The Crud economy, and the rationale for industrial strategy

There is a lot of what I will call “crud” in the economy.  Into this category I throw:

• Increased compliance to demonstrate trustworthiness.  Red tape, if you like!. Company policies on this, that or the other.  I’ve spent hours watching videos about problems like money laundering and correct use of information. Somewhere, behind this, is a company making videos and quizzes and training courses, and its revenues count as GDP. Relatedly, I know headteachers who put days and days into the work of writing policies on this or that.
• Legally driven, zero sum arms races. One bunch of lawyers examines a contract to see if it enables 51% of a bankrupt company’s creditors to stiff the 49%. The 49% hire lawyers to prevent this. (read Matt Levine). The original writers of the debt contracts worked 18 hour days at goodness knows what per hour in a vain attempt to stop such shenanigans, and failed
• Straightforward crime and the anti-crime measures. Constantly upgraded IT systems to fight cyber attacks are the most obvious example.
• Finance itself deserves its own category. The financial system generates so many possibilities for extracting little rents, and all somehow in the name of deploying capital to actually useful purposes, and stashing savings correctly. Somehow, those two simple-sounding causes have caused us to create a vast structure of intermediaries, high speed traders, arbitrageurs, salesmen, IT investment (trillions a year, I think), media commentary – all in order move capital from one category to another. Amazing.  Britain has had a low investment rate for decades (read my piece) despite having an amazingly sophisticated financial sector.
• Conspicuous consumption industries. Galleries paying ridiculous rents in order that their delicate wares can be displayed in the highest value neighbourhoods, and paying for this with artwork on a gigantic mark-up.
• Or “advanced civilization conspicuous consumption”.  When a civilization becomes rich enough it spins out activities from the surplus enjoyed by the richer part.  The 18^th century court with its multiple orchestras and hunting lodges, in spite of the city having no working sewage. In modern terms, a vast edifice of entertainment industries – where I would include very high culture, hundreds of thousands of obscure academics mostly writing for one another, much off the associated education. The thousands of novelists we have – and tens of thousands of would-be novelists. How much does an extra novelist really add to production? Possibly nothing – but he or she still expects to be fed, clothed and sheltered.

In my sourest mood, I see all this crud in a few negative ways. First, it is a function of the increasing complexity and mediated nature of the economy. There are ever-longer chains of production, and the need for trust and coordination means ever more human labour shoved at the middle part, where the connection with the actual production of something really useful and scarce is hard to prove.

Second, they are an inevitable consequence of how the best way of the very long term of growing an economy is to allow free agents to pursue their own incentives. Private incentives, coordinated in markets, are amazing but also motivate the urge to monopolize, to cheat, to test and break the rules of the game, and this demands more and more policing activity in return.  Third, our method of measuring output inevitably tells us that activities that are freely paid for and provide someone with an income are themselves valuable. We even get optimistic about all this and call the investments “intangible capital” (which can also denote genuinely useful things. Read my blog).

And, finally, having high culture, hundreds more novels and TV shows and leader columns than we ‘need’, these are all unavoidable expressions of being advanced, civilised and free. A really free economy finds ways to keep unproductive activities going.  There is absolutely no way of constructing a free capitalist society without it deploying a lot of its ingenuity, capital and talent towards producing yet another detective series, coming of age novel, phD in Greek pottery or obscure economic thesis investigating some irrelevant nonsense about macroeconomics. You can’t stop it.

How all of this gets measured in terms of the productive growth of the economy is complicated, wrapped up in use of the correct deflator, relative price changes, Baumol’s cost disease and all those considerations.  I expect lots of tedious eye-rolling about consumer surplus and how great that is, and don’t you remember when an album cost £10 in 1990 pounds, and we only had 4 channels.  But my sour contention is that there are real, important economic goods that we do need more of – and the crud-production described above is in no useful sense fungible with that.  We need vastly more clean energy, actual hard defence equipment for handling nasty rogue nations, the soldiers to use it, and much more numerous and productive care and health workers for the ageing population. Mitigating the dangerous effects of climate change is going to take real physical capital and effort. These are actual hard problems – and being able to produce more streaming videos, intelligent AI-related chat, or brilliant legal ‘solutions’ to financial market problems is not exchangeable for the assets we need for the real problems.  Just because the lawyer’s fee is expressed in dollars, and so is the cost of transforming the US electricity system, doesn’t mean the two can get traded together.

This, ultimately, is what I like about industrial strategy: it gives policymakers the opportunity and the tool to do an end-run around the crud, towards the objectives that they think are actually, truly valuable.  The US version of this, Bidenomics and the Inflation Reduction Act, appears to do that – it goes directly to the actual activities that the President wants the economy to be engaging in – creation of more EV charge points, more clean energy, and so on – and says “you can get paid for doing this”.  The brutal simplicity of the approach no doubt feeds its critics – “wouldn’t it be better to price carbon correctly and see where the market finds opportunities in light of that, and what’s with the protectionism” – but I think its directness is a huge advantage. We can all see how markets do miraculous things – read Alex Tabarrok on the smart way Europe has adjusted to scarce gas – but we can also see that they can divert our resources towards the crud, and slow us down as we try to do important things. 

To avoid drowning in crud, you need industrial strategy.