Escaping the whirlpool

Earlier this month, as part of a series of articles looking at stagnation, we ran a piece called The Whirlpool Economy, in which Charles Leadbeater argued that we are living at a unique time when prolonged stagnation and rapid innovation combine with rising inequality. This, he claims, creates a whirlpool effect with people subject to incessant change while their living standards are stubbornly stuck.

We asked a number of people to respond on how we might face a world of fast innovation, slow growth and rising inequality. Here, Alain de Botton, Andrew Keen and Mariana Mazzucato offer their thoughts.

Take an expensive meal you had. The fashionable food and drinks were very good. But the conversation was lacklustre, you had a row with your partner, stayed up too late and felt exhausted the next day. You spent a lot of money but didn’t manage to fulfil your needs well. Or – more positively – perhaps you bought a very nice bedside lamp. It felt expensive at the time but, you have found you’ve been reading more in bed and waking more refreshed. It has genuinely improved your life.

There won’t be a single set of purchases right for everyone, that’s not the point. The issue is merely to draw attention to the fact there are better and worse decisions – and that a society needs to discuss what these might be.

There are some major reasons why we end up demanding the wrong things. For a start, it’s hard for us to define our needs. We know we want to be happy but our understanding of what would work best is terribly vague so we are prone to grasping at whatever is blinking most attractively. What’s more, we’re creatures of the herd: everyone else is doing something, so we assume it must be working – even if it isn’t.

Moreover, there is a hugely active industry encouraging us to want things, not so much because it is in our own true interests to consume, but because it serves the profit motive of certain businesses. This means that, individually, we don’t get the happiness we seek. And collectively we end up with a dysfunctional economy.

Raising the quality of demand doesn’t imply a draconian government imposing some high-minded agenda on a reluctant public. Demand, in a market oriented democratic society, is and can only ever be voluntary.

What we need is the more important, more humane, task of encouraging ourselves to be wiser in our choices. There are a couple of major ways this can be done.

Between 1950 and 1980, the English cookery writer, Elizabeth David, undertook a heroic campaign to improve national taste. In books, articles and on television, she suggested things people might like, she wittily mocked low-quality goods, she taught people to have higher expectations. She had a major impact on the growth of the olive oil industry for example, which when she started was regarded as an irrelevant oddity. She is an inspiring example of a phenomenon we don’t pay enough attention to: the education of the consumer.

It’s an approach with wide application. With the right, engaging, guides we can overhaul our ideas of what we want in areas far beyond cooking. We’ve done it to some extent around food. But travel, housing design, education, psychotherapy and relationships all stand in need of their own Elizabeth Davids.

Advertising is another major way of changing demand. At the moment, too often it seems to be an attempt to seduce people into making poor choices by overselling products that cannot in reality deliver on the implied promise. But this is rarely the fault of the ad agencies. They can only work with what their clients have to offer. There’s clearly a better option.

Genuinely beneficial products, that do promote our better selves, could more vigorously be brought to our attention and their merits rigorously explained. Advertising has a key role to play.

If 'good demand' were more normal, it would transform society. There’d be fewer jobs that felt demeaning because more demand would be directed towards our true needs. Profit wouldn’t look suspect. It would be a sign that a company was doing the right thing, and doing it rather brilliantly. We’ve been too ready to accept that ‘what people want’ is an immovable force. In fact, it’s entirely subject to change. It’s simply a pity that the only people who actively seek to change what people want are corporations with large budgets and often rather doubtful things to sell.

It’s time to engage in the complex, ethical task of influencing public wants: the task of creating better demand.

Alain de Botton will be talking, along with colleagues from The School of Life, at their first business conference, Business Wise, Meaning, Culture and Value, at the Southbank Centre on 4 June. For more information, visit: theschooloflife.com/business or call 0207 278 7826

So what to do about this high-tech Downton-Abbey? Charlie lists five ideas to break out of the cycle. But here the old idealistic Charlie reappears – saying that “What matters might not be economic growth” and urging us to “Stop talking about disruptive innovation”. That’s all very well for Charlie’s Islington set who can afford to deprioritise economic growth and ban words like 'disruption' and 'innovation' from their dinner parties. But such symbolic, cosmetic or tautological solutions – the supposed values of “friendship, recognition, trust, pride” – aren’t very useful to Uber drivers or those selling their labour for minimum wage on Taskrabbit, let alone the long-term unemployed of Tottenham.

Worse still, Charlie has found a new holy grail: what he breathlessly calls 'cities'. Apparently, 'social' and 'sharing' cities like Seoul or Curitiba will “create inclusive, fair models of growth”. Charlie, Charlie! Curitiba (of all places) is the urban version of Wikipedia. No, the future of 21st-century cities is in neo-feudal, exclusive global enclaves like Paris, London and Manhattan which are anything but 'social' or 'sharing' places. Besides, the truth about 21st-century cities – so-called 'smart cities' – is that the Internet of Things revolution is making them the key architecture not only of automation and a deepening of unemployment crisis, but also the central architecture, the big data panopticon, of our surveillance state.

“Stop fighting the last economic war” is another of Charlie’s ideas to break the cycle. But Charlie is wrong. This is a political rather than economic war. We’ve seen it before and we’ll see it again. Rather than the stagflation of the 70s, today’s techno-stagnovation is more akin to the 30s. Cities won’t solve this crisis, nor will a reliance on friendship or pride. Deep crises require deep solutions. Meanwhile, the really big storm is now on the horizon: the storm of artificial intelligence and its truly catastrophic impact on the middle class jobs of the industrial age.

So let me add a sixth idea to break out of the cycle. Let’s learn from the economic war of the 30s. The answer is stronger regulation of new monopolists like Google and Amazon. The answer is new labour laws to protect the precariat. Rather than the internet, the answer is government.

Andrew Keen is the author of The Internet Is Not The Answer

If policymakers want to get serious about tackling inequality they need to radically rethink how value is generated to begin with. Here are three areas we need to look at:

Socialising risks and rewards

The pretence that government only spends, regulates, administers and, at best ‘de-risks’, or ‘fixes’ market failures (eg investing in ‘public goods’) prevents us from seeing that it has been a lead risk taker and investor along the entire innovation chain. As a result, government has socialised the risks but not the rewards. Some economists argue that the reward for the state comes through taxation. Indeed, this is – in theory – right. Innovation-led growth should lead to an increase in tax revenue. But not if the companies that benefit the most don’t pay much tax compared to the income they generate, not only by exploiting loopholes but also by successful lobbying for tax cuts, from the rent-seeking controversial Patent Box policy in the UK, to the way in which the National Venture Capital Association in the US successfully got capital gains tax to fall by 50 per cent in just five years in the 80s. And what was the upper tax rate when NASA was founded? Over 90 per cent!

Building more symbiotic innovation ecosystems

Sharing risks and rewards also requires making sure that private sector commitment to innovation increases. Of course business invests in R&D, but the emphasis is increasingly on the D, building on earlier public sector investment in R. There is also reliance on small firms doing niche research, which is then reduced when such small firms are acquired by financialised larger firms who spend an increasing portion of their net income on share buybacks as outlined in my recent article with William Lazonick on risks and rewards. Indeed, we hear a lot about skill biased technical change, but not enough about how changes in corporate governance (shareholder vs stakeholder) have damaged skill development inside companies.

A New Deal... and a More Serious Deal!

To kickstart investment we need not only a new Keynesian deal, investing in areas like infrastructure and innovation (which many of us write about), but also more serious ‘deals’ between business and government that benefit both sides. We need to consider questions like these:

1. How could the patent system better reflect the collective public-private contribution to innovations?
2. How can we reform the tax system to reward long-term value creation over value extraction?
3. Should the prices of products be capped when the products (such as medicines) are a result of government funded research – so the tax payer does not pay twice?
4. When government gives guaranteed loans to companies, wouldn't it make sense to retain equity, so to cover not only the downside in the case of failure (eg Solyndra) but also from the upside of successes (eg Tesla)? As any good venture capitalist would.

Nesta [publisher of The Long + Short] has made a point of using its recent blogs to critique this approach to rethinking the risks-reward relationship. Dani Rodrik, one of the leading academics in this area, has recently supported it in a Project Syndicate article, as have others. There is no question that these ideas require some hard thinking, and that there will be a healthy plurality of views. But we live in an era in which the profit/wage ratio is at record levels. Continuing with the shared delusion that this is simply due to the smart management of companies which produce great products (and hence consumer surplus!), rather than concrete ideas on how to render parasitic eco-systems of innovation into more ‘symbiotic ones’ is not only naive, but I believe also irresponsible. It puts future innovation at risk and increases inequality in the process.

Mariana Mazzucato is RM Phillips Professor in the Economics of Innovation at SPRU, University of Sussex. A longer version of this article originally appeared in the New Statesman