10 Membranes

Industrial and Economic Policy: Part I

There are, for me, several structural problems with the British economy where the belief in a free market overshadows the economic logic that underlies a society.  If the British economy is ever going to have a sustainable future it should address the following:

-          Foreign takeovers. The logic of allowing foreign takeovers is that the movements of capital should be unimpeded to produce the greatest efficiency possible and maximise profits transnationally. Companies are global and thus operate in a sphere where nationality becomes irrelevant. What is relevant is that they can become better business. Moreover a foreign takeover is investment in a country. There are three problems with this. Firstly there is no uneven terrain of acquisition law; it is easier to take over a British company than a French; easier to take over a French company than a Chinese company and so on. Essentially the current system is rigged in favour of those with closed economies and wealthy companies – like for example almost the whole of the Far East; India; Russia; the Middle East and to a certain extent places like Brazil. The system is not reciprocal. Secondly, national interests do matter. Ultimately foreign companies will, often for political and not economic reasons, be more likely to close foreign outlets and plants etc than home ones. It is not in the long term interests of a country to have too much foreign ownership as it runs the risk of having R&D taken away, asset stripping, closures and so on. Lastly foreign takeovers, like takeovers generally, can barely be seen as investment. In fact they are often the reverse, when the debt financing of the takeover is laid on the company itself, with the result that rather than investing in growth the company is crippled by debt finance repayments. Profitable businesses are wrecked, the profits from the deal have no bearing on the company, and the long term health of the economy, at all. The British lassiez faire policy on takeovers should be revised so that the long term strategic national interest is taken into account much more than is presently the case.

-          House prices. House price inflation ran at 100% over the years 2000-10. Wages rose on average 40%. The ratio of earnings to mortgage repayments has spiralled. In the long term this is not good for the economy – it reduces people’s living standards by giving them less disposable income; unfairly benefits the baby boomers (although I concede this point may have more grudge) and lastly and most importantly ties wealth in non-productive assets e.g. property. Not only could the capital tied up in property be used more effectively to build long term success – by being invested in good business etc – but it actively contributes to economic stability by forcing overstretched borrowing and then repackaging of sub prime mortgage debt. While this is unlikely to happen again we can conclude that rising wage to house price ratios lead, without strong regulation, to “weapons to financial mass destruction” to quote Warren Buffet, in order to keep the spiral, which like a Ponzi scheme everyone becomes dependent upon, growing ever upward. Currently there are two things holding up property prices – historically low interest rates and the price elasticity of demand. Given the Bank’s hand is tied on interest rates for now, this suggests that there is a core lack of supply in the UK housing market, as was recognised by the last and present governments. Clearly, over the past 30 or so years, the free market has not built enough houses to keep housing within the bounds of affordability. The government should step in and build houses on a vast scale against the protests of house builders. Such a scheme would pay for itself, contribute to the government coffers and would rebalance the economy away from an over-emphasis on property as a source of wealth into more productive and sustainable sources. Growing property prices is an easy way of growing money out of thin air; yet it cannot continue indefinitely above wage increases, and it cannot provide a back bone for an economy.

-          Overemphasis on services. Past governments have been quite happy to see the advance of services over manufacturing as a mark of progress and a mature economy. While relative shifts are inevitable given rapid productivity growth in manufacturing (so that its relative position in terms of the total economy is reduced) the utter dominance of services is bad for two main reasons. Firstly is that services enjoy much lower productivity growth than manufacturing – a solicitors total possible productivity is not much greater in 2011 than 1911, a little yes, but there is only so much head space a solicitor can devote to a problem. Ditto for hairdressers, cleaners and management consultants. Yet a factory worker’s productivity has grown, through technology and workflow improvements an unbelievably vast amount in that time. There is thus always more productivity growth potential in manufacturing; a higher proportion of manufacturing means a higher overall productivity growth potential; which means a higher growth potential for the economy as a whole. Secondly services are much more difficult to export than manufactured goods. While Britain has become export at exporting services it will never be possible to export services to the same extent as manufacturing – services hence underperform against manufacturing. Given that we know that the engines of growth over the coming decades will come overseas; given that we know we need to export more and given that we should improve our balance of payments the logical answer is to manufacture more.  

-          How to manufacture more? This requires government help. It is clear that firstly the position of the UK in manufacturing terms has fallen relative to both peer nations in Europe and of course the industrial powers of the East. Only the US to a certain extent has de-industrialised, probably because like the UK its government mistakenly believes in not supporting sectors. However when you look at Japan in the 1950s and 60s, Korea in the 70s and 80s and more recently China you notice two things – firstly their average growth rates in these years was 10% and secondly their industries enjoyed close links, plentiful investment and ample protection by the government. Likewise in France and Germany in their golden postwar years. As with infrastructure manufacturing is capital intensive, requires nurturing, foresight and the possibility of returns only in the very long term – all antithetical to the kind of fast moving capitalism we now “enjoy”.  Governments should put cheap money into their best manufacturing businesses and shield them from international competition – where this is mostly happening. For example GKN got £60m from labour to develop new composite material technologies for the Boeing Dreamliner; the present government insanely cut a grant for £80m that would have allowed Forgemasters to become only the second firm on earth capably of casting the cases for nuclear reactors. Such projects never get built; the UK manufacturing industry is checked again; companies with sympathetic governments develop the tech and become dominant. Without such moves – e.g. an active rather than passive industrial policy – we will never grow manufacturing beyond the help of minor currency fluctuations; we will never proper rebalance our economy and both our growth prospects and our balance of payments will hence suffer.

Even the present government wants to structurally change – diversify, make more productive, evolve from consumption to production, import to export, the City to the provinces – the economy. However within a rigid ideological straightjacket of the free market it will be unable to do this. The free market comes to London; we need to go elsewhere. In short the government needs to rethink its bias and realise that we do not live in fair free world and that leaving things to markets has been insufficient in certain areas to provide the best platform for the economy.