The seeds of destruction

9 03 2009

Martin Wolf has written a semi-apocalyptic analysis of the recession as part of a major series on the Future of Capitalism in the Financial Times. Read this in conjunction with this article by Roger Altman and it is clear that a recognition of the deep hole that capitalism is in is spreading amongst those who have been its biggest advocates. Wolf argues that

the assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism…the integration of the global economy on which almost everybody now depends might be reversed.’

Wolf’s fear is that history may repeat itself,

Remember what happened in the Great Depression of the 1930s. Unemployment rose to one quarter of the labour force.. in the US..It led to the collapse of liberal trade, fortified the credibility of socialism and communism…led to xenophobia and authoritarianism.

Wolf argues that the system of financialisation of the world economy carried ‘the seeds of its own destruction’.  We should also bear in mind that the future is contained within the seeds of the present. Whatever is to come is already present in nascent form. It may be as gruesome as Wolf suggests but history does not repeat itself in straightforward ways and we are able to affect its outcome simply because it is we who make history.

It is an extraordinarily remarkable thing that we have now reached a point in history where we have  global twin crises,of politics and economics, simultaneously,but that the only real critics of the system are those who come from the standpoint of wishing the system to implode.  The main opposition to globalisation has been inspired by those who have opposed it as unsustainable and environmentally damaging. These are people who campaign against flight while the numbers of flights are plunging, who oppose free trade while world trade is disappearing.

The main political parties are discredited because of their close association with the financialisation of the world economy over the past 20 years and the current collapse. The main opponents to this approach are opposed to growth altogether.  Yet without economic growth billions will be condemned to lives of poverty. We are at a crucial turning point in history and it is vital that we do not throw out the baby of growth with the bathwater of the free market. We desperately need an opposition which is pro-growth and also not tied to the failed policies of the past.

The Great Crash 2008

6 03 2009

Yesterday I was in Brussels for this event on innovation. There are only two places in the world where I have been advised by the locals not to go for a walk . One is Los Angeles,for obvious reasons, the other is now Brussels. not because of its mean streets but because the walk is ‘boring’. And they are not wrong. Apart from the tiny picturesque old city centre most of the rest is fairly relentlessly 1950s brutalist. However I did find a buzzing cafe during a break and while I was there read this article, The Great Crash 2008, by the former US deputy treasurer, Roger Altman.

Written at the end of 2008, this is an attempt to think through what the recession is going to mean for the US’s  place in the world. It identifies a partnership with China as being the key relationship for the US going forward and because the analysis is rooted in economic developments it is well worth a read. Some useful background to this can also be found in Gavin Poynter’s white paper.

The Paradox of Risk

4 03 2009

At the Economist’s conference on innovation last week,the organisers revealed the results of research on innovation amongst business leaders they had consulted worldwide. In the opinion of those surveyed in the UK,the top three factors inhibiting innovation here are: red tape,taxation (presumably excessive rather than not enough) and risk aversion. In the rest of the world,taxation was seen as less of a problem and risk aversion was at number 2 (everybody in business  seems to hate red tape most).

Risk aversion has become endemic in the UK and other, particularly western, societies over the past 20 years or so. Risk aversion now influences all aspects of our lives,from child rearing to bank regulation. The response to any problem often takes the form of a clamour for regulation to avoid or reduce risk. In the field of science risk aversion is represented by the notion of the precautionary principle and in economics by the idea of sustainibility.

The Paradox of Risk is a bit like Keynes’s paradox of thrift in that good intentions can lead to bad outcomes. It may feel safer, for example, for your own children not to walk to school on their own,but if all children are not allowed out alone then their ability to socialise and learn to cope with the world decrease, adults forget how to deal with other people’s children and society as a whole suffers. Risk aversion may make narrow sense for individuals but for society as a whole it can be crippling.

In the UK our economy faces a grim future and some fairly big gambles and bold actions have to be taken if we are to turn things around. But the overall climate of risk aversion makes such leaps forward far less likely. Visitors to dynamic economies like China and India often make the point that, although these countries still suffer from poverty and other social problems, there is a tangible desire for change and progress, a sense that any problem can be fixed.How do we generate such an optimistic and ‘can do’ atmosphere in our country?  I think we begin by having an open and frank public discussion about what the problems are. There are many people now in our society worried about the future who are open to a debate about what needs to change.

The political sphere is where this debate has to start,unlikely I know given the low repute in which our politicians are held. But politics is where we can all debate and act as citizens whoever we are and whatever we do.  The conference on May 16 will be a good place to begin that debate.

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.