When Rishi Sunak stands up tomorrow to provide his latest economic statement to the Commons, he will have read all the stories about the cost of living squeeze. He will have listened to his colleagues and their concerns about tax. But I wonder if he will have given any thought to the moment in 1819 when Augustin Fresnel’s inventions began to transform lighthouses.
There is no doubt that Britain’s immediate economic challenges are serious. And it is inevitable that the chancellor is pressed to address them, and will seek to do so. Quite right too. Just as long as he doesn’t forget that we are living through what economists are calling the Great Economic Disappointment. And we’ve been living through it for 20 years.
At the end of 2019, the Royal Statistical Society chose low productivity growth as its statistic of the decade. But the problem had begun earlier. For most of the second half of the 20th century, developed economies were growing, on average, at more than 2 percent a year. Since the turn of the century the rate has halved. Since the financial crisis of 2008 it has been even lower.
Review all our political and social discontents, and the Great Economic Disappointment can be found in the vicinity. In any discussion of the reasons why our politics has become more polarised, low growth must feature strongly. When politicians decide how to allocate resources in periods of high growth, everyone is still better off, even if some are preferred to others. You can cut taxes, say, and still increase public spending. In periods of low growth, giving to one section of society may require taking from another. Politics becomes scratchier. The chancellor may be about to experience the impact of this.
So why are we experiencing this Disappointment, and what can we do about it? In a compelling new book, Restarting the Future, published today, the economist Professor Jonathan Haskel and Stian Westlake, the chief executive of the Royal Statistical Society, provide both an intriguing theory and plausible response. And it begins with Fresnel and the lighthouses.
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In the early 1800s, lighthouses were lit with candles using mirrors that absorbed half the light they reflected. They had a range of between five and eight miles. Then Fresnel invented a way of concentrating the rays into a single beam. The light could rotate, and send out signals of varying length so ships knew the distance to the coast. The range was 30 miles.
There was a public policy consequence to this change. The old lighthouses sat in the harbour and ships would have to pay to use them if they wanted to dock. Lighthouses could be privately provided. The new lighthouses spread their benefits far and wide. Many ships profited and the gain to trade and safety was obvious. But if no one could be excluded from using the lighthouse, who was going to pay for it?
The solution, of course, was publicly-funded lighthouses, although there was some resistance and this took time. Haskel and Westlake use this example to point out that new technologies often require new economic arrangements and that these aren’t always forthcoming. And they think that is the position we are in now.
In a previous book, on which their new volume builds, the authors argued that we are living through an important change: the rise of the intangible asset. They use gyms as an example. A single gym might consist of tangible assets — a building, dumbbells, mats and so on. But a chain can be created as a brand, complete with training programmes and dance routines. The last 20 years has seen the growth of software products, websites, brands, processes, ideas — intangible products all.
The success of the economy therefore depends to a large extent on the growth of investment in intangible assets. And the authors are concerned that such investment isn’t growing fast enough. It’s their explanation of the Great Economic Disappointment.
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Their theory runs like this. Intangible assets are different to tangible ones. If you create a brilliant idea, or process, it’s a little like a 30-mile range lighthouse. It’s hard to stop everyone benefiting from your investment. Intangibles also rely a lot on creative synergies, people bringing together ideas or software to make something even better.
They can make a lot of money if you get it right, since an idea isn’t like a dumbbell or a mat. It doesn’t cost you much, or sometimes anything, for each new customer. But there is a downside. If your idea doesn’t work, you’ve nothing left. With a failed gym you can sell off the dumbbells. What do you do with a failed brand? Or dance routine?
This means our economic arrangements don’t necessarily suit our investment needs. Banks, for instance, are wary of lending to those investing in intangible assets, because an idea or a process isn’t collateral. This has got worse since the financial crisis, as banks have become more cautious. The authors suggest it helps explain why we expected growth to rebound after 2008 but it didn’t.
Intangibles, with their need for creative synergies, require people to live near each other and the authors do not believe that working from home during the pandemic has abolished this need. Yet our city planning laws help push up the costs, and poor transport links reduce the number of places where people can easily gather together.
Intangibles also require a fine balance of intellectual property laws, between those so weak they allow everyone to copy someone else’s investment, and those so strong they prevent synergies, the creative combining of ideas. The Ed Sheeran case in court right now concerns precisely this sort of balance. The authors cite the Tabarrok curve, developed by the economist Alex Tabarrok. At first, innovation grows with patent strength. Then it peaks, and stronger patents begin to reduce innovation growth. They think we are on the wrong side of this curve, with patents too strong.
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From all this, the authors provide an agenda rather different from the usual discussions between right and left on low growth. It’s less about tax and spend and more technical. Change tax regimes so there is more equity finance and less reliance on debt; change city planning rules; improve transport links; and cautiously reduce the strength of patents. I suspect a series of announcements like this might prove a Great Political Disappointment. But then again, it just might work.