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What productivity “puzzle?”

Image: Billy Wilson

Despite its usual economic cheer-leading, even the BBC is forced to lament that:

“UK productivity shrank in the first quarter of the year and continues to lag rates achieved before the financial crisis in 2008… The Office for National Statistics said productivity fell by 0.4% compared to the final quarter of last year.  It rose by 0.9% compared to the first three months of 2017.  However, the ONS said it remains below the average pre-crisis growth rate of 2%, suggesting that the ‘productivity puzzle’ remains unsolved.”

Productivity – the amount of production per hour worked – is a measure of the health of an economy.  A growing economy will experience increasing productivity; a failing one will experience falling productivity.  Fortunately for the UK, we are not quite there yet.  Britain’s productivity has flat-lined since 2011.

True to form, the BBC attempts to link the new trend to Brexit even though the data show that the referendum has had no impact on UK productivity – Britain’s economy is no stronger in 2018 than it was in 2012; and remains behind where it had been in 2008.

There is a productivity puzzle of sorts going on just at the moment; but it is not what economists – who are generally wrong about everything – believe it to be.  The real puzzle is how the British economy has not collapsed into ashes already.

To understand this, think for a moment about what productivity means.  On one side of the production process are all of the inputs that allow economic activity to occur; broadly categorised as Capital + Labour + Resources.  On the other side are Widgets – the total goods and services produced in the economy.  To increase productivity means either to produce the same quantity of widgets with less capital, labour and/or resources, or to produce more widgets for the same inputs.

How is this trick achieved?

Stated in terms of Capital + Labour + Resources, economists fool themselves into believing that our old friend “Technology” is what causes productivity to grow.  As a result, they look to “Investment” as the means to stimulate productivity growth.  This is partially true – in the same way that the eighteenth century Physiocrats were partially correct when they suggested that land/food was the source of productivity.

What, however, is this magical technology that the economists wish entrepreneurs to invest in actually doing?

Suppose we unpack Capital + Labour + Resources and re-state it as Capital + Labour + Raw materials + Energy.  Those technologies that increase productivity (and many do not) either harness more useful energy or reduce the amount of energy that is lost as waste heat.  In effect, they enable more work than could previously occur.  Labour power (i.e. energy) is puny compared to the energy derived from fossil fuels, nuclear power and renewables.  Despite claims to the contrary by Marxists and some Liberals, the role of labour (and Capital) in the modern economy is more to harness and focus energy than to provide energy directly.

Once we understand that energy is the true driver of economic activity, we can see clearly that there is no “puzzle” to Britain’s stagnant productivity.  As contrarian economist Steve Keen puts it:

“Capital without energy is a statue; labour without energy is a corpse.”

In one simple chart, we can see precisely what is wrong with the UK economy:

UK Energy per capita 1960-2015
UK Energy per capita 1960-2015

The collapse of Britain’s oil and gas industry from its peak in 1999 undermined its productivity potential dramatically.  The North Sea now provides 60 percent less oil and gas than it did 18 years ago.  In consequence, Britain became a net energy importer in 2004/5.  Everything that had allowed for prosperity prior to that date became a cause of ruin afterward.  Imported energy came at a price far above what the UK economy as a whole could afford.  So, as the chart shows, we stopped using it. Taxes that had been levied on oil and gas exports were replaced by subsidies to keep the North Sea fields producing, and to install new alternative energy sources. Governments borrowed to enable this and then turned to already hard-pressed households and businesses to repay the debt with their taxes and via their energy bills.

The only mystery here is that the UK economy has not plummeted over a very steep cliff already.  Inadvertently, the BBC points to why, for the time being, this has not happened:

“A previous study by the ONS found that while more people are in employment, they have found work in parts of the economy that are just not that productive such as food and drinks services.”

Rather than a rapid collapse, the UK has opted for a slow motion train wreck.  Workers have chosen lower wages and worsening work conditions in preference to mass unemployment; while government has chosen to destroy public infrastructure and services rather than engage in new borrowing that can only be repaid at the cost a the devaluation of the currency.  Both of these actions serve to suck currency out of the economy – as witnessed in the economic holocaust that is unfolding in the retail sector – trapping the UK into a downward spiral of decline.

There is, of course, an easy way out – a new, affordable, high density energy source that a new suite of technologies can harness to dramatically reverse the declining per-capita energy trend.  The trouble is that no such energy source and no such technologies exist.

As you made it to the end…

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