"Rethinking Capitalism" by M. Jacobs and M. Mazzucato (Eds.)

"Rethinking Capitalism" by M. Jacobs & M. Mazzucato (Eds)

The Political Quarterly Publishing 2016

ISBN 978-1-1191-2095-7

If there were to be a prize for the most important futures work for 2016, this book would be a contender to win it. It is a very important book on a very pressing matter. Perhaps a little context would help to establish why this is so?

The financial crash of 2007-08 rather caught the economics profession by surprise. Admittedly, some economists saw it coming, but, in the main, most didn't. Why was that so? Economists largely failed to spot the crisis on the horizon because their models incorrectly described the way in which the economy works. Even after the crisis, the policy response of monetary expansion was condemned for it's inflationary potential. Consumer price inflation failed to take off because the monetary expansion was coupled with a fiscal contraction and there simply wasn't sufficient aggregate demand in the economy to set off inflationary forces. Orthodox economics got it wrong again!

At the time of the financial crash, a number of academic economists correctly saw that the base theory behind many economics models needed to be re-written. If economics, as a discipline, were to be more useful than an intellectual curiosity, then it needs to contain a more accurate description of the way in which the economy works. This book represents a significant down payment on the re-writing of economics. Some of the argument - such as the endogeneity of the money supply - can be a bit technical at times, but it is important nonetheless.

The book contains a sequential set of essays. The most important one, in our opinion, is the last, but the reader will be very handicapped if they skip ahead to the last essay. The argument is developed over the eleven essays in the book. The first essay sets the scene by outlining why the authors believe the economics profession managed to fail to understand the imminent crisis in 2007.

This is followed by the theme of macroeconomic policy. The second essay establishes that fiscal austerity at this point in time is a bit muddle headed, and that current conditions warrant a fiscal expansion; whilst the third essay establishes the endogeneity of the money supply where orthodox economics considers it to be exogenous. What this means in plain English is that we are currently stuck in a loop of secular stagnation, and we are unlikely to find our way out of the maze until aggregate demand recovers. The easiest way to stimulate aggregate demand is through a fiscal expansion. If we remain reliant upon an unconventional monetary expansion (i.e. Quantitative Easing), then all we will see is the further pumping up of asset prices.

The next three essays move away from macroeconomics and start to focus on the microeconomic theory of the firm. The fourth essay looks at short-termism as a feature of Anglo-Saxon Capitalism, and how the need to maintain the quarterly dividend and share buy-back has led to companies failing to re-invest in future productive capacity. This is followed by an essay on the innovative enterprise, in which the author establishes that if a firm wishes to compete in the long term, then it has to innovate, which means that it needs to invest in future productive capacity. This section is then rounded out with an essay - the sixth in the book - on the role of Patient Capital (i.e. investors who are willing to wait for the return on capital to materialise) and the role of the state as a provider of Patient Capital.

It is at this point that the contours of the book start to emerge. The economics profession has largely failed the public because the models on which policy of based are too divergent from the real world. We are currently stuck in a position of secular stagnation which is reinforced by the current policy of fiscal austerity combined with monetary expansion. In order to move forward, aggregate demand needs to grow, and the easiest way of achieving this is by reversing the policy of fiscal austerity. If austerity is to be relaxed, then public sector investment in productive capacity is likely to stimulate aggregate demand without the additional productive capital being diverted into unproductive dividends and share buy-backs. The book then continues to examine four specific aspects of this argument.

The seventh essay, using the insights of the first six essays, makes a good case for investment-led growth as a solution to the European Crisis. The European economy finds itself in a very parlous state at the moment, one that needs growth as a solution. The private sector hasn't delivered growth, so perhaps the public sector could? The eighth essay examines the link between inequality and economic growth. I found the argument to be a bit circular in that the best way to reduce poverty is growth, but also that a good way to stimulate growth would be to tackle inequality. The fact that an argument is circular doesn't invalidate it. The ninth essay examines the paradoxes of privatisation and public service outsourcing. The old distinction of private and public sectors has dissolved a great deal in the past thirty years, but our thinking in this regard hasn't. The last essay of this section - the tenth in the book - considers the relationship between innovation, de-carbonisation, economic growth, and climate change.

If the first six chapters laid out the contours of what a new economics might look like, the following four chapters lay out the contours of what economic policy might look like. Starting with a recognition that a fiscal expansion is needed to stimulate aggregate demand at the macroeconomic level, the microeconomics of such an expansion would be to focus on investment in 'green-tech', delivered by private sector agents of public sector commissioners; in tandem with policies to reduce inequality. This sounds like a winning formula!

With this thinking in hand, one is then ready to tackle the final chapter of the book, one that happily has more questions than answers. In the final essay, Carlota Perez takes a far longer perspective on the question of green-tech and helps to map out the contours of our collective future. Here, the focus moves away from the immediate and towards the more distant future. There is enough evidence presented to convince us that the next technological wave will be one based around green-tech. What isn't clear is whether this represents the deployment phase of the Fifth Wave, or the installation phase of the Sixth Wave. I am inclined to the latter view, but the chapter makes a sufficiently good case for the former view to sow the seeds of doubt in my mind. This aspect of the essay needs more thought on my part.

This is a really important book. However, it has to be remembered that it is an economics text book, which means that the style is dry and academic. The prose is turgid and, in places, downright boring. This is not bedtime reading. The book does lack the mass of higher mathematics normally associated with economics texts and, in this regard, is quite accessible. It is the content that underscores the importance of the book. This is a very significant step away from the barren territory of the neo-liberal economics that failed us all in 2007. This is why we recommend it.

Stephen Aguilar-Millan

© The European Futures Observatory 2017

Banking: The Story Continues

Our recent post on the next ten years in banking drew a couple of interesting comments. On Twitter, Esmee Wilcox asked:

"Thinking about notions of trust, re rural communities where this is more expected. What new models will emerge if metro bank not viable?"

Whilst in the comments section, Michael Spink commented:

"The successful will lead with purpose, not product. Engagement with the consumer base needs to extend into communities, demonstrating the value of an FI and its role in community...it will need to be about people, not profit. Think credit union on a grander scale."

Both of these are good points, and we rather feel that they tend to reinforce what we were saying. They certainly point towards what we see as the successful commercial banking business model in the years to come.

Before we continue, it is worth just outlining a bit of context. In the UK, and, I suspect to some extent in the US, the structure of rural communities has changed profoundly. The response to the financial crisis by the monetary authorities has been one of unconventional monetary policy - quantitative easing - which has served to pump liquidity into the financial system. Conventional economics would suggest that such an increase in liquidity would serve to be inflationary. This has not occurred with consumer prices, but is quite evident in the case of asset prices.

It is almost a truism that those who hold the most assets have seen the greatest increase in wealth. Residential property has enjoyed the best risk weighted return on capital for a number of years, and there is no reason to suggest that it will not continue to do so in the near future. The resultant rise in inequality has a bearing upon rural communities. Most of the increase in wealth has occurred in metropolitan areas, such as London and South East England. It has allowed the residents of these metropolitan areas to move out to the rural hinterland, to places such as East Anglia or South West England, either permanently or through the purchase of a second home.

The movement of people out of the metropolitan areas has bid up the property prices in the rural hinterland. However, prosperity has not spread that far. Those born in the rural hinterland are unable to purchase property in those areas because they lack sufficient income to buy a house. This has led to the withering of rural life. Within a village, the local school is usually the first to go, as local people start to have fewer children. Then the village shop, post office, and pub would close as the volume of trade becomes insufficient to support those businesses. This process has been occurring for decades, well before the financial crisis, but the financial crisis has given it a certain impetus. It is in this context that bank closures need to be viewed.

The strain placed upon the commercial banking business model has meant that the minimum size of the community which a branch bank can serve has increased. Looking at it the other way around, the pressure on the commercial banking business model has led to the commercial banks withdrawing from communities of an increasing size. Esmee was correct to point out that Metro Bank, the example of the new insurgent banks, is predominantly located in London and South East England. It is unlikely to locate in much smaller communities because it is not commercially viable to do so.

In some respects, this is a case of the people left behind, which will be the subject of a future post. In other respects this is a case of a tremendous commercial opportunity in the banking sector. The incumbent banks are delivering a service that is a poor fit with the desires of their customers. There is an opportunity for an insurgent bank that builds trust at a local level. That offers services at a human scale. Michael is right in directing us towards Credit Unions because they are community based, value driven, and people centred. At the moment, few banks offer this. And yet, it seems to me that this will be the key to success as we move forward.

We see the market wide open at present, it just needs a community focussed insurgent to fill the void!

Stephen Aguilar-Millan

© The European Futures Observatory 2017

"Progress" by Johan Norberg

"Progress" by Johan Norberg

Oneworld Publishing 2016

ISBN 978-1-78074-950-1

Why is it that all of the news seems to be bad? Why is it that it is far easier to sell dystopian scenarios than utopian ones? Why is it that many people believe that the future will be worse than the past? This book goes a long way to address the issues these questions raise.

The author laments our apparent loss of belief in progress as a feature of human advancement. The bulk of the book is used to show us that we are living at a time in history when hunger is at its least, sanitation and health are at their greatest, where life expectancy is at its longest, where poverty and violence are at their lowest. We are the most literate, free, and equal humans in history. There is nothing to suggest that this trajectory of improvement in the progress of humanity is either slowing or reversing, and yet we simply refuse to acknowledge these facts.

Why is that? The last two chapters consider this question head on. The penultimate chapter considers the prospects for the generation to come. It looks at the question from a longitudinal view rather than an inter-generational one. It is easier for us to review our own experiences rather than to imagine those of others. If we think about how our own lives have improved as we have become older, then we see the point that is being made.

For example, when I was a boy, we didn't have a TV. I remember the arrival our first TV (black & white) to displace the radio we had before. That was later replaced by a colour TV with three channels, and has now been supplanted by a mobile device through which I can watch literally thousands of channels showing hundreds of thousands of programmes, streamed to me the instant I demand them. This gives an account of the scale of progress over the last 50 years in a relatively inconsequential area. There have been even greater improvements in areas that matter, such as medicine, public health, or the eradication of poverty. There is nothing to suggest that this pace of improvement will slow. If anything, the evidence suggests that the trajectory of improvement will continue, but possibly at an accelerating pace.

If this is our experience, which is uncovered by the simplest of reflection, then why do we see an half empty glass rather than one that is half full? The final chapter in the book - the epilogue - deals with this question head on. The clues to the answer lie in human psychology, which provides us with three biases. The first is that we find that 'bad is stronger than good'. We remember our losses more than we remember our gains. We fear a prospective loss more than a prospective gain. We fear that the present we have will be better than a future that has yet to happen. The second bias is what the author outlines as 'the psychology of moralization'. We use our complaints about problems as a signal to others that we care about our listeners. It is a way of empathising with the problems of others. The final bias is a nostalgia about a golden past that never existed. When we hear about 'the good old days', we tend to forget that they were the bad old days also. These biases are an important part of our make up as humans. They have helped us to evolve as the dominant species on the planet, but they also constrain us as well.

We now live in a world in which, through the use of modern technology, we can witness the drama of events as they unfold. We have access to news events, on a rolling 24 hour basis, right across the world. No wonder the news always seems bleak. It comes to us in planetary volumes. However, if we stop to think about how many of those events have touched us directly, or in which we have even remotely participated, then the news we receive tends to become someone else's news.

In most of our lives, our own news is that not a lot new has happened. Things today are more or less the same as yesterday. This is not enough to capture attention. It lacks drama. It lacks entertainment. It doesn't inform us. This is why we very rarely feature in the news, even in an extremely minor role. The fact is that most of our lives are uneventful. That makes us sad because we want our lives to have had a meaning - a purpose - which causes us to look back to a past that seems so much better than today. Even if the facts say otherwise.

This is a book that is based upon fact. There are nine chapters that consider the facts relating to such issues as food, sanitation, poverty, violence, the environment, literacy and freedom. In each of them, the author presents a factual base to demonstrate a history of improvement. At times, this reads like a list of numbers, which is not the most engaging of prose. The book could do with the simple editing device of tabulation, but that would make it a much shorter book. It is not a difficult read, but there are times when the statistics make it bit of a dull read.

This is, however, an important book because it does provide the basis to address some of the questions which occupy the minds of futurists. For example, it is easier to sell dystopian scenarios than utopian ones because dystopia has the drama necessary to engage an audience. This drama can be used to engage an audience to provide a vehicle through which a message can be delivered, especially if that message is one of change.

It is why we would recommend the book to the more thoughtful of futurists.

Stephen Aguilar-Millan

© The European Futures Observatory 2017