Britain is trying to shrink its way to prosperity. It doesn’t work.

You may not realise it, but those empty shelves, the unfuelled car of Kirstie Allsopp, and thousands of pointlessly culled pigs all mark the “birth pangs of a new economic model.” Get over it, we are heading to prosperity, this is what it looks like.  

Prosperity, here we come!

The gist of the idea is simple, and much-rehearsed in various protectionist quarters. Britain has in the past “reached for the same old lever of uncontrolled immigration to keep wages low”.[1]  Instead we should control immigration, and as a result business will invest in people, skills and capital and so make native Britons richer and better paid.

It sounds simple. In its crudest form, it even sounds like it has some economics to it! “Basic supply and demand, duh” as some on Twitter claim: fewer people, more prosperity per person! All these years, we could have been fixing productivity simply by cutting the supply of workers! While we are at it, why not a French-style shorter working week, and insist that everyone retires at 60?

There are any number of ways of attacking this. Most don’t work politically, even if they are perfectly valid. Here are a few:

  • I thought you were free traders, but this is protectionism. This charge has been thrown at some on the right for a while (US Republicans, anyone?), and it never sticks.[2]  Free trade in goods and capital, fine. People, no, yuk. Politics gives few marks for ideological consistency
  • What is with the sudden urge to protect workers’ rights? I really get this. I spent a lot of time in Government (2010-14) fighting a Conservative attempt to water down rights, called the Beecroft Report; read my Spad’s Eye View here. But Conservatives reversed course on this as long ago as 2016, with support for the Taylor Report instead. And remember the point above about ideological consistency.
  • Since when did Conservatives fight for the Producer Interest over the Consumer? All these ministers so pleased with lorry drivers’ wages going up, and customers suffering the higher prices and worse service – it is quite the reverse of what Margaret Thatcher fought for.  It’s a version of favouring the more visible over invisible interests (see p19)

But the one that I really believe, which Danny Finkelstein alludes to here, is this:

  • You can’t make people prosperous when shrinking the pie. I remember the arguments as a schoolboy in the 1980s. Labour lefties just wanted to redistribute, give a bigger slice to the people they thought deserving (back then, union-members). Tories instead wanted to grow the whole pie, and see everyone get a larger slice.  

Let’s not argue about whether Thatcher succeeded, but simply marvel at the transformation wrought by 30 years. Thatcherites would applaud companies that sought markets and suppliers far and wide, and fought to provide them that right. Now, to search for the best person for a job is “taking the easy way out”.

To illustrate how wrong headed I think this may be, consider this caricature.  Two managers, Maynard and Mellon, are charged with raising the productivity of their respective company divisions. 

They take a very different approach. Maynard devises a strategy based upon growing production, using all and any inputs to get there.   He cuts prices to chase sales, introduces incentive schemes to encourage work, funds research into new products and sends staff onto red-eye flights to find new markets. It works, and soon the place is buzzing – demand pressing against supply. He also needs to hire a lot more – some locally, but a lot from all around – which frees up staff to work on growing sales. Pay rises.

Mellon takes a lazier and more negative tack. He looks around cuts, and soon orders a hiring freeze, cancels use of the outsourced caterer – people can make their own sandwiches! – and culls the list of approved suppliers, removing anyone further than 50 miles away. He also lets prices rise a bit.

In the short term, Mellon succeeds. Demand again bumps against the now-diminished supply. The staff that remain, disgruntled at the loss of perks, face less competition from outsiders and so feel they can demand more. But in the years afterwards, things go wrong. With less choice of suppliers, quality suffers, new markets are harder to find. Staff are also wasting time on work they used to pay someone else to do.  Soon, Mellon finds himself forced to choose between a pay freeze and redundancies.

You get the picture. The expansive Maynard is like a fast-growing Asian economy in their miracle growth years – find new markets, capture share with cost efficiency, expand, innovate, expand more! In this way Korea and Japan catapulted themselves from poverty to modernity in a few decades.  Mellon’s way is closer to the protectionist, special-interest-captured, import-substitution model, as followed by Argentina – which sagged from the richest country on earth to a continuous crisis soap opera.  It is also the sort of economy I picture when I hear that cutting overseas supply is the path to prosperity.  

Is it a fair analogy? Perhaps defenders of the government line would argue that I should portray Mellon as encouraging his staff to train up more and become more productive. Taking away the easy option of other sources of supply provides that incentive. Is that reasonable?

I don’t think so, because I still share the market-oriented outlook the Conservatives used to have. When pro-EC Tories like Nigel Lawson called for entry in the 1960s, they welcomed what Lawson called “the cold douche of competition”.  Protecting British companies and workers had not worked. Incentives needed to change. The best source comes from competition on all sides: the Five Forces of Michael Porter: new entrants, suppliers with bargaining power, industry competitors, substitute products, empowered customers.  It was a call for more – more markets, more competition, more variety.

More is better than less. I find myself having to repeat a view so basic it is hard to articulate. Supply is good! What the “shortages to prosperity” crew ignore is the basic value of what is being supplied.  Cut the supply of overseas nurses, and what you definitely experience is … less nursing! Forcibly remove choice from the market, and you end up with less supply. The set of possibilities when you are allowed options A to Z is simply greater than when you arbitrarily take out letters J to V. Your horizons contract.

All this is before you consider the other advantages provided by variety and choice: innovation-by-emulation, the exploitation of economies of scale, all of that.  Every time I go from a busy city (London) to one less busy (all of the rest), and whinge about the paucity of cafes, bars and shops, I am experiencing this.

The world has been suffering from a curtailment of supply on massive scale, everywhere and in all sorts of ways. The major vectors of it have been energy, semiconductors, shipping containers, and the right workers. No matter whether some special interests benefit, overall the effect is bad. It could end up posing the most difficult challenge for policymakers since Covid burst upon us. Not the least of this is the possibility of a major central bank mistake, tightening too soon or too late. (Either should scare the wits out of our Treasury, given the shortening effective maturity of our debt.) But even without monetary policy mistakes, supply shocks are the most fundamental economic problem there is. You Can’t Get The Stuff You Want. It is rationing, it is queues, it is making less and having less and everything being worse.

Britain is suffering this as badly as anyone, possibly worse. Brexit is not the sole impulse.  But it is the only major policy programme that apparently revels in curtailing supply! With goods markets bunged up, we in the UK face the risk of more import controls.  With industries everywhere hunting for the right staff, we are meant to welcome new barriers on free movement.  And now the government is justifying this by acting like there is a lump of economic prosperity, and the fewer people we let grab at it, the more prosperous each be. 

Meanwhile, subtle thinkers try to imagine ways in which curtailing supply just encourages an economy to find smarter and better ways to re-establish it.  Destroy all the coaches, and then people will invent cars!

I just don’t think that is how matters turn out. Maybe Tim Harford is right that sometimes great creative achievements come out of adversity, like Keith Jarrett producing marvels from a tinny keyboard. But it is a dodgy theory for entire economies. Cutting supply so that demand pushes up against it is not like running the economy hot. It means less of everything.   Poorly supplied places don’t become inventive and productive out of sheer necessity. Things become more inconvenient (see Julian Jessop in this clip). Businesses sometimes just go out of business. Rationing didn’t lead to an explosion in UK culinary quality post war[3]. Protecting our companies didn’t make them world leading and productive. English football didn’t soar in quality when banned from competing in the 1980s. Hermit kingdoms don’t create marvellous inventions.  Wakanda isn’t real. Korea absolutely destroyed Argentina, economically.

Britain doesn’t have a fixed lump of prosperity, a fat pie to share out to the deserving. Deliberately hobble its supply, and the markets it can serve overseas will shrink, and the services it can provide itself become less. It needs functioning markets and abundant, diverse supplies of labour and capital to keep growing.  Conservatives do really understand this. I know many who do. I can understand the political impulse to portray shortages as part of a clever plan. Their deeper instincts surely know better than to fall for it. Conservatives need to get behind the supply side once more.

[1] Quoting from the PM’s speech

[2] I even put this one to Vote Leave when they came to the FT: how do you campaign on protectionist slogans, but then do this Global Britain thing? Cameron’s problem, apparently.

[3] Elizabeth David bringing back ideas from Provence did that, I understand. 

Published by freethinkingeconomist

I'm former special adviser (Downing Street 2017-19, BIS from 2010-14), former FT leader writer and Lex Columnist, former financial dealer (?) at IG, student of economic history, PPE like the rest of them, etc, and formerly in my mid-40s. This blog has large gaps for obvious reasons. The name is dumb - the CentreForum think tank blog was called Freethink, I adapted that, we are stuck now.

One thought on “Britain is trying to shrink its way to prosperity. It doesn’t work.

  1. Such an obvious straw man here: Mellon is seeking short-run profits in an unsustainable way, and then you assume Maynard is successful when that strategy often ends up in overextension. The better comparison would be a more cautious approach to growth by recruiting only the very best talent and ensuring their cultural fit, aiming for high productivity rather than Maynard’s growth through scale. We know big name knowledge intensive firms that have been very successful with this strategy – and it’s much more analogous to the immigration restrictionist case.

    On a wider note, the ‘size of the pie’ metaphor is simply being misused here. The productivity effect of immigration is ambiguous but not large; a migrant worker’s addition to GDP does not change GDP per capita all that much. On that basis, immigration grows the pie only by adding more people expecting slices of it – it is not at all like the postwar (ultimately Thatcher) argument that growing the pie through allowing productivity-enhancing market reforms would allow larger slices.

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