Edmund Phelps was the 2006 Nobel laureate in Economics and is director of the Center on Capitalism and Society at Columbia University. He argues in the FT this morning that the:
slowdown [in European growth] resulted from narrowing innovation. Even in the postwar years, innovation in Europe was feeble by past standards. In the 1960s, it slackened again, leaving the continent largely dependent on America for new ideas that would generate further productivity growth. But in the 1970s American innovation, confined to Silicon Valley, waned in the aggregate. The pool of past American advances on which Europe could draw would narrow to a trickle and lead to the productivity slowdown on the continent in the late 1990s and which came later to Germany.
This is an idea I have put forward on this blog, often.
The simple fact is that the need for the goods and services that the market supplies has been, to a very large degree, satisfied by the current state of technology given the current state of wealth and income distribution in Europe and there is little or no chance of some new technology coming along and changing that any time soon, not least because no one is investing to make that happen.
In that case two things follow. The first is the rise of the rentier economy.
The second is the decline in real wages. As rentiers extract more from the economy there is less left for wages and no disruptive technology to redistribute the balance.
Unless, of course, we have a Courageous State to do the job that would, firstly, realise that when the private sector has ceased to innovate it falls to the state to do so, and secondly would realise that this is the only way in which the real, and growing, needs of people can now be met in the future, and that this is the key to the real prosperity based upon wage growth that is fundamental to the well-being of any society and economy.
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It dawned on me some time ago that the habit of educating a specific class/group of people in a very specific way would eventually lead to a complete lack of innovation and originality and lead to the very obviuos lack of new ideas that has been highlighted.
Society has brought abought its own stagnation by denying quality education to everyone. Couldnt happen to a nicer class of drones!
it’s a curious thing, this. I work in technology. Just this morning I was rabidly reading a stunning and insightful essay on data visualisation by a chap called Bret Victor. In my view, he has profound insist in to methods that, if widely available, could be positively transformative for society – certainly for education and academic discussion.
To build and test his ideas you’d need a team of tech people. 10 would be a huge start for evaluating. A million a year would happily set them up well rewarded and comfortably housed.
They might not work, but this is but one instance of opportunity in the world.
For all its billions, Apple is not doing this. Microsoft does have research fellows, to its merit. But why isn’t capital looking for opportunity here? Does it assume it’s good enough to wait for the open community to invent it and then use it for free? Where is the vision to move forward fast and get the job done sooner. Where is the confidence that being first might be enough to get the lead on the pack and ensure a strong return for many years?
Supporting people to try the ideas that might bring amazing rewards is costly, but the pay offs can be profound. It’s really very sad if capital in companies is so yellow or so complacent that it doesn’t do this. Stuck in corporate coffers it’s just rotting away, wasted, and racking up ignored opportunity costs on the world.
In a rentier society those with money demand regular returns, not risk
Exactly.
I agree that captialism has ran out of ideas Richard.
The problem is however, that it never seems to run out of excuses.
More’s the pity…………
“it’s just rotting away, wasted”-if it was rotting away (demurrage) they’d soon shift it. Time for a rethink of Sylvio Gesell.
Neil Woodford, one of the UK’s most renowned fund managers, is in the process of raising money for a new fund of his, the Patient Capital Trust, aimed at investing in early stage technology, particularly university spin-offs. The name comes from the fact that he expects investors to be patient and to hold for at least 10 years.
I don’t think anybody would dispute that the UK has some of the very best universities in the world, and are world leaders in technology. However, Woodford has identified that what we are rubbish at is commercialising technology: banks don’t lend to businesses with no track record, venture capital is very thin on the ground and the people who innovate often either lack business skills (having been on a focussed academic track all their lives) or would be better off focussing their minds on innovation rather than marketing and business.
It will be interesting to see the demand for the new fund and how it performs (and before anyone has a go, the manager only receives a management fee if the trust returns more than 10% pa).
It looks like a very good investment opportunity to me, but of course, that is precisely because these type of innovative companies are not getting the proper level of funding at the moment through existing channels. But there is an appetite for this sort of investment, what has been missing is the middleman who can evaluate the opportunities and efficiently allocate capital to innovation.
While I have read plenty on secular stagnation and so on I do note the analysis of Michael Pettis which characterises the current era as no different to ecnomic shfts in the last 200 years and ealier, whereby large global imbalances are being resolved to eliminate misaligned trade policies. It is an inevitable realignment and cannot be stopped. While it occurs it may feel like there are no new opportunities we are in a new paradigm but actually it is not much different to what has come before (absent the impacts of certain polich choices)
One argument is the lack of innovation. Another is the lack of sufficient profit potential to attract investment. Capitalism is about enrichment and if the capitalist sees poor returns he won’t invest. The GDP growth we’re being told is the new normal is indeed the old normal. The growth we had after the war through to the 70’s was itself unusual. It’s all well and good for the state to invest but this won’t rekindle private investment in the long run. Without corporations being run and owned by those who work in them rather than by highly paid CEO’s for the benefit of institutional shareholders state investment is no more than a short term answer to an age old problem.
We may not need to rekindle private investment
The private sector may have reached the limit of the need it can meet
Capitalism has indeed run out of ideas, but not, it seems of friends in high places. I’ve just been rendered speechless by this article highlighting a systematic failure to follow-up very serious complaints about a possible £1 billion HSBC fraud on UK debtors. It’s scathing of the role of the UK media and the Guardian’s Scott Trust (or rather Scot Trust Ltd) in particular.
Apologies for posting it in the comments to this blog Richard, but I think this really needs to be more widely reported:
https://medium.com/@NafeezAhmed/death-drugs-and-hsbc-355ed9ef5316
I think the evidence shows that something more complicated is going on. there certainly is a problem with lack of investment in productive assets by large public companies. These are also the firms that clearly have a serious principal-agent problem when it comes to the relation between their nominal owners and their senior managers, not least with regard to the latter’s remuneration. However there is very dynamic growth and increasing innovation among SME’s particularly in the UK but also throughout Europe. I think that what we are seeing is the early phase of another major technological transformation of the kind we last saw in the 1970 to 1920 period. That means declining rates of return on lots of traditional technologies and assets. In a few years this will start to change very rapidly however. The result may well be a kind of market economy that is quite different from the kind of capitalism we have had for the last hundred and fifty years but not necessarily with a larger state – government is probably going to be transformed as well. I do think that a key issue is going to be IP where we will see a sustained effort by many to capture as much as possible of the new wealth in the shape of rents, as you have said.
I think some of the Phelps article is nonsense; he says that growth in Europe was feeble in the post-war period but in fact in the 1950s and 60s (Western) Europe did very well – it wasn’t until the 1973 oil shock and subsequent turn towards neoliberal policies that the continent began to stagnate. Having said that, the idea that we’ve reached a technological plateau and a slackening off in the growth rate – at least for the time being – would explain a lot. And it may well be that the investment crisis helps account for this. These are the kinds of issues I’d love to work on if I had more time.
Time is always the issue…
Ant news?
Howard, I don’t read Phelps as saying that growth declined in Europe in the 1950s and 1960s, he’s saying that innovation declined. There’s a connection of course because ultimately it is innovation that drives growth but there is a time delay in that so the slowdown in innovation that he and others see as having happened in the mid to late twentieth century will only have started to have an effect from the later 1970s onwards (if he’s correct).A related argument is that innovation has continued but no longer brings gains in productivity. I’m sceptical myself but time will tell.
Capitalism frequently throughout history always ends up in crisis…primarily as it puts profit before all else.
Capitalism seems to always have been at its “best” when it has been restrained and regulated.
It worked at its best in this country post world war II when it was on a fairly tight leash.
Yes indeed – heartily agree with that.
I think capitalism went down a cul de sac called “financialisation”. There’s been plenty of innovation here, credit default swaps etc etc.
All this has done is produce more and a greater variety of claims on real wealth.
This has built up a huge head of steam so that the pressure on capitalism to satisfy the claims (debt) has resulted in short termism and predatory behaviour.
We need to get out of this dead end quickly, because the financial products created are no longer useful, but have now morphed into a “wrecking ball” which is destroying the real economy.
How do we de-rail the “neo-liberal debt train” perhaps a suit currently being brought against the Bank of Canada may provide a glimmer of light….
http://www.ukcolumn.org/article/amid-media-blackout-canada-lawsuit-challenges-banker-rule
I heartily agree with your appraisal TMBAW.
One area of growth and innovation might be in space exploration – brought to an end by neo-lib politicians moaning about taxes in the US. No more giant leaps for mankind since politicians used tax as weapon against each other in elections.
My worry however is that the excess money available will be used to finance and make money from conflict. There are lots of smaller scale wars and wars waiting to happen in this world of ours at the moment that are good investment choices for certain banks.
Another dimension may be the size of services sector. With odd exceptions, I’d argue that it’s profoundly uninnovative, in terms of process, skills use of technology. Compare/contrast with manufacturing. That must influence the demand side of innovation.
From experience, the City and financial institutions are deeply and complacently innefficient operationally. But then that would be typical of rentier institutions
This ‘there’s been no innovation since whenever’ really is complete nonsense.
if this were true I’d be writing this on a Commodore Petas I did in 1982, I can now do it on an iPad on a train, post it to the cloud system, print it remotely on a 3D printer, all via wireless on the train. Meanwhile, my driverless car is being driven to the station to pick me up using SatNav, video etc and, as it is all electric no carbon will be produced. I’ll charge the car up using solar electricity etc etc.
No innovation?
Comparatively
Not none
And not life changing
Smart phones etc are not life changing? Container shipping is not innovation? Bring back full employment in the mines, farms, factories etc and then, when nobody buys our too expensive consumer goods?
You clearly have no idea what I am talking about
Or more likely, just do not want to partake meaningfully
Too much of this so-called innovation seems to make people redundant. If we have self driving trains and buses there will be no such jobs anymore.
Frankily I’m sick of this labour saving stuff. It just helps rentiers keep more money for themselves. Then they don’t want to redistribute it through taxation as transfer payments like benefits, pensions etc., for those who are unemployed and under-employed.
In the past we were told that we’d have increased ‘leisure time’ as labour saving innovations took hold in the future. The trouble is that in the real world, you need a disposable income to enjoy your leisure time!!
So to me a major innovation in modern capitalism would be to have full employment and decent pay.
The way things are going, sooner or later the rentiers will be telling us how many children the rest of us can have or not. Because we won’t have anything for them to do!!
We clearly need to rethink ecomnomic priorities
I tried to do that in The Courageous State
I imagine the millions of workers making iPhones etc in China might disagree that redistribution from the ‘west’ isn’t happening. It’s all the fault of that Henry Ford for daring to make cars that people could afford.
Max
You’re twisting an egalitarian concept (redistribution)- a tactic commonly used by Lynton Crosby. Are you Lynton by the way?
Those millions of Chinese workers have gained jobs at the expense of other workers in the world – say for example, those in the UK. When one society gains fom another’s loss – is that progress? Wasn’t capitalism orginally about growing wealth across the board? Many neo-libs talk of ‘raising all the boats’ – comparing how increased in economic activity to that of how a tide works. But when other workers lose out, how is that so? Many of the boats sink instead, rather than being raised.
The so-called competition you talk of that led to the Chinese getting those jobs is not a natural phenomenan; it’s an outcome of companies deliberately reducing output costs to appeal to rentiers who want high returns. This is the arbitraging of labour on a global scale. The West was told that globalisation would lift many people out of poverty. It has, but we were not told that it would need the loss of our jobs to make that happen.
Thus carries on the the big neo-lib lie, like their other lies – another one being that apparently our children are not well educated enough to compete in the global market. So it’s all OUR fault that jobs have gone abroad when in fact the truth is that business has put rentier needs first in search of the lowest cost of production.
Your cover is blown. Now, as politely as I can on someone elses blog could I ask you to be a good chap and please go and bother someone else with your badly informed drivel?
Well said