Capitalism requires capital. The process of industrialization is partly one of technological advance, but it is also one of increasing capital use in the economy. But when the return to capital is forced below zero, as in the last decade, the capital base shrinks, the economy misbehaves and productivity declines, in spite of technological wizardry. Thanks to the world’s central banks, that is happening now in every advanced country. The rich world’s economy is thus in a death spiral, and it is not clear what forces can be used to get us out.
Productivity growth is the key statistic to measure economic progress. Without it, citizens will never get any richer, and if low-skill immigration is plentiful, they will become poorer. Without it, technological progress is utterly futile; it produces change without progress, disrupting the patterns of life without adding any value. Technological change without productivity growth is what the Luddites thought they had; it is only the productivity growth of the last two centuries that makes us better off than early 19th Century handloom weavers.
From the late 18th Century to 2007, Western residents could rely on a steady, even increasing rate of productivity growth. At less than 1% per annum in the decades before 1850, it gradually accelerated in the late 19th and early 20th century, reaching a high of 2.8% annually in the United States quarter-century to 1973. The invention of the EPA and the OSHA in the early 1970s caused a sharp downturn in U.S. productivity’s exuberant growth, but even so it managed to average 1.8% annually over the 1973-2010 period.
Other countries increased their productivity at similar rates to the U.S.in 1990-2007. Britain did slightly better at 2.0% annually while Japan, in spite of its slump from 1990, did better still, increasing productivity at 2.3% annually. Thus, there was no sign of secular slowing in productivity growth except perhaps in the European Union, where productivity growth was slightly slower, at 1.4% (figures for the eurozone are not available back to 1990.)
After 2007, the picture changed drastically. Following a couple of years recovering from the financial crisis, U.S. productivity growth in 2010-16 was a pathetic 0.6% annually. However, that beat everywhere else. Eurozone productivity growth in 2007-16 was minus 0.2% annually, British productivity growth was nearly as low at plus 0.2% while Japanese productivity growth was an appalling minus 0.6% annually.