Wednesday 8 September 2021 2:00 pm

A service economy and shrinking workforce is the driving force of low economic growth

Paul Ormerod is an economist at Volterra Partners LLP, a Visiting Professor in the Department of Computer Science at UCL, and author of Against the Grain: Insights of an Economic Contrarian, published by the IEA in conjunction with City A.M.

Extinction Rebellion’s fortnight of protests have only hardened existing beliefs and positions on both sides of the debate.

But a book by Dietrich Vollrath of the University of Houston suggests that there may be much broader support for a low or even zero growth agenda than even XR might imagine.

Vollrath does not address this question directly.  His work is an attempt to explain why economic growth in the West has been so feeble over the past 10 or 15 years.

The title of the book summarises Vollrath’s message: “Fully Grown: Why a Stagnant Economy is a Sign of Success”.

In the decade or so since the financial crisis, GDP growth in the Western economies has been unprecedentedly low by historical standards.  

Most policy makers and commentators view this with concern. However, the author argues that we should not be worried.  On the contrary, for him, it is an unequivocally Good Thing.

This is because, in Vollrath’s view, very low growth can be explained by the preferences of individuals.  Implicitly, in the West we have already chosen the path of low growth.

His analysis is based on the standard growth model in economic theory.  Growth in output depends upon growth in the two main inputs into the productive process – labour and capital,  along with innovation.

Vollrath’s main argument is that there has been a dramatic slow down in the amount of labour which is being used to produce goods and services.

Vollrath uses the more technical term “human capital”.  He constructs a sophisticated index, which suggests that its value has even fallen since 2000 in the United States.

A key reason for this is that people increasingly prefer more leisure rather than more income by working– a point highlighted by the current debate about working from home after the pandemic.

The improvement in women’s rights decades ago enabled women to choose both to have smaller families and to go out to work. The expansion of the latter by the Baby Boomers has come to an end in the 21st century. And smaller families have led to lower growth in the  workforce.

Vollrath also revives an important argument made over 50 years ago by Nobel Laureate William Baumol.  It is inherently easier to raise productivity – and therefore growth – in the manufacturing sector than it is in services.  

But increasingly, we choose services rather than goods.  This switch slows growth down.

There are several serious counter arguments which Vollrath dismisses too lightly.  For example, we may be suffering a monumental and persistent hangover from the financial crisis, which is just depressing our animal spirits, as Keynes once put it.  National account statisticians may not be placing enough value on innovative products such as smartphones.

But it is nevertheless an intriguing book.  The collective consequences of our individual choices on what we spend our money on, how many hours and weeks we want to work, and how many children to have – these all translate eventually into very low growth.  Have we all done XR’s work for them?

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