relatively easy for firms to relocate to a country with cheaper labour and fewer regulations. Wages have also been held down by increasingly punitive welfare systems that make it much harder for workers to leave their jobs. At the same time, those who find themselves without work are often better off taking low-paid, part-time or zero hours employment or going self-employed, than remaining on benefits while holding out for better paid full-time work. In addition, the growing use of “non-compete” clauses in employment contracts, and clauses preventing firms offering employment to agency workers make it difficult for workers to move to a better-paying employer in the same line of business.
This systematic downward pressure on wages despite (official) near full employment presents an absolute barrier to productivity on the demand side. Behind the rosy façade of rising share prices, all is far from well on the stock exchanges. The total market capitalisation of the London Stock Exchange fell from £5.3 trillion in 2009 to £3.9 trillion in 2017. Over the same period, the number of companies listed fell from more than 3,000 in 2007 to 2,030 in 2017 – evidence that unproductive mergers and share buy-backs are playing a large part in holding up share prices.
Companies House statistics show that while company formation has been much higher since 2008 than it had been in the years prior to the crash, the number of company failures has also increased dramatically. Moreover, the number of companies founded in the final quarter of 2017 dipped below the figure for the previous year for the first time since 2010. As Courtney Goldsmith at City AM notes:
“The number of startups launched in 2017 dropped more than 10 per cent to just over 589,000 last year, according to figures published today by the Centre for Entrepreneurs (CFE) think tank.
“Data from Companies House showed 589,008 new businesses set up shop in 2017, down from 657,790 the previous year. This marked the first drop in business launches since 2010, according to the Office for National Statistics.”
This accords with the view of Jim Duffy writing in the Guardian last year:
“Entrepreneurship has become a trendy career choice and the credit crunch has prompted people to start their own business as the jobs market has shrunk. Startups were formed at the record pace of 80 an hour last year, according to research by StartUp Britain. But along with the boom in startups there has been a race to the bottom to get investment…
“In effect, they become zombie startups, the term for companies that keep going after funding runs out but don’t actually grow, and investors no longer see them as attractive nor worth a punt.”
While Duffy points to a lack of planning on the part of business founders as a possible cause, the true state of the UK economy has a far more important part to play. As is reflected in the growing “retail apocalypse,” with debts rising perilously close to 2007 levels, and with the price of essential items like food, fuel and rent rising far faster than inflation, too many potential customers are broke. Furthermore, with interest rates rising once again, people are more inclined to pay off existing debt than to put even more purchases on their credit cards. The result is that at the start of 2018, half a million UK businesses reported experiencing financial distress; up 36 percent from the previous year. According to Julie Palmer from the insolvency specialist Begbies Traynor Group:
“Our data shows that no region or industry has entered the New Year unaffected, as the whole economy felt the combined drags of the inflationary environment, higher interest rates, growing business uncertainty, tighter credit availability and subdued consumer spending.”
With no prospect of significant wage increases on the horizon; with political uncertainties like Brexit and Trump’s trade war to contend with; and with central banks withdrawing stimulus packages and jacking up interest rates, only a raving lunatic would invest vast sums of money into new capital (technology) to improve the productivity of a business that stands every chance of going bust by the end of the decade (if not the end of the year) – far better (i.e. cheaper) to keep plodding along using cheap labour and cutting away at employment rights and conditions.
The global economy enjoyed just two periods of phenomenal economic growth since 1800. The first was the oil-fuelled two decades boom 1953-73, which generated more growth than had been managed in the preceding 150 years (a period economists continue to regard as “normal”). The second was the unsustainable debt-fuelled decade 1996-2006 which exhausted most of the planet’s resources and natural capital. We are unlikely to see the like of either anomaly in future. Rather, we are set for decades of decline as we try to unwind the mountain of debts that were taken out back in the days when the economists assured us that infinite growth on a finite planet was possible.
That, ultimately, is why the “fourth industrial revolution” has been postponed indefinitely: because the few people who still have sufficient wealth to invest in it would be fools to do so, and because the rest of us could not afford it even if they did.
As you made it to the end…
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