will hutton - london child poverty conference
TRANSCRIPT
Plenary
Will HuttonChair, Big Innovation Centre,The Work Foundation
12/06/12
Remaking the Social Contract in the wake of the financial crisis
Will HuttonLondon child poverty conferenceDecember 10th
12/06/12
Good capitalism The future is by definition unknowable. No innovator or entrepreneur can be
sure that a good idea will become a commercial reality – or that wider framework in which business is being done is stable. This is “Knightian risk” – risk that cannot be reduced to mathematical probabilities
Consequently there is necessarily unpredictable change in business models – risk but also opportunity
To lift innovation and investment to optimal levels requires mechanisms for companies to lay off and socialise risk – and address co-ordination failures which are embedded in the market economy
Hence the importance of the ecosystem that underpins capitalism – co-created between public and private, a means of underwriting risk but which needs an attendant value system: equity
Risk must be socialised for ordinary citiizens – the social contract
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The rise of bad capitalism….
Size of UK banking sector
0
100
200
300
400
500
600
1880 1904 1928 1952 1976 2000
Banking sector assets (per cent of GDP)
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Long-run equity capital ratios
0
5
10
15
20
25
30
1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Per cent
United Kingdom
United States
Source: US – Berger, A., Herring, R. and Szegö, G. (1995). UK – Sheppard, D.K. (1971), British Bankers’ Association, published accounts and Bank calculations.
12/06/12
15
20
25
30
35
40
00 01 02 03 04 05 06 07
Total trading assets as a proportion of total assets
Total loans to customers as a proportion of total assets
Per cent
Growth in trading book assets
JPMHSBCBofA
Citi
Credit Suisse
DeutscheUBS
BNP
SocGenBarclays
RBS
0
10
20
30
40
50
60
70
80
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8Trading assets/total assets
Fina
ncia
l lev
erag
e
Line of best fit
Global banks’ trading portfolios and financial leverage
Trading books and leverage balloon
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All to create this model… Major UK banks’ aggregate balance sheet as at
2010
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Return on equity in finance rose…
-10
-5
0
5
10
15
20
25
30
35
1921 1929 1937 1945 1953 1961 1969 1977 1985 1993 2001
μ = 7.0σ = 2.0
μ = 21.0σ = 9.0
Per cent
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And remuneration in financial
services boomed…
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A brave new world: The profile of recession and recovery
Source: NIESR http://www.niesr.ac.uk/
12/06/12
Sterling’s Actual Exchange rate ( v euro) compared to
equilibrium
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Actual
Equilibrium
12/06/12
A brave new world: A strategic trade gapComponents of the Current Account (% GDP) base
projection
Source:Centre for Business Research, University of Cambridge
12/06/12© The Work Foundation.
The West’s Dilemma - Bank assets as share of GDP
12/06/12
A brave new world: A long deleveraging process
Source: Haver Analytics; Bank for International Settlements; national central banks; McKinsey Global Institute
12/06/12
Good capitalism as the way forward Unproductive entrepreneurship v productive entrepreneurshipIncumbent v insurgents“Ownership tourism” v committed ownersDarwinian v CollaborativeFinance sole priority v business purpose and balanced score-cardTransactional workplace relations v hi trust workplacesRent-seeking managements v proportionally rewarded managersSocial contract as safety net v social contract as social insuranceClosed access v open accessOpaque v transparencyState capture/minimal state v private and public as co-dependent domainsPolitical capture v democratic processKey value system – fairness, due desert and proportionality
12/06/12
The times they are a’changingBiggest Bank of England balance sheet ever – including war-time
Intellectual climate changing - Governor of Bank of England: lets get flexible about inflation targets and defer lowering public debt/GDP
Professor Michael Woodford at Jackson Hole. Lets drop inflation targets and adopt targets for Money GDP
The IMF World Economic Outlook. A 1 per cent cut in budget deficit can lead to a 1.7 per cent loss of output. Keynes was right – too much austerity too soon is self- defeating.
Antony Jenkins, Elizabeth Murdoch, Jack Welch, Richard Lambert, Alan Greenspan.
Desperation of Coalition government – funding for lending, Business bank, Catapaults, infrastructure guarantees. Like the 1930s – reality is breaking in.
Concern about social mobility
Decline of Tea Party Republicanism and Thatcherite Conservatism
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Knowledge based industries defined by the OECD
Note: manufacturing classified by R&D intensity; services classified by ICT use and employment of graduates. Recreational and cultural industries
recognised as knowledge based by EU but not OECD, and includes libraries and museums.
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Knowledge economy and the 1980s recession and recovery
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
ind
ex 1
980
=10
0
KE market based KE public based Manufacturing Other Services
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Knowledge economy and the 1990s recession and recovery
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
ind
ex 1
990=
100
KE market based KE public based Manufacturing Other Services
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Knowledge based sectors leading the entrepreneurial revival
Note: all figures employees, excluding health employment. Knowledge service industries are OECD definition and include business, high tech, and financial services. Other sectors include transport, retailing, hospitality and
other services delivered by non-public organisations. SMEs defined as all with less than 250 employees.
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A short history of general purpose technologies (GPTs)…
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Revolutions of ‘general purpose
technologies’Different types of society and different historical circumstances have been transformed by groups of technologies. Archaeologists have recognised the crucial importance of ‘key factors’ in economic development in their classification of the ‘stone age’, ‘bronze age’ and ‘Iron age’
1784-1845: Early mechanisation and water power – carried by textiles and cotton industries
1845-1900: Steam power and steel – carried by railway expansion and heavy engineering
1900-1950: Electrical engineering and chemistry – carried by rise of electric / chemical industries
1950-1990: Petrochemicals and oil – carried by automotive and the rise of aviation
1990-2020: The digital economy – carried by new media, knowledge intensive and manu. services
2020-2040: Health economics, life sciences, low-carbon economy
The EconomistThe Economist's special survey "Innovation in Industry“ (20 February 1999) 's special survey "Innovation in Industry“ (20 February 1999)
12/06/12
Twenty-first century prospects ? Grand ChallengesThe mobile phone
NanotechnologiesEnergy from fusionAdvanced materialsCarbon sequestrationSpaceManage the nitrogen cycleWaterHealth informatics Durable customised infrastructureCustomised medicineThe brainCyberspace securityEnhance virtual realityPersonalised learning
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Innovation as the product of a system
Source: NESTA
12/06/12
The Ecosystem Approach
Division of Labour in reality is necessarily structured through organisations and institutions
All confront risk which needs to be at the very least to be mitigated – and at system level risk has to be socialised
There is thus co-dependence and co-creation of business models both within the private sector and between public and private sectors.
Price mechanism cannot perform the co-ordination of relationships, information and idea flows – blockages, breakdowns and coordination failure thus the norm not a default possibility.
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The Ecosystem Approach ( cont )
Public sector is socialiser of risk and designer/custodian of ecosystem within private sector – and the public sector component
The system and actors have to be “open” to maximise interative flows of ideas/relationships/information – hence open innovation and absorptive capacity of firms crucial
Strategic questions for firms: What business am I in? What is the supportive ecosystem? How to promote open innovation? How to build my absorptive capacity?
Strategic question for governments: How to create framework that allows government to assess and evaluate private sector risk? Is the national and sectoral ecosystem fit for purpose? How can government be an open innovation hub itself?
What is social eco-system?
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Universities as interactive
partnersIntermediates
Innovative Sectors and Markets
Financial services
Manu-services
FMCG
Digital and creative
University Consortium (8 Russell Group
members)
The Enterprising StateBIC as a Microcosm of the UK
Innovation Ecosystem
Professional services
Energy Pharma
Private trusts:•Lord Sainsbury
•Jon Moulton
12/06/12
New Flexibilities
5/6 transformational GPTs likely during 50 year working life of a 2012 graduate
Open innovation business models new template – joint ventures, openness,
porousness ( Unilever and “ open innovation orchestrators”)
Average life expectancy of firms around 10 years
All skills and professions likely to become obsolescent
Need to commit to constant reinvention
Firms displacing responsibility for health, pensions and risk on to individuals
Good capitalism, commitment to innovation, new social contract and vibrant
civil society will underpin 21st century growth
12/06/12
What to do – macro economic policy
Mitigation of unknowable risks and consequential vicious/virtuous circles in credit and labour markets heart of Keynesian economics
Integration of fiscal, monetary and financial policyAbandon public debt/GDP ratio target and replace with debt service ratioRewrite Bank of England mandate and replace inflation target with money GDP
targetRe-orient liquidity and capital rules to support contra-cyclical lendingCreate scope for discretionary fiscal policy within ten year deficit reduction planReinstate capital spending cuts, in particular on infrastructure, housing and
innovationUse public guarantees and capital to de-risk new bank lending
12/06/12
What to do – ownership, investment and innovation ecosystem
Risk mitigation to bring about more optimal levels of innovation and investment
Credit flows - indemnify new SME lending, Infrastructure bank
Innovation – Catapault network plus Technology Strategy Board. Grants and Public R and D spend count!
Ownership engagement and stewardship - tackle high discount rates, myopia and disengagement
Ownership revolution: re-conceive the idea of the company. Business purpose/fiduciary duties/voting strength rises the longer shares held
Support with new 3is and level playing field between debt and equity ( Mirrlees report )
Develop institutional network for British Mittelstand
Proportionate rewards
12/06/12
Potential sectors
“ Manuservices” in aerospace, pharmaceuticals, defence, high tech
engineering( cars, chemicals)
Low carbon economy – energy production, energy efficiency, green
manufacturing plus associated services
Life sciences
Creative and cultural industries – design, electronic/digital media and
publishing, games
High tech and business services – computer, business to business services
Caring and servicing the newly young old
12/06/12
What to do – a 21st century social contract
Socialising risk – but through intermediate institutionsNew trade unions – as employment shock absorbers and enterprise partnersSocial insurance to re-legitimise social security. Payments more directly linked
to benefits Flexi-security – a new workplace bargain. Acceptance of less job security in
exchange for more training plus lifelong learning, higher transitional but unconditional unemployment benefit and state assumes employer of last resort responsibilities ( eg job guarantee)
Housing, housing, housing – new build, mixed housing and revitalisation of housing associations
Education – British variant of Berufschule/apprenticeship? Lower tuition fees?
12/06/12
Internationally …
Support euro survival – banking union, financial transactions tax etc
Peg pound to euroGlobal abandonment of inflation targetsGlobal implementation of Vickers Keep trade open – protect four pillars of EU including free
movement of peoplesDon’t be frightened of the BRICsSocial contracts are not burdens but enablersOur open society is in peril. It must be argued for and protected!
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Appendices and spare slides
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Potential sectors
“ Manuservices” in aerospace, pharmaceuticals, defence, high tech
engineering( cars, chemicals)
Low carbon economy – energy production, energy efficiency, green
manufacturing plus associated services
Life sciences
Creative and cultural industries – design, electronic/digital media and
publishing, games
High tech and business services – computer, business to business services
Caring and servicing the newly young old
12/06/12
New Flexibilities
5/6 transformational GPTs likely during 50 year working life of a 2012 graduate
Open innovation business models new template – joint ventures, openness,
porousness ( Unilever and “ open innovation orchestrators”)
Average life expectancy of firms around 10 years
All skills and professions likely to become obsolescent
Need to commit to constant reinvention
Firms displacing responsibility for health, pensions and risk on to individuals
Good capitalism, commitment to innovation, new social contract and vibrant
civil society will underpin 21st century growth
12/06/12
Universities as interactive
partnersIntermediates
Innovative Sectors and Markets
Financial services
Manu-services
FMCG
Digital and creative
University Consortium (8 Russell Group
members)
The Enterprising StateBIC as a Microcosm of the UK
Innovation Ecosystem
Professional services
Energy Pharma
Private trusts:•Lord Sainsbury
•Jon Moulton
12/06/12
Scaling up the ecosystem approach:
Common methodologies, theories, and diagnostic tools.
- Integrate open innovation approaches and distributed risk
management. Research themes: • Innovative markets, places and networks
• Innovation friendly financial system
• University-business linkages
• Skills for innovation
• Enterprising state and public action
Competence blocs: • Big data and digital
economy
• Bio-Med, life science and health care
• Low carbon, green tech and sustainability
12/06/12
Partner investment for working together: An open innovation hub par excellence
Not just money…Partners open their doors to share
people and talentdataideas
Research, practice, trial testing, pilot companies, business and policy forums, and more….
Knowledge transfer between partners
Share good practice Solve problems which create systemic barriers to growth: Collective action is needed
12/06/12
Where have the jobs been coming from over the last 30 years?
Manufacturing – minus 3.8 million
Health and Social care – 1.9 million
Professional, Scientific and Technical – 1.5 million
Administration and Business Services – 1.3 million
Education – 1.1 million
12/06/12
And don’t forget geography
20%
40%
60%
80%
100%
120%
140%
160%
10% 15% 20% 25% 30% 35% 40%
Proportion of employment in Private Sector Knowledge Intensive Industries (2008)
Tota
l G
VA
gro
wth
19
95
-20
08
London
Milton Keynes
Edinburgh
Aldershot
Swindon
Derby
CambridgeReading
Stoke-on-TrentBlackpool
Barnsley
Birkenhead
Mansfield
R2 = 0.402