Duncan’s Economic Blog

Some thoughts on the British Promise and the Politics of Productivity

Posted in Uncategorized by duncanseconomicblog on March 15, 2011

In his speech to Resolution Foundation on the ‘Cost of Living Crisis’ two weeks ago Ed Miliband spoke of ‘the British Promise’:

Squeezed wages, squeezed prospects, squeezed aspirations.

That is why the British Promise, that the next generation would always do better than the last, is now under threat like never before

The phrase came up again at his press conference with Ed Balls and was mentioned in John Denham’s comments on the launch of Labour’s Business and Enterprise review:

“We need to build a different sort of economy; a high quality economy with quality jobs and a better quality of life. This means good jobs with good wages for middle and lower income families – and the British Promise – that we need to ensure the next generation is able to do better than the last.”

I suspect that like ‘squeezed middle’ it’s a phrase we’ll be hearing rather a lot in the coming months and indeed years. Which means it’s worth considering in more detail exactly what it might mean.

How can Labour aim to guarantee  a promise that each generation will be better of than the next will actually be met?

The answer no doubt lies in productivity. Re-reading the Miliband speech it’s notable that ‘productivity’ appears no fewer than six times.

Of course raising productivity alone doesn’t mean that the British Promise will be met, as Miliband himself acknowledges and as Stewart Lansley has demonstrated. As Lansley has written:

One of the principal consequences of this change in the power balance has been a rising gap between pay and productivity. While economic capacity has been rising at 1.9% a year over this 30-year period, wages have been rising by only 1.6%, a gap which has been getting even wider over the last decade. Between 2000 and 2007, productivity increased at almost twice the rate of real wages. It was this trend that has been the main cause of stagnant real earnings.

So really the challenge for Labour’s Enterprise and Business Review specifically, and for Social Democratic economic policymakers more generally, is two-stage. First, how can the government increase productivity and second how can it ensure that the gains from increased productivity are equally shared?

New Labour did focus on the first of these issues and achieved some success. As the LSE’s Centre for Economic Policy notes (pdf):

Raising UK productivity has been one of the main policy targets pursued by the Chancellor over the last ten years. There have been improvements in labour productivity both in terms of output per worker and output per hour worked, but a large gap remains. Overall growth of gross domestic product (GDP) growth has been mainly driven by increases in total employment and capital rather than large growths in efficiency (total factor productivity – TFP).

The CEP also suggests some answers to the first challenge – how to raise productivity: 

Recent evidence suggests that the factors behind the UK productivity gap include deficits in innovation, skills and management practices, as well as regulatory constraints in the retail sector.

Tackling these problems together is likely to remain a challenge.

However there has been relatively little attention paid to the second question – how to ensure that the gains from increased productivity are equally shared. It’s important that Labour’s policy review pays just as much attention to this issue as to the first – a failing of Brown’s time in office was too much focus on simply raising productivity and not enough on wages.

The ‘Politics of Productivity’ are a complex business and have generated quite an extensive academic literature focussed on the 1940s and 50s in particular. Charles Maier has written that:

The years immediately after World War II provided American policy makers with a unique opportunity to help shape the international economic order for a generation to come. United States objectives are usually described in terms of enlightened idealism or capitalist expansionism. But much of the way policy makers envisaged international economic reconstruction derived from the ambivalent way in which domestic economic conflict had been resolved before and during the New Deal. In the inconclusive struggle between business champions and the spokesmen for reform, Americans achieved consensus by celebrating a supposedly impartial efficiency and productivity and by condemning allegedly wasteful monopoly. Looking outward during and after World War II, United States representatives condemned Fascism as a form of monopoly power, then later sought to isolate Communist parties and labor unions as adversaries of their priorities of production. American blueprints for international monetary order, policy toward trade unions, and the intervention of occupation authorities in West Germany and Japan sought to transform political issues into problems of output, to adjourn class conflict for a consensus on growth. The American approach was successful because for almost two decades high rates of growth made the politics of productivity apparently pay off. Whether an alternative approach could have achieved more equality remains an important but separate inquiry. (My emphasis).

This is an important point to bear in mind – much of the origins of a championing of productivity emerge from an historical comprise between labour and capital: better to work together for growth in order to raise living standards than to fight over the proceeds of a stagnant economy.

I have a lot of sympathy with that position, but we should always remember that it is premised on the gains from productivity increases being adequately reflected in rising wages – which hasn’t been the case in the UK since the 1970s.

Historically the ‘Politics of Productivity’ in Britain have never survived serious economic problems: 

Thus, a pattern is emerging. Depressions in twentieth-century Britain have typically appeared at the end of an extended period of sustained expansion. The economic pressures are perceived first in the City which reacts by calling for cuts in public spending and other measures to restore confidence in sterling.
Industry is also faced with the need to respond to market forces. The experience of this century suggests that British industry will also press for retrenchment by government even if the cost is the loss of some measure of State support for industry and the weakening of the corporatist structures in which business leaders had a considerable stake. Thus, by the time that depression begins to  hit employment (and changes in unemployment always follow changes in the  national income), there is a considerable climate of opinion which blames the  level of government spending and the level of wages (maintained in part by the  closeness of the unions to the centre of government) for many of the economic  problems. These opinions are exposed to an electorate which had become accustomed to annual rises in real living standards. The frustrated expectations among the mass of the population, which in other circumstances can be a pre-condition to revolution, are channelled in the British case towards economic liberalism and orthodox finance. During the three depressions of this century, organized labour has been in no position to offer a challenge to this movement. In the British context, therefore, ‘orthodoxy’ or ‘monetarism’ are the natural policies of depression.

Booth, A (1982) ‘Corporatism, capitalism and depression in twentieth-century
Britain’, The British Journal of Sociology 33 (2)

Finding a way to credibly honour the ‘British Promise’ is crucial to Labour’s message in 2015, it won’t be easy.

3 Responses

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  1. James Doran said, on March 15, 2011 at 1:50 pm

    I suspect the answer is in the reform of corporate governance to recognise the ownership rights of other stakeholders in firms. By limiting liability in both the firm and the private corporation, the state necessarily plays a role in allowing capital accumulation to take place. I doubt much support could be gathered for a state-centred initiative.

    I think that perhaps something more movement-centred would be more appropriate – http://www.labourlist.org/ideas-for-electability-the-right-to-own

  2. Dave Holden said, on March 15, 2011 at 2:55 pm

    I have to say I admire your efforts in search of something substantial by wading through these bland platitudes that Milliband and Balls are churning out. I truly believe that the electorate is now beyond cynical to such talk.

    With that said I think James makes a good point on the importance of “the reform of corporate governance to recognise the ownership rights of other stakeholders in firms”

  3. Agog said, on March 15, 2011 at 5:47 pm

    Agreed on James’ point, of course defining ‘stakeholder’ very inclusively. That puts me in mind of Berle and Means:

    Why have stockholders? What contribution do they make, entitling them to heirship of half the profits of the industrial system, receivable partly in the form of dividends, and partly in the form of increased market values resulting from undistributed corporate gains? Stockholders toil not, neither do they spin, to earn that reward. they are beneficiaries by position only. Justification for their inheritance must be sought outside classic economic reasoning.
    It can be founded only upon social grounds. There is – and in American social economy, there always has been – a value attached to individual life, individual development, individual solution of personal problems, individual choice of consumption and activity. Wealth unquestionably does add to an individual’s capacity and range in pursuit of happiness and self-development. there is certainly advantage to the community when men take care of themselves. But that justification turns on the distribution as well as the existence of wealth. its force exists only in direct ratio to the number of individuals who hold such wealth. Justification for the stockholder’s existence thus depends on increasing distribution within the American population. Ideally, the stockholder’s position will be impregnable only when every American family has its fragment of that position and of the wealth by which opportunity to develop individuality becomes fully actualized.
    Privilege to have income and a fragment of wealth without a corresponding duty to work for it cannot be justified except on the ground that the community is better off – and not unless most members of the community share it. A guaranteed annual wage for all, a governmentally assured minimum income, a stockholder’s share in the united States distributed to every American family – these are all different ways of giving Americans capacity to settle their own lives rather than having their lives settled for them by blind economic forces, by compulsions of poverty or by regulation of a social-work bureaucracy.
    Wide distribution of stockholdings is one way of working toward this.

    (from the preface to The Modern Corporation and Private Property, 1967)


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