Diane Coyle: Market setbacks fail to hold down the weightless economy

Despite the market turmoil, the US is still leading the transition to weightless growth

It isn't only the new Archbishop of Canterbury who is worried about the materialism of modern society, apparently symbolised for him by Mickey Mouse pyjamas. Many of us in the affluent parts of the world must have felt, at some time, stifled by the weight of our possessions.

Although it can't help us with our spiritual burdens, the Office for National Statistics has some good news for us on the materialism front: the impressive growth in the economy during the 1990s did not involve the use of extra stuff. The British economy in 2000 was 25 per cent bigger but more than 10 per cent lighter than in 1990.

To put it more precisely, while GDP increased by a quarter between 1990 and 2000, the use of minerals and metals, biomass and energy in the economy declined by about a tenth. This is a striking contrast to earlier economic growth, as the charts show. During the 1980s a similar increase in GDP increased the use of material resources by 15 per cent.

The calculations* rest on the principle that matter cannot be created or destroyed: it all goes somewhere and can be accounted for. Including imports, all the surplus materials extracted but not processed, all the waste in landfill sites, emissions to the atmosphere and energy used, as well as the materials eventually converted into finished goods, the UK economy used materials weighing 35.1 tonnes per person in 2000. This was virtually unchanged from the 1990 level, while GDP per capita climbed 22 per cent. Economic progress is, it seems, becoming decoupled from material resources.

This pattern is not consistent across all of the OECD countries, but it is shared by enough of them, including the US, to point to the same conclusion. Economic growth is becoming increasingly weightless. The statistics are particularly pleasing to me, because I wrote a book about this phenomenon back in 1996. The idea was greeted with some scepticism then, a common response being that it couldn't be true because we all had more and more clothes and CD players and washing machines and so on. Well, as the Archbishop has been complaining, this may indeed be true. But the point is that the relationship between economic value and raw materials has changed.

This is obviously good news for the environment. The ONS exercise to measure the economy's use of material resources was carried out on behalf of the Department for Environment, Food and Rural Affairs (Defra) as part of a sustainable development project. The new ONS figures suggest that policies in place in the UK must have helped make economic growth more benign in its environmental impact. They tie in with other indicators that growth globally is, albeit slowly, getting greener. For instance, a 1 per cent increase in global GDP now requires only a 0.4 per cent rise in energy use, and as little as 0.1 per cent in the most energy-efficient countries.

However, the diminishing importance of materials also confirms the fact that the nature of the economy is in transformation. Service industries account for a growing share of output in all the developed economies. Moreover, manufacturing industries are becoming more and more service-like. The production of physical goods is using lighter materials, less of them, and involving less energy and waste in the process; but at the same time adding more value than ever because of improvements in design, customisation, consumer choice, quality of service and timeliness of delivery. Behind the shift lie new information and communication technologies, and the staggering decline in the cost of computer power over the decades.

There are two lessons in this economic transition, whose reality is now backed up by the ONS figures. One concerns management failure. For one of the reasons the UK economy, in particular, saw no increase in the use of materials during the 1990s was that manufacturing industry struggled to grow at all. Industry likes to pin the blame on the exchange rate and interest rate policy, but it lies much closer to home, in the failure of many British manufacturers to provide what customers want, which is less stuff and more intelligence or creativity. Although some UK companies are at the forefront of international competition thanks to successful innovation, the shamefully low national spending on research and development and design in British industry shows that the majority have been backward-looking and complacent.

Recent research by the OECD** confirms that higher business spending on R&D significantly boosts national productivity. What is more, there are increasing returns to R&D. In other words, countries with high levels of spending on innovation get an ever-bigger payback from increasing that spending even more. Much of British industry, unfortunately, seems to be in a vicious spiral of too little innovation and stagnant productivity, rather than a virtuous circle of plentiful innovation and increasing productivity.

The second lesson of weightless growth is that it would be a mistake to get too carried away by the current melodrama on the world's stockmarkets. Of course there was too much hype about economic transformation and new technologies during the late 1990s, but now there is too little. In fact, in the United States the output of the hi-tech industries has been climbing since last September (after a huge fall during the previous 15 months) and has passed its 2001 peak by approaching 10 per cent. As telecoms output has continued to collapse, this means an extraordinarily strong and almost unnoticed recovery in the computer industry. Investment in the hi-tech sector has also increased, indicating confidence that the outlook will continue to improve.

The longer the stockmarket continues to fall, the bigger the question mark has to be over the future for the US economy, but there is nothing in the data on the leading new economy sector so far to suggest that underlying productivity gains, thanks to the spread of new technologies, have evaporated. On the contrary, American businesses and consumers are still spending on IT.

Despite the market turmoil, terrorist attacks and economic slowdown, the US remains in the lead in making the transition to weightless growth. Although it is so often seen as the leading example of consumerism gone mad, Mickey Mouse and his fellow-citizens are still further ahead of the rest of us in valuing the non-material things in life.

* 'UK Material Flow Accounting' by Caroline Sheerin, Economic Trends, June 2002.
http://www.statistics.gov.uk/themes/economy/Articles/General/Extracts/downloads/ET_June02_Sheerin.pdf

** See http://www.oecd.org/dsti/sti/prod/sti_wp.htm

Diane Coyle runs the consultancy Enlightenment Economics.
e-mail: diane@enlightenmenteconomics.com