Most of the country is hurting. But it won’t be able to escape the shadow of the mighty metropolis without an overhaul of capitalismby Paul Collier / October 12, 2018 / Leave a comment
Published in November 2018 issue of Prospect Magazine
Can the rest of the UK escape from London’s shadow? Illustration by Jamie Wignall Across most of Britain, capitalism is simply not working. In many emerging economies, it continues to transform opportunities and raise living standards, as it does for the UK’s metropolitan elite. But you can see its failure elsewhere simply by driving across the country. Alongside the glittering metropolis of London, you will find broken cities and dying towns. The post-war generation, of which I am part, perhaps grew complacent in the assumption that a capitalism that worked in parts of the country would, in the end, work for it all. No matter where we hailed from, we had seen capitalism delivering on its promise: living standards and life opportunities rose everywhere. But history teaches us that capitalism periodically derails—and more spectacularly in some places than others. It was in the factories of northern England that 19th-century capitalism harnessed economies of scale to drive up productivity; and yet it also turned the world’s first industrial cities into hell on earth. Life expectancy collapsed from 33 years for a rural labourer to 19 for the urban working class. Some 80 years later, between the wars, British capitalism again failed huge tracts of the country. The penury and mass unemployment of the 1920s and 30s were intensely regional, sparking the Jarrow march and inspiring George Orwell’s The Road to Wigan Pier. Another 80 years hence, and we watched, mesmerised, by the unfolding of the 2008 global financial crisis. At first, this most recent crisis seemed to be playing out way up in the towers of high finance. But, in truth, both the causes and the consequences go far beyond the banking sector. Its origins lay in profound economic changes that began in the 1980s. And 10 years on, the after-effects are most evident well away from the City—in those provincial high streets that have become wastelands of boarded-up stores, payday lenders and pound shops. Economists in their ivory towers scratch their head about a “productivity puzzle,” while—back in the real world—workers endure the longest squeeze on wages since the Napoleonic Wars. What both halves of this are really about is that in many forgotten communities there is nothing useful to do. Official figures in September showed that the upward march of life expectancy had stalled nationwide, and in some places gone into reverse. The economic dysfunction, it would seem, is now getting under the skin. ________________ Read Torsten Bell’s analysis of the gap between London and the rest of Britain ________________ Only active public policy can rescue us. Those cruel northern cities of Victorian times were eventually improved by public investment organised by local government and national regulation of factories. The 1930s wastelands of south Wales and industrial Lancashire were in the end rescued by the invention of Keynesian macro-economics and William Beveridge’s welfare state. The current derailment is as different from the previous two as they were from each other. England’s failing towns and cities need new ideas, but a decade on from the bust we’re still waiting. The City’s banking crisis has been patched up by bailouts, liquidity injections and complex regulation. Far less has been done about the rot revealed across so much of the country when the financial tide went out. Britain, which was Europe’s most powerful economy for a long time after the Industrial Revolution, now has some of the poorest regions in the continent. As a Sheffield boy I have lived this divergence. The Head Boy from my school went to Oxford and then returned to join one of Sheffield’s world-beating steel companies. I followed him to Oxford, and stayed there, thinking that perhaps he had made not only the more conventional choice, but also the better one. In the 1980s it became too apparent that he hadn’t. My relatives lived Sheffield’s catastrophe. After the Brexit vote much talk (and panic) was suddenly devoted to “left-behind” places. But nobody is proposing practical remedies. My concern is not more dinner party chatter about how grim it has got up north. No: my purpose is to explain how these anxieties can be practically addressed. In order to fix it, though, we must first face up to the division that modern capitalism has seared across the map of Britain. The ideas deficit Whereas past crises were eventually answered with new thinking, Martin Wolf summed up the intellectual impasse in a recent FT column headlined “Why so little has changed since the crash.” Too many people remain trapped in the same mental world that gave rise to the crisis. For me, an economist whose work has principally focused on the developing world—often in impoverished places where it’s impossible to think about economic life without bumping up against social problems, desperate hardship and ethical dilemmas—the roots of this failure of imagination are stark. For a long time, the standard economic models have been founded on a reductionist utilitarian philosophy, in which people are shrivelled to atomised individuals who are greedy, lazy and justified in their existence only by their own “utility.” In the distant past, that was a term for wellbeing or happiness, but in most of the models the idea of utility is boiled down until it effectively means little more than how much someone consumes. Already, you might be starting to spot why public policy has had little to offer families and communities who are today struggling to muster a sense of purpose. But things get even more perverse. At the same time as the ordinary individual is reduced to an insatiably greedy ego, policy is entrusted to another species: selflessly disinterested Platonic guardians, the class of officials and economists trusted to steer society towards the best of all possible worlds. They do so by redistributing from the richer to the poorer, while calibrating the levelling to make sure they don’t undermine the incentives of the productive elite. The apparatus of modern public policy can get complex. But the problem to which it is applied is simple, narrow and arid—to strike a balance between “equity” (or equality) and “efficiency.” Fundamental ethical concepts such as belonging, obligation and purpose are swept under the carpet. They count for a great deal with any rounded human being, but not one jot to rational economic man. Steel City: Sheffield’s clusters of manual skills were not nurtured and modernised as they were in Germany. Photo: Getty Such philosophical objections to the way public policy has been framed may seem a long way from the difficulties that have faced Stoke, Nottingham and Doncaster in finding a vibrant post-industrial future. But there is a connection. The apotheosis of technocratic public policy came under New Labour, and it is easily summed up: let the City rip, and use the taxes to finance Benefits Street. That agenda never spoke to the anxieties of people living in failing towns, where bright young people are leaving, and a narrative of despair had set in. The approach was centred on means-tested hand-outs, which offered left-behind communities no hope of achieving independent prosperity. There was no dignity in the good times—and no security once the party was over. When the City blew itself up and the tax cheques fell away, those who had grown used to the hand-outs were subjected to painful retrenchment. The shortcomings of substantive policy have only been filled by hollow popular politics. On the centre-right, we hear much talk about “strivers” but none about what, exactly, someone stuck in a post-industrial desert is supposed to strive for. Meanwhile, the centre-left seems to have given up—lapsing into nostalgic socialism and magic money. The latest Labour Party political broadcast spoke to the sense of despair in many towns, and promised to bring back “decent jobs.” But it was not accompanied by any analysis of how this might be done. For as long as that party’s MPs can win conference cheers by proposing general strikes about nothing in particular, it’s easier to imagine it wrecking those parts of the economy that still function than rescuing those that don’t. And so the field has been left to the populists, who propose to wring the necks of the (typically international) “elite” and—somehow—protect the “victims” at home. As always with populism, the ideas are bad but they speak to real concerns, which—in a vacuum—is often enough to succeed. My aim is to fill the depleted cupboard of policies for “left-behind” Britain with the pragmatic and ethical remedies that might begin to heal the divide between the country’s capital and its southeastern hinterland, and the nation as a whole. Shackled to a shark One sneering metropolitan pundit recently wrote that go-ahead London was “shackled to a corpse”—the rest of the country. The disdainful suggestion was that we should pronounce the funeral rites over once-proud provinces, and bury the body out of sight. London is not shackled to a corpse; the rest of the country is shackled to a shark. Many of the capital’s highest-earning activities are zero-sum games such as asset management and legal disputes, or outright managerial looting such as at BHS. Who pays for this? We all do. For skilled city dwellers, global capitalism has been the gift that keeps giving: in Harold Macmillan’s famous phrase, they “have never had it so good.” But his line was pitched at provincial manual workers: no politician would dare say that to them today. Back then, myriad industries flourished in far-flung places, and incremental wage rises created a shared feeling of progress, and so the nostalgic rhetoric of “taking back control,” or making one’s country “great again” would thus never have acquired the same purchase. Today, instead, the experience of the provincial workforce is defined by the new anxieties: their towns forlorn, their skills devalued, their prestige shredded, their family structures fraying. They are now the mutineers, and not only in Britain: Brexit, for sure, but also Trump, the chaotic Five Star in Italy, and the far-right AfD in Germany. All of these movements have performed the strongest in regions where people feel they are missing out. The modestly-educated provincial has become the new revolutionary force around the west: the sans culottes supplanted by the sans cool, watched by their supposed betters with derision tinged with trepidation. Not so long ago, marketopian think tanks could gain a hearing by suggesting that the best reponse to the economic decline of industrial Britain was to match it with a managed demographic reduction—build homes in the south, and lay on coaches to bring ambitious northerners down to them. But this was never going to work. For one thing, the easiest single escape route from failing towns is quite simply closed for people who do not—and probably should not—go to university. More fundamentally, people gain meaning from being attached to a place. They cannot, as economic orthodoxy imagines, just “pack up and go”—individual attachment, family obligations and friendship networks mean they are too rooted for that. Economists might struggle to grasp this reality, but most citizens don’t—and they are offended by the great divergences between London and the rest of the country (just glance at Torsten Bell’s analysis on income and wealth—right and p27—if you need persuading of the facts). Virtually everyone has now come to accept that, in principle, we can’t continue to accelerate the drift by shifting yet more of the most able into London. Even George Osborne, who nowadays combines a handsomely rewarded post with City “shadow bank” BlackRock and editing the London Evening Standard, took to talking about a “Northern Powerhouse.” And yet we remain as far as we have ever been from a capitalism that works once again for Britain’s many towns, as opposed to the metropolitan few. Illustration by Jamie Wignall Policy needs to work for every citizen in the places where they live. That means much better training, and creating better jobs everywhere. Not easy to do if you are stuck in a mindset that sees the state’s job as unleashing the market before picking up the pieces. For when it comes to the location of opportunities, market forces, which we have been misled into treating as sacrosanct, will drive things in precisely the wrong direction. If firms are concerned only with their own bottom line, they will not “share the wealth around,” but reap rewards from clustering ever-more tightly—all too often in London. Why? The root problem is that the complexity of much modern economic activity increases the value of agglomeration. Bringing people with different specialisations together in the same city makes them more productive. London is the perfect location: it has the national transport hubs, the courts, the government, the Underground. Everyone working or doing business nearby benefits from these things. And employers aren’t unduly burdened by costly training because there are already so many skilled employees around. So far, so positive—but why does the corollary have to be the decline of the provinces? It needn’t have been, and certainly not to the extent that it was. Part of the story with the provincial cities is straightforward neglect. The old clusters of manual skills, such as cutlery in Sheffield, were not nurtured and modernised as they were in Germany, where they have mostly adapted and survived. Consequently, they were knocked out when competition from Asia arose. But we are where we are, and, once a cluster has gone, the right policy is usually not to revive it, but to attract a new knowledge cluster. The unfettered market, though, will not do it: taking a chance on a new cluster feels risky: nobody wants to be first; others may not follow. In the face of uncertainty, locating in London is the safest option. And thus laissez-faire leads broken cities into a cul-de-sac of low-productivity firms whose business model is based on low wages and cheap property. Active policy can—and should—change this. The mighty productivity of today’s London grows out of advantages to which the whole nation has historically contributed. The whole nation won the political struggles for the rule-of-law, and a culture of integrity, and paid the taxes for the infrastructure. Yet today, the prosperity of London is tightly clasped in and around the metropolis: the rest of the country must feel as if it is living under not so much the “yoke of capital,” as the yoke of the capital. It is time to cast it off. The Aberdeen example The gains made in the capital are captured as rents—most obviously to those with London properties and land, whose value has rocketed. But in economics there are other forms of “rent”—the term covers any payment in excess of what is required to induce someone to do, or part with, something. It is not only London landlords, but also skilled people who benefit from working alongside Londoners whose abilities complement their own that can cash-in this way. Recently, with my Oxford colleague Tony Venables, I’ve been working on who cleans up in giant clusters. The answer isn’t everyone: exhausted commuters who spend much of their salary on season tickets to family houses miles out of town aren’t necessarily prospering; nor are hard-pressed cleaners and waitresses battling to pay London rents. But alongside the rentiers themselves, young professionals who can comfortably live in shoe-boxes while earning a packet are hugely advantaged by the opportunities London affords. We should tax more those sources of income—earned and unearned—that are produced by agglomeration in London. Metropolitan property is a ripe source of revenue. We should also levy a London income tax on high earners. But we should proceed cautiously, monitoring decisions, taking care not to destroy the activity whose benefits we need to share around. In the end, though, well-designed taxes on economic rents are fairer and less distorting than any alternative. They can also bring in big money. As oil begun to flow in the 1970s, the government claimed a share for the national community; we can do the same with the bonanza around the Thames if we approach it in the same spirit as we did the oilfields off Aberdeen. If politicians have until now failed to make good on their talk about “rebalancing” towards the north that is probably because most are too beholden to London interests. For example, the specific advantages of one—and only one—industry constituted one of the five tests that Gordon Brown’s Treasury used to determine whether or not Britain should join the euro: the City. Let us look for leaders who will shake off the fear of making enemies, and then rake in substantial resources. Once we’ve got the revenue, we should set it to work on giving a new, better and meaningful future to cities like Stoke and Sheffield. The task of attracting knowledge-intensive firms into new clusters is tricky; it needs approaching with ambition, but also some humility. We should learn from effective policies around the world unencumbered by prejudice about whether they come from the right or left. If you are out to create a cluster of global significance, encouraging job-creating investment from a multinational firm is a good place to start. Low headline corporation tax rates in Ireland attract the attention, but in truth much of the work in persuading companies in has been done below the radar by investment authorities. For the outlay of modest public resource, they have made a big difference by making it clear that, for example, “we’ll fill in the forms for you.” With more commitment and linkage into the wider bureaucracy, they can move on to the proactive—“we think your business could thrive here, and we’ll do the reconnaissance that can show you how”—and then on again to a more anticipatory role: “we know our city will need to fix this for you to expand, and we will.” If it’s good enough for Shannon on the remote Irish west coast, then why not Sheffield? Above left: a hi-vis George Osborne talking the talk. Above right: China, where the steel jobs have gone. Both photos: Getty images. Training, as distinct from purely academic education, is central to attracting knowledge-intensive firms to provincial cities. It has collapsed because British labour-market policy has prioritised getting people into jobs over giving them skills. Firms have cut training partly because apprenticeships were regarded as archaic vehicles of union power, partly because they squeezed investment to raise distributed profits, partly because in a tight labour market their trained-up workers got poached by others, and partly because they could import ready-trained workers. This is fertile terrain for companies and their employees to co-operate fruitfully. It is striking that in Switzerland, where firms are hard-wired into the vocational training system, the qualifications are so prestigious that around 60 per cent of Swiss youth opt for vocational training rather than university. Long before youngsters confront that choice, the British policy of catchment areas turns schools into sites where children from similarly-priced homes interact, amplifying the advantage and disadvantage already conferred by their family background. As the educated marry each other, social separation is getting worse. Looking at the US—whose stripe of capitalism and social maladies have much in common with our own—Robert Putnam has shown in his 2015 book Our Kids how skewed social networks are. The most extreme divergence is between caretakers, whom the poor know in abundance, and professors, whom the rich know in abundance. It can matter. My parents had left school aged 12 and so when I had to make a life-shaping choice of which subject to study, we knew nobody to consult. In desperation, I asked my dentist. When my son faced the same issue, he went next door. If we are to give a fair chance to all young people, then we need more mentors, more people running extra-curricular activities, more summer internships in communities where you can’t rely on having a professor for a neighbour. Everybody could sign up to that in principle, but in practice such a commitment is likely to go the way of David Cameron’s Big Society, unless the state puts some resources behind it—or persuades businesses to do the same. Business with purpose So might British industry, perhaps nudged along by the state, rise to the challenge by facilitating the training, internships and mentoring that is so needed by disadvantaged families in broken cities? If that sounds like a pipe dream, then it is worth reflecting that it has risen to answer the failings of capitalism before. Taking inspiration from the 19th-century northern industrialist Titus Salt, business leaders recognised their obligations to their workers and their communities and invested in them: his own Saltaire in West Yorkshire, now a World Heritage Site, together with Bournville and Port Sunlight all stand as permanent testimonies to business-with-purpose in our former industrial heartlands. What happened to this fine tradition? It was abandoned as executives were seduced by Milton Friedman’s thesis that the sole purpose of a firm is the pursuit of profit. Ethics became redundant. The theory was that by intensifying the drive for profit, firms would propel the greater good of everyone. The implication for government, and one which the Thatcher government was content with, was “get out of the way: deregulate!” But as John Kay showed in Obliquity, profit as an outcome is more reliably attained when it is not the primary aim. Workers perform better if they have some more meaningful purpose, such as producing something that people truly value. Imperial Chemical Industries, revered in my youth as Britain’s outstanding company, declined into oblivion after it changed its mission to “we aim to maximise shareholder value.” Where is the employee who got up in the morning with the zestful purpose of achieving that? The recent proposals of the shadow chancellor, John McDonnell, that ostensibly hand workers a stake in their firms are flawed: they involve an arbitrary and uncompensated hit on shareholders, and are in reality more of a stealth tax than anything more creative, seeing as the Treasury would swipe the profits if they turn out to be good. And yet there is worthwhile terrain here. Through tax, company law or other regulations, public policy can surely find ways to create new structures that encourage the sharing of the responsibility, and the rewards, of a business with its staff—helping them to “take back control” from remote investors, whether from London or overseas. Some conventionally structured firms retain an ethical purpose at their core. But the culture of business and related professions, who are heavily concentrated in London, has shamefully eroded. Accountants, once known for being upright, have routinely connived at the misrepresentation of the financial position of troubled firms such as Carillion. As for bankers, it has been shown in experiments that when they are primed to identify themselves by their profession, they become more likely to cheat. When an expectation of dishonesty is baked into the culture of the City, we shouldn’t be surprised when it fleeces us. Capitalism badly needs to rediscover reciprocal ethics. The ethical firm retains loyal customers and workers, but recognises its obligations to them, not because it may turn out to be good for business, but because it is at the core of its purpose. And in the ethical society, those living in prospering places recognise their obligations to those in declining ones, mandating the state to do “whatever it takes” to restore economic balance. This ethics of reciprocity galvanised people into founding the co-operative movement. There is a reason why a movement that rapidly spread globally started in Rochdale, Halifax and other early industrial towns and cities in England’s north. They were pragmatic responses to the grim anxieties thrown up by the industrial revolution. The Rochdale Pioneers, the original working-class co-operative movement of the 1840s, matched the purpose of the enlightened industrialism of Titus Salt, who was just 30 miles away on the other side of the Pennines. These two movements—one bottom-up, one top-down, both intensely ethical—were forged in the same decade and the same northern cities, both in answer to a life that had become so brutal. Just as business abandoned this communitarian tradition for the temptations of the individualist agenda of profit, so the left abandoned hard-pressed towns and cities for two narrow ambitions: it wanted to help “the poor” (whether they thought of themselves as such or not) to consume more through redistribution; and then confer lawyerly individual rights not balanced by any obligation. The agendas of today’s more egalitarian economists and the leftist lawyers are different, but they have two characteristics in common: they are set by highly-educated metropolitans, and neither resonates with the practical concerns of less-educated provincials. While they continue to fuss over their agenda of umbrage and outrage—the latest furores have been about transgender rights and reusable coffee cups—the great regional divide scarring society only deepens, unaddressed. And now all attention is being devoured by the Great Distraction—Brexit. It could cost the country dear; but there is no point bemoaning it without understanding why it happened. Brexit is a mutiny of the sans cool: it is not about the arcane details of relationships with the EU. Across Europe, leaders are facing equivalent mutinies. Regardless of the outcome, the underlying issues will rise to the surface. They will not be fixed in some all-night meeting room in Brussels. They can be fixed only by mapping out a new future for capitalism and the communities that it has forgotten. Today’s grotesquely skewed capitalism can only be fixed by radical pragmatism, a spirit of experiment, and a new political commitment to provide purpose to every part of the nation. We have delayed too long. ____________________________ Relocation, relocation, relocation… If a government wants to create a new “cluster” of prosperity, relocating its own departments and other national organisations out to the provinces would seem an obvious place to start. In their last manifesto, the Conservatives promised to move “significant numbers” of “civil servants and other public servants out of London.” But it’s been tried before—so how well has it worked out? Office of National Statistics to Newport In 2005, the ONS and 1,000 of its London-based jobs were moved to the Welsh city. This was supposed to boost the local economy, but according to a 2017 report by the Centre for Cities think tank, a combination of the sensitive nature of the ONS’s work and a decision to base it in an out-of-town campus has meant that the relocation has “done little” for growth. Worse, due to the comparative unattractiveness of living in Newport—which lacks the social and professional opportunities of a major conurbation—90 per cent of London-based staff quit rather than move. That adversely affected the quality of the ONS’s output. BBC to Salford Relocating a big chunk of the Beeb to Salford was initially controversial, with many high- rofile presenters balking at the idea of being landed there. But on the edges of vibrant Manchester, a serious potential cluster, the new site held out more promise than many office moves. Eight years on from its completion, it has, arguably, helped the BBC to become less London-centric, but the debate about the economic effect rumbles on. Salford’s mayor claimed that around 250 digital companies clustered in the region, but the Centre for Cities argued that there were only 4,400 new jobs—not the 15,000 once predicted. This ambiguity has not put off other cities, including Birmingham, where the metro mayor, Andy Street, is hoping to persuade Channel 4 to relocate. Business department to Sheffield—and back One of the departments responsible for the “Northern Powerhouse” project had its largest office outside London in Sheffield. But two years ago, the business department “streamlined”—shutting it down, moving all policy jobs back to London and leaving 247 Sheffield-based civil servants without a job. As Northerners muttered you couldn’t make it up, even southerners learned that economic rebalancing simply won’t happen without some sustained political will.