An economic strategy for New Zealand

New Zealand has many conditions in place to support increased per capita income and living standards.  These include inclusive, high-integrity government, quality institutions, macroeconomic stability and microeconomic flexibility.

However, productivity is stagnating.  We are struggling to address rising superannuation and health costs, let alone close the per capita income gap with better-performing economies.  We are poorly positioned to deal with threats.  These include breakdowns in international trade and biosecurity.  The primary industries are vulnerable to disruptive offshore innovation.  There are risks that our access to the Australian labour market will be eroded.

New Zealand’s relative decline is associated with its weak tradeable sector and its persistent high real exchange rate.  Inwards migration has put pressure on infrastructure and housing affordability.  New Zealand suffers from massive capital misallocations that inflate existing farm and housing prices.  This leads to indebtedness (largely to overseas banks), and barriers to entry.  It starves innovative businesses of investment capital.

New Zealand’s isolation limits trade connections and slows technology transfer.  However, it has some advantages.  We have low defence expenditure and high biosecurity.  We are better placed than Western European countries to service Asia-Pacific markets.   Shipping costs to export markets are often lower than land transport costs for continental countries.   IT is making knowledge flows faster and cheaper.  However, unlike Singapore and China we lack an economic strategy.

A strategy is needed because hands-off market liberalism from the mid-1980s has failed to arrest our relative decline.  Our economy has no growth trajectory that can meet future health and social security expectations, let alone manage major shocks.

New Zealand’s economic strategy should aim to recapture our past position near the top of the world’s per capita income ratings.  This is what underpinned our lead in living standards, social cohesion and human rights.

Internationally, productivity gains and returns on capital have been disproportionately concentrated in dominant frontier firms[1].  Productivity growth and returns on capital have been decoupled from wage growth, exacerbating inequality.

New Zealand’s economic strategy needs a supporting narrative based on investing in people, inclusive growth, sustainability, and concern for others.  New Zealand colonists rejected the British class system and believed in fairness, equalitarianism and self-reliance.  In Maori culture, Manaakitanga involves caring for others and whanaungatanga supports the importance of relationships.  Kaitiakitanga values environmental stewardship, and Te pae tawhiti supports a long-term intergenerational view.

We must also hold to an even more important narrative.  We are citizens of the world, especially the modernist, democratic world.  While our capital and ownership must be more local, ideas and technologies are increasingly international, and we must meet our global obligations.

An economic strategy for New Zealand would involve:

Lifting domestic savings rates

Lifting domestic savings rates will deepen and diversify New Zealand’s capital markets, and over time see more financial sector profits retained in New Zealand.  It will reduce the real exchange rate, and lift the capital to labour ratio.  It will make exporters more competitive, improve labour productivity, and foster innovation, entrepreneurship and economic diversification.

Lifting domestic savings rates means addressing issues such as retirement provisions and tax policy.  New Zealand superannuation is equitable, efficient and gives people good incentives to work beyond retirement age.  However, pay as you go (PAYGO) schemes do not contribute to capital market development and productive sector growth.  Save as you go (SAYGO) schemes such as the New Zealand Superannuation Fund (NZSF) and Kiwisaver develop capital markets and expand productive capacity.

New Zealand is unusual among OECD countries in lacking mandatory requirements for personal retirement savings.    Compulsory saving can reduce other savings forms, and squeeze consumption.  However, increased savings flowing into productive investment makes higher consumption possible in later time periods.

Compulsory savings for superannuation could be reintroduced[2].   However, this is politically challenging, and can increase complexity and transaction costs.  It raises equity issues.  Domestic savings can be increased through other interventions.  These include lifting contributions to the NZSF, making Kiwisaver mandatory, and other initiatives akin to Whai Rawa and Individual Development accounts – see: https://en.wikipedia.org/wiki/Individual_Development_Account

Tax on interest should not discourage savings in, for example, retirement schemes.  However, tax or other subsidies for private saving should not lead to government dissaving.

Shifting domestic savings and investment into the productive sector

Higher savings will lift growth and per capita incomes when invested in expanding productive capacity.  Tax and business regulatory policy needs to support this.

We need to ensure that regulatory settings and incentives lead to a greater share of increased savings being invested in the tradeable sector and expanding productive capacity, rather than inflating fixed asset prices.

Tax policy, financial market and business regulatory settings need to support “retain and invest” rather than shareholder maximisation business models – see: https://winsleys.wordpress.com/2017/01/15/what-caused-the-mess-we-are-in-and-how-do-we-get-out-of-it/

Savings rates and business tax policy need to encourage businesses to apply more capital to labour. Capital needs to be in productive capabilities, and be patient.  What is scarce in New Zealand is not money, but equity in productive, tradeable sector businesses with long-term, innovation-focused strategies.

Gearing social expenditure to support economic development

Social policy has three main pillars.  These are:

  • Services that government can deliver more efficiently and equitably than the private sector (much health, education and superannuation provision, and ACC)
  • Targeted interventions to address at risk populations, such as vulnerable children
  • Social transfers to keep people out of poverty, and to act as fiscal stabilisers during recessions (unemployment benefits, support for low income families)

Social policy dominates government spending.  Even incremental efficiency improvements have massive economic benefits.  Social investment to provide security and well-being can be geared to economic development in a mutually reinforcing way.

The best social welfare is a high-performing economy that generates rewarding jobs, with social welfare as a backstop.  Comprehensive social security systems in Scandinavian countries encourage rather than stifle risk-taking.  Entrepreneurs know that if they fail they can recover rather than be left destitute.

However, some social welfare expenditure that subsidises consumption and keeps people out of absolute poverty can entrench them in relative poverty, and the passivity this gives rise to.  Some social welfare transfers subsidise businesses that should be paying a living wage.

Social expenditure should build people’s human capital capabilities, and build assets for them, allowing them to escape from poverty.

Singapore avoided a welfare-dependent underclass from emerging.  It did so through investing in individual and family education, financial assets, and home ownership rather than subsidising consumption.  New Zealand should develop similar approaches.

Individual Development Accounts (IDAs) could be established to invest in education, net worth and productive asset creation.  These could involve start-up government contributions beginning from birth or early childhood.  They would be open to contributions from different sources, with withdrawals restricted to capability development purposes.   For example, some part of child poverty-related financial transfers could be invested in IDAs.  Grandparent, wider whanau, iwi and church contributions could be made with confidence they will be invested in children’s interests and not be diverted to “other purposes”.

IDA accounts could be drawn on at particular lifecycle stages, such as early childhood, tertiary education, and for financial and business asset creation.  Aggregate savings from these accounts would boost economy-wide growth, while building individual wealth-creating capabilities.

New Zealand should continue a “social investment” approach to optimise expenditure targeting, taking account of all direct and indirect benefits and costs.  This can complement capability development.

Social investment allows targeting investment to key lifecycle stages, and to address specific risks or opportunities.  It could for example target investment more heavily at the earliest childhood development stages, building capability from then on, and delivering both wealth creation and avoided social cost dividends.  This can lift the productivity of New Zealand’s social expenditure, giving better outcomes for people at lower cost to all parties.

New Zealand can lead the world in social investment.

Tax reform

New Zealand has a well-designed, broad-based and low transaction cost tax system.   GST is comprehensive, and minimises exemption-based transaction costs.  Simplicity in tax policy and in regulatory design makes it difficult for the powerful to game.

Tax policy should encourage savings and investment in productive capacity.  Capital gains taxation would help shift investment into productivity and wealth creation.

Tax policy needs to keep up with how technological change erodes tax bases and creates monopoly rents.  For example, some global IT companies and private equity investors have exercised monopolistic powers through their scale and network barriers to entry, more so than intellectual property rights.  This has exacerbated inequality.  This might be addressed through tax and competition policy interventions.

Tax reform can focus on changing behaviour more so than raising revenue.  We should increase taxes on “bads” (for example, pollution, tobacco and sugar drinks) and reduce taxes on “goods”, such as interest from savings.

End corporate welfare and incumbent coercive power

Businesses should exist to serve their customers, and to allow their staff, owners and communities to flourish.  CEO rewards should be based on productivity, not bargaining power.  Business regulation must not protect incumbents or discourage new business entries and competition.  It should favour value creation rather than value extraction.

Immigration policy and labour market regulation should avoid a “race to the bottom”.  Migration should not be used to subsidise businesses through, for example, putting downward pressure on wages, or lifting demand for housing at times of housing shortages.

Migration should grow our intellectual, creative and entrepreneurial capabilities, our links to the world, and shift our productivity possibility frontiers outwards.  It should bring diversity in forms that meld with our democratic and modernist values.  We should ensure we are a good global citizen through refugee intakes.

Weakening of trade union bargaining power in the 1990s reduced incentives for businesses to invest in training and in labour-augmenting and labour-displacing technology.  It is likely to have harmed both worker interests and long-run business productivity.

Labour market regulation should balance business flexibility with a more stable work environment that encourages longer-term investments such as apprenticeship and other training, and which helps workers plan their lives.  Done well, this can underpin cooperative and “positive sum game” approaches to labour relations.  Employees then see the need for businesses to grow through dynamic responses to markets, underpinned by stable and cumulative approaches to workforce development and human capital creation.

Businesses do not have a monopoly on incumbent coercive power and impeding opportunities for others.  Restrictive trade union practices can impede innovation and productivity.   Workplace bullying by peers as well as bosses causes misery and stifles new perspectives.   “Nimbyism” impedes new housing developments.

Innovation-driven industrial development

Government should champion innovation-driven industrial development see: https://winsleys.wordpress.com/2017/02/15/how-innovation-can-fulfil-our-future/

Innovation and business development policy can include government equity investment and other “hands-on” policies.   While honouring international agreements, New Zealand can actively use innovation-related procurement policy to foster industry development.

New Zealand needs to be linked to and participating in international basic research, and have the capacity to adopt, extend and apply leading-edge science and technology.  Universities need the freedom to pursue undirected basic research.  However, we need more challenge-based research and DARPA model approaches to create technological solutions and “new economic space”.

We should set technological challenge targets, and marshal public and private capabilities to achieve them.   This will create technology to grow New Zealand businesses.  Illustrative examples might include electrical engineering innovation[3], for example to manage renewable generation intermittency, and for primary industry vehicles and machinery.  Remote monitoring technology can enhance environmental and natural resources management and EEZ surveillance.  Precision agriculture can optimise nutrient management.  Automation of dangerous and debilitating work can lift productivity and enhance worker safety and job satisfaction.

Business-specific technology adoption and application must be market-driven.  However, Government has a key role in strategic research going beyond business time horizons, and focused on opportunities for New Zealand.  Its research investment needs to be enhanced, and focused on specific technological platforms that multiple companies can draw on.

Government should not provide corporate welfare through non-competitive business grants.  It should take stakes in the technologies it helps fund, and leverage returns from this taxpayer investment.

Science-driven and “high tech” businesses can be powerful enablers.  However, they generate few jobs directly.  Innovation-based growth must be leveraged over broad product and service sector opportunities.  Some of these will be core New Zealand industries, others will be tightly-focused microcosms of future mass markets.

New Zealand-specific strategies are needed.  These could focus on:

Leveraging off the primary industries

The primary industries are a growth platform.  New Zealand has primary industry scale, and many business models to build from.  Leading-edge technology from other industries can be applied in primary sector applications.   Landcorp can play a role in trialling new technologies at scale, and diffusing what is learnt more widely.

The primary industries are also a base from which to grow manufacturing, engineering, biotechnology (including pharmaceuticals), IT, energy and other industries.

Some growth can come from businesses that cluster around the primary sector.  Examples include agricultural equipment and machinery, grading, product testing and processing plant, IT, and plant and animal genetics products and services.  Other businesses can begin in the primary industries, and from this platform diversify into different markets.  This can come from a “migration of market structure” business journey.

Using sustainable development as an economic development strategy

New Zealand’s low per capita population to natural resources ratio is a key to our living standards.    Most of our land is mountainous or has poor soil, and we should minimise urban encroachment on our best agricultural land.   We already harness most of our low cost hydroelectricity potential, and are up against water use, biodiversity and sustainable fisheries limitations.

However, natural resources are not entirely inelastic.   They can be expanded (for example through forestry plantings), more widely harnessed (wind and geothermal power) and used more efficiently (nutrient management).

Imagine a thought experiment in which someone invented “an imaginary country” designed to survive and prosper through climate change and sustainability challenges.  This country would have a long coast to land area ratio, and be located in the “roaring forties” to maximise wind power.  It would have good farming and forestry resources for sustainable food, fibre and energy production.  It would be mountainous to harvest rain, and to create hydro-electricity potential.  Its volcanism would sustain soil fertility over geological time, and underpin geothermal power.  It would be located in a large ocean away from the poles, to reduce climate change extremes.

New Zealand is well positioned to move to sustainable resource use and break dependence on fossil fuels and other non-renewables.  In doing so it would reduce import costs, create competitive technology-based businesses, and address climate change and other environmental challenges.

We must set high ambitions and fulfil them.  Our renewable electricity resources can underpin mass electric vehicle adoption.  Farm and forestry businesses can contribute to distributed generation.

Healthy, sustainable housing is a foundation for families and communities.  It can also generate electricity and enhance grid security.  Government-led housing, construction and infrastructure development can drive technological innovation, and translate this into business growth. We can be the world leader in multi-storey, highly engineered wood-based buildings, and move our commodity timber into high-end applications.

Growing and retaining knowledge-intensive manufacturing and services (KIMS) businesses

New Zealand has birthed many knowledge-intensive manufacturing and services (KIMS) businesses.  They are often private or unlisted public companies.  They typically focus on industry rather than consumer good markets.  They compete in technically challenging, small to medium scale niche markets. They have economies of scope more so than scale.  Their competitive strategies include customisation, flexible production runs and customer responsiveness.

New Zealand fails to grow and retain the benefits of KIMS businesses.   Some of them move offshore, for example Glaxo and many IT companies.  Others are bought out by offshore competitors and turned into “branch offices” or import distribution arms.  Examples include Interlock and Navman, and more recently Sistema, Compac Sorting Equipment and PowerbyProxi.

Sales of businesses to offshore investors can make sense.  Some such businesses are footloose, with little to anchor them in New Zealand.   Proceeds from offshore sales can be reinvested in other New Zealand technology-based businesses, supporting “serial entrepreneurship”.

However, New Zealand loses when it fails to grow many KIMS businesses into globally significant players and anchor them in New Zealand.  To do so needs capital investment of a scale and long-termism that local private investors struggle with.

There is nothing autocratic or self-defeating in governments retaining high-productivity businesses within their borders.  The Lower Saxony State owns 12.7% of Volkswagen, giving it 20% of the voting rights in the world’s seventh biggest company.  The French government intervened to prevent foreign buyout of Danone.  Nestles’ headquarters, and about one third of its shareholding are anchored in Switzerland.  The United States masquerades as a free market economy while protecting its own strategic businesses.

A publicly-supported “growth and anchoring” fund could be established to take cornerstone shareholdings in KIMS businesses.  The intent would be to help these businesses achieve international scale and long-term growth horizons.  In return, these businesses would have to anchor core activities in New Zealand, even though much of their marketing, servicing and manufacturing might be offshore.   These core activities might include R&D, design, business strategy and financial management.

Such a fund could be administered via the NZSF, or some other stable, long-term investment vehicle.  KIMS businesses with this government stake might also attract stable investment from other New Zealand superannuation funds, iwi and other long-term investors.

Returns from NZSF and ACC investment compare favourably with private investors.  They have the scale and patience that New Zealand private funds lack. New Zealand should use long-term state investment to substitute for the private investment it lacks.

Concluding comment

New Zealand cannot prosper in the long-term through dependence on market-based resource allocation, with government’s role limited to setting the rules.  The government must be a prominent actor on the economic development stage, without at the same time stifling or crowding out the other players.

Addressing capital misallocations and low domestic savings rates are the biggest challenges government needs to address.  Without this, “industry policy” will lack traction and wider economic impact.

The government must align savings, tax and business regulatory policy and social investment to support inclusive economic growth.  It must also focus on time horizons longer than those of individuals and businesses, and on opportunities for future generations.

 

[1] This might partly explain why low interest rates and high business cash surpluses have not translated into higher demand, business investment response to service it, and higher employment and wage levels.

[2] This was introduced by the 1972-75 Labour Government.

[3] New Zealand has strengths in wireless power, power conversion and superconductivity science.  A New Zealand engineer, Ian Wright co-founded Tesla.  However, we have not fully leveraged these capabilities and retained benefits in New Zealand.

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Russian, Chinese and American economic narratives

Some convince with numbers, most with stories.  When stories turn into national narratives, history is made.

Narratives turn complexity into simplicity, and give identity and purpose.  Individuals can be conflated into a nation state akin to a single person: “China will”, “Iran is…”

Even preposterous narratives convince if they feel right.  They can motivate people beyond their individual limits, for good or ill.  “Good” narratives can focus on a country’s living standards and global citizenship. “Bad” narratives can strip people of their individuality, create double standards of morality between in and out-groups, and encourage win: lose competition between countries.

Russia, China and America all have greatness narratives.

Russia is crumbling internally.  It has high morbidity, low fertility and risks population collapse.  It is deindustrialising.  It depends for exports on military and space technology and natural resources, not complex civil market products.   Elites control its wealth.

Russia’s malaise results from its lack of market memory and its autocratic history.   Market exchange requires respect for customers as individuals – economic autocracy does not.

Russia’s inability to develop a market economy and supporting institutions can be traced to Ivan the Terrible’s destruction of the boyar class.  Russia never developed a strong middle class that demanded property rights and the civil and political rights arising from them.  There was no Russian Magna Carta.

The 1917 Bolshevik revolution swept away Tsarist autocracy, however Russia did not have deep enough market roots for a modern economy to build from.  Coercion rather than market forces drove economic development.

Some Bolshevik leaders such as Bukharin, Rykov and Tomsky favoured a New Economic Policy based on market liberalism.  Bukharin was a keen botanist, an accomplished poet, and had deep cultural interests.  He split with Stalin in 1929 over collectivisation, fearing it would lead to military-feudal exploitation.  His advice to peasants was” “enrich yourselves”.  His thinking on “market socialism” was influential among Chinese communists, and helped lay the groundwork for Deng Xiao Ping’s reforms.

Placed on trial for opposing Stalinism, Bukharin pleaded guilty to the “sum total” of crimes in the abstract, but denied specific crimes against particular individuals.

From the late 1920s, Stalin destroyed the kulaks, using famine as a weapon.  In doing so he crippled Soviet agriculture, despite its huge resource base and economic potential.  This is notable, because autocratic narratives impoverish even countries with huge resource advantages.  Mugabe created a famine in the bread basket of Africa!  Chavez created a petrol shortage in Venezuela, a country with the world’s higher per capita oil endowments!  Such tragedies occurred because populist and autocratic narratives replaced individualism and market exchange.

Putin has sought to recreate national pride through an imperial narrative expressing power over non-Russians.  He has courted Orthodox Church spiritual support, Solzhenitsyn’s cultural validation and Great Patriotic War history to support his narrative.  He shows no interest in economic advancement and lifting Russia’s own population out of degradation.

Arguably, China of all countries has had the longest historical periods in which it was the world technological leader with the highest per capita income and the most stable continuous polity.  Its market memory stretches back for centuries.  Much was suppressed by Mao Zedong’s communist government, but remained latent.  Even under Mao, Zhou en-lai drew on China’s cultural and market heritage to moderate communist excesses.

Zhou served as Premier from 1949 to 1976.  He acquired a life-long passion for Chinese literature and opera from his adoptive mother.  He supported liberal reforms that he saw beneficial for China.  He prevented Beijing from being renamed “East Is Red City”, and the Chinese guardian lions in front of Tiananmen Square from being replaced with statues of Mao… The 1966 Cultural Revolution destroyed cultural artefacts, but failed to destroy cultural narrative.

The Chinese people had subtle ways of signalling their views, even with limited civil rights.  Zhou’s death in January 1976 triggered nationwide grief for a leader seen as exemplifying cultural continuity, economic hope and supporting narrative.  The April 5 1976 Tiananmen Square incident saw about two million Chinese commemorate Zhou’s death with flowers, poems and prayers, rather than communist slogans.

Deng Xiaoping built on Zhou’s liberalising tendencies.  Though purged twice during the Cultural Revolution, he led China from 1978 to 1989 and liberalised China’s economy.  Zhou and Deng were Chinese patriots who used central planning as tools for China’s development, not for ideological ends.

Xi Jinping’s father, Xi Zhongxun was known for moderation, empiricism rather than ideology, empathy with cultural minorities, and economic pragmatism.  He influenced Deng Xiaoping’s early experiments with market liberalisation, including the creation of special economic zones.

Key Chinese leaders learnt from other countries, and integrated that thinking into a Chinese cultural and economic context.   Xi Jinping was profoundly influenced by his 1985 visit to America to study agriculture, and to stay for a time with an American family.

China’s economic growth and dynamism comes from a powerful idea – China has been great, and will be great again.  Chinese leaders and people, including minorities within China share this narrative.  It has deep cultural and intellectual as well as economic roots, and connects to individual motivations.  Xi wants young people to “dare to dream, work assiduously to fulfil the dreams and contribute to the revitalisation of the China Dream”.

China liberalised its economy through learning by doing and thinking in time, not rigid ideology.  Chinese leaders characterised the process as crossing a river and “feeling for the slippery underwater stones”.  China opened the windows to let fresh market air in, but “kept the fly screens up” to avoid such destabilising forces as international financial crises.  It adopted a “bird-cage” strategy, liberalising within a framework based on China’s wider interests, and including a core role for the state.

China’s bureaucracy is meritocratic.  China has been innovative in its state-owned enterprise sector, in local government and private sector joint ventures, and in using state power to adopt and extend international technology.  Open debate and pluralism is welcome in China, but attacks on the Communist Party’s political legitimacy are not.

America has led the world scientifically, technologically and economically for the last century. It has unchallenged military capability.  America is still great, and does not have to revive an imaginary “lost greatness”.  However, individuals in Rust Belt zones and in low socio-economic groups do not feel great when they compare themselves with others, and benchmark themselves against past American “high expectations” narratives.

America’s current turmoil reflects conflicts between narratives.

One narrative is America as a melting pot where anyone can aspire to go from rags to riches, from log house to White House, or college drop-out to unicorn start-up entrepreneur.  America is an endless frontier of unbounded optimism, a City on the Hill.  Dreams come true if you want them to.

A Charles Koch variant is that America is the land of free business entrepreneurship involving a profit and loss system which creates opportunities for most, even though gains are unevenly distributed.  It concedes that some lose out, in relative if not in absolute terms.

This narrative is intellectually and socially libertarian.  Broadly, it resonates with the thinking of the late Milton Friedman, and of Tyler Cowen and Deirdre McCloskey.  This narrative supports free trade, and despises corporate welfare and vested interests (including coercive forms of trade unionism) that impede opportunities for others.  It is consistent with strong competition policy, however government’s role focuses largely on public goods rather than economic leadership.

This narrative supports helping the downtrodden through second chances, whether through prison reform or new entrepreneurial opportunities and the jobs and wealth coming from them.  It is humble enough to concede that the American free enterprise system failed indigenous Americans and Afro-Americans, but is deeply sceptical of stronger central government.

The American “liberal narrative” is a variant of European social democracy.  Its intellectual leaders include Paul Krugman and Joseph Stiglitz.  It supports a market system, but with a more prominent role for, and confidence in government.  It aims to replicate in the American economy the best features of the German and Scandinavian market systems, with their risk-buffering macro-economic and social policy devices.

Another American narrative thread is state and individual rights to counter perceived federal government over-reach. Its origin myths include the American War of Independence and the Constitution (selectively interpreted).  Its historical manifestations include attempted secession of the southern states during the Civil War, and the later overhang of Jim Crow policies.  Enduring cultural expressions include Gun Rights and the Tea Party.  Other American narratives are even more inchoate, or so divisive they speak only in code…

Donald Trump’s rise gives insights into facile, plausible narratives.  Such narratives typically have a core of truth. They are most powerful when their core of truth has been suppressed by those in elitist positions.  Stating truths that others have suppressed legitimatises a mass of subsequent falsehood.

President Trump is a master-singer of subtly false narratives, credentialed with uncomfortable truths.  Iraq was not developing nuclear weapons.  The Iraq invasion and its aftermath created a power vacuum ISIS filled.  America’s infrastructure is degraded.  That someone states these truths means false contentions about climate change and free trade are believed.

The difficulty with the Trump narrative is the inherent conflicts woven into its fabric.  There is no affinity of interest between the far right Republican establishment and the embittered Rust Belt.  The Trump narrative is supported by millions of American voters who would lose badly if the Affordable Care Act was repealed, or taxes on the rich reduced in a way that shifts the long-term burden to blue collar workers.  Trump’s trade, defence and climate change policies will damage America’s industrial base, erode its security, and forego massive opportunities from sustainable energy technologies.

However, damaging narratives such as the Trumperian patchwork can be challenged and co-opted.  Attitudes to single sex marriage improved when they were personalised as being about love, not abstract human rights.  American Muslim women can wear stars and stripes headdresses…

America has deep local democracy, intellectual pluralism, and effective constitutional checks and balances.  The tension between America’s federal and state government systems impedes central action.  However it also allows real-time experimentation between competing state policies.

America will meander before it develops a narrative it can rally around.  This narrative will have threads from Lincoln, Martin Luther King, Obama, and from market liberalism.  When it comes together, America will feel as well as be great.

However, true greatness for America, China, Russia and other big powers depends on their international as well as domestic contributions. This means shared narratives relating to global environmental, health, communication and security public goods, and to international rules fostering trade and international law.  Only then will these powers be authentically great; as they see themselves, and others see them.

 

 

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Kinship, modernism and Donald Trump

Kinship, modernism and Donald Trump

Kinship-based societies are based around extended family relationships.  They transmit learning and beliefs vertically, from elders to children.  They may limit women’s rights, and have larger families.  These societies meet kin obligations, yet may permit cheating of out-group members and mandate tax evasion and benefit fraud.

Kinship-based societies dominate in tribal regions, and can be powerful in non-tribal ones. Some scholars such as Edward Banfield attributed Southern Italy’s underdevelopment to “amoral familism” that focuses narrowly on family interests, and assumes others do the same.  This leaves little space for social capital and non-kin collective projects.

Modernist societies value individual advancement and meritocracy.  They are typically urbanised, engaged with international trade, and they learn horizontally from non-kin sources.  Women have rights, and are likely to participate in the paid workforce.  Modernist societies have small families, and invest heavily in individual children.

Urbanisation, IT and mass media make it easier to learn from non-relatives, and for horizontal cultural transmission to occur.  Famously, TV soap operas depicting modernist lifestyles led to reduced fertility rates in Brazilian favelas communities.

Humanistic principles, civil society, moral codes, and secular institutions underpin modernist societies.  Taxes are moral as well as legal obligations, to deliver shared public services, and to socially mitigate individual risks.  Modernism dominates in regions such as East Asia, Western Europe and North America.

America is a modernist society, yet it has a kinship-based President.  Donald Trump is a product of kin influences from his grandfather and father, and ideation from sources such as Fox News.  He is a kinship-based, amoral family leader, misplaced within a modernist society.

Donald Trump came to power with the support of a Republican Party tribally visceral in its hostility to out-groups. He made his money from inheritance, asset management, real estate price inflation and amoral business ruthlessness.  He created no new technology, innovation or idea.  None of his investments deliver wider social benefits.  Trump Tower and his golf courses will survive him as artefacts.  Nothing he created will be a platform for future enduring benefits.

Kinship-based societies are poor partly because they under-deliver social innovations.  Such innovations deliver non-rival benefits that spill-over wider than those which can be captured by individuals and kin.  They persist longer than an individual’s lifetime, and are building blocks for future innovation.

Social innovation sparks future innovation that transcends individual and kin-based interests.  It underpins ongoing human creativity, technological development and higher civilisation.

Paradoxically, it is “individualistic” modernist societies that deliver social innovation, yet such innovation requires feelings for others and magnanimous spirit.

America’s constitutional protections are constraining President Trump.  However, it is American generosity of mind and intellectual unboundedness that will end his presidency.  America can then once again become the leader of the modernist world.

 

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Poets better prove – the sacred craft challenges autocracy

Great Russian writers such as Turgenev, Tolstoy and Dostoyevsky opposed Tsarist tyranny.  Their successors challenged the Bolshevik autocracy.

The Bolsheviks knew the power of literature.  Lenin never forgave Dostoyevsky’s devastating critique of revolutionary thinking in The Devils.  The Soviet regime sought to co-opt literature to its cause.  A Soviet ruling decreed that “any preaching of ideological emptiness, of an apolitical attitude, of ‘art for art’s sake,’ is foreign to Soviet literature, and harmful to the interests of the Soviet people and State.”

Stalin knew that Russian cultural achievement preceded and would survive him, that it defined people’s collective narrative, and that it could laud or demonise leaders.  He created a Soviet-era Pushkin cult, and co-opted Maxim Gorky to burnish his regime’s cultural legitimacy.  Gorky’s relationship with Stalin broke down in 1935, and he died in 1936 in mysterious circumstances.

The four greatest twentieth century Russian poets were Osip Mandelstam (1891-1938), Marina Tsvetaeva (1892-1941), Anna Akhmatova (1889-1966) and Boris Pasternak (1890–1960).  Many Bolshevik leaders had a near superstitious reverence for poetry – and fear of it.  Russian poets were the abstract chronicles of the nation.  As Mandelstam wrote:

A people needs poems darkly familiar

to keep them awake forever…

 

Bukharin warned Stalin that “poets are never wrong”.  Pasternak’s prowess as a translator of Georgian poetry saved him from the NKVD, with Stalin instructing his secret police to “leave this cloud-dweller alone”.

However, poetry could also prove lethal.  Mandelstam remarked in the midst of Stalin’s terror:  “poetry is respected only in this country – it gets people killed.” He wrote his Stalin Epigram:

Our lives no longer feel ground under them.
At ten paces you can’t hear our words.

But whenever there’s a snatch of talk
it turns to the Kremlin mountaineer,

the ten thick worms his fingers,
his words like measures of weight,

the huge laughing cockroaches on his top lip,
the glitter of his boot-rims.

Ringed with a scum of chicken-necked bosses
he toys with the tributes of half-men.

One whistles, another meows, a third snivels.
He pokes out his finger and he alone goes boom.

He forges decrees in a line like horseshoes,
One for the groin, one the forehead, temple, eye.

He rolls the executions on his tongue like berries.
He wishes he could hug them like big friends from home.

 

Mandelstam was arrested, and he died incarcerated in December 1938.

His widow Nadezhda Mandelstam chronicled the Soviet suppression of literature in   two memoirs: Hope against hope and Hope abandoned.  She wrote that: “…they always knew what they were doing: the aim was to destroy not only people, but the intellect itself”.

Stalin aimed to undermine people’s critical faculties and replace them with simplistic faith in himself, the Party, and the ideology and identity politics that supported them. He sought a new narrative for Russia based on class warfare, the “New Soviet Man”, and “Heroes of Labour”.  These were stylised, abstract figures lacking authentic human nature.

Nadezhda Mandelstam argued that “the usual line was to denounce history as such: it had always been the same, mankind had never known anything but violence and tyranny.”  The Stalinist regime “attacked all old concepts just because they were old. . . Everything was dismissed as fiction.  Freedom?  There’s no such thing and never was!…Terms such as ‘honor’ and ‘conscience’ went out of use at this time…”

The result was the degrading of Russian culture and the destruction of those who safeguarded it.  The heaviest toll among the intelligentsia during the 1930s purges was among writers.

Marina Tsvetaeva’s husband died in a labour camp, and she committed suicide in 1941.  As writers died or fell silent, Stalin turned to Eisenstein’s cinematography to reconstruct Ivan the Terrible’s image, to strengthen his own.  Eisenstein’s Ivan the Terrible Part 1 was an apologia for the Tsar, and tacitly for Stalin.  Ivan the Terrible Part 2 depicted the Tsar’s mental deterioration, and was banned till after Stalin’s death…

However during the Great Patriotic War, patriotic poetry revived.  Konstantin Simonov’s Remember Alyosha drew on Russian history and cultural continuity to hearten Russian soldiers.http://lingualeo.com/pt/jungle/konstantin-simonov-remember-alyosha-the-roads-of-smolenshchina-31640#/page/1

Persecution then revived after the war, and continued into the 1950s.  On 12 August 1952, 13 Soviet Jewish poets, intellectuals and professionals were executed in Lubkyanka prison in Moscow.  By 1954, only 50 writers remained alive of the 700 who had met at the First Congress of the Union of Soviet Writers twenty years earlier.

The only two great writers who survived Stalin’s terror were Akhmatova and Pasternak.

Akhmatova’s husband was executed, and her son imprisoned.  The Russian people, as Stalin saw them, had “a craving for an all-embracing idea which would explain everything in the world and bring about universal harmony at one go.”  Nazism and Stalinism sought racially or ideologically pure utopias controlled by rulers who did the thinking for the compliant masses.  Akhmatova did not believe in utopias:

 

Our sacred craft has existed

For a thousand years.

With it even a world without light would be bright.

But not one poet has ever yet said

That there is no wisdom and no old age,

And that possibly there is no death.

 

The greatest intellectual threat to Stalin was Shakespeare, who was enormously influential in Russia.  Catherine the Great loved Shakespeare. In the years following the 1825 Decembrist revolt, Shakespeare’s works helped to interpret to Russia the meaning of the times.  Pushkin drew on Shakespeare’s inspiration to help create a Russian national literature.

Belinsky argued that “reading Shakespeare’s drama shows that each person is a legitimate artistic subject, however low he stands in the social hierarchy and even in humanity as such”.  Lermontov wrote that Shakespeare is “a genius too broad to comprehend, penetrating into people’s hearts and fates”. Turgenev placed him among Titans and semi-gods.  Dostoyevsky regarded him as “the prophet sent us by God to announce the mystery of man, and of man’s soul”.

During the 1940 blitz, when the Soviet Union was allied with Nazi Germany, Ahkmatova telegraphed through Shakespearean imagery which side Russia’s literati were on in To the Londoners.

The twenty-fourth drama of Shakespeare

Time is writing with its indifferent hand.

We, ourselves, the guests at this awful event,

Better would read Hamlet, Caesar, and Lear

Over the river, in heavy lead clad;

Better – to bear, with singing and torches,

Juliet, the dove, to her family’s graves,

Peep into windows of Macbeth’s castle

Tremble with the knife of the hired assassin

But not this one, this one, this one –

This one we don’t have the strength to read…

 

Shakespeare’s plays and poems attack vaulting ambition, and power achieved through murder.  They allude to the tyrant’s stroke, and to art tongue-tied by authority.  In Shakespeare, death levels paupers and kings: “imperious Caesar, dead and turned to clay, might stop a hole to keep the wind away”.

The sonnets are about one individual’s feelings for another.  They are concerned with love, mortality, the uniqueness and value of individuality, and with moments in time, not with group narratives or collective morality tales.  They see love triumphing over princes’ monuments and tyrants’ brass tombs.

Pasternak turned to translation to avoid persecution for contentious writings, and became famous for his Shakespeare translations.  Only after Stalin’s death was his greatest prose work, Dr Zhivago published.  It is concerned with individuals not collectives. It was sharply criticized in Israel for its assimilationist views on the Jewish people.  Pasternak’s response was: “I am above race”.

Pasternak survived Stalin’s time, avoiding where he could literary meetings subject to state scrutiny.  At one gathering Pasternak knew his loyalty to the state would be questioned if he stayed away, if he attended and remained silent, or if he said anything that could be used against him.  Urged to speak, he finally stood up and said “thirty-two”, and then sat down again.  He was referring to his translation of sonnet 32:

If thou survive my well-contented day,

When that churl death my bones with dust shall cover,

And shalt by fortune once more re-survey

These poor rude lines of thy deceasèd lover,

Compare them with the bettering of the time,

And though they be outstripped by every pen,

Reserve them for my love, not for their rhyme,

Exceeded by the height of happier men.

O then vouchsafe me but this loving thought:

“Had my friend’s muse grown with this growing age,

A dearer birth than this his love had brought

To march in ranks of better equipage.

But since he died and poets better prove,

Theirs for their style I’ll read, his for his love”.

 

http://sonnetprojectnyc.com/portfolio/play-sonnet-32/

In this sonnet, Shakespeare imagines his lover outliving him.  While future poets may outshine him, this will not take away from Shakespeare’s love while he lived.

Sonnet 112 sees a scandalised Shakespeare surviving only through the love one person has for him. http://sonnetprojectnyc.com/portfolio/play-sonnet-112/    Simonov’s Wait for me sees a Russian soldier in the Great Patriotic War attribute his survival only to his wife’s confidence he would return, when all others assumed him dead, and were drinking to his memory.  The soldier survived, only because his wife, and only her, waited for him: https://www.youtube.com/watch?v=LQ2gMcFx3No

These intimate, humanised feelings between people are possible only when there is unique individuality. They are impossible when people are conceived as abstract group caricatures.

 

Stalin particularly hated Hamlet, ostensibly because “Hamlet’s indecisiveness and depression were incompatible with the new Soviet spirit of optimism, fortitude, and clarity”.  Hamlet was banned from 1941 until Stalin’s death.

The great Soviet theatre director, Vsevolod Meyerhold was obsessed with Hamlet, and had plans to stage it.  He was murdered by Stalin’s secret police, and his wife stabbed to death.  Meyerhold had told his friends “Engrave on my tombstone ‘here lies an actor who never played and never staged Hamlet’.” 

Hamlet posed an existential threat to Stalin.  Like Claudius, Stalin had murdered for power.  Hamlet was just a sword stroke away from the head of state.  He was intellectually autonomous. Squares in tyrannous states are huge to make individuals feel small.  Hamlet could be bounded in a nutshell and count himself the king of infinite space.

Claudius might justify his actions because Denmark was subject to external threat, needed strong leadership, and could not afford internal strife.  Stalin used such arguments to justify his tyranny.  Shakespeare never believed that individuals should be sacrificed for power or “the good of the masses”.

Stalin lived a life of public “adulation” and private loneliness. His wife committed suicide.  Stalin executed almost all his closest Bolshevik colleagues, and was left without any close friendships.

Millions died in the gulags from 1929 to 1953.  In 1937 and 1938 Stalin signed lists condemning masses of people to execution.  When reviewing one such list, he muttered: “Who’s going to remember all this riff-raff in ten or twenty years’ time? No one.  Who remembers the names now of the Boyars that Ivan the Terrible got rid of?  No one.”

However, those who survived the gulags remembered those who had died.   The ghost in Hamlet wanted to be remembered, as much as to be avenged.  Did Stalin fear that survivors might seek revenge?  Or was his fear how he would be remembered in Russia’s cultural memory?

At Pasternak’s stage-managed funeral in 1960, party officials were horrified when mourners spontaneously recited a banned Pasternak poem comparing Hamlet to Soviet reality.

The sacred craft outlived autocracy.

 

Posted in Economics, Shakespeare | 2 Comments

How innovation can fulfil our future

By Peter Winsley, 15 February 2017

Malaise[i] in developed countries can be countered through productivity growth.  This creates wealth for those working productively, and for social transfers and expanded services.  However, people want meaningful work and empowered lives, not compensatory afterthoughts.  If there is no “we” in a shared journey on the same timetable, there is only “them and us”, and future fears.

Monetary and fiscal policy[ii] lacks traction, and productivity growth can only come from innovation that delivers wider spill-over benefits.  There are positive correlations between innovativeness and social mobility, driven by new entries more than incumbents[iii].  However, network returns, market power, intellectual property and tax regimes mean innovation often leads to “winner take all” effects.

Innovation “superstars” reinforce myths that a few private individuals working in isolation drive innovation.  In fact, most transformative technologies now depend on public funding[iv] and social learning, not individual “genius”.

None of us in the developed world deserve what we have.  Our wellbeing largely results from luck – when and where we were born, and history’s physical and intellectual gifts to us.  The technologies we use were developed by others, from different times, countries and cultures.

While business responds to today’s demands, government needs to address long-term societal challenges.  These include aging populations, health, and resource management.

A business can be like a hedgehog that knows just one or a few big things.  However, a government must be like a fox that knows and does lots of things.  It must play a large and multi-faceted role in innovation, including steering private investment in ways that support a wider social flourishing[v].

Government needs to invest in human capital, infrastructure such as roads and broad band, and systems to manage sustainable distributed energy generation[vi].

Corporate and incumbent welfare[vii] stifles innovation, while new business entries foster it.  Institutions and policy settings therefore need to foster competition and innovation.  For example, patent thickets, trolling, and excessive vagueness and duration of intellectual property rights impede innovation.  Government should shorten intellectual property protection, and let entrepreneurs exploit grey areas where rights are unclear.

The US FDA illustrates how excessive regulatory hurdles impose social costs[viii]. Its processes are ill-suited to some personalised medicine, combinational therapies and low risk devices.  New Zealand could do better[ix] through agile institutions and greater tolerance of high salient risk to deliver low visibility but high impact health advances[x].

New Zealand needs increased domestic savings rates[xi] to lift capital intensity and labour productivity, to reduce real interest and exchange rates, and to improve tradeable sector performance[xii].  Compulsory savings schemes and fine-tuning the tax system could encourage savings and investment that underpin the productive sector.

Shifting social policy transfers from consumption subsidies to capability development investment could build human and financial capital to drive innovation and productivity growth[xiii].

Risk capital is needed for innovation, and patient capital to retain benefits in New Zealand.  Private investors focus on privately-captured benefits, while the state should focus on long-term benefits for New Zealand[xiv].

Venture capitalists often support serial entrepreneurship where investments are realised and reinvested.  However, New Zealand struggles to retain long-run benefits from knowledge-intensive manufacturing and services (KIMS) businesses[xv].  State agencies could use investment stakes to anchor some core activities in New Zealand.  These could relate to head office, design, IT and R&D functions.  When a KIMS business reaches international scale, has core competencies embedded in New Zealand, and is financially self-sustaining state investors can exit and reinvest in new businesses[xvi].

New Zealand has exceptional opportunities for technology adoption and extension.    There is a rising productivity gap between global frontier and other businesses[xvii].  Innovators need to connect to businesses on the global technological production possibility frontier and learn from them.

New Zealand “innovation” is essentially extension of international advances.  It must start with documenting prior art and international understanding[xviii].  This both drives technology adoption and seeds new ideas for innovation.  A focus on long-term innovation therefore pays short-term technology adoption dividends.

Research clutter and duplication, “outcome switching”, unreproducible and trivial results and methodological weaknesses blight research internationally[xix].  Research can focus on what fits the methods recognised in peer review, not what needs to be understood or done[xx].  Publication counts and author attributions are inflated to lift “box ticking” ratings[xxi].

New Zealand is too small to capture benefits from its own science-push research.  It should specialise in the rapid adoption, extension and commercialisation of international basic science. This is not free-riding, since our international contribution is applied technology that delivers consumer surpluses and wider spill-over benefits[xxii].

Curiosity-driven research within time-frames that suit researchers will not lead in a linear way to innovation[xxiii].  Innovation requires external engagement, user focus, two-way learning, and a drive to create technology that improves people’s lives.  In longitudinal and in some biological and ecological studies long time-frames are inevitable.  However, as evidenced in the Manhattan Project and the Apollo Programme, technology can answer to deadlines.

Our publicly-funded research should deliver technological solutions, and the results should then be codified in publications that show how impacts were made[xxiv].  This is more holistically challenging than unfocused research as it requires more social engagement and interactive learning.  Technological achievements, not promises, should drive academic standing and institutional rankings.

New Zealand can succeed in innovation in differentiated as well as commodity-based industries[xxv].  Its businesses do well in “hard to research” industry good markets, and in customised short production runs.  Many leverage economies of scope rather than scale.  IT facilitates disintermediation and integration into global value chains.  It mitigates economic geography and engineering scale economy constraints.  It has transformative capacity in fields as diverse as “Internet of Things” enablers, precision agriculture, social media and digital finance.

Freeman Dyson in The Sun, the Genome, and the Internet[xxvi]envisages sustainable energy, biotechnology and the Internet ending rural intellectual isolation and economic stagnation.  These capabilities, together with small-scale 3D manufacturing and natural environment assets can create opportunities within provincial New Zealand.

The US is reducing emphasis on climate change mitigation and sustainable energy in favour of greater fossil fuel dependency.  Fossil fuels are capital-intensive resources that concentrate power and create few knowledge-intensive jobs or wider innovative and entrepreneurial opportunities.

New Zealand should do the opposite to the US.  It has among the world’s highest per capita natural resource endowments.  Climate change response and sustainability shifts create opportunities in agriculture, renewable energy, timber engineering and biomaterials innovation.  Much of this is differentiated[xxvii], capital-light and knowledge-intensive innovation that creates opportunities for many New Zealand businesses and regions.

In such a tale of two countries New Zealand would do better socioeconomically and environmentally, and benefit more from the longer-term sustainability upside.

Manufacturing sector productivity frees up resources to expand service sector employment.  This is often low paid, low status work.  However, labour market policy settings can change to value the deeply human skills that automation cannot replace.  Service sector jobs can evolve to build new working life identities and social standing[xxviii].

Social investment approaches and data analytics can lift service sector productivity directly, and through interventions that avoid future costs from crime and benefit dependency.

Health and education sector productivity is low, partly because it requires voluntary patient and student cooperation.  The challenge is to make working with people as efficient as manipulating physical objects, while fostering respectful relationships and the meaning and self-worth that come with them[xxix].

Innovation will only fulfil our future if we socially mandate it.  People need such survival traits as prudence, tact, and frugality.  They also need expansive traits of courage, truth-telling, and generosity that create opportunities for others.

We need to value our risk takers and innovators more than our sportspeople and celebrities.  Then our entrepreneurial spirits will flourish, and innovation will fulfil our future.

.

 

[i] Malaise as described in: https://winsleys.wordpress.com/2017/01/15/what-caused-the-mess-we-are-in-and-how-do-we-get-out-of-it/

[ii] Near zero interest rates seem to be having no effect in countering economic stagnation.  Keynesian expansion succeeded dramatically from the late 1930s due to recovery from the Great Depression, long waves of technological innovation dating from the 19th century, war stimulus followed by meeting pent-up consumer demand from deferred consumption, followed by a  baby boom.  These conditions are unusual and unlikely to be repeated.  The US economy had high employment and productive capacity utilisation in the lead up to the 2016 Presidential election.  Given this, growth from high Keynesian multipliers through fiscal expansion seems unlikely, even if through massive infrastructure investment.  See Glaesar, E. 2016: If you build it…Myths and realities about America’s infrastructure spending.  City Journal.

[iii] Aghion, et al 2015: Innovation and top income inequality  NBER Working Paper No. 21247

[iv] See Mazzucato, M. 2015: The Creative State.  RSA Journal Issue 2, pp. 12-17.

[v] See Phelps, E. 2013: Mass Flourishing.  Princeton University Press.

[vi] An example is ways to manage the integration of distributed and intermittent energy sources into a reliable national system.

[vii] For example, government bail-outs, grants or special deals for existing businesses, overly tight intellectual property protection, regulatory restrictions on new housing, and protection of professional rent-seeking.

[viii] These include the size and duration of clinical trials.

[ix] An example would be giving patients, under personalised clinical guidance, access to drugs that have passed safety trials but have yet to be approved.

[x] The FDA’s risk aversion avoids a visible death at the cost of “invisible graveyards” due to delays in therapeutic advances.  See Madden, B. 2010: Free to choose medicine.  National Center for Policy Analysis.

[xi] It matters where investment is sourced and where revenue is earned.  Dollars earned from exports are different to those borrowed offshore.  The former create wealth, net worth and capability, the latter a rising debt servicing burden.  Likewise, income from gainful employment is more valuable sociologically than benefit payments.

[xii] See OECD 2016: OECD structural mission to New Zealand 29 August – 2 September 2016.  OECD.

[xiii] One approach might be to give all children a capability development account to be used only for education and investment in assets that enhance productive capacity and build net worth.  Social policy transfers that subsidise adult consumption could instead be channelled into these accounts.

[xiv] For an interesting discussion of the state’s role in innovation see Mazzucato, M.; Perez, C. 2014: Innovation as growth policy: the challenge for Europe.  SPRU, Working Paper Series 2014-13.

[xv] KIMS businesses enrich product diversity and therefore product space opportunities.  See Hausmann, R. Hidalgo, C. et al, The Atlas of Economic Complexity: Mapping Paths to Prosperity. Published jointly Harvard Kennedy School and Center for Economic Development; and MIT Media Lab, 2011. http://atlas.media.mit.edu/book/ Also see Hidalgo, C. et al  2007: The product space conditions the development of nations.  Science 27 July 2007.

[xvi] Such state investments could turn “intellectual putty” into “clay” embedded into New Zealand’s productive base on a longer-term basis.

[xvii] Andrews et al, 2015: Frontier Firms, Technology Diffusion and Public Policy: Micro Evidence from OECD Countries.  OECD.

[xviii] Some New Zealand researchers and innovators put too little effort into this.

[xix] Sarewitz, 2016: Saving science.  The New Atlantis.  Spring-Summer 2016.

[xx] See Deaton, A.; Cartwright, N. 2016: Understanding and misunderstanding randomised controlled trials.  NBER Working Paper No. 22595.  See also Hausmann, R. 2016: The problem with evidence-based policies.  Project Syndicate 25 February.

[xxi] These behaviours reflect the bad incentives that are created for scientists, and should not be blamed on scientists themselves.

[xxii] Examples include Fisher and Paykel’s healthcare innovation, Graham Liggins’ development of steroid solutions to foetal lung maturation challenges, and Hayward Wright’s development of the international kiwifruit industry based on imported plant material.

[xxiii] Taylor (2016) argues that New Zealand appears “to be far more focused on scientific research than on technological innovation”. See Taylor, M. Z. 2016: The politics of innovation.  Why some countries are better than others at science and technology.  Oxford University Press.

[xxiv] Much basic science is a spin-off from applied research and technological development.  Pasteur’s research on applied health and agricultural problems helped create microbiology science.  Karl Jansky founded much of radio-astronomy while exploring practical telecommunications problems for Bell Labs.

[xxv] R&D in commodity-based industries can be of exceptionally high productivity as its costs are spread over large product volumes.  There can therefore be an inverse relationship between R&D productivity and R&D intensity as measured by R&D expenditure as a proportion of total business revenue.

[xxvi] Dyson, F. 1999:  The Sun, the Genome and the Internet.  Oxford Books.

[xxvii] Such differentiated businesses may be small, however this can be an advantage.  Smaller, knowledge-intensive businesses have a higher ratio of external surface area to mass and therefore greater potential for a higher proportion of staff to be interacting with and learning from external parties.

[xxviii] People value personal relationships in market transactions and in their wider lives.  This is influenced by national and cultural context.  German trades people have higher standing that their Anglophone counterparts.  French waiters demand more respect than US or New Zealand ones.  Recreational and community services are often driven by people’s desire for esteem based on a sense of indispensability or self-worth in a specialised field.

[xxix] A good start would be banning the instrumentalist term “human resources”.

Posted in Uncategorized | 2 Comments

What caused the mess we are in, and how do we get out of it?

By Peter Winsley

16 January, 2017

Inequality, social malaise, and identity-based extremism result from productivity trends, technological change, globalisation, and business models.  These sit within tax, labour market, competition, trade, intellectual property and other policy settings that governments can change.  Policy makers must find ways to drive inclusive growth with widely-shared benefits that restore self-worth and open society.

Globally, wealth has never been more evenly spread (Heise, 2016).  However in some developed countries inequality has risen.  Since the early 1970s incomes in the US for the top 1% rose by around 300%, while incomes for those below the top 10% stagnated.  The real median income of US households was less in 2016 than in 1999 (Cowen, 2016).

In the US, rates of “absolute income mobility” – the fraction of children who earn more than their parents – have fallen from around 90% for children born in 1940 to 50% for children born in the 1980s (Chetty et al, 2016).  Some communities have seen rises in drug abuse and morbidity (Case & Deaton, 2015), and reduced life expectancy (NCHS, 2016).

Divergence has grown between the most profitable businesses and those in the mainstream.  This divergence reflects a mix of frontier firms with exceptional innovative capabilities, network effects, and mergers and acquisitions that create market power and monopolistic pricing (Barth et al, 2014; Furman & Orszag, 2015).  This has led to higher economic rents

Productivity and median incomes have diverged.  For example, in the US from 1948 to 1973 productivity grew by 96.7% and hourly compensation by 91.3%.  From 1973-2014 productivity grew by 72.2% and hourly compensation by only 9.2% (Bivens & Mishel, 2015).

Technological change in the manufacturing and IT industries has reduced material goods and IT costs.  It has also destroyed many jobs, with employment growth largely being in ill-paid service sectors.  Productivity gains have therefore not translated into well-rewarded jobs.  Identity as well as skill mismatches have occurred as self-worth and pride disappeared with the jobs that gave rise to them.

Globalisation is associated with manufacturing sector job losses.  However, Helpman (2016) concludes that while trade has played a role in increasing wage inequality, its cumulative effect has been modest, and globalization does not explain most of the rise in wage inequality within countries.

Malaise comes when businesses lose sight of external customers and focus on management and shareholder interests.  Examples include the finance sector model leading to the 2008 Global Financial Crisis (GFC), and the Maximising Shareholder Value (MSV) model.

In the lead up to the GFC, banks went from financing economies’ capital needs to financing themselves.  Even as local, community banks declined, finance expanded as a proportion of the economy.  The GFC lowered the path of GDP in advanced economies (Fatas & Summers, 2015).  It caused enduring negative impacts on future output (Ball, 2015).  Post-GFC attempts to reduce government debt have likely resulted in a higher debt to GDP ratio associated with negative output effects.

The GFC saw lower income people lose jobs and incomes, and then bail out finance companies “too big to fail”.  Gains were privatised and losses socialised.  This corporate welfare helped give rise to the Tea Party movement and subsequent American and European populism.

In the post-World War Two period in the developed world, a “retain and invest” business model drove innovation, productivity, social mobility and real income advances.  Shareholders were rewarded with dividends from patient capital and long-term productivity growth.  Stable employment helped workplace learning translate into sustained productivity and job security.

William Lazonik (2014; 2015, 2016) documents how, from around the 1980s, many corporations moved to an MSV model.  This created incentives for share price manipulation, insider trading, and share buy-back schemes.  These diverted finance away from innovation and other productive investment towards short-term management and shareholder interests (Kozul-Wright, 2016).

Over 2003 to 2012 the largest 500 US companies returned more than US$2.4 trillion to shareholders through share buy-back and other arrangements.  US public corporations now have record cash holdings, and total pay-outs to shareholders as a percentage of net income are at record levels (Kahle & Stulz, 2016).

Both the financial conduct associated with the GFC, and the MSV model diverted resources from innovation and productivity growth into short-term gains for the privileged few.

Policy levers are needed to address problems that policy makers have allowed to happen.  However, options are limited.  Monetary policy has little traction at low interest rates.  There is scepticism about how big the Keynesian multiplier is now in many economies.  Infrastructure spending may not be effective (Glaesar, 2016).  Many countries face environmental limits, debt burdens, unfunded entitlements and ageing populations.

Crony capitalism and corporate welfare in western countries do not deliver widely-shared benefits.  State capitalism degrades people’s rights and freedoms.  Populist movements are shallow, divisive and capricious.  Social welfare transfers cannot compensate for labour market income losses.  People want jobs for meaning, standing and social connections, not just money.  A dollar earned is worth more than a dollar paid as a benefit.

However there are opportunities, and cues on where to focus.  Middle class spending power is rising within growing and better connected world populations. Climate change and resource depletion creates demand for technological and investment responses.  Businesses are cash-rich and interest rates are low.

Never before have so many scientists and technologists been active in so many different fields and countries.  Physical communication has never been cheaper, nor idea exchanges greater, more diverse, faster, or more stimulating.

My next paper will argue for an inclusive innovation strategy to lift productivity and deliver broadly-shared benefits.

References

Ball, L. 2014: Long-term damage from the Great Recession in OECD countries.  NBER Working Paper 20185.

Barth, E. et al 2014: It’s where you work: Increases in earnings dispersion across establishments and individuals in the US.  IZA DP No. 8432.

Bivens, J.; Mishel, L. 2015: Understanding the historical divergence between productivity and a typical worker’s pay. Economic Policy Institute Briefing Paper No. 406.  2 September 2015.

Case, A.; Deaton, A. 2015: Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century.  Proceedings of the National Academy of the Sciences of the United States of America 112(49).

Chetty, R. et al 2016: The fading American dream: trends in absolute income mobility since 1940: NBER Working Paper No. 22910.

Cowen, T. 2016: Is Innovation Over? The Case Against Pessimism.  Foreign Affairs March/April 2016 Issue.

Fatas, A.; Summers, L. 2015: The permanent effects of fiscal consolidations.  CEPR Discussion Paper No. DP10902.

Furman, J.; Orszag, P. 2015: A firm-level perspective on the role of rents in the rise of inequality.  Presentation at ‘A Just Society’ Centennial Event in Honor of Joseph Stiglitz.  Columbia University.

Glaeser, E. 2016: If you build it…Myths and realities about America’s infrastructure spending.  City Journal, Summer 2016.

Heise, M 2016: The Complexity of Inequality.  Project Syndicate 9 December, 2016.

Helpman, E. 2016: Globalisation and wage inequality.  NBER Working Paper No. 22994.

Khale, K.; Stulz, R. 2016: Is the American Public Corporation in Trouble?  NBER Working Paper No. 22857.

Kozul-Wright, R. 2016: Returning to investment.  Project Syndicate 6 October 2016.

Lazonick, W. 2016: The Value-Extracting CEO: How executive stock-based pay undermines investment in productive capabilities.  Institute for New Economic Thinking.  Working Paper No. 54.

Lazonick, W. 2015: Stock buybacks: From retain and reinvest to downsize-and-distribute.  Centre for Effective Public Management at Brookings.

Lazonick, W. 2014: Profits without prosperity.  Harvard Business Review September 2014 Issue.

NCHS 2016: Mortality in the United States 2015.  NCHS Data Brief No. 267.

 

 

Posted in Economics, Uncategorized | Tagged , | 3 Comments

Letter to Donald Trump

23 December 2016

Dear Donald

What you bring to the Presidency is the ability to reach across the aisle, make workable deals, and drive them through Congress. 

You also need to carry Americans with you.  To do this, you must drive a wave of innovation that delivers mass benefits and a nationwide flourishing.  

You need the entrepreneurs and wealthy investors to make this happen.  However, well-rewarded blue collar jobs and middle class upwards mobility must be delivered. America must show leadership in the world.

America’s difficulties do not come from trade, or from Hispanic immigrants.  America has the right to ensure other countries respect its intellectual property rights, and that foreign bureaucrats do not impede its exports.  All countries have the right to control their borders.  However, you need to deal with the real causes of America’s malaise. 

The American tax and regulatory system has favoured the existing wealthy and powerful, and led to corporate welfare and economic stagnation.  It has destroyed the self-esteem of millions of Americans through eroding meaningful employment and the sense that people have control over their lives.

American businesses used to lead the world in innovation to deliver great new products to customers, and to create jobs that give people pride as well as better lives.  Such businesses were based on the “retain and invest” model. 

Since the 1970s, these businesses have been degraded by the “maximize shareholder value’ model.  This has led to share buy-backs and excessive CEO benefits, at the expense of long-term wealth creation.  Banks drifted away from their core lending functions to developing complex derivatives disconnected from the real world.  Inept regulation and tax policy allowed this to happen.

The American education system needs to be upgraded and made more equitable.  Vocational education linked to academic content needs to be expanded.  Social and ethnic background should not become social predestination.  Invest in young Americans!  Give every American child a Great America capability development account, to be used only for education, business and home ownership investment.  This should be favoured over tax cuts.

US decision-making has been gridlocked through politics, regulation, and litigation.  You have broken the political gridlock.  Regulation is needed to protect the environment, working conditions, health and safety.  However, too much corporate welfare, agricultural subsidies, occupational licensing, and FDA and other regulation burdens Americans and stifles their innovation.  Cut through it with well-targeted secateurs, not a chainsaw!

America’s litigious environment is more about coupon-clipping and deadweight loss than it is about justice.  Test some new ideas.  Look at New Zealand’s Accident Compensation scheme.

In healthcare, ask yourself why other western democracies have better health coverage, and why it is far cheaper.  Retain the best elements of “Obamacare”.  Look at a single-payer system.  Learn from what New Zealand has done with its Pharmac model.

Invest in a massive upgrading of America infrastructure.  Lead America’s transformation to a sustainable society that manages through climate change and bullet-proofs its future.  This means millions of job making electric cars, solar panels, wind turbines, smart grid technology and biomaterials.  This is far more job-rich and technology-intensive than fossil fuel production.  It would break the power of oil producers in countries hostile to democratic values.  You can pay for future tax cuts from the wealth streams the above strategy would generate in future.

Simplify the American tax code, and if you must cut taxes do so to benefit the working poor and middle classes.   A destination-based consumption tax and elimination of interest tax deductions could level the trade playing field, keep jobs in America, and discourage debt-fuelled real estate and financial sector growth.

Work constructively with China and Russian, since common interests are greater than differences.  Avoid future entanglements, and foster potential new friends such as Iran.  Deal with international issues in a constitutional way that respects international law.  The breakdown of trade and of arms limitation agreements would be catastrophic for everyone. 

You have your chance to make America Great.  History will not forgive failure, so let’s make sure it canonizes your success.

Merry Christmas, and a Happy New Year.

Peter Winsley

Wellington, New Zealand

Posted in Economics | 2 Comments