4 May 2021

Why the post-war period was no Golden Age – and neoliberalism has not been a failure

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There is a fashionable, pervasive and tempting idea that the post-war decades really were the Good Old Days – a period of remarkable economic growth which was also wondrously equitable. When The Times describes this period as a “golden era” we can probably assume that this is the establishment view.

The corollary of this is that neoliberalism has failed and we ought to return to the approach of yesteryear. The policies slated to rise from their graves include strong trade unions, high taxes, Men in Whitehall picking losers and so on. 

There are two very good reasons to question this consensus – and both involve being able to count.

The first is that, contrary to popular belief, the growth back then wasn’t all that remarkable. It’s always possible to pick and choose starting and ending years in any series, which is exactly what the ‘golden era’ brigade do. Using the economist Angus Maddison’s figures, the per annum (real GDP per capita) growth rate for the UK from 1947 – the post-war nadir – to 1976 when the wheels came off the model, was 2.9%. That is indeed better than the neoliberal years since of 2.3%. So, does that prove the conventional wisdom?

Well, not quite. The point here is that long-term growth rates are driven by advancing technology, which is closely allied but not exactly the same as advancing productivity. Growth from 1918 to 1947, by the same measure, was 0.7% a year. Case proven again we might think – except when we combine the two periods we get a proper long-term growth rate of 2.1%.  

I’ve expressed this view before in Anglo-Saxon terms, but to do so more politely: some portion of that post-war growth was driven by the technological and productivity advances of the previous decades that were not, earlier, translated into actual economic growth.

It is indeed possible to argue that peace and the absence of a depression allowed that expression of the stored up growth, but it becomes a lot more difficult to argue that it was those golden years policies that were the cause. That 2.1% growth rate across the whole period is about what we think a mature economy is capable of over longish periods of time, after all. That it came as lean years and fat is interesting but not a proof of policy actions. That the neoliberalism since has matched or slightly beaten that long-run rate is another interesting point. Growth is more to do with technology and productivity than public policy perhaps.

Let’s not forget either that the more recent neoliberal years are when the poor of the world finally got richAs the good liberals we are this is the economic outcome we all desired and the one we also got – a justification of the system even as we appeared to also enjoy slightly higher growth rates ourselves.

The second reason the post-war period is oversold is that we simply don’t count the size of the modern economy correctly. In fact, I would insist that we grossly undercount economic growth these days, the more conventional view is that we might do so, slightly, but it’s not a big issue. Except that detailed research is telling us that grossly probably is correct.

Consider WhatsApp. In GDP terns this kind of messaging service counts as a reduction in productivity. A billion or so people are getting a chunk of their telecoms for free, and this is somehow construed as making us poorer. Clearly, we are doing something wrong here.

Within the technical confines of GDP calculations, this is correct. Using WhatsApp is free, there is no advertising either (or perhaps was not when this example was constructed). That means there is, technically, no output to be measured. Back a while Facebook told me they had “a couple of hundred” engineers working on it. So that is in GDP as incomes, as costs of production, but there’s no output number to assign on top. So, the app’s existence comes out as a reduction in productivity – we have costs in our national accounts but no benefits.

As Google’s Hal Varian has rightly pointed out: “GDP doesn’t deal well with free”. A study from Bryjolfsson et al notes that search engines are apparently worth $18,000 a year to each of us, email $8,000 and even Facebook $1,200.

Now, this is not an entirely new phenomenon, of course. There have always been rises in living standards – or the ‘consumer surplus’ if you prefer – that aren’t included in GDP calculations. The digital economy has upset the traditional relationship between what is so measured and what is not. By a factor of five to 10, perhaps – although personally I would insist it’s more than that. 

Our method of counting how well off we are simply does not deal well with how well off this modern world is making us. If we add this effect to the first one it’s no longer at all obvious that the post-war decades really were the halcyon era some might claim. Looking at long run growth rates that post-war period appears good, yes, but averaging out that result over a less cherry-picked era gives us an increase in wealth slower than even our undermeasurements of the current world.

It’s terribly fashionable to want to return to that post-war consensus but as with all too many intellectualisms there’s remarkably little evidence that it’s actually a good idea.

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Tim Worstall works for the Continental Telegraph and the Adam Smith Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.