Innovation island?

2 03 2009

At the Economist’s Conference, Innovation Island,on Friday I was struck by two things.

Firstly,this assembly of businessmen was still largely in semi-shock and near denial about the true state of the economy. In between the sessions there was a tremendous thirst to discuss what is going on and what could be done. To me this demonstrates the need and the opportunity for a more open public debate about the way ahead, something I hope we will be able to address at the conference planned for May 16 (keep the date free in your diaries).

Secondly the speakers’ proposals for how to innovate our way out of the recession were nowhere near radical enough. This became clear in the contributions around what the state should be doing to encourage innovation. There is some confusion about what legitimate role the state should play in encouraging change. Many businessmen see the state as a blocker to change because of red tape or excessive taxation. While I generally go along with a ‘small state’ approach, I also think that governments should lead. A big problem with our government is that it is often not prepared to take bold action, for example in pushing ahead the nuclear power station building programme, because it is afraid to face down the opposition.

The state in the UK spends too much money, time and energy in intervening in daily life, and encouraging a generally risk averse approach. We need leaders who are prepared to throw off this obsession with risk and who can enable change on a large scale. Leaders who understand that the ‘economy’ is the product of our collective activities, not something that is outside of our control.





The crisis of consumer capitalism in the UK

27 02 2009

 

There is not enough discussion yet about how the current credit crisis sits within the longer term problems of the UK economy. My thanks then to Gavin Poynter for allowing me to be the first to publish his very valuable white paper on the crisis of lifestyle capitalism,The Crunch and the Crisis   creditcrisisgpfin-55 

 





Where is Britain (and this blog) going?

25 02 2009

I have made my white paper that was the original basis for this blog available here .

Since I began the blog , only just over a month ago, I have become involved in very interesting discussions with a number of people,some through the blog and some off line. Now I need your help in working out where I should go with it. 

There are some very exciting developments in the pipeline. I have been connected to other people who are trying to look ahead beyond the immediate crisis. Planning for a conference in May, which will take a critical look at all of the crunch related issues, is now well underway, details to follow. The preparation for this conference will definitely become a major focus for this blog.

I would appreciate any comments or suggestions about the blog, things you like or do not like,things you would like added. I began to work on this subject because I needed to find out the answers to aspects of the recession I did not understand. Perhaps the blog could take on the role of trying to answer your questions about where our country is going and what we can do to influence its development? I also have a Linked-in group and a Facebook group if you prefer to communicate that way.





More regulation is the wrong way to tackle the recession

23 02 2009

They may not agree on much,but the EU governments managed to agree this weekend that more regulation of financial markets is needed. This focus on regulation has now become the default position,along with the more populist campaign against bankers’ bonuses, of governments which do not know what to do to fix the recession.

There is a paradox in the current recession, but it is not the often quoted one about ‘the paradox of thrift’. The true paradox is that governments are calling for more regulation and less risk,when it should be the other way round. The avoidance of risk, along with the desire to make more money, was behind the rapid growth of  hedge funds. By spreading the risk of investments across the world economy the intention was to avoid over exposure to any one group of investments. These hedge funds attracted wealth on a grand scale.

Meanwhile, the latest figures on venture capital in the UK  show that relatively tiny amounts of money have been put into innovative new businesses. The culture of risk avoidance, which is endemic in the UK and not limited to the economy, is a far greater threat to the future of the economy than under regulated markets.

The underlying problem of the world economy is the disequilibrium between the increasingly productive east and the underproductive west,hence the growing indebtedness of the west to the east. The focus on regulation is the wrong policy at the wrong time.





Come fly with me

20 02 2009

There were pro and anti demonstrations in Westminster last night around the expansion of Heathrow. Those who are against the expansion will no doubt be heartened by the fact that the number of flights over the UK is falling fast,because of the recession.

The recession is destroying jobs in the developed western economies, which is bad enough. But for developing countries the collapse of world travel, which the decline in flights represents, world trade and international capital flows are having a disproportionately harsh impact, as you would expect. Most of the bad news from Africa and elsewhere has so far been drowned out of the western media because of the trivial obsession with bankers’ bonuses amongst other things, but a terrible harvest is underway.

Eco warriors are quick to claim that man made climate change will kill our children in the future and argue that less consumption is good for the planet. But the consequences of the fall in consumption caused by the recession are more  poverty and early deaths for millions in the developing countries today. Is this what they want?





Let’s put the politics back in political economy

18 02 2009

I have argued in the last part of my white paper The UK Economy After the Recession that this recession represents the spread of a political crisis into the economy.

The great thinkers of the 18th and 19th Centuries understood that economics and politics were intertwined,and that you could not understand one without the other. That is why they preferred the term political economy to describe economic activity. This was as true of proponents of the market such as Adam Smith as it was of its critics,like Karl Marx.

These days economics is analysed as a  technical process, divorced from the political and sociological aspects of society. It appears mystified and incomprehensible to the majority of people . Yet we should always remind ourselves that economics is the sum total of what we do to make a living. It is human activity and therefore, like politics,susceptible at least in theory to conscious change.





The UK economy after the recession-Part 8

18 02 2009

The struggle for democracy and for economic growth

Some countries, such as Britain, which has hitched its prosperity more completely to the wealth generated by the City of London, may wish that their economies were more ‘real’ in 2009. The idea that Britain’s economy can rely solely on finance-exporting banks and importing goods-is surely dead. 1

The UK has been living beyond its means. We have been consuming the product of somebody else’s labour, in the form of loans from the more dynamic countries in the world. The relative over exposure of the UK to the global financial system means that within the current parameters the UK is over dependent on international developments. This is not sustainable in the longer term. The instinct of UK politicians is not to confront this problem but to put off the day of reckoning by finding ways to continue financing consumption. The issue of ‘quantitative easing’,however it is dressed up, is a short term attempt to stimulate the economy by printing money. This could have potentially dangerous long term consequences.

There is always scope for the economy to recover, for example the falling value of the pound may accelerate foreign direct investment. It is also the case that the compliance of British workers in pay freezes and wage cuts gives business more scope to recover. British capitalism will not collapse as a consequence of the recession. Economic activity will revive eventually. But the fundamental problem of the long of a dynamic economic engine will not go away.

The failures of the UK and other western governments to react effectively to this crisis are a product of the lack of real democracy and leadership in the west. The concept of TINA,There Is No Alternative to the market,has lulled politicians into the mistaken belief that the market always works and that governments need merely tinker with the economy. Unsurprisingly interest in politics has diminished. If,after all, economic activity is out of human control,what’s the point in politics?

Even worse is the trend to interpret the many failures of the market as a reason to oppose economic growth. Even in the middle of this recession, when world trade is collapsing and capital flows between countries are drying up, with potentially disastrous consequences for the health and well being of the people of this planet, there are those who argue that falls in consumption are a a good thing. We need to argue that continued economic growth is vital. If the market cannot deliver economic growth then we need to look at alternative ways of delivering it.

We should see this recession as an opportunity to develop arguments for democracy and for economic growth. The economy is the sum total of human activity. We made this mess and we can unmake it. But to do this requires a revolution in our attitude to politics and a renewed belief in our ability to change the course of human activity through conscious activity. The UK requires a political and cultural revolution in order for the economy to recover and thrive into the future. A more innovative business environment cannot thrive in a generally risk averse culture and one which is wedded to welfarism, state intervention and regulation.

[1] Financial Times editorial December 31 2009





We should be so lucky

16 02 2009

‘It is true that we had ten years of record growth when I was prime minister.I have, unfortunately, come to the conclusion that it was luck.’  Tony Blair

A recent article by Gideon Rachman coined the term ‘Generation L’  ,the lucky generations which have avoided wars and depressions. He sums up the period since World War Two as one of exceptional peace and stability in the western world which may now be over as a result of political problems caused through the Recession.

Instead of ‘the end of history’ he thinks that perhaps we have had a ‘holiday from history’. It is an interesting point to raise. I would be interested in any comments on whether we are entering a new period of global instability or not.





Leadership, and the lack of it

13 02 2009

When Franklin K Roosevelt became President in the depression he said in his inaugural speech,
‘I shall ask the Congress for the one remaining instrument to meet the crisis—broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.’
The lack of clear leadership at the moment in the world,as Anatole Kaletsky points out in the Times today, is the worst element of this recession.

 

 

 





The UK economy after the recession-Part 7

13 02 2009

 

 Proposed ways out of the recession

More regulation

The Financial Services Authority will be beefed up in response to the credit crunch. It is planned to take on an extra 218 jobs giving it a total of 3000. It is clear that for the time being at least the message is that the finance sector needs to be both externally and internally policed more thoroughly,

In terms of finding the new people the banking downturn has helped only a little since the worst hit sectors include traders and bankers and neither group is exactly what the regulator is looking for. Those it does want-risk managers, product controllers and compliance officers-are still needed by the banks. In fact, the FSA wrote to the industry earlier this year warning them against making any cutbacks in these areas.[1]

This is as clear an example of closing the gate after the horse has bolted as one could wish to find. It is very doubtful whether more regulation could have prevented the credit crunch. Everybody was swept up in the bull market and dissenting voices were usually ignored. The issue of regulation now is largely irrelevant to getting us out of the recession.

Capital projects

It is already clear that attempts to move forward government spending on capital projects are limited by the extensive regime of planning agreements and consultations that have become an integral part of modern government. This means that projects such as new nuclear power stations or the extension of Heathrow can get bogged down for years. When Franklin Roosevelt became President and had to tackle the depression in the thirties he asked for one thing,executive power. Governments have to be prepared to override objections and cut through planning procedures if they wish to really make a difference in this area.

Focus on the digital and creative industries

Stephen Carter has been appointed to oversee the development of digital development in the UK. The government sees this as a key part of the future development of the UK economy. The report Innovation Nation[2] and more recently the NESTA report, Attacking the Recession[3], attempt to develop a strategy for innovating the UK out of its current difficulties. Neither report deals with the risk averse, over regulated nature of our society and the climate of low expectations which make a culture of innovation unlikely to develop.

 

Green new deal

What about a “Global Green New Deal”?…The industrial and service sector-led growth “at any cost” may have hit its limits – in terms of job creation and in terms of its ecological footprint on the world’s increasingly scarce nature-based assets. Gross domestic product as a measure of real wealth and as a bell-weather of economic success or failure may also have had its day in its current, narrow configuration.[4]

An emerging response to the recession is to call for a Green New Deal.  This response has the advantage that it appears to offer a way out of the recession by encouraging a switch to investment in green technologies rather than a return to the credit based boom of the past decade.

Some environmentalists go even further,

Unless economic growth can be reconciled with unprecedented rates of decarbonisation, it is difficult to foresee anything other than a planned economic recession being compatible with stabilising the climate[5]

While it is unlikely that the call for more recession will achieve great resonance outside the ranks of hard core environmentalists, there will be resonance for seeing the recession as an opportunity to speed up green economics, which could end up with declines in growth rates and consequent reductions in living standards.

Lord Stern, who produced the Stern report for the UK government on the economics of climate change, explains it like this,

We will have to pump up demand – by cutting taxes and increasing transfer payments and making investments that can take place quickly and are labour-intensive – all of those will matter. But we should be thinking about these things in a way that can start to drive forward a form of growth that is really well-founded and sustainable.[6]

Currently in the UK what the treasury defines as Environmental goods and services grew from £16b to £25b between 2001-4, employing 400,000 people.[7] However Stern recommends that,

it extends to new types of cars and other transport, new building materials and designs, energy transmission systems, new packaging for retailers, the redesign of manufacturing techniques, different farming methods, and a host of other developments in nearly all sectors of the economy

[1] FT December 1 2008

[5] Tyndall Centre for Climate Change Control

[7] The UK economy, analysis of long-term performance and strategic challenges march 2008 HM Treasury p33