No medals for the metaphors

It has been a great summer to be in the UK, with the Olympics providing a much needed lift. Most of us were drawn in at some stage to the action whether it was in the diving, athletics, fencing, cycling or whatever took your fancy. However some commentators seem to have been drawn in a little too deeply and have started making a direct argument from supporting athletes to supporting industries. This kind of argument is counter productive, as it does not provide a realistic comparison and allows critics of constructive government intervention to have another non-argument rather than get around to fixing the problems that the UK economy faces. 

The argument was made at length by Aditya Chakrabortty in the Guardian in his piece Why Osborne Should Pay Heed to Our Olympic Triumph. The article is good on how UK sport turned itself around following the dismal showing in Atlanta, but making the jump to 'picking winners' in an industrial context is a stretch. The end of the piece sums up the position - 

Cabinet ministers bang on about growing our manufacturing base, and yet their solution is to spread a little bit of money very thinly. To do otherwise, they claim, would be to pick winners and we know how badly that ends. Really, there's something wrong with picking winners? Tell that to Bradley Wiggins.

A similar phrasing has been used by Brendan Barber as quoted by the BBC in the run up to his speech at the TUC conference in Brighton. According to the BBC 

In his speech, Mr Barber will say it is wrong of the government to say it "can't pick winners" in helping companies and instead leaving the market to decide. He will add: "Tell that that to Bradley [Wiggins], Jessica [Ennis] or Mo [Farah], all supported by targeted funding.

This version of argument ignores in a wilful way the complexity of support, encouragement and assessment that has occurred in sport before any of the leading athletes see a penny or pound of public funding. In supporting a specific individual with a track record there is a basis for that investment and an understanding of when the investment is not working and so it should be cancelled. 

Supporting industries just does not work like this. The time frames are different, the amount of information you have prior to investing is vastly different, and most importantly the size of the bets you need to make and the portfolio of bets you can take are completely different. 

Now to be clear I am a supporter of activist industrial policy, based on strong dialogue between industry and government and with a shared sense of purpose. But when we start having these kinds of statements, returning again to the dead language of 'picking winners' we are doing nobody any favours. 

The UK needs an activist industrial policy, but even more than that it needs a frank and apolitical debate on how to support current and emerging industries. Without a clear sense of how government is working with industry, an understanding of how the benefits of the new industries will be shared, and above all else an understanding that neither side can move the economy forward alone, this sterile debate will continue to the detriment of the country and everyone struggling to find work and move forward. 

Ask Wiggins, Ennis or any of the other elite athletes - they may be the stars but they would not be able to do it without the support of an expert and committed team. That's the real lesson of the summer. 

Wishful thinking in policy debates

Four years after the global economic system almost crashed in on top of itself we're still searching for ways to build sustainable economies. These discussions and debates are important and complex, but they appear to be suffering from a set of ideals that we just cannot seem to shake off - the silver bullet, the binary choice, and the permanent fix. Maybe this is a result of our 24 hour news culture and the need just to fill airtime, but it feels like we're on a repeat loop of lazy thinking and that's stopping us from making serious progress on restarting the global economy.


Let's take each of these in turn. First is silver bullet, the desire to have a policy solution that at a stroke solves all of the problems that face us. Hopefully it will be cheap, easy to implement and obvious enough to garner public support. An example of this is the much repeated mantra of deregulating the market, specifically in the UK reducing the 'burden' of red tape on small and medium size businesses. While there are doubtless some examples where regulation could be eased, listening to some political speeches and lobby groups you could be forgiven for thinking that if this could be achieved all would be well in the world. We know this is not the case, but still the issue comes back time and again as a silver bullet that could save the economy. And so it is in many other areas of policy, the desire to have a complete fix even though we know that silver bullets are just bullets. 


The binary choice is even more pervasive and it is a core element of the narrative on the economy. Prior to the credit crisis reporting on the economy tended to go something like this - services great, manufacturing bad. All of the choices on the economy were reduced to this binary set, either you were a service company or a manufacturing company, either you were part of the new and wonderful knowledge economy, or you were trapped in the depths of time in some dark mill that dared to produced things. It is incredible to see, but this binary thinking and discussion continues even now, as this article on manufacturing versus services shows (and is the one that prompted me to talk about how we have policy debates). Our choices are rarely if ever a simple choice between yes and no, forward or backwards. Reducing the world to ones and zeros doesn't work at the level of economic policy, or most other policies for that matter. 


Last and by no means least we have the hope of permanent solutions. If we could just reduce the tax rate for the top earners we'd have a virtuous cycle of earning and investment and all would be well into the future for the economy, or so the story goes. It reminds me of the start of the Incredibles when Mr Incredible is being interviewed about being a superhero. "No matter how many times you save the world, it always manages to get back in jeopardy again. Sometimes I just want it to stay saved! You know, for a little bit?" Unfortunately the world keeps on turning and governments along with everyone else needs to keep on adapting. 


Our economy faces very difficult challenges. Allowing debates on policy which will have major impacts on individuals, families and companies to use these misleading ideas is not only incoherent it is wrong. Policy makers of all political stripes, commentators and we the public have to allow complexity back into our discussions, otherwise we'll just keep on looking for solutions that don't exist. 


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Terms of engagement

There has been a rash of pieces lately on industrial policy, rebalancing, growth and competitiveness, all discussing what the UK needs to do to move forward and shake off the shadow of the credit crisis. Some claim manufacturing to be special, others that they have the silver bullet to kick start growth. What none really do is clarify the terms of the debate that we're having, to clean up the horrible mess of overused, broken and misunderstood terms that we keep flinging around. You say industrial policy and I say innovation policy, let's call the whole thing off.

So let's agree on one thing - we don't have a clear common language to discuss the needs of the economy, how its structure has changed and what weapons we have in policy to try to move ourselves forward. And this is not a semantic, ivory tower point. If we have no common language we cannot have a sensible debate on the needs of the economy. Without this, we'll keep talking past one another, rehashing old and tired language on left versus right, manufacturing versus services, openness versus protectionism.

I do think that there is one common thread that we can and should start to build on and that is the interface between the public and the private sectors. The gross simplifications of the 80s, where government was to be removed completely and companies allowed to press bravely on, should not be replaced pendulum like with a similar swing to the public sector. We need a strong dialogue and progressive relationship between the public and the private sectors, one that recognises the differences in goals and works to benefit both sides.

This we have not had, with many companies viewing government as an impediment and some in government slightly fearful of the power of the companies to decide their fate. This is not about a protectionist agenda purely preferencing UK companies. However, it is about recognising that government support can have different effects depending on whether it is provided to a UK based company or a multinational. It is about having a realistic conversation between both sides so that social goals re-enter the conversation. And finally it is about achieving the appropriate balance between public and private action to achieve the goals that both have.

The language on this debate is slowly changing, for example with Mariana Mazzucato's work emphasising how the private sector has depended on prior public sector investments in so many technology areas. But these more reasoned voices are still outnumbered. A stronger debate on how to balance the work between the public and the private sector needs more progressive voices, more companies willing to be open to more than quarterly returns and more politicians to be stronger on the role of government in technology development, innovation and growth.

It is only by acknowledging that both sides need each other that we have a chance to achieve growth again. Let's hope that we all are mature enough to have that conversation and not be sucked back into the thrall of long dead economists.

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Is this a failure of democracy?

The continuing crisis in the Euro zone, framed by a series of meetings that seem to never come to a conclusion, has many people asking whether government, or more broadly democracy, has failed (as Prof Ngaire Woods discussed in a recent radio interview). The narrative goes something like this - the markets need clear signals and strong action, government cannot provide them with these actions or they do not wish to do so as the actions that are needed are politically unpalatable. So this is now a failure of government, of the system of democracy, as we are seeing the limits of what can be done via the political process.

This for me is completely wrong headed - what we are seeing is a failure of our combined system of governance, including the public and the private sector. There is no public sector without a private sector, and no matter what some libertarians would have you believe, there is no private sector without the public sector. Markets are embedded in social structures and to try to claim that they are independent is foolish and in many cases disingenuous.

The past couple of weeks have been hairy for my television, as the risk of something hitting it at speed has been very high. A parade of commentators, valued and promoted on the basis of their expertise as economists whilst ignoring their interest in specific outcomes, claiming that the credit crisis was due to a lack of regulation are happily forgetting the drum beat of no regulation, no government that existed pre the crisis. At the same time many politicians are castigating the evil bankers while forgetting either their campaign contributions or their lack of action on existing regulation. No wonder I see the television shudder when I flick over to Paxman and his sneer.

This is a failure of the business-government relationship, specifically in the financial sector, on a global basis. The narratives of growth and the zealous belief in the end of boom and bust, the death of risk and the boon of every rising incomes, all were built on false foundations. Niall Ferguson's latest op-vid (a horrible term for someone making a speech to camera with some natty supporting animation) hits this nail on the head, turning Clinton's mantra of 'It's the economy stupid' into a more pointed 'It's the stupid economists' (however, his proposed actions are not ones I'd agree with).

There are some industrialists, some economists, some politicians who are trying to move forward, not letting ideology hold them down. But they are a little lost in the cacophony that surrounds the Greek situation, the probable Italian bailout and the continuing problem of stalled growth. Unless we can create the space for a new conversation to occur, for clear thinking and constructive debate to emerge, we won't be able to solve our problems. And that would be the worst failure of our liberal, democratic system.

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Inevitable or not? The return of manufacturing to the US

The credit crisis and the recession have been good at one thing - forcing commentators, researchers and managers to challenge their implicit assumptions about the world. The end of boom and bust, the possibility of having a post-industrial society, and the continued growth of China all have been called into question since 2008.

One of the emerging discussions is on whether manufacturing will 'return' to developed or leading economies such as the United States. While this was not on policy makers' agendas five years ago, the need to find growth is forcing them to look anew at industrial structure and their role in supporting industrial growth.

As this discussion unfolds it is interesting to contrast the positions being taken by various of the writers and commentators. A new report from Boston Consulting Group claims that manufacturing cost advantages will erode between the US and China within five years leading to a rise in manufacturing in the US. Reading it made me think back to the 2009 piece from Pisano and Shi which lamented the loss of the industrial commons in the US and the need for the public and the private sector to engage in rebuilding the foundations of industrial strength in the US. Both can be true but maybe they should be taken together to get a better picture of what might need to be done to support industrial growth in the US.

Looking at the BCG report it does a good job of reminding us of the context for US manufacturing. According to the report, since 1972 manufacturing output has more than doubled in constant dollars and the US share of world manufacturing value added for 2010 is 19.4% compared to 19.8% for China. Without showing their explicit analysis the report claims that rising wages, increasing shipping costs, more expensive land and the strengthening renminbi will mean the cost advantages for China are about to disappear.

"Our analysis concludes that, within five years, the total cost of production for many products will be only about 10 to 15 percent less in Chinese coastal cities than in some parts of the US where factories are likely to be built."

This is a very strong statement and one that really needs to show the background analysis so that it can be critiqued properly. However, there are immediate reasons why this may be too rosy a picture for those hoping for increases in manufacturing in the US. The comparison between the cheapest parts of the US and the most expensive parts of China may mislead, as cheaper options will still exist in China. Also, is this really a total cost model? Have they included the potential actions of state and federal government in the US and in China? While the message may be right overall (arguments about the timescale aside) the model may just be too simple to back up the claims.

Which is what led me back to the Pisano and Shi piece in Harvard Business Review on restoring American competitiveness. The main argument here is that over the past 30 to 40 years as outsourcing of production has risen significantly the US has essentially weakened its industrial commons. Many products can no longer be made in the US as specific knowledge has left the country and has not been retained either in people or companies. The rebuilding of the commons, and possibly more importantly the building of a commons that is appropriate to the needs of the next generation of manufacturing, will be a difficult task that potentially will require much coordination and collaboration between industry and government.

So the mainly cost based analysis of BCG does not appear to admit to the kinds of issues that Pisano and Shi are worried about, the fabric of industry and its ability to adapt and do new things, the skills base of the country and its investment in retaining and improving production processes through strong R&D. This is why I'm wary of big claims like those made in the BCG report, especially when they could potentially lead policy makers to think of the return (increase really) of manufacturing as somehow inevitable. It is not and there are many complexities to be unearthed and overcome before we'll see a significant shift in the structure of the economy and strong growth based on industry in the US or in other developed economies.

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Finbarr

The problem of scale

I've been reading Ian Morris' Why the West Rules - For Now over the past couple of weeks (some of the blow by blow in the earlier centuries might have made way to get it down from its 600+ page length) and I've been struck by two things. First the assertion that there have at points in history been barriers or limits to development that have held until conditions or technology moved past a certain limit. And the second is that the problem of scale seems writ large even though it is not really brought out in the text.

The second for me is an integral part of the first and I'm not saying Morris doesn't recognise this or in some ways discuss it. However I thought it was worth making it really explicit. Simply put, big things are not small things made large.

Probably the best piece on this in management literature is the classic 1972 Harvard Business Review article by Larry Greiner Evolution and Revolution as Organizations Grow which discusses the differences between moments of smooth evolution and disruptive revolution based on the age and size of an organization. The idea that the small and the large don't work in the same way is fundamental in physics, in the difference between Newtonian mechanics and the strange world of quantum mechanics (for a musical version of this have a look at the Symphonies of Science the Quantum World).

And in Morris' text what I see lurking is that large countries are not big small countries, if I can mush all of that together. Or to put it another way, the scaling of companies into national economies and from national economies to the global economy involves scaling steps that are discontinuous.

This is very important when trying to understand commentary on the nature of the current recession and the actions that are being taken (or not) to try to reignite growth. How the narrative on how to address the problems is structured depends on what scale you're used to working at. Paul Krugman wrote about this in a direct way in his 1996 piece, again for Harvard Business Review, A Country is Not a Company, where he strongly argued for not following the instincts of CEOs of large companies in terms of economic policy.

It may also point to significant fault lines in economics, between those trying to work up from the microeconomics of companies to the macroeconomics of countries. Maybe, again in parallel to physics, there is no grand theory of everything.

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Industrial policy back in the Economist

At the risk of being a cracked record, countries need to consider industrial policy anew. Interestingly even the Economist is looking at industrial policy arguments and is willing to engage in debate on the issues. A new column discusses recent papers by Rodrik and others being relatively open to the arguments made about positive versus negative paths of innovation. 


However the slight bias for the Economist comes out towards the end ...

In effect, Mr Rodrik and others are arguing that industrial policy requires disinterested, benevolent policymakers who can do it well. Unfortunately, they do not yet have a recipe for how such policymakers can be created. Policy is made by real people with political and personal motivations. What they come up with is unlikely to be as well designed as the ones in the models.

Rodrik has argued elsewhere that industrial policy is an ongoing dialogue and depends on input from industry as much as from policymakers. But I am struck by the argument as it could be reflected into the economy generally. The market is embedded in society, designed and bounded by the laws of each country and a set of norms (those criticised by Ed Milliband in his recent Labour Party conference speech). If policymakers cannot be expected to be perfect designers of industrial policy, let's not assume that financial engineers and captains of industry are perfect decision makers either. 


How can such policymakers be created? Well in the UK a step forward is to provide stronger training, as with the new Blavatnik School of Government opening at Oxford, and to have a more transparent policy process that engages a broad conversation rather than trying to keep everything under the covers. By taking us away from the images of Sir Humphrey and into a more professionalised policy process we can hope for better outcomes.


In the meantime let's be grown up and have a realistic conversation on industrial policy that is not trapped in the tropes of the 80s. 


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