It is the late 1480s. An Italian explorer by the name of Christopher Columbus has the idea that by sailing westwards he could reach the East Indies. He needs to fit out ships for his voyage and goes looking for venture capital to back his scheme. So who gives Columbus the money for the Nina, the Pinta and the Santa Maria? Not the bankers of his native Genoa, but Queen Isabella and King Ferdinand of Spain.
This story of how it was the state rather than the private sector that backed Columbus was told by a participant at a three-day conference in London last week. There are more recent examples. The commitment by John F. Kennedy in the early 1960s to put a man on the moon led to spin-offs including memory foam, improved radial tires, freeze-dried food and cochlear implants.
Speaking at last week’s event, Bank of England chief economist Andy Haldane said today’s investment is tomorrow’s growth, but added that investment requires the patience to forgo instant gratification. Haldane said that in recent years, there had been a tendency for societies to become less patient, perhaps caused by a surfeit of information leading to a deficit of attention. Financial markets were an example of this, he said. There was too much information, excessive liquidity and too much short-termism.
Adair Turner, former chairman of the UK’s Financial Services Authority — which regulates Britain’s financial services industry — built on this theme. He said that not only had finance’s share of GDP increased fourfold to about 8 percent since the 1950s, but that the idea that banks took in deposits from savers and recycled them as loans to budding entrepreneurs was a thing of the past. Instead, two developments explained the increased size of the financial sector: the tendency of banks to trade with each other, and the focus on lending to the property market, seen as safer than lending to business.
Between them, Haldane and Turner provided a pretty good explanation of the way in which the economy has behaved over the past 40 years. Finance has become bigger and less patient. It has become less willing to lend for new business ventures and more willing to lend for speculative activities in the financial and property markets. Cheap money does not prompt an increase in funding for entrepreneurs — it simply provides a bigger stack of casino chips.
In the circumstances, it is hardly surprising that fundamental economic change remains elusive, not just in Britain, but in Europe and the US as well. If there is a lack of investment today, there will be no growth tomorrow. The story of the past 250 years of capitalist development has been of waves of creative destruction: a new wave of products replacing an exhausted technological paradigm. There is a new wave waiting out there, but its emergence is being hindered by a lack of finance.
How can this problem be addressed? Firms could bypass the banks and seek alternative sources of finance. The rise of peer-to-peer lending suggests that this is happening, although still on a relatively small scale. Attempts could be made to force banks to change, either by governments nationalizing them or by increasing the capital requirements on mortgage lending to make it more expensive. Do not hold your breath.
Finally, the state could take a more active role. This was British Business Secretary Vince Cable’s theme at the conference, where he listed ways in which the government was using public money to encourage innovation.
“If we consistently invest less in our science and innovation capabilities than our competitors, we cannot expect to sustain the UK as a world leader in knowledge-based activity,” was Cable’s blunt assessment.
Cable said that the share of GDP spent on research and development in the UK stood at 1.7 percent, well below the 2.8 percent in the US and 4 percent in South Korea. Germany and France spend more than 2 percent of GDP on research and development, with the aspiration of reaching 3 percent. There is a similar deficit in support for innovation, which is 10 times higher as a share of the economy in Finland than in Britain.
The British government, to its credit, has set up seven “catapult” centers — places where scientists, engineers and businesses can work to turn ideas into new products and services — based on the German Fraunhofer institutes. The seven sectors identified are advanced manufacturing, cell therapy, offshore energy, satellite applications, the digital economy, future cities and transport, but as Cable says, the UK is a long way behind. There are more Fraunhofers outside Germany than the UK has catapult centers.
Innovation support has a big payback. Investment by the UK’s Technology Strategy Board — designed to accelerate economic growth by stimulating and supporting business-led innovation — has generated a return to the British economy of ￡3 to ￡9 of additional value for each ￡1 of public money invested. These are not easy times for government ministers to be asking for cash from the UK Treasury, but Cable insisted “a doubling of innovation spend is what a serious commitment to innovation means.”
Actually, it means more than that. The loosening of treasury purse strings to expand the work of the Technology Strategy Board would be welcome, but a fundamental recasting of the economy will only happen if and when the state accepts that it can shape and create markets. The clue was in the title of last week’s conference: mission-oriented finance for innovation. Once governments have decided what the mission is, the private sector will respond to the opportunities provided.
In the past, missions have involved discovering the new world, defeating fascism, winning the Cold War and putting men in space. In a paper written for the conference, Mariana Mazzucato and Carlota Perez said that today’s mission was a “policy direction that is smart, inclusive and takes advantage of ‘green’ as the next big opportunity.”
Mazzucato and Perez are talking about more than just low-carbon and renewable energies. They are talking about “conservation; pollution control; reduction of material content per product; replacing products, possession and waste with services, rental and maintenance and recycling, respectively; promoting the flourishing of the creative economy; making cities more liveable and less polluting; revamping transport systems and the built economy; promoting collaborative and sharing economies; focusing on health (including preventive and personalised medicine); and promoting all forms of education, in and out of school.”
Let us be clear. Change on this scale has happened before and could happen again. However, only if the state has a mission, loses its hang-ups about picking winners and understands there is more to good government than bean counting.
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