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Government should not seek to rebalance the economy, says leading economist
We need to rethink work, according to John Kay, Fellow in Economics at St John’s College, Oxford. Beneath talk of “rebalancing” the economy, there is often an underlying belief that he called “manufacturing fetishism”. The idea, said Professor Kay, that “real work is hard manual labour performed by men. Hard manual labour performed by women and the kind of jobs that are rather pleasant, intellectual and relatively well-paid are not real work.” The notion is left over from our primitive past, he suggested. “We need to get over it.”
Professor Kay was speaking at a London Business School (LBS) event chaired by Linda Yueh, Adjunct Professor of Economics at LBS and author of the new book The Great Economists: How Their Ideas Can Help Us Today. Together with Andrew Scott, Professor of Economics at LBS and co-author of the bestselling book The 100-Year Life: Living and Working in an Age of Longevity, they explored what the ideas of some of history’s greatest economists can tell us about the most important issues of our time.
Dr Yueh said that Adam Smith, the father of classical economics, who came up with the concept of the “invisible hand” – the view that without government action, supply and demand would determine prices and quantities in an economy – was wary of governments being too active in the economy: “Smith said, ‘There is no art which one government sooner learns of another than draining money from the pockets of the people.’”
Professor Kay said Smith was not the rabid free-marketer that he’s often depicted as by the political right. “Adam Smith was sceptical about governments intervening. He was sceptical about everybody. He denounced merchants, he denounced the rich. He was writing at a time where the state had been majorly rent-seeking and was beginning to recede and you were beginning to see the growth of business, of trade.
“If you look at the ‘invisible hand’ quote in context, it’s not actually saying that everything will rebalance itself. It’s saying that you don’t need protectionism because people will tend to buy products from home suppliers anyway.”
He also pointed out that the great economists’ ideas were formed in a particular historical context. “In Smith’s day, the idea that you might export services was ludicrous.” An example Smith gave of a service was opera – which, in 1776, people did not cross continents to listen to. Nowadays, “I don’t think there’s any superiority about manufacturing over services – what you want is an economy that provides a good standard of living for everyone. Much of manufacturing is actually services anyway, such as R&D.”
The impact of technology has yet to unfold, said Professor Scott. “Manufacturing is a small part of the economy, not because we don’t produce much but because what we do produce is of increasingly low value, because of productivity growth. What makes the service sector such a source of value-add is that it’s been hard to get productivity growth.”
Going forward, robots will increasingly be substituted for humans, “which I think will help British manufacturing, with technology and AI improving productivity in the service sector and reducing value in some sectors.”