What future for business? Risk taking and innovation after the recession

8 07 2009

AR0UCTVCA3838BCCAIFF8UXCA19JEK3CAQ8BA1JCA74964FCA1VCLJNCA6PF3CECAA4KB0ZCAIM1R9SCAXA15DGCARAN6ALCADTF3IBCAR9Q12XCAKU4BXVCAYL6X9PCAR7T817CAP861NNCA1HBK90CAPC1B8MThis is an edited version of my speech at this last night.

Whenever there is a panic in society, for example around swine flu, I usually find myself on the side of those saying ‘calm down, its not as bad as you think’. I generally take the view that as a society we are too risk averse and liable to panic. However, as far as the recession has been concerned the opposite is the case.  The recession now appears to have been a bad dream about greedy bankers and corrupt politicians from which we are awaking. The concensus appears to be to forget about it as quickly as possible and get back to business as usual. I feel like Cassandra, condemned to tell the truth but to be disbelieved, because there is no ‘business as usual’ and here are three reasons why.

The first is that the damage done by the recession is deep and likely to be prolonged. I say the damage done by the recession rather than the recession itself because technically the recession, defined as consecutive quarters of nagative growth, may be over or almost over, but the damage will linger on:

  1. Unemployment is continuing to rise
  2. Toxic debt has not been removed from the system
  3.  Banks are not lending
  4. The securitization business, provider of investment finance, has disappeared
  5. World trade has collapsed
  6. Global capital flows have slowed dramatically

Secondly, for the UK there is no business as usual for three main reasons. For the past ten years financial services have been the main driver or the economy. there is very little chance that this will return. Also the crisis in public sector finance, affected badly by the reduction of taxation from the finacial services sector and the costs of propping up the banks, will mean big challenges for the public sector in terms of employment and services. Lastly our political class has run out of ideas and lost a large amount of authority. This will make any hard choices difficult for it to take.

Thirdly, real change in the economy will require inevitably some risk taking and more innovation. Yet even before the recession the UK had the lowest Research and Development and Venture Capital investment in the developed world. The recession, according to the Future Foundation, has made business even more risk averse.

We are culturally a safety first society. We view new developments in science and technology with suspicion and hostility. We are over protective to an absurd degree of our children and ourselves. Is it possible to imagine that this kind of attitude will foster and encourage a dynamic econopmy?

Take the banking crisis. We have capitalism which cannot stand on its own two feet and a state which cannot act decisively. The banks have been protected from their own recklessness by a state too feeble to either force them to face the market or to take complete control. Instead we have a half way house which allows the banks to stop playing their role as providers of credit. Some people see the banking crisis as an example of taking too much risk. But there is a big difference between taking a calculated risk and sheer recklessness and stupidity.  The creation of toxic debt began as an attempt to spread and minimise risk. It became reckless once the people buying the debt stopped checking on what they were buying. This was just plain stupid.

There is not one part of our society , business, politics, culture, which has not become more risk averse. The way to challenge it in the first instance is through politics, something anybody can play a role in. We have to renew our democracy as the prelude and the process of renewing our economy and our society.

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Reboot Britain-Innovation requires more than tweeting

7 07 2009

twitter-bird-money-eyesThe Reboot Britain Conference yesterday organised by NESTA had promise, focussed as it was on the need to transform the future of the UK, a project I am very keen on. In particular it was looking at the power of the web to shape better public services. Did it deliver on its promise? I was struck by several things.

Firstly, what people now consider ‘innovation‘ is mainly the ability through social media to communicate with each other more. Social media are now becoming the focus of hope for the future in every area of life. The capacity of social media to really change things is overestimated while the lack of any substantive polices for change is underestimated.

Secondly I heard almost no discussion or even mention of the recession. The tone was relentlessly upbeat and the emphasis was on ‘optimism’. The whole event felt like some kind of strange religious sect which attempts to operate outside of normal reality. There was a strong sense that if only we could convince ourselves that the recession was over then it will be.

Thirdly, politics and politicians are not only held in contempt, but hold themselves in contempt. The Conservative MP Jeremy Hunt, who opened the proceedings, spent a lot of his speech making jokes about corrupt MPS and lauding social media as a way of keeping MPs under control through greater transparency. Any discussion of the content of politics was entirely absent from the day.

Fourthly, even clever economists like Gillian Tett view the causes of the recession in non economic terms. In her case she interprets the behaviour of bankers in organisational terms as being about lack of effective structures.

Lastly, the CEO of NESTA, Jonathan Kestenbaum, has decided that the Tories are going to win the next election. His introduction to Jeremy Hunt was the most effulgent suck-up I have heard for some time.





Making the trains run on time

3 07 2009

imagesFollowing the de facto nationalisation of the East Coast Rail line, no doubt David Miliband will be popping up to tell us this is another example of New Labour radicalism, alongside the nationalisation of the banks. What really happened is that another deal that the government did with the private sector has unravelled as soon as it looked as if National Express, the company concerned, would have to make some hard choices about how to run the railway during a downturn.

What does this episode tell us? Firstly it confirms the point made by James Heartfield in his essay on the state and the economy, that the state and private industry have become more and more interpenetrated. A key aspect of the deal between the government and National Express was that the government would pick up 80% of any losses. This is not free enterprise by any stretch of the imagination. It is effectively a state subsidy to a private industry, as are many of the big government related projects, particularly in the IT sector. This process is likely to go even further as the government struggles to provide key services during the recession.

The state certainly does have a key role in the management of big infrastructural projects such as the railways. But the current system where neither the state nor private enterprise take full control is the worst of all worlds. It is possible for the capitalist state to run big infrastructural projects successfully, as anybody who has travelled on French high speed trains or driven on their motorways knows. In Britain this ability appears to have been lost.

As it stands the system we currently have allows neither the market nor the state to operate effectively. The deal with National Express allowed them to walk away just as they should have been bringing their management skills to bear in keeping the railways going through a recession. Even with the 80% subsidy against loss, rather than tackle the difficulty choices, of how to cut costs, improve service and productivity, they simply gave up.





Why the behavioural economists are wrong, a review of ‘Animal Spirits’ (Part Two)

1 07 2009
  
Animal Spirits: How Human Psychology Drives The Economy, And Why It Matters For Global Capitalism, by George Akerlof & Rober Shiller

Animal Spirits: How Human Psychology Drives The Economy, And Why It Matters For Global Capitalism, by George Akerlof & Robert Shiller

BOOK REVIEW (Part Two)
Animal Spirits: How human psychology drives the economy and why it matters for global capitalism, by George Akerlof and Robert Shiller (published by Princeton University Press)

“Animal spirits…is an economic term, referring to a restless and inconsistent element in the economy. It refers to our peculiar relationship with ambiguity or uncertainty. Sometimes we are paralyzed by it. Yet at other times it refreshes and energises us, overcoming our fears and indecisions.” [1]

The first part of this review contested  Shiller and Akerlof’s claims that the recession is caused by the irrational behaviour of individuals. There is however much more in their book to challenge.

I once talked to a behavioural psychologist whose job was to improve the behaviour of children in the classroom. The first thing he told me was that to do his job properly he had to completely ignore the, often tragic, social backgrounds of the disturbed children. Instead, he focussed entirely on strategies for changing their behaviour by psychological tricks which were akin to those used to train dogs. I was reminded of this when reading Shiller and Akerlof’s approach to some major economic and social issues. They too ignore the historical and social factors which have led to many of the phenomena they discuss and instead present them as merely behavioural oddities.

Their view is that human economic behaviour is determined by a combination of five things: confidence, fairness, corruption, money illusion, and storytelling.

These are all relatively straightforward concepts, except perhaps for money illusion. Money illusion is a term used to explain why people will oppose wage cuts, even if the prices of what they buy are falling in deflationary times, more than they will fight for wage rises at a time of inflation when everything is getting more expensive.

Why do workers resist wage cuts and not fight as strongly for indexed linked rises?  Rather than a psychological reason, is it not more likely that workers understand that once they have conceded the need to accept pay cuts that they will have handed power to their bosses to do so again, to keep coming to the well? Is it not also likely that compared with this, the need to combat inflation, a future event which like all future events is uncertain, will seem less of a vital issue? The authors approach to this is typical of many of the points they make. They persistently choose to interpret attitudes arising from social and historical experience as hard wired psychology. Often this leads to observations which are so stunningly banal that you are left wondering whether these authors simply need to get out more. Take the following examples:

‘people rarely quit their jobs in recessions’[2]

‘people tend to want to work in higher paid industries’[3]

‘students…really don’t seem to care how much they save’ [4]

Their emphasis on the importance of storytelling also takes them away from understanding what is perfectly clear and rational behaviour based upon experience. They claim that the high savings rate in China and other new economies is down to the ‘story’ that ‘there is no shame in being poor in China, since this is viewed as a transitional state’[5], therefore people do not consume. However as many people have pointed out, in a country with often rudimentary social and medical insurance[6], savings are an essential to fall back on when times get tough.

The answer to most of the problems the authors riase is state action of one kind or another. For example, a discussion on racial discrimination in the US describes the situation of black Americans thus,

‘there is the notion among both blacks and whites that there are two groups, we and they. This very notion is part of daily reality. This notion – as much as low financial assets and skill levels – is responsible for the continued poverty of African Americans.’[7]

The experience of racism in the US is reduced to a ‘story’ which reinforces social stereotyping. The authors do not recognise that racism, where it exists, needs to be combatted through political means. Their suggestion instead is positive discrimination, action by the state.

Of course, there are many aspects of human behaviour which appear to be irrational. We can usually see them more clearly when we look at other people’s cultures rather than our own; and there’s the clue. Generally speaking these types of behaviour are the product of a specific cultural and social experience. Sometimes it is also true that we take our lead from what other people do, as in buying houses or shares in a rising market. But this is a perfectly rational thing to do in the absence of information as to why this is a bad idea.  Very few people can call the top or the bottom of any market, and those that do are often just lucky. In the mean time we all try to take as much advantage of it as we can.

The rise of behavioural economics is a symptom of the paucity of proper historical, political and economic analysis of society. In that sense it is just as much part of the voodoo culture of the day as the types of behaviour it disparages.

 

[1] Animal Spirits p4

[2] Ibid p103

[3] Ibid p103

[4] Ibid p116

[5] Ibid p128


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