Economists puzzle over why the neoliberal changes did not generate the promised productivity gains. I don’t mean neoliberal economists because they don’t puzzle much at all. But even orthodox, empirically-driven economists expected some productivity boost from some of the policy changes. However, economic stagnation aside, the annual productivity increases after the neoliberal policy changes were much the same as they had been earlier.
Orthodox analysis predicted two main sources of productivity boosts. First, the removal of the plethora of erratic subsidies and taxes would generate allocative gains as the economy switched into higher productivity activities. Second, the increased competition from the ending of barriers to entry would release entrepreneurial initiative. Neither expectation seems to have been fulfilled.
A major failure of the neoliberal policy changes was that its poor macroeconomic management frustrated the expected microeconomic gains. It is damned hard for a firm to improve performance positively when the entire economy is stagnating.
At the micro-foundation level we have not paid enough attention to the cost of regulating the economy’s transactions. The neoliberals thought that most government regulation was unnecessary. However the disbanded public sector regulation was handed over to the private sector a more of less extent took over the job (or in many cases failed to.) .
Is private regulation would be more efficient than public regulation?. Certainly ‘Light-Handed Regulation’ proved to be wasteful. Every time we rebuild or refurbish a building because of regulatory failure the additional resources the rebuilding uses are a total waste in productivity terms.
The neoliberal model of human behaviour assumes that everyone is entirely self-centred. (I have wondered if the neoliberals exempted themselves; they certainly talk about acting in the public good although they were generally well-rewarded.) That meant nobody could be trusted to pursue any objectives other than their own. So it became necessary to introduce a layer of management to control the underlings. But, uh-oh, that layer could not be trusted either, so another layer was needed.
Before long one had increasing numbers of employees who did not contribute to the output of the firm or the objectives of the public agency but whose task was to make sure that others did.
We ignore this phenomenon, or at least the Productivity Commission did when it was reviewing universities. Its report has a graph showing that the number of non-academics was rising faster than the number of academics, and now exceeds them. (Many ‘academics’ are in fact also administrators and hardly directly contribute to the academic functions of a university.) Yet while the Productivity Commission provided the graph it seemed uninterested by the transactions-regulation part of the economy and did not take the next step of investigating it. No wonder it is struggling to explain our productivity performance.
The controls reflected a lack of trust in the workers who in turn change the way they behave; grumbling about head office officiousness is common and some retaliate by bending the rules in a way they would not have in the past. (Which results in yet more controls.)
This is not true for all. Those in the actual delivery of health services generally focus on their patient needs (there you are, I did not use the distancing jargon of ‘client’) and ignore the head office.
Yes, today most workers are less loyal to their agency than a few decades ago. Which, of course, makes it harder to align their interests with the firm or agency (thereby requiring more controls). The higher staff turnover reduces productivity.
While I would not want to argue that the rise in the need for control explains all the ongoing productivity failure, it surely has contributed to much of it.
I began this column with wondering why the neoliberal changes of the 1980s and 1990s so manifestly failed in terms of productivity gains? I suggested the growth of staff devoted to controlling frontline workers is part of the answer. However, it is possible that the neoliberals triggered an underlying change to a less trusting, greater worker-regulating economy, which would have happened anyway.
It would be easy to argue that we should reverse the trend, but I fear the toothpaste is out of the tube. Trying to put it back – to return to a more trusting society – could generate an even greater productivity loss; nobody would trust those doing it.