When economists talk about the UK economy, the discussion tends to be framed in terms of the ongoing recovery from the financial crisis and its associated recession. That crisis and the vivid images of pensioners queuing outside the branches of Northern Rock which it produced date from the autumn of 2007, the best part of a decade ago.
There is undeniable disagreement between economists about the role of aggregate demand in determining short run output and the appropriate role for the state in manipulating it via monetary and fiscal measures. However there is consensus on the fact that our long run standard of living is derived from supply side factors. The major ones being the stock of capital (both physical and human), the state of technological knowledge and the nature of the institutional framework these factors have to work within.
In a world where global growth resumed robustly from 2010 onwards, the disappointing recent performance of the UK economy requires an explanation beyond depressed aggregate demand and the ineffective nature of monetary policy at the zero lower bound, yet most economic analysis focuses on these issues. Indeed, if the supply side of the economy is mentioned at all, it is usually a one sentence remark about the need for unspecified ‘structural reforms’.
Nevertheless if we want to understand why the UK underperforms relative to richer countries it is these supply side factors which must be discussed. A lack of technological knowledge can be ruled out given the near-instantaneous spread of scientific advances across the globe. The enviable period of relatively undisturbed capital accumulation enjoyed by the UK since the onset of the industrial age also makes it unlikely that a shortage of capital is the key factor preventing us from achieving at least parity in growth rates with the wealthiest developed nations. Instead, economists should explain to a general audience how the nature of our institutional structure can help or hinder the economy.
Unfortunately, focussing on the ways institutions affect growth has acquired a reputation for being something pursued only by those holding right-wing ideological views, but in the UK’s present situation this need not be the case. There is no principled reason why economists holding broadly left wing views about the desirability of redistribution and well-funded public services should be supporting laws such as our restrictive land use planning regulations which benefit wealthy homeowners and force low income people to pay higher rents. The ongoing ‘war’ on drugs which persecutes those at the bottom of society alongside increasingly determined efforts to restrict the number of migrants able to work within Britain are also examples of supply side restrictions which economists of all ideological hues can unite in discouraging.
Many of these issues are undeniably controversial with the public but this is where the input of economists is most needed. However understandable the reluctance of economists to attack misguided public opinions, if they do not do this who will? Continued hopes that politicians will lead the public in a more economically sensible direction represent a fundamental misunderstanding about the democratic process and the incentives facing elected officials. As highlighted by economist Bryan Caplan, politicians reflect public opinion, rather than leading it.
There should also be more focus on the moral case for a pro-growth agenda. There is a significant strain of thought which is opposed to growth and market mechanisms, based on concerns about their supposed lack of compassion. Such concerns are misplaced. Ultimately the extent of our compassion is limited by the extent of our production. To see this clearly consider the horrific trade-offs which humans were forced to make in various primitive societies. For example when food supplies were low some Inuit villages obliged the elderly to leave in order to secure the survival of those remaining. As noted by philosopher Michael Huemer; the Inuits were using the same moral judgements us, i.e. they believed killing was generally wrong, however it was the reality that there was not enough food being produced to sustain the whole population which compelled them to make highly unpleasant decisions. It was not compassion they were lacking in but production. By extension, in the UK the quality of the treatment we are able to provide to the elderly, disabled and sick is directly dependent on the productive capacity of the economy. It is a counter-intuitive but crucial truth that in the long run a society which prioritises mass production will be able to provide better treatment for the relatively unproductive than a society which makes the treatment of such groups its main focus.
There is a pressing need for economists to move away from monetary and demand side analysis and embrace the task of educating the public about the basic supply side forces which drive UK growth. Given the stakes it will surely be worthwhile.