Rewriting the Rules for the British Economy

What a state we’re in.

Ten years on from the financial crash, we’re mired in the worst squeeze on living standards since the days of Dickens. As in the 1930s and 1970s, this new malaise can only be lifted by forging a new economic settlement. That is what we must fashion on the foundation of Labour’s brilliant manifesto.

We should be clear-eyed about what’s gone wrong.

During the 1990s, progressives bet that trade and tech together would deliver the tax we needed to rebuild public services and roll back inequality. For some years, we seemed right but the creation of vast new global markets saw the formation of huge new companies like GE or Apple or Microsoft with unprecedented market power. A $20 trillion global merger wave created exactly the sort of oligopolies that Joseph Schumpeter predicted; giant new firms with unparalleled ‘monopsony’ power to set prices – and wages. Just as they were forming, one billion people were entering the labour force in a massive movement from “farm to factory”,[1] offering these new global firms cheap supplies of labour. Meanwhile, the transformation of technology means that in industries like automotive, robots are already two-thirds cheaper than people.[2]

This fundamental change ruined the political economy of ‘trade, tech and tax’. First, the new inequalities created by low wages were simply too big to bridge with a politically plausible level of redistribution. Second, the innovation that created high wages simply didn’t diffuse those wages throughout the marketplace; good ideas were hoarded by high-tech behemoths like Apple, Boeing and GE. Third, creating global markets without effective global regulation created huge new risks in the global banking sector, which, when it collapsed, brought down the roof on all of us.

The old law of comparative advantage became a new law to advantage the comparatively rich. Today, half of global wealth is owned by just one per cent of the world’s population.

So, where do we go from here?

The supply-siders of the Right will continue to argue that it’s the supply of capital and labour that’s key: cut taxes on the wealthy and strip away the welfare state and magically growth will follow. This is simply wrong. We are now close to full employment but wages are still not rising. And while we cut taxes for big firms, they simply hoarded the cash; stacks of corporate cash stuck in the bank have risen nearly five times faster than investment.

Instead we should champion a new British growth strategy that recognises that in today’s world, knowledge – not capital – is the chief factor of production and shared gains from productivity growth are the key to long term prosperity,[3] for the many and not the few.

The first challenge is to tackle our productivity problem. Right now, what our competitors finish making on a Thursday night takes us in Britain until the end of Friday to get done, not least because they investment much more in R&D than we do. To hit the international benchmark of three per cent of GDP, we need to raise science spending by around £23 billion a year.

Our second task is to find new ways of reconnecting productivity growth and wage growth. This requires rewriting the rules of the institutions that make up our marketplace.

In my book, Dragons, I tell the story of British capitalism through the lives of ten of our greatest entrepreneurs. Entrepreneurs make history by inventing the future. But down the ages there would have been no British entrepreneurial miracle if it wasn’t for the great national institutions we invented, reformed and adapted, like Parliament, the Royal Navy, the Royal Exchange, the Royal Courts of Justice, the Royal Society, the limited liability company and the welfare state. Institutions matter. The ‘visible hand’ of the public realm has always helped the invisible hand of the private market to deliver by underwriting risk. All helped our country both create wealth and share it.

Today, our institutions are not fit for purpose. We need a new settlement that rewrites the rules of the marketplace around a new role for the state as a collaborator in innovation and growth.

Where to start?

  1. Let’s change the mandate of the Bank of England so it must prioritise full employment and price stability, just like the US Federal Reserve.
  2. Let’s require the Office of Budget Responsibility to report to Parliament on how we close the tax-gap created by the sheltering of up to $7.5 trillion in havens like Panama. While we’re at it, let’s signal we aim to rewrite the rules of our trade treaties to include new labour and environmental standards and an insistence that firms declare where and how they’re paying their taxes.
  3. To incentivise long term investment in good jobs, let’s rewrite the company code so boards take on a fiduciary duty to prioritise workers, customers and creditors, not just shareholders.
  4. Let’s incentivise long term shareholding and rewrite the tax code so firms are encouraged to invest, for example, with investment allowances in new technology – whether it's leasing new servers in the Cloud or building new factories in deprived areas. Let’s build new regional banks to transform the supply of ‘patient’ capital for a new British Mittelstand.
  5. Let’s rewrite the rules for social security to offer retraining to those who face ‘technological unemployment’ – just as Beveridge originally proposed. Let’s join together schools, colleges and technical universities to create ‘technical university trusts’ to revolutionise technical education. Let’s connect the Open University, the Workers Education Association and UnionLearn to create the greatest open source MOOC on earth, offering workers a genuine path from literacy to advanced research – “from ABC to PhD”.
  6. Let’s rewrite the national curriculum to include new emphasis on skills of the future, from coding to starting a business, and change procurement rules to use public contracts to support fledgling firms just as they do in the US.
  7. And let’s rewrite the rules for science policy, raising the budget on the one hand but also requiring universities to develop University Enterprise Zones that connect research to local firms, backed by a vastly larger Higher Education Innovation Fund.

I offer these ideas, merely to get the ball rolling. Are they radical? Yes. Would they make a difference? Certainly. Can we do it? Well, why not?

 

Rt Hon. Liam Byrne MP was Chief Secretary to the Treasury. He chairs the All-Party Parliamentary Group on Inclusive Growth. His history of British capitalism, Dragons: Ten Entrepreneurs Who Built Britain, is out now in paperback.

 

[1] McKinsey & Co, The world at work: Jobs, pay, and skills for 3.5 billion people

[2] In the American, European and Japanese car industries, it costs $8 an hour to employ a robot for spot welding, compared to $25 for a worker

[3] See Robert Atkinson, Supply-Side Follies, Rowman and Littlefield, (2006)