Thanks for the namecheck, David. But a comprehensive strategy for smarter, fairer growth will require Theresa May to upend many more failed orthodoxies.by / September 15, 2016 / Leave a comment
Published in October 2016 issue of Prospect Magazine
In arguing for a more active industrial strategy, David Willetts is right to highlight the progress he and Vince Cable made when in government. Much of this was lost when the last Business Secretary, Sajid Javid, fell back on the old mantra that government had to get out of the way. If Theresa May is serious about industrial strategy, she must begin a fundamental shift in how economic growth is understood, and fostered. Growth has a direction as well as a rate, and the aim of industrial-innovation policy must be to set that direction. Willetts gives 10 practical tests for policies, but I’d like to add eight more ideas that Whitehall must embrace if it is to give a radical lead.
1. Understand that value is collectively produced
May’s call for “an economy for all” requires a drastic change in how politicians view wealth creation. New Labour and Conservative figures alike both hail “wealth creators,” but this is usually code for business leaders and entrepreneurs. In truth, workers, public institutions and civil society organisations are also essential to wealth creation. Markets embody the interactions between all of these actors, and so they should be structured to produce fairer growth which taps and reflects the contribution of all the stakeholders.
2. It’s growth, not the deficit, stupid
It was private debt not public debt that caused the crisis. Reducing private debt requires investing in long-run growth areas that raise real incomes, and reduce reliance on speculative credit. Public investment in education, research and technology expands productive capacity. It will boost productivity and growth, and—in the long-term—keep Britain’s debt to GDP ratio manageable. Across Europe, many countries have relatively low deficits but high debt to GDP ratios precisely because they are not investing in growth.
3. Invest in smarter “mission-oriented” growth
Modern capitalism has come about through the tremendous productivity of technological and organisational advances. These require increased investment in things like education and research, and “mission-oriented” investments that focus on solving big problems. Some of the greatest technological changes—from the internet to GPS—have emerged from state investments aimed at solving societal and technological challenges. We need a new conversation about driving such creativity across many different sectors.
4. Embrace green missions
A green revolution in the economy requires more than “nudging.” By focusing both on push factors, like investments in a broad portfolio of renewable energy, and pull factors, policies which reward sustainable practices, the whole direction of the economy can become green. That would mean transforming production, distribution and consumption across multiple sectors. The new remit of the business ministry offers a real opportunity to integrate the industrial and environmental strategy.
5. Reform finance
Innovation and long-term investment require strategic finance, not speculative finance. Across the world, such long-term investment has included forms of public finance. Recent innovations, such as the Business Investment Bank and the Green Investment Bank, have faltered—the former never got going; the latter is on its way to being privatised. This must be redressed to give the UK a financial system which serves something more than itself.
6. Re-investment, not financial fiddles
Large corporates increasingly prefer to buy back shares (boosting stock prices, and thus executive rewards) instead of using profits for reinvestment. On top of this “financialisation” of industry, cash hoarding has also reached record rates: close to $2 trillion in the United States, over €2 trillion in Europe. It is this investment strike, with its effects on skill formation and R&D, and not the much-maligned robots that most threatens future employment. Tax and other reforms must reward companies reinvesting in productive capacity, and discourage those that waste resources.
7. Create, not assume, animal spirits
If policymakers assume the private sector can be easily induced to invest, they will end up spending a lot on sweeteners, like tax credits and lowering corporate tax rates. But, in a mood of pessimism about the prospects of new ventures, there comes a point where another dollop of subsidy makes little difference to change the firm’s underlying judgment. In these circumstances, animal spirits—business expectations of future growth areas—must be created, not assumed. In the past, they have been stimulated by public investments in new strategic areas, which have created new opportunities that “crowd in” business investment.
8. Capable and confident state structures
Smart growth requires smart government and this requires building capacity and capabilities within public institutions. The current trend of outsourcing government capacity and privatising government assets must be rethought, free from ideology. Creating mission-driven public institutions, where it is an honour for the most talented to work, is a first step in reversing the brain drain and the dismantling of the state.
Sound industrial-innovation policy can increase the rate of UK growth, but also shape its direction. These eight truths can guide Theresa May’s approach towards a fairer, greener, stronger and more innovative economy.