Sir,
In his commentary on my article “The myths that Europe’s policymakers must forget” in the Summer issue of Europe’s World, Jean Gadrey takes an ideological position against mainstream economic thinking and policy making. His harshly-worded commentary misrepresents the arguments I put forward, and it also misrepresents the role of the European Investment Bank (EIB).
Prof. Gadrey makes three main points. First, advocates of the “free market” have over the past 30 years overvalued competition as a source of innovation and growth. Second, in many services productivity cannot be increased without compromising quality (this is the only context where Gadrey makes direct references to the text of the article). And third, the EIB should “put more emphasis on co-operation than competition, and on increasing quality and sustainability rather than productivity”.
Consider his first point on competition and innovation. The current view among mainstream economists about the relationship between competition and innovation is, in fact, more nuanced than insinuated by Prof. Gadrey. The mainstream view has it that both the absence of competition and too much competition can be harmful for innovation. The absence of competition means that the producer(s) can reap excessive profits even in the absence of innovation and change, so they have no incentives to innovate. Too much competition, in turn, curbs the incentives to innovate, as any innovation would be costly but it would not yield much benefits as competitors could simply imitate it at no cost. For these reasons, as the article clearly states, competition is necessary to create incentives to innovate, but it has to be accompanied with patent protection and sometimes R&D subsidies to maximise those incentives. Thus, mainstream economists have not overvalued the role of competition in boosting innovation; they have a rather measured and nuanced view of that relationship.
On the second point, Jean Gadrey says that my article mixes up productivity and quality in services. In fact, the article calls for innovations that improve the quality of the service, stating explicitly that in health, education or the care of elderly this means that productivity growth should not result in fewer employees delivering the same service. Thus, the article explicitly acknowledges that there is possible tension between service quality and quantity, taking a position in favour of quality in services such as health, education and care for the elderly. It is unclear what Gadrey sees as being “mixed up”.
The criticism of a “selected reading” of William Baumol’s work is almost malicious. The article explicitly mentions Baumol’s work on the free-market innovation machine (and the role of competition). The work of Baumol that Gadrey himself refers to is “Baumol’s cost disease”. In a nutshell, what it says comes in three parts: (i) there are services (e.g., health and education) with limited potential for productivity growth unless one accepts a decline in service quality; (ii) the increase in wages in an economy is driven by sectors where productivity growth is feasible and takes place; (iii) and this wage increase inevitably spills over to other sectors (because employers compete for workers) even if these sectors did not experience a productivity increase; thus, these services become more costly without that indicating any inefficiencies (it simply reflects the co-existence of sectors where productivity growth is not possible or desired with sectors where that is not the case).
Without mentioning Baumol in that context explicitly the article which was written with as little jargon as possible deliberately emphasizes: “Think of health, education, and care of the elderly. There is consensus that productivity growth in the provision of these services should not result in fewer employees delivering the same service (or the same number of employees taking care of more patients, pupils and students, and elderly).” In essence, this sentence emphasizes Baumol’s cost disease and, equally important, its policy implications.
The only other direct reference by Prof. Gadrey to the text of the article is his question of (and implicit criticism) defining and measuring productivity gains in the banking sector. Again, his criticism is close to being malicious because the article (without spelling it out) alludes to the challenge of properly measuring productivity growth in finance by stating: “Third, there is evidence that productivity growth in the EU services sector has been lagging behind developments in the U.S. (even when accounting for the possibility that the pre-crisis productivity growth in U.S. financial services was, in part, virtual rather than real).”
Gadrey’s third main point related to the EIB seems to be based on a profound misunderstanding of its role and activities. Being a public policy institution with a mandate to support investment that boosts Europe’s long-term growth potential, the EIB is at the forefront of supporting quality and sustainability of growth and broader well-being. Its role as a public policy bank means that it is there to mitigate market failures and support economically and socially valuable projects that would not happen without public support. Gadrey’s caricature is a misrepresentation of what the EIB is and what it does.
As a closing remark, Prof. Gadrey presents “quality” and “sustainability” as opposites of productivity. This rests on a fundamental misunderstanding of what productivity as an economic concept means. Productivity – output per unit of input – is a measure that can very well be positively related to quality: a worker producing a higher-quality output is more productive than a worker producing a lower-quality output. While Gadrey does not mention what kind of “sustainability” he has in mind, it is clear that the only way to achieve sustained improvements in economic output and broader well-being will, almost by definition, have to come from higher productivity. Thus, productivity as an economic concept is no opposite of quality or sustainability. In a political-ideological concept productivity can be of course be given a different meaning, but an article with economic substance would have deserved a commentary on its economic merits.