Our fight is not with the Chinese, but amongst ourselves

 “Since the crisis, developing countries have lost interest in the old Washington consensus that promoted democracy and liberal economics. Wherever I go in the world, governments and business leaders talk about the new Beijing consensus — the Chinese route to prosperity and power. The West must come up with a new model of capitalism that’s consistent with our political values. Either we reinvent ourselves or we will lose.” Times

The recession may be over, and I stress the ‘may’, but the deep damage done to the confidence of western leaders remains. Anatole Kaletsky’s article in today’s Times, written as a review of the mood at Davos last week, reveals how deep the loss of confidence is. Let us review what forms the damage has taken.

Firstly, the recession has accelerated the economic balance towards China and the east. Secondly, it has destroyed the Reagan/Thatcher rhetorical commitment to free markets which underpinned most western economies. Thirdly it has revealed the ideological bankruptcy of western political parties. Kaletsky is right to point out that the failure of the meetings at Davos, and we could add of all of the global summits since the recession started, to address these issues is symptomatic of the crisis itself. There has been a studied refusal to properly debate the recession and its consequences. The western ruling elite has spent its time in the modern equivalent of a bar room brawl rather than addressing the main issues.

Kaletsky’s proposed solution is that western capitalism should reinvent itself. His suggested routes for doing this are themselves a symptom of the limited imagination that exists within the western elite. In fact, while appearing to want to challenge the Chinese model, Kaletsky’s solutions look suspiciously as if he wants to get as close to it as possible.

Do Western political systems need to be reformed to make them more conducive to compromise and rapid, consensual decision- making instead of the political paralysis that now threatens the US? Do we need an economy in which government plays a bigger role in finance, energy, environment and strategic infrastructure investment, but actually reduces public spending and taxes by backing away from some of its traditional, and ruinously expensive, responsibilities for health, pensions and education?

A political system which is based on consensus is what the Chinese Communist party enjoys. It is the antithesis of openly contested democracy. The ‘political paralysis’ which infects western governments is a product of the lack of any coherent political programme for change which can force its way on to the political agenda and persuade the majority in a democracy to support it. It is not more compromise that is needed, but more contestation.

It is not at all clear what western societies need to do in order to continue to make general progress. At present it seems as if the market is the only route. It may be, as Kaletsky suggests, that the state needs to play a more central role in developing the economy. But if this is the case there is even more need for a vigorous democracy to exist which can challenge and guide the state. At the very least we need an open public debate about the role of the state. It is not the form of politics which needs to be changed, but the content. Giving the state more powers without strengthening democratic control over it takes us closer again to the Chinese model.

Even Kaletsky’s final summation of the ‘choice’ facing us is wrongly framed. What we are trying to win against the Chinese is not continued global dominance by the west over the east. If it were only that why we would care? Capitalism is firmly entrenched in China and there is no threat to the market. If the stakes were only about which capitalist country comes out on top then most of us probably would not care very much. What is at stake is the future of democracy.

The experiment in democratic politics, which began with the Greeks and was taken up much later mainly in the west, is now weaker and feebler than at any time in the past sixty years. We do have a fight on our hands, but it is not with the Chinese. It is with our own narrow perceptions of what is possible. We suffer from a failure of political imagination and a climate of low expectations which infect every area of life. Any challenge to the status quo has to begin by taking on the pessimistic, risk obsessed cultures of the west.

The Tories shrink before our eyes

The(Tory) MP was unable to identify many points of difference between the Tory plan and Labour’s proposals to rebalance the economy and put the finances back on to a stable footing. But he stressed the contrast with the government’s economic record – a point the Tories will drive home as they seek to blame Gordon Brown for the recession and the painful corrective measures it has made necessary. Financial Times

Here we are a few months from a general election and it is increasingly obvious that on the biggest issue facing the UK, the future of the economy, the main opposition party has nothing different to offer from New Labour. The Tories are saying in essence that they would manage the economy better than New Labour, but the policies would be the same.

The Tories tried to differentiate themselves last year by saying that they were the ‘austerity’ party. Even at the time I pointed out that this would be both unpopular and also that big spending cuts would be very difficult to implement. Now that Cameron is backing away from the austerity message the Tories are revealed as having nothing to say that could not come from the mouths of Brown or Mandelson.

Why is this a problem? There are two reasons. Firstly, the UK economy is at a turning point. Business as usual cannot be the solution. The financial sector is unlikely to recover its position as the locomotive of the economy. Indeed, as populism continues to rule government’s attitude towards bankers and banking and debts remain unpaid, there may be more bad news to come from the financial sector. Short termism still rules economic policies. There is an absence of both strategic thinking about the long-term development of the UK economy and also the kind of entrepreneurial attitude which is required to lead the UK out of the hole it is in.

Sir John Rose, the CEO of Rolls-Royce, has written today about the potential strengths of the UK economy. There is much in his article to agree with. Yet Rose misses out the key element of  the lack of political leadership that is required to ensure the kind of transformation he is asking for. Which brings us on to the second problem.

In a recent study of British Social Attitudes the percentage of people in the UK who saw voting as a duty had fallen from 64% in 2000 to 56% in 2009. There has been a continuous disengagement with politics and the political process for some years. The recent scandal over MPs’ expenses was both a symptom of disillusionment with politics and a reinforcement of it.  If political parties cannot differentiate themselves on the question of the economy, which is central to everybody’s lives, then there is even less reason to vote.

Finally this seems to sum up the bankers bonus issue as succinctly as anything else I have read on it.

barroom

Innovation and inspiration-part 2

During today’s economic downturn, innovation will be more important than ever. The sooner far-sighted strategies are developed and implemented by government, business and other agencies, the more a better world will be within humanity’s reach. It is not innovation that creates inequality, but the social choices of institutions. We distinguish innovation from fiscal, regulatory, legal and cap-and-trade responses to today’s challenges. Unlike these technocratic measures, innovation has the potential, at least, to increase wealth and opportunity for everyone: it is not a zero-sum game. Big Potatoes: The London Manifesto for Innovation

 

This blog has long argued that the UK requires a radical change for the better in its approach to innovation. I am delighted to recommend a new report, Big Potatoes: the London Manifesto for Innovation,which you can register for here, which proposes a 14 point programme for innovation.

On Davos and the crisis of global leadership

Even if economic issues are more central to politics than ever before, argument today is less about the nature of economic systems than about the relative abilities of different politicians to administer a system on whose basic structure all are in agreement. In both Europe and the US, party identities are not now principally defined by economic differences but by questions that always crossed class lines and economic interests – nationalism and cultural identity, social liberalism versus social authoritarianism, and religious affiliation – a list to which we might now add environmental awareness. John Kay

As the international political and business elites gather in Davos for their annual away day, John Kay neatly sums up the state of modern politics.  While politicians focus on social, cultural and environmental issues, their discussion of the economy is restricted to the management of the latest crisis.

Yet at the same time there is a palpable sense that something important is missing. The FT’s Davos feature, the World in 2010,  is full of references to the failures and weaknesses of leadership at both a global and a local level. Nearly two years after the onset of the recession the world is still grappling unsuccessfully with the problems which created the financial crisis. Just to recap, here are three key issues I identified nearly a year ago in The Three Interlocking Crises of Global Capitalism.

Firstly;

The recession is severe, but what makes it worse is that it is happening when the coherence and the credibility of the political elites is at an historical low ebb.  The coexistence of a political with an economic crisis is what makes this recession so dangerous.

This has been born out completely. Remember a year ago Obama was in the first flush of his popularity and there was a sense in some quarters that new leadership had appeared to set the world on a different and better course. One year on and while the leadership of most western countries has struggled on in the same way, the big hope that Obama brought has been dimmed. Global leaders are still squabbling about the best way to constrain banking activity if at all, accompanied by a concerted campaign to ‘punish’ bankers for their supposed role in causing the crisis.

In the UK we are faced with an election choice between three parties which have little discernable differences. The main point of contention is over how far and how fast to cut public spending and introduce austerity measures. It is no wonder that a record number of people see voting as irrelevant.

Secondly;

The imbalance between productive economies like China and the less productive economies in the west lies at the heart of the recession…changing the way the world is run will be a tricky process as there will be losers as well as winners.

Events since then have reinforced this point. China in particular has come to the fore and its economy has proved much more resilient to the recession than any in the west. The stagnation of western economies and the growth of  China, India and others have added weight to the global political crisis, as agreement over issues such as rebalancing the world economy or tackling global warming have proved so far impossible.

The Chinese have continued to finance US consumption throughout the recession and western debt levels at a governmental and personal level have continued to grow. With all of the world’s major economies hoping for export led recoveries from the recession, as Martin Wolf has pointed out, there is much more scope for conflict over trade than has been the case before.

Thirdly;

The absence of opposition of any kind to capitalism today has contributed to a sense of drift and general loss of impetus in society in general and has also affected the political elites.

The absence of any alternative has been a mixed blessing for the economic system. There is no doubt that in the UK and elsewhere the absence of any kind of alternative vision has worked to the benefit of the status quo. It has been possible for employers to introduce wage freezes or cuts and short time working with little or no resistance. This  widespread acceptance of cuts in living standards has minimised social conflict and helped to stabilise society through a period of economic uncertainty.

But the problem remains that in the absence  of  any sense of a different way of organising society, the western world has become more and more conservative. This conservatism is increasingly taking the form of an anti -growth sentiment. It is important that we see this for what it is, at heart an abdication of the necessity for human development and the forward march of science and technology. People look at the failure of the market to be able to deliver consistent growth and improvement in living standards, and draw the conclusion that not only is it impossible to do so but it is probably the wrong objective anyway. In other words we are becoming resigned to a world of low growth and stagnation, causing negativity which then spreads out from the economic into the cultural and social spheres of life.

One commentator on the Davos meetings makes the point,

If the Davos crowd cannot identify a workable way to rebuild and reinvigorate the international system, it is hard to think where else the ideas will come from.

This is a question that all of us with pretensions to political change need to consider.

Lost in space-the aliens are coming and they are as bad as us, apparently

According to one prominent speaker at tomorrow’s conference at the Royal Society on alien life,

Governments should prepare for the worst if aliens visit Earth because beings from outer space are likely to be just like humans…Extra-terrestrials might not only ­resemble us but have our foibles, such as greed, violence and a tendency to exploit others’ resources.

One could not sum up the current misanthropism in society more concisely than this. Apparently, the worst thing that could happen is that aliens are like human beings. I wonder if the writer of these words has seen any of the films which imagine monsters from space, the huge carnivorous spiders from  Starship Troopers  or the truly nightmarish creatures from the Alien films.

It used to be the case that we feared these imagined horrors so much precisely because they were not human. That is why sci fi monsters so often appear as giant insects, the closest thing we have on earth to species which appear utterly alien to us in every way. Now the worst that some people can imagine is that they are like humans. We used to be afraid of monsters and now we are afraid of ourselves.

This attitude chimes with the anti-human approach of some environmentalists and population controllers who see humanity as not only a kind of pestilence on the face of the Earth, but also a danger to those beyond it. The new James Cameron film, Avatar, for example depicts humans as a threat to other, gentler, species in outer space.

The wish to explore space used to be at the heart of human endeavour. President John Kennedy put it at the heart of the United States’ aspirations in the 1960s. These days the urge to explore has been weakened and instead fears about the dangers of space exploration have come to the fore.  Now,it appears to be beyond us to repeat even what we managed 40 years ago by going to the Moon because of the difficulty and expense. In addition, we are warned of the dangers we bring to the Universe by simply existing.

There are many good, practical reasons to push ahead with the exploration of space, some of which I listed in this article on travel to Mars. But it is humanity’s endless curiosity and willingness to experiment and explore which has made us as unique in the universe as we currently appear to be. It is the triumph of human ingenuity and spirit over enormous difficulties which makes space travel so inspiring.

If it turns out that extraterrestrial life is like us then this would be a truly wonderful thing. It could mean creatures more technologically advanced from whom we could learn enormously. This is all in the field of speculation, although the massive increase in the number of inhabitable planets discovered in the recent past increases the likelihood that intelligent life exists elsewhere, at least on the statistical level.

The UK needs an industrial policy, and fast

‘Industrial policy’ means in essence an activist approach by the state towards support for and development of the economy. In the UK, state activism in this area was discredited in the 1970s because extensive state financial support for the defunct UK car industry failed at huge expense. In France and elsewhere state support for industry has persisted and is seen as key to economic success.

The future of the UK economy is in a state of chronic uncertainty. Having depended for so long on the success primarily of the financial sector there is now grave doubt about where economic dynamism in the UK can spring from. There is also a growing sentiment that even were the financial sector to recover, over dependence on this one area is very dangerous. This has led to calls to ‘rebalance’ the economy.

Today’s Financial Times carries an analysis of why technology businesses in the UK are not able to offer the necessary dynamism. One key reason given is lack of the necessary support and investment to turn promising small companies into large successful ones. The article points out that Business Secretary Peter Mandelson is now keen on developing an industrial policy for the UK.

So what should an industrial policy look like were we to go down this road? Firstly, what it should not be. Propping up failing businesses in order to save jobs is a waste of money. For that reason the government ’scrappage’ scheme to enable the buying of new cars was a mistake. Were it not for the fact that the UK no longer has an indigenous car industry no doubt the government would have done what the US did through the nationalisation of General Motors in 2008. Government money should not be used to keep failing industries going.

Nor should an industrial policy be about trying to preserve UK industry in the hands of UK owners as Mandelson has argued in relation to the proposed takeover of Cadbury by Kraft. Generally speaking any foreign buyer will want to keep good businesses going. If there are loss making parts of the business they would  be closed down eventually anyway. The key issue is what new businesses are emerging and growing and that is where the problems of the UK lie.

An industrial policy would first and foremost require a change in the nature of political leadership. The UK government has adopted a managerial approach to the economy for the past 13 years. This worked only because the technology and financial services bubbles kept the economy growing. Now that these bubbles have burst a different approach is required. We need a political leadership which is both entrepreneurial and strategic.

Government needs to be entrepreneurial initially by changing the nature of public debate away from risk avoidance and caution, at every level, towards one of measured risk taking. There is a growing unease  in the UK that we have become stifled by regulation, both state and self regulation, in every area of life. Politicians need to give a lead away from this towards a more self-reliant and entrepreneurial approach to life in general and to the economy in particular. This should then be backed up by specific tax breaks and other incentives to encourage new business and more research and development in older businesses.

Government needs to be more strategic by taking a longer term view of the infrastructural requirements of the UK and investing more where necessary. This is a huge discussion in itself and needs to be looked at in depth. Government should also be encouraging and incentivizing those sectors of the economy which are already successful to be more successful.

I wrote recently of the NASTI approach, No Alternative STagnation is Inevitable,  which dominates current thinking around the economy in this country. For this to be transformed requires a sea change in political leadership away from cautious managerialism  and towards dynamic entrepreneurialism. The upcoming general election campaign offers an opportunity to argue for this radically different way forward.

The lesson of Haiti is we need faster global economic growth

The truly dreadful events in Haiti are the product of an unavoidable natural event. Earthquakes are not something that can be prevented. But what is preventable is the huge impact they can have on people who are affected by them.

The earthquake had a magnitude of 7 and the devastation and loss of life are enormous. However, two similar sized earthquakes in California within the past 30 years had the following effects;

The last major earthquake in the state occurred in the Northridge section of Los Angeles in 1994. The magnitude 6.7 earthquake damaged freeways, killed at least 70 people and did $20 billion in damage. On the evening of Oct. 17, 1989, a 6.9 magnitude quake hit the San Francisco and Monterey Bay regions. The 10-15 second tremor left 63 dead, more than 3,700 injured and thousands homeless.

Bad as these effects were, they is no comparison with the damage currently being inflicted on the Haitians. The reason for this differential impact is very simple. California is a wealthy, advanced state which has invested huge amounts in earthquake proofing buildings, bridges and public spaces. Haiti is a wretchedly impoverished country which has invested next to nothing.

Reaction to the earthquake in the west has focused on the need for aid, both as a short-term solution and a longer term one to the problems of Haitian society. However well-intentioned this may be, nothing short of a major transformation of the economy of poor countries such as Haiti can prevent natural disasters of this type creating disproportionate suffering.

The  depth of the  problems facing Haiti is fully revealed by the inability of aid donors to reach those who need help. Haiti has only one tiny airport which has meant that aid by air has had to be turned away. Its port, unprotected from the effects of earthquake, is blocked making shipping aid in impossible. Its infrastructure is primitive and its social services inadequate. Helping the injured and homeless can only have  a very temporary positive impact on the lives of the Haitians.

The plight of Haiti should be remembered by those who advocate slowing down global economic growth or making it more ’sustainable’. Haitians can only ever look forward to relief from poverty when growth in the global economy has enebled poor countries to develop. Many of Haiti’s problems originated from its past as a French colony. Like many third world countries its economy has been distorted and exploited by more powerful western countries over the centuries. This imbalance of power can only ever be addressed through economic development, rising living standards and concomitant social and political progress.

The clear lesson of Haiti, and the many other poor regions unnecessarily afflicted by natural disasters, is that we should reject calls for limits on global economic growth. We in the west cannot in all conscience refuse the poor of the undeveloped world the same rights to a decent life that we enjoy.

2010-the year of living uncertainly

Welcome to 2010, a year which is pregnant with doubt and uncertainty. The western world has moved from the certainty of recession to a fear and acceptance of stagnation, the ‘flat is the new up’ mentality derided by Martin Sorrell. In the UK we have a general election contested by three parties which is shaping up like a contest between weak boxers. Every time they land a punch on each other they weaken their opponent without strengthening themselves.

There is a general mood of cynicism and disgust towards the political process which means that whichever party or parties win the election then nothing can really change. Mick Hume has accurately summed up the state of modern politics as dominated by;

..the politics of fear, with many apocalyptic warnings, but little analysis of the underlying causes; the politics of behaviour, with attempts to blame the crisis of the system on the greed of individuals; and the politics of low expectations, with efforts to persuade us that the most we can hope for in the future is no/low growth in a stable/stagnant capitalism on a life-support machine of state intervention.

We  have reached the end of a political cycle which began with the collapse of communism in 1989. Just to remind ourselves, the collapse of the Soviet Union created an initial surge of optimism that history had ended with the triumph of western liberal democracy.  In the East new democracies arose. In the west the third way concensus politics of Bill Clinton, adopted by Blair and others, replaced class based politics. It is very hard now to remember the enthusiasm which accompanied the election of Blair’ s New Labour in 1997. Many people welcomed what they saw as a decisive break with the past and the opening of a new chapter in history. We can now see that the idea of a new era of peaceful and stable capitalism which dominated the twenty years since the end of communism has come to a political dead end.

The upcoming defeat of Gordon Brown in the general election here will mark the final eclipse of New Labourism in the UK. What we are left with is a severely confused and disoriented western elite which is struggling to tackle the major changes taking place in the world. During the credit fuelled  boom years of the noughties the absence of any clear economic and political blueprint for the future did not matter so much as it does now. The best that any politician can do now is to try to navigate the future without a map. On the economic front there is just as much confusion. While there are some commentators who wish to paint a rosy picture the general view is one of foreboding. The underlying problems facing western capitalism, which have been extensively debated in this blog over the past year, have not even begun to be addressed. The lack of a plan means they will fall back on restraint and cutbacks in public spending rather than bold policies for economic growth.

Elsewhere the triumph of liberal democracy is looking very hollow. The most dynamic economies in the world now pay lip service to democracy in general if at all. The recession has played its part in deepening the crisis of western politics by accelerating  both a shift in global power eastwards and by undermining the western model of (supposedly) free markets plus democracy.

All of this means that the stakes are even higher for anybody who can come up with a better idea of how to run things. The depths of cynicism amongst the elite and the general populace will prove a huge barrier to any ideas of change, but there are always some people who will not want to give in to these  widespread negative sentiments. Uncertainty can be a good thing if it leads to broader questioning and wider debate. There are those, such as Martin Wolf, who accept that we have reached a ‘hinge in history’. Whether this leads to a turn for the better or the worse is up to us.

George Monbiot is right about one thing-we should draw the election battle lines around economic growth

Humanity is no longer split between conservatives and liberals, reactionaries and progressives, though both sides are informed by the older politics. Today the battle lines are drawn between expanders and restrainers; those who believe that there should be no impediments and those who believe that we must live within limits.George Monbiot

The debate about economic growth has a peculiar character to it. On the one hand there are the plainly anti-growth forces of the environmentalists, as embodied in the shape of George Monbiot, with their quasi mystical commitment to Gaia. On the other are those, like myself, who believe that continuous economic growth is the salvation of mankind. Then there are many who struggle to accomodate a sense of limits within a recognition that economic growth is desirable. Broadly speaking these can be characterised as being in favour of sustainable growth. I am fascinated by the interplay between the living reality of the  stagnant  economies of the advanced countries, including the UK,  and the prevailing orthodoxy of sustainable development.

Maurice Saatchi recently summed up succinctly a common view amongst the UK elite about our economic prospects

…during a recent visit to the London School of Economics. I asked if any professors thought it was possible, by an act of will, to increase the long-run trend rate of growth of UK GDP. The answer was: “It can’t be done.” Or at least that to do it would require preconditions so daunting that no realist could contemplate them — more investment, higher productivity, a different culture, a new education system, etc. That list is the dog-eared trump card of those who see such ambition as a touching illusion. For them, the growth rate of the UK economy will always be the “trend rate”. It is like the weather. You can complain, but you can’t change it.

There is a distinct convergence between the kind of people Saatchi was describing and those who believe in sustainable growth. As I have argued before, it is convenient that climate change offers both a justification for accepting what Saatchi calls ‘trend growth’ in stagnating western economies and an excuse for not looking for ways to change it. It is this pessimistic outlook which explains why so many are ready to jump on the ’share out the misery’ response to the recession exemplified in the Tories championing of austerity.

We seem to have moved from TINA (there is no alternative to the market) to there being no alternative, stagnation is inevitable (NASTI perhaps?). There is an exhaustion of ideas at the heart of the political establishment which leads to fatalism about the economy. But we should remind ourselves that the economy is not something external to us. It is the sum product of our daily activity. It is influenced by our ideas and energy. It is what we are and who we are.

In the run up to the next election it is vital that a challenge is launched against the prevailing orthodoxy of NASTI. We should be arguing for:

*an end to negativity around economic growth. We need to create the infrastructure and support necessary to encourage a more entrepreneurial society.

*Government should be bolder in defending new technologies and scientific breakthroughs which have the potential to make us healthier and live longer.

* Government needs to play a greater role in modernising our transport and communications systems.

What next for UK banking? Not learning from the past apparently

I was at this event yesterday jointly organised by the New Statesman and Barclays Bank and addressed by representatives by the three main political parties. John Varley, the Chief Executive of Barclays Bank, began by arguing that banks should adopt more social responsibility, by which I think he means not to get into the same mess as last year again.

Two things struck me from the discussion. The first is that there is hardly a cigarette paper’s difference between the three parties on the issue of banks or by implication in their understanding of the recession. They all supported the populist tax on bonuses (described privately to me by one senior banker there as ‘puerile’). They all agree that there should be more competition in banking, better management of risk  and better regulation. One wonders yet again why there are three parties when there are virtually no policy differences between them. The cosy atmosphere was upset only marginally by John Snow asking why no bankers were in jail yet.

The second problem is that in this discussion, supposedly about the future of banking, there was disappointingly no discussion about the role that banks could be playing in the regeneration of the UK economy.  The whole discussion was about  not repeating the mistakes of the past rather than tackling the problems of the future. Lord Myners, Labour’s  Financial Services Secretary to the Treasury, mentioned in passing that there no longer appeared to be a blockage in banks financing business, although the cost of credit was perhaps too high. The banks say that there is less demand for credit from business. If there is little demand for credit this should warn us that the economy is unlikely to see a fast recovery from the recession.

The main lessons from the recession appear to be passing the parties by. The financial bubble, as I have argued before, was not the product of too much risk taking but too much risk aversion. Investors were seeking ways of making money through apparently safe new financial ’products’ rather than through investment in apparently riskier new industries and new technologies.

The government now effectively controls two of the major banks in the UK. It would be a good idea if it could enter into some major planning exercise to encourage investment from these banks in the kind of infrastructural projects that the UK desperately needs. It would also be a good idea to encourage these banks to set more investment aside for innovation and those areas of the UK economy which have the most promise.

None of the parties is facing up to the real problem facing the UK economy, what is going to be the engine of growth if financial services does not recover its dynamism, a prospect which appears to be receding all the time. Banks have a role in solving this problem, but the leadership has to come from politicians and there is precious little sign of that at the moment.