A Tech-First New Deal #

“Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around” — Milton Friedman

The biggest external shock in post-war history leaves us with one certainty: things will never be the same (but some stuff will be). Crises force change, and ideas that only a few days ago seemed radical or crazy are now being pushed through at neck-breaking speed. Previous pandemics led to fundamental changes in the way we live and preceded radical innovation. This one will be no different.

Summary:

  • The biggest economic intervention since the Great Depression comes at a time when the West’s old growth model had already stalled out since 2008
  • Stimulus plans have to balance immediate help to an old economy in crisis and also to help midwife a new model, better suited to the times and hard to bring into existence in a ‘peacetime’ economy
  • Old growth models, like the post-war Bretton Woods system, Japan’s export-first model, and the US/UK finance capitalism system, worked because they went with the grain of underlying material and technological change. A new model has to be better aligned with the world of the 21st century
  • A new model has to be founded on four principles: shared ownership, a social security system that rewards risk taking, a system of life-long learning and skills acquisition, and, finally, institutional support for innovation, research and technology with a bias towards real technological advances
  • The next, deglobalised system is likely to see more regional hubs, with production closer to holders of capital. This is a chance for VCs to renew investments in actual production rather than simply leveraged attempts at cornering markets or new business models to sell old services
  • While change is inevitable, the scale and far-sightedness of our politicians remains to be seen. While everything is in flux, it is up to people interested in forging the next world, in policy, business or investment, to push for a new model which is both inclusive and sustainable.

PART 1: A Tech-First New Deal

“In Every Crisis There is an Opportunity”- Chinese Proverb

We now know that economic historians will look back on a period bookmarked by two economic crises: the Great Recession of 2008 and the Coronarecession of 2020. What are they likely to say? They will point out the underlying fragilities that are now being exposed but that were allowed to fester since 2008, and how this period likely served as a sort of interregnum between two economic paradigms: the capital-led globalisation-a-go-go years of 1976 to 2008 and whatever comes next.

2008 exposed an economic compact that, in many ways, has failed. And yet neither the imbalances that led to the financial crisis nor the growing climate emergency seemed severe enough to enforce fundamental and much-needed shifts: we have been living in a liminal state where the old world has died but the next is waiting to be born.

But in the wake of the coronavirus, it’s been incredible to see how quickly and decisively politicians and corporate leaders can act under imminent threat- especially when similar ideas were dismissed as fanciful a few short months before. That’s why we’re more confident that, this time, we’ll not just patch up the old but will fundamentally replace what’s not been working.

President Macron, the new UK Chancellor Rishi Sunak, and a bipartisan effort in the US, have all unveiled stimulus plans: they will need to balance a short-term defibrillator to an economy in shock, with an acknowledgment that the effects of the treatment are likely to hugely outrun the short-term pain in terms of the world which we will soon all inhabit.

Whether intentionally or not, massive government spending unknown outside of wartime will shape the relationships between citizens, the state, and the economy, long after the coronavirus retreats from the headlines. The American sociologist Charles Tilly, in contemplating how wars and massive social mobilisations shape history long after, once wrote that “war made the state and the state made war”: so too do crises make economic settlements and those same economic settlements sow the seeds of later crises in turn.

Coronavirus will have an impact far beyond most armed conflicts: but what sort of society are these new economic interventions ushering us towards? And how can we steer these costly interventions towards a new set of social and institutional arrangements more fit for purpose than the ones which preceded them?

To all the growth models I have loved (for a while)

The last few decades since the fall of the Bretton Woods post-war system have seen subsequent growth models founder on their own internal limits, although their synergistic relationships to changing material conditions made each of them the envy of much of the rest of the world at one time. Institutions break and forging new ones requires radical new thinking and a willingness to experiment with ideas that go against conventional wisdom.

Japan’s growth miracle was based on an institutional set of arrangements where governments worked with the private sector, linking large corporates (keiretsus) with banks to fund them and skills to supply the talent they needed. Official targets like global market share enforced an export-first mindset, while lifetime employment rules provided incentives for firms to invest in the workforce as it aged. As the model ran out of steam, each part of this extended set of interdependent relationships shunted into the part of the supply chain before it, like a motorway pile-up.

The “Lost Decade” of Japan is now coming up to Year 30… Despite Prime Minister Abe’s best efforts, he has not been able to unpick and reassemble Japan’s interlocking economic ecosystem into something better fitted to today’s growth patterns.

The US and Britain pioneered a 1980s model of flexible labour markets and mobile capital, able to move quickly to adapt to new technology or consumer preferences. Its reliance on consumer debt in the face of flat wages led to the crisis of 2008 and a balance sheet recession where western consumers lacked the means to consume the cheap goods in Asia when the credit lines dried up. Central banks and governments have tried to ‘extend and pretend’ with the old system, but a combination of a global pandemic and a preceding populist revolt, has made the old model as dead as Japan’s.

New social security systems will forge a tech-first economy

It’s time that we gave some thought to what an ideal tech-first, rather than finance- or consumer goods-based, economy and institutional arrangements should look like. It needs to be grounded on four principles: shared ownership to repair the labour/capital divide, a social security system that rewards risk taking rather than stigmatising ‘welfare queens’, a system of life-long learning and skills acquisition to allow for continued adaptation, and, finally, institutional support for innovation, research and technology with a bias towards real technological advances.

  • Intellectuals on both sides of the Atlantic had already been dusting off their old textbooks on Sweden’s Meidner plan to reimagine what a Social Wealth Fund might look like to repair the wealth gap. Thomas Piketty has highlighted the growing wealth gap: a new economic model can either penalise excess concentrations of wealth, or forge new institutions which allows for wealth to be more equitably shared, but the contradictions of the old model will be resolved, one way or another.
  • Even with stock options and a steady supply of ramen, risk-takers with big new ideas still need to pay the rent, and the gig economy only works if there are..well, gigs. While the flexibility of gig economy workers and start-up founders is desperately needed in this brave new world, there needs to be a security net for when things break down. And yes, Universal Basic Income (UBI) is something that will go from dinner party punchline to bracing reality.
  • While Silicon Valley has long chased what Michael Lewis called “the New New Thing”, the skills needed to service rapidly changing innovations change just as rapidly. Just as universities have started exploring how to adapt the old, four-year college model, governments will need to set up learning accounts to draw on public funding to hasten the transition.
  • The breakdown in globalisation symbolised by Trump’s trade wars, Brexit, and global rebellions against migration, is likely to find an equilibrium with regional trade blocs: just as the globalised world had a circular flow of goods being shipped West and capital moving East (until the West’s credit lines ran out), now a series of smaller regional economies are likely to emerge.
  • Venture Capital will change accordingly. Rather than using cheap money to try and dominate questionable markets in everything from scooters to laundry, to favoring asset-lite digital business models which either rested on no real assets or leveraged supply chains which fed the ‘Western consumer-Eastern producer’ dyad, governments and VCs are likely to work together to create incentives to invest in real technologies and invention, not just subsidised taxis and short-let office spaces.

Venture investments in a deglobalised system

Political limits are likely to demand an end to a system which fell over because too much wealth was flowing up the socio-economic hierarchy — as Western working classes lost out to cheaper, Eastern European and East Asian labour, powered by Western capital- and the rise of producer nations in the East saw power flow to where the wealth was: a combination of Western working-class resentment and the high politics of international competition has seen pro-globalisation centrism dig its own grave.

The world went from a global system with tentpole production centres in the US, Germany and Japan, where goods were made and dollars circulated, while the latter’s demise and the US’s hollowing out of manufacturing, saw this change to a world where Mexico, Germany and China produced, and financial inflows into Wall Street rather than Main Street allowed the continued dominance of the dollar and to finance America’s twin trade and government deficits (‘No taxation without Prime Overnight Delivery!’).

The next, deglobalised system is likely to see more regional hubs, a series of tributary systems dominated by the US and its local dependents (now including Brexit UK), Germany and the Eurozone, and China and East Asia, all with their own financial, trade and migratory ecosystems. Bringing production closer to the sources of finance capital might well allow ideas and capital to meet processes and real-world goods, especially if governments provide more incentives for venture investment in the real economy, like Britain tried to do recently with its Patient Capital Review.

Tesla got so many headlines, in part, because it is as a company making things with factories in California and not just Szechuan. Making actual cars seemed so retro but also so modern! With the right incentives, and production onshored, or at least brought into a similar time zone, VCs will have a greater ability to invest in hard technology, new production techniques, and new, real-world products.

VCs can revolutionise how we make our goods, not just what is made and the business models to best sell them. We’ll miss the subsidised scooters, though.

‘The point is not to analyse the world but to change it’ #

Crises reveal the much broader sense of possibility that exists for policymakers to operate within: who remembers bien pensant smirks about ‘magic money trees’ and patronising op-eds about how universal basic income was a fantasy in the last few years? The iron grip of ‘sensible opinion’ who welcomed change as long as it maintained a status quo ante? But while possibilities abound in a period of crisis like we have now, this moment doesn’t last forever: as life settles back into a routine, and power and practice hardens into ‘common sense’, change becomes much harder and ‘sensible opinion’ reestablishes itself.

While some change is inevitable, the extent and direction of that change is still to be decided: incumbent power structures do not go quietly into that good night without a significant amount of raging. However, for those policymakers, investors, and citizens convinced that the former system cannot simply be resuscitated and that the unprecedented amount of money now being spent would be wasted without thinking about our long-term destination, as well as our urgent, short-term challenges, the moment to ask hard questions and make specific demands is upon us. Those countries/regions which establish coherent new growth models- successfully reconciling the previously unsustainable relationships between finance and production, East and West, labour and capital, growth and climate, and entrepreneurship and an adequate safety net, can look forward to being in a vanguard of a truly 21st century recipe for inclusive growth. If only those capable of imagining it are brave enough to grasp it.