Should we be making more things? Part 2

27 03 2009

Having looked at one of the wrong arguments against reindustrialisation let us now look at one which does have some substance.

A global division of labour is a good thing. It makes more sense because of the economies of scale to focus production of cars in large factories located in a few countries rather than a myriad of small ones dotted around the world.  Some countries are rich in raw materials and therefore focus on mining. Others, such as Finland, focus on niche technologies. The alternative,which would be for each country to try to make everything it needed, is a kind of autarky last tried unsuccessfully by the Soviet Union and makes no sense.

What each country brings to the world market can change and evolve. We have seen this most recently in the way that China has rapidly become a leading producer of consumer goods for export. However it is also true that a country’s speciality can be surprisingly persistent. Take Holland and the diamond trade. Holland’s leading role in diamond trading began in the 16th century and flourished when Holland was a global power. Yet despite the fact that Holland lost its global status centuries ago, it remains the centre for diamond trading. In World War Two the trade was largely destroyed by the Nazis but even so it was revived after the war was over.

The UK’s speciality over the past ten years has become financial and business services while its manufacturing base has played a relatively less important role. There is nothing wrong with this in principle, as long as we have something to exchange on the world markets.  Enterprises which make things generally speaking produce new value. Service industries generally speaking do not. They take a share of the value produced elsewhere. As long as we can exchange our services with countries that produce value then we can legitimately take a share of the value they create and consume it ourselves. An analogy would be a car maker using part of his wages to pay a hairdresser.

In the UK we have two problems. Firstly, most services are easy to move, certainly easier than large scale manufacturing. The loss of belief in UK bankers knowing what they are doing may lead to new global financial centres opening up. Or it may not. The kind of inertia which has preserved the Dutch diamond trade may apply to the financial services sector in the UK.

However we have a second problem. It seems pretty certain that financial services as a sector is not going to come back after the recession to the size and dynamism that it had before. That is why we need to look for other engines for the economy even if we do not lose our financial services expertise elsewhere.

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Obama and the vision thing

25 03 2009

We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.

Compared with John Kennedy’s space agenda speech in 1961 from which this extract comes Barack Obama’s syndicated address to the world in the run up to the G20 is a fairly dull affair. You may say that Obama has his hands tied by the economic recession,but Kennedy made his speech at the height of the Cold War,when nuclear meltdown seemed to be on the cards.

If Obama announced that his priority was to land a manned mission on Mars,something which is beyond our current technological ability, he would no doubt be met by a mixture of hostility and bafflement. Hostility from those who see any attempt to extend mankind’s dominion as an affront to nature and bafflement from the many about how this could impact positively on their lives compared with other priorities.

Yet if you go through Kennedy’s speech and substitute Mars for the Moon (and leave out the Cold War rhetoric) you have  powerful claims for exploration and experimentation with all the benefits and risks they involve which are as relevant now as they were nearly fifty years ago. Kennedy’s speech sums up the gains that would be made from technological advance,economic progress and knowledge that  come from harnessing a nation’s efforts on trying to achieve the impossible.

Kennedy’s speech includes a description of human development that locates mankind as being currently at the beginning of our development. I have reproduced it below. What we need to hear from Obama is something along these lines. Something that really does carry the audacity of hope.

No man can fully grasp how far and how fast we have come, but condense, if you will, the 50,000 years of man’s recorded history in a time span of but a half-century. Stated in these terms, we know very little about the first 40 years, except at the end of them advanced man had learned to use the skins of animals to cover them. Then about 10 years ago, under this standard, man emerged from his caves to construct other kinds of shelter. Only five years ago man learned to write and use a cart with wheels. Christianity began less than two years ago. The printing press came this year, and then less than two months ago, during this whole 50-year span of human history, the steam engine provided a new source of power. Newton explored the meaning of gravity. Last month electric lights and telephones and automobiles and airplanes became available. Only last week did we develop penicillin and television and nuclear power, and now if America’s new spacecraft succeeds in reaching Venus, we will have literally reached the stars before midnight tonight.





Reasons to to be cheerful Part 2

23 03 2009

The Olympics

It is a gloomy Monday morning here in London so my thoughts have turned again to my occasional series on good things that might come out of the recession. The Olympics is a beacon of light on the horizon for two reasons and potentially for a third.

Firstly the event itself of course on which I will not dwell too long.  It is only really the athletics which really gets me going although I have enough residual patriotism to recognise the achievement of the cyclists and the rowers. Mainly it is the knowledge of the huge amount of sheer bloody hard work of all those who take part which I find inspiring.

Secondly, the economic impact on London is and will be huge,and could be very significant. The amounts spent on building the site have come at a great time considering what else is going on, plus the fact that it cannot be cancelled  however deep in trouble we are.The regeneration of  parts of east London will be a lasting legacy of the games.

However,it could be much better. Currently the legacy plans for the Olympic site are fairly modest.  The location of the site,right next to the City of London and close to all international travel routes, would be an ideal place for a new and vibrant economic community to develop. If we set up a Special Investment Zone(SIZ) after the Games are over it have a galvanising impact on innovation in the UK.

This SIZ would be a place where new businesses could set up with tax and rent breaks to get them going. This is a once in a century opportunity to set up a new zone of innovation in the UK which could replace the failing financial sector as a motor for the UK economy. It would also act as a boost for the inadequate venture capital sector here.

 Here is an opportunity to make a statement about what kind of economy we want to have this century. It is time for real boldness on the part of our political leaders.





Should we be making more things? Part 1

18 03 2009

Should we in the UK be making more things? Is this the way out of the recession for us? The business secretary Peter Mandelson seems to think so . He has called for less financial engineering and more real engineering. Over the next week I will be asking that if it is true as  Jim Rogers   has said that  the UK has nothing to sell, whether reindustrialisation is the answer.

There is an interesting debate opening up about how the recession will impact on different sectors of the economy in the UK and what the regional impact will be. Some people are expressing surprise that manufacturing in the UK has been hit as hard,if not harder,than services,including financial services. Some commentators, such as Simon Tilford are now arguing that this proves that the UK does not need to reindustrialise, even if that were possible, because we would still have been affected by the recession.

Tilford is tilting at those who assumed when the recession began,that the countries whose economies are based on making things and exporting them,such as China,Japan and Germany ,would fare better than the UK and the US. Leaving  aside the fact that the US is still the biggest maker of things in the world, this approach betrays a lack of grasp of what happens in the kind of world recession we are experiencing. It also confuses cause with effect.

This recession was triggered by a crisis in the financial sector,but underlying it is a massive imbalance between China and other productive economies on the one side and the US, the UK and other countries on the other. This imbalance took the form of the export of products from the former countries to the latter, and the building up of debt in the latter countries to pay for them. This much is now undisputed.

 The reason why the UK and the US were able to get so deep in debt was because the exporting countries are creating far more than they need of the products we all consume.  The need for these products has not gone away but our ability to pay for them has.. What has happened is that the ability of the UK and the US to export services and products to the same value as its imports has gone away. This imbalance was concealed for some time because China and others lent us their money to buy their goods. It cannot be sustainable however that the same countries that make products give us the money to buy them.

Not surprisingly, ,as sources of credit dried up, demand for the exported manufactures of China and others also dried up. These countries have suffered a huge fall in demand as a result. Japan’s exports fell a massive  45% in January year on year.The key questions for the future for China and other exporting countries are  whether thay can create sufficient internal demand for their goods. This may take time, as Stuart Simpson has argued. The key questions for the UK and the US are different.

It is a fatuous argument to say that the UK does not need to reindustrialise because the recession has caused a drop in demand. When the recession is over the factories of China will be back at full tilt. But neither does it mean that reindustrialisation is necessarily the answer for us.The problem for the UK is that we have to create something that we can sell on the world market. But does it have to be through manfacturing? Next time I will look at this question. 





Pick up thy shovels and work

16 03 2009

Sometimes its the (relatively) little things that tell you the most. On the same weekend that the G20 finance ministers agreed not to agree on anything very much and put out the most anodyne of public statements as a result, I was driving to the seaside.  My journey took a while longer than it should have done because one of the main roads out of London,the A2, has been dug up causing traffic chaos though much of SE London. I have driven past these roadworks in the evenings and at weekends and have never seen a single person working.

We have a government which has committed itself to stimulating the economy through a programme of public investment. At the same time 100,000 construction workers have lost their jobs so far in the UK during this recession. We are told that  the problem with public works programmes is that they take a long time to get under way,or to become ‘shovel ready’.

So here’s an idea. Call in every local council leader and tell them that all the roadworks they have underway should be completed on a 24/7 basis and that they can suck up the unemployed construction workers to do the work. The only extra money this should cost councils is that night and weekend working might incur overtime. The government would pick up the bill for the overtime,which would be a tiny amount compared with what is going in to prop up the financial sector.  This approach could also apply to national government projects. This way all the ‘shovels’left lying by the side of the road could become’ready’very quickly.

The pluses: we would all experience a warm glow from seeing things get done faster and also experience in practical terms a sense of urgency from the government. More people would be in work. It would offset the disruption to peoples’ trading and leisure caused by the roadworks, as they would be finished quicker. From the point of view of the impact on the economy I cannot think of any negatives.

For something like this to happen the government would have to override any local objections to night or weekend working and any other bureaucratic obstacles put in the way. In other words it would require active and decisive leadership from the top. As I have argued elsewhere,the main problem we have today is ineffective leadership. So do not hold your breath that this or any other radical way of dealing with the crisis would even be attempted.





No such thing as a final collapse of capitalism

12 03 2009

Marx may have been semi-resurrected a while back, at least in a bastardised version. It has taken a global slump to bring Lenin back into the limelight. He is quoted in the Financial Times as saying in 1919 that,

To believe that there is no way out of the present crisis for capitalism is an error.

In the run up to the G20 meeting in April it is important to keep in mind what Lenin said. You would be forgiven for thinking that some supporters of capitalism have forgotten this crucial truth. The news media are full of  articles from erstwhile advocates of the free market, such as Anatole Kaletsky, arguing that only state activity can get the world economy going again. Others, like Noreena Hertz, dream of a new form of capitalism which is free from conflict and based on cooperation.

We are moving into a global slump the consequences of which could be terrible for the developed west and disastrous for the developing world. But capitalism is not going to collapse. In the continued absence of any alternative the market will revive at some point. Nor is it going to somehow transform itself into something which is not capitalism, mainly because there is no agency to affect that kind of change. The main problem is not the potential for capitalism to collapse or to be transformed, but whether the world’s leaders can prevent a full blown catastrophic slump.

Leadership is the key issue at the moment, not the mode of production. We can agree that the market economy is failing. It would certainly be a good thing if we could think about practical alternatives to the market and how to promote them. But the priority has to be to encourage ways of involving more people in finding solutions to the current crisis. Looking to the state or relying on utopian dreamers is not going to help create a long term solution.

The current quiescence of the population in most countries in the face of recession is the biggest barrier to recovery. Most people are still in a state of shock and disbelief and that extends to the political elites. For example, as Daniel Finkelstein points out, our leaders here in the UK are in denial about the consequences of the slump for the future funding of the public sector.

In the absence of proper democratic politics, with parties that stand for something and which have ideas for change, the scope for activity to get out of the slump has fallen entirely back within the realm of the state. The rest of us are reduced to passive observers or suffering victims. Yet the economy is not a technical process,it is the product of all of our activity. We need to find ways of involving more people in the debate on what is wrong and what we can do to fix it.





Reasons to be cheerful-an occasional series

11 03 2009

When I wrote in my blog that the future is contained within the seeds of the present I was challenged by a friend to come up with some ideas of what exactly is happening now that could turn into something positive as the recession becomes resolved. Crystal ball gazing is not very productive but I think there are identifiable currents which have the potential to become significant.

I would add however that nothing is predetermined and the subjective factor,ie what you and I do to make things change, is the most important aspect of the problem at present. So with that caveat out of the way I invite you to join with me in identifying potentially positive outcomes from the recession.

Just to kick things off, I would argue that three developments in education have the potential to become positive. One is the increase in applications for teaching science, maths and engineering. Without getting hung up on whether the UK needs to reindustrialise there is no doubt that maths and science are the building blocks for any kind of productive future economy.

 Two is the plan to fast track people from the commercial sector into teaching .  Running a school requires many skills but a key one is leadership from the top. It is unlikely that any school can be succesful without a good head teacher and strong management skills are central to this.

Three is the decline in private schools. This may mean that more middle class parents will have to help tackle the problems of the state sector rather than trying their utmost to escape from it.

None of this of course will of necessity change the drift of education away from high academic standards,which remains a severe problem. But the renewed focus on the need for innovation in the UK may help to focus us on the fact that world beating innovation requires highly skilled and well educated people to deliver it.