Modern Times (1936, dir. Charlie Chaplin)

On productivity, living standards and the British economic model – thoughts and reflections

In the wake of last week’s (22 November 2017) Budget Statement, Joe Sabatini ponders Britain’s productivity puzzle.

Britain’s economy is in trouble. Within a day of last week’s Autumn Budget Statement, the Institute for Fiscal Studies (IFS) did not mince its words:

Productivity measures how much, on average, workers in the UK produce per hour worked. Ultimately, improvements in living standards arise as a result of productivity increases – slower productivity growth means wages will grow more slowly. It is this effect on wage growth that means lower productivity is bad news for the Chancellor (as this means lower tax revenues) but it is also why the downgrade yesterday is bad news for all of us.

It then went on to describe wage growth in the UK as ‘abysmal’ and the ‘new normal’:

In 2008, the median worker in the UK (i.e. the person for whom half of workers earn more and half earn less) working full time had an annual salary of £24,500 in today’s prices. Today, a decade later, the median worker working full-time earns £23,000, still £1,500 below the pre-crisis level.

This came on top of Hammond’s admission in the Budget Statement that the Office for Budgetary Responsibility has downgraded GDP expectations, and that we will not see a balanced budget (originally set for 2015) until 2023 at the earliest.

UK’s ‘productivity puzzle’

Productivity is a technical measure that looks at how much on average workers produce per hour worked. The Office for National Statistics is responsible for measuring productivity and producing bulletins that are then used by people ranging from the Chancellor to bodies like the IFS. As the official source it is worth seeing how they define the problem:

Labour productivity on an output per hour basis – our headline measure – fell by 0.1% in Quarter 2 (Apr to June) 2017. This fall left productivity for Quarter 2 2017 slightly below the peak achieved in Quarter 4 (Oct to Dec) 2007 immediately prior to the economic downturn. Productivity for Quarter 2 2017 was 0.6% below the post-downturn peak that occurred in Quarter 4 2016.

A fall of 0.1% contrasts with a long period of average productivity growth prior to the economic downturn, and represents a continuation of the UK’s “productivity puzzle”. This term refers to the relative stagnation of labour productivity since the recent economic downturn. This is in contrast with patterns following previous UK economic downturns where productivity initially fell, but subsequently bounced back to the previous trend rate of growth.

In another document they set out the puzzle as follows:

Among the many reasons suggested are low levels of investment, the impact of the financial crisis on bank’s [sic] willingness to lend to new businesses, higher numbers of people working beyond normal retirement age as a result of population and pensions changes, and firms’ ability to retain staff because of low pay growth. While these and other factors may be relevant, they do not provide a complete explanation for the weakness in productivity.

In the same piece they published a chart that showed that if GDP is held constant, the numbers of hours people work and the total amount of employment jumped while productivity remained lower than growth. Putting this in the simplest terms, it means that what has been driving growth since the crash has been people working longer hours doing the same kind of work, and a greater proportion of the workforce doing those kind of jobs, rather than people doing more skilled work than used to the be the case. To upskill the workforce would require greater investment in basic and technical education, but also in technology – changing the way jobs are performed.

It is important to note here productivity is not about workers’ laziness, though low morale and motivation can be a factor, especially if translated into stress and time off sick. The main focus for the ONS and the IFS is the impact of investment.

To understand what is going on here, and why this seems to have affected Britain more than its competitors in the developed world, we need to turn to another source.

Value and surplus value

The productivity puzzle is a strangely Marxist question. In volume 1 of Capital, Marx developed theoretical categories to explore the ways in which the productivity of each worker is critical to the overall dynamics of the system.

Marx based his analysis on the theory of value, in which the total amount of capital that is invested in a commodity accumulates through a series of cycles of production, sale and reinvestment. The secret of such accumulation lies not in the genius of the investors or the efficiency of their machines, but in workers being put to work at a rate at which their productivity exceeds their wages. This creates surplus value.

A machine or computer, once bought, has a fixed level of productivity – so that during the period it is being worked it has a standard productivity rate per hour, and depreciates at a fixed rate. The worker on the other hand not only can work with greater degrees of skill or motivation, but can work greater or lesser hours. Marx coined the terms constant and variable capital to capture this distinction. The portion of capital invested in machines, land, energy etc. is constant, while that invested in labour variable. This is because the hours worked, the intensity of working and the motivation, not to mention the total volume of output per hour are variable, and can also vary wildly from wages.

This latter point is the hinge that links the argument to questions of profit and exploitation. If a wage is held constant (i.e. the pay freezes many are experiencing in Britain today), but the output a worker has increased, then the gap between the value created and the amount the worker takes in wages increases and that gap is pocketed by the investor as surplus value.

Absolute and relative surplus value

While Marx saw surplus value as the defining characteristic of capitalism – there could be no stable form of capitalism without the extraction of surplus value – Capital volume 1 is largely taken up with exploring the different dynamics of this upon the question of productivity.

Absolute surplus value is the addition that accrues to capital from the sale of a commodity that has come about by making workers work longer hours. If wages are constant and a worker does the same job for ten hours per day instead of eight – there is an additional 20 percent surplus value (assuming all the commodities are sold at the market rate that covers costs of production).

Relative surplus value is the addition that accrues to capital from the sale of a commodity that has come about by introducing new technology, changing the form of the organisation or engaging more skilled workers. This intensifies the work, more is produced in less time, and a worker may even retain the same wages, but work less hours. In some situations, relative surplus value may allow wage rises and profits to be achieved simultaneously (as was the case in the long post-war boom).

When Marx published Capital volume 1 in 1867, Britain had been through a period of industrial take up powered by key industries (textiles is the main focus) that relied upon extending the working day to its maximum limits, large scale use of women and children in the workforce undertaking strenuous physical labour, and an appalling lack of health and safety. Workers were treated as an expendable and limitless resource that would be replaced by more children and people migrating from the countryside.

By the 1840s the length of the working day became a focus of protractive class struggle and resulted in the earliest legislation to limit the working day. At the time capitalists and sympathetic theorists tried to justify the length of the working day as being the sole guarantor of profits. In the event, however, the introduction of shorter working days proved to have no negative impact on the system. Marx explained this with the concept of relative surplus value.

While Marx was looking back to the 1840s, his chapter on machinery discusses latest developments that would reach far into the 20th century. But essentially, he saw that mechanisation of production resulting in a shift towards relative surplus value becoming the norm, and absolute surplus value becoming marginalised.

This was largely correct for the 20th century up to the dawn of neoliberalism (late 1970s to early 1980s). However, when coming to terms with capitalism in its current state it is possibility more beneficial to treat relative and absolute surplus value as interchangable forms of profit making. That with an aging industrial capitalist system now into its second century, multiple forms of previous regimes of accumulation, political and state strategies and historical outcomes of class struggles become less linear and beginning to fold in on themselves – posing new challenges for theory and practice alike.

This approach can help us to look at the productivity puzzle in Britain.

Britain under neoliberalism

The neoliberal period has witnessed a general pressure away from relative surplus value towards absolute surplus value – we have seen this with offshoring of manufacturing jobs from the historic capitalist core to China, India, Vietnam and Bangladesh. This process of offshoring has resulted in a large portion of the world’s manufacturing taking place in locations where the cost of labour is so cheap that it is simpler to set up the same labour-intensive processes in a place like China than to reinvest in more up to date machinery etc. in a place like the UK.

This has been a result of a number of convergent pressures that built up in places like the UK over the post-war period: rising costs of labour, greater taxation on capital, development of mass consumer markets relying on increased imports of food and manufactured products (i.e. electronics from Japan in the 1970s and 1980s), neglect of any state strategy in relation to skilling the population compared to industrial competitors and lagging investment in the latest technology in production of key commodities such as cars, TVs, household white goods.
These pressures were shared by the US and Western Europe who also had become heavily reliant on oil to power the boom, and had found that their model of building up a national market where workers’ increased standard of living would enable them to buy goods produced within their country was being displaced by a mix of home produced goods and imports.

In such a situation each state within the historic core of capitalism developed, in partnership with key fractions of capital, a kind of strategy. In Britain’s case the pressures were greater as the country had a combination of high labour costs, high welfare and state spending, low levels in investment in technology and a higher dependence on imports. The one advantage Britain had was the centrality of the City of London within the global financial and banking system. This was an advantage that dated to Britain’s position as global hegemon in the 19th century, and meant that much of the money generated by surpluses produced globally passed through London based banks.

In the face of this the Thatcher government orchestrated a strategic response. Their goals were to reduce labour costs, de-industrialise high cost industries to replace them with lower cost imports (especially ship building, steel production and coal, but also manufacturing) and to build up London’s position as pivot of global finance. The other side of the strategy was to generate capital by selling off nationalised industries, and to commodify housing, transport and utilities. While creating opportunities for some sections of the working class to benefit by the sale of council homes and buying shares, the long-term effect was to trap the population within a high cost form of capitalism.

This was the situation that Blair inherited. Rather than tackling the challenges he and Brown sought to use the City of London as a cash cow to provide revenue that could be redistributed through expanded investment in the NHS, local councils and especially through tax credits to low income households. This barely kept pace, however, with the spiraling costs of housing and with the domestic economy tied to services and consumption, households were also bombarded by banks with opportunities to borrow.

The crash, which looks inevitable in retrospect, left the state, British based corporations and households high and dry. There was no scope for the state or private business to use the crash as an opportunity to buy up property and technology on the cheap or reinvest in new forms of production. In a way, this was down to the fact that the state stepped in to protect the banks. Had this not happened a 1929 style crash would have occurred. Instead, the firms that remained in business largely froze. They kept their workers on, doing the same jobs in the same way for much longer periods than normal. This was cheaper than taking the risk of spending huge sums on installing new technology and retraining the workforce.

The lack of a state strategy on skills – going back at least to the post-war period – also played into this. By expanding the university sector during the neoliberal period without a clear industrial strategy, capital faced the dilemma of large numbers of educated graduates without jobs to go to, when the new frontiers of investment would require people with high levels of education in STEM subjects (science, technology, engineering and maths).

With the government more in debt than any time since the War, there was no appetite to step in and deliver an industrial strategy, and even if Brown had won the 2010 election and delivered austerity lite (which Alisdair Darling had planned), the time-lag between investing in skills and reaping the rewards would take at least a decade to work its way through to sustained higher profits.

With the Conservative government and austerity these problems have been exacerbated. Those familiar with dialectics will notice how the very things they do to escape their predicament only make the predicament more insurmountable. By cutting state expenditure they have not only reduced the tax base, but also increased demand for public services. The increases in demand on the NHS, numbers of children being taken into care and the growing mental health crisis are all hitting big spending departments of the state.

This means that the net result is firms trapped within their pre-crash economic models. Workers taking lower wages to keep these firms afloat, and a state that is unable to intervene by providing the combination of investment in services that reproduce healthy labour power, and infrastructure that can offset some of the costs capital faces.

Everyone from the Conservatives to the IFS knows the problem exists. Osborne’s Northern Powerhouse and May’s Industrial Strategy are instances of attempts to confront the problem. The government’s plans around skills to increase apprenticeships and introduce T-levels also are attempts to restructure the education system around future work skills. However, they cannot face the central question that any state or investor faces under capitalism – which is how to make a profit.

The trap is that the best way of making a profit is to extend working time, keep workers on their pre-2008 wages, and not to pay the level of taxes required to keep pace with the NHS and other public services vital to the reproduction of the labour force.
The capitalists know this and are unhappy with the limitations to profit this is imposing. Also, post the Brexit vote they are suffering from the weakening of the pound, which is making imports more expensive, and threatening the position of London as the global financial hub. Brexit is the efficient cause of downward revisions of GDP, but the instrumental cause is low productivity – which should be seen as one of structural preconditions for the discontent which fueled the Leave vote in areas that have seen extreme economic stagnation.

The problem is that UK capital is unable to generate out of its resources an alternative model based on high end UK exports and the infrastructure and skilled labour that would have to underpin this.

Conclusion – implications for a Labour government

One of the reasons the CBI is contemplating a Labour government is that they know that the state is the only body capable of turning the tanker around. The Labour Manifesto’s plans for borrow £125 billion for infrastructure and its proposals for a National Education Service, in principle point the way to a more balanced economic model.

Some sections of capital are also realising that they need workers with more secure incomes to buy up commodities, not to mention better trained, healthier and more motivated workers. The problem for capital is that this can only be achieved at a huge cost to themselves.

Austerity has demonstrated the limits of reducing the social cost of the reproduction of labour-power. The net result has been to compound the productivity trap. The next step will require capital to front the bill or face permanently low profits amid greater global competition.

By drawing on Marx’s analysis, we can see how the process of extracting surplus value remains key to understanding problems that elude mainstream thinking. We can also see how the categories he developed must be used in a flexible way to understand how capitalism develops and can become stuck, as it has in Britain.