How to tackle low productivity and growth

hello and welcome to this discussion on

how to tackle

low productivity and growth i'm bromo

maddox

director of the institute for government

we've got a lot to talk about it is not

a new question

uh it is one that is still hotly

contested

the causes and the solutions we've had

some very good questions sent in on this

as well thank you very much indeed for

that

so i'm delighted to have here two

excellent panelists i'm not going to

call them contestants

we have david sainsbury who is the

author of this new book

windows of opportunity how nations

create

wealth which speaks exactly to these

questions

and he was uh for eight years minister

of science and innovation

in tony blair's government and in 2015

led an independent panel arguing for a

radical reform

of the uk's technical education which i

think i can say

has had some impact and is is being put

into practice

and he is of course chancellor of

cambridge university and

the founder and chairman of the

institute for government

drawing on some of his frustrations in

government

and why it might work more effectively

we also have with us ed balls

a senior fellow at the harvard

university's kennedy school

and i was a secretary of state in gordon

brown's

government and former shadow chancellor

and is of course as well a visiting

professor at king's college and we're

delighted i've worked with king's

college

on putting this all together well we're

going to kick off with david sainsbury

setting out uh some ideas from his book

in a presentation and then ed balls is

going to respond to him and then we're

going to

tease apart the ideas that they've both

put up there

so with that very warm welcome and david

sainsbury

uh please please go ahead

in the uk we are today faced with a very

alarming

situation in the period between 2010

and 2019 we had a very poor record of

growth

with the annualized rate of growth of

output per hour averaging just 0.4

percent

and the pandemic has of course made the

situation worse

at the same time the economists who

advise the government have not been able

to explain why

our rate of growth has been so low

referring to it as a productivity puzzle

in fact in recent weeks the government

has put 34 million pounds

into a productivity institute to try and

find out why

the uk has a low rate of economic growth

in circumstances where we could be

heading towards a decline in the

country's gdp

i do not think we can afford to wait for

the economics profession to spend a

couple of years

finding out why our rate of productivity

and growth is so low

i therefore want this morning to show

how a simple analysis

of our gdp figures us a high level

explanation

of why our growth rate is low and what

we need to do

to improve it before i explain why the

growth rate of the uk has been very poor

there is one technical issue which is

important to

understand when economists talk about

the productivity of the economy they are

not

talking about production efficiency as

most business people think

they are not talking about the number of

manners used to produce

the economy's output what they're

talking about

is the value-added power of firms in the

economy

inflation adjusted this is important

because the value-added per hour of a

firm depends not only

on its production efficiency but it also

its innovation

and competitive advantage in the

marketplace

and the price it can charge its

customers

so why can't economists explain our slow

rate of growth

the answer is they can't because in most

cases their thinking is based

on a mathematical model of growth which

has built

into it three assumptions which are

completely

unrealistic they are that the

capabilities of firms don't matter

and that we can think in terms of the

representative firm

that firms are managed by irrational

managers and that consequently

entrepreneurs play no part and that

we're dealing with perfectly competitive

markets

where everyone is selling the same

product at the same price

in such a world the only variable left

is the overall efficiency of the market

and as a result the value added per

hour of all sectors is assumed to be the

same

in my book windows of opportunity how

nations create wealth

on the other hand i put forward a

production capability

theory of economic growth

which is based on the idea that the

value-added power of the firms

in the different sectors of the economy

varies

because it reflects the performance of

the firms in terms of innovation

and competitive advantage

if we look at the performance of the

different sectors of the uk economy

during the period 2000 to 2019

as shown on this chart this is clearly

the case

the chart also shows that the poor

growth record of the economy and indeed

the poor productivity

can be explained by what happened in the

different sectors of the economy

and the shift of economic activity

between them

the data in the chart shows is that the

slow growth of the economy

was due to the performance of three

major sectors of the economy

manufacturing financial services and oil

and gas

and a shift in economic activities from

the high value added sectors

to low value added sectors as shown by

negative between effect

of minus 2.4 percent

in the case of manufacturing it suffered

a falling gva

from 55 pounds 73 pence

to 52 pounds 20 pence and also saw

fall in its percentage share of total

gva

from 10.64 to 9.65 percent

this was caused by firms in foreign

countries rapidly innovating

and increasing the competitive advantage

of their manufacturing industries

faster than our manufacturing industries

were doing

in the case of financial services which

is one of the uk's high

value added services the gva power grew

by 3.4 percent

between 2010 and 2019

but as a percentage of the country's

total gva

it fell from 5.44 to 3.99

the average revenues of the leading

listed four uk banks

fell by 17 between 2010

and 2019 as lower aggregate demand in

the economy

resulted in less demand for financial

products

in addition many of the financial

products which had flourished in the

boom conditions leading up to the

financial crash

were seen to have little economic value

after the crash

finally the oil and gas sector saw a

fall in gva per hour

from an amazing 681 pounds per hour

to 546 gva per hour

while its percentage share of the

country's gva

fell from 1.51 to 0.72 percent

the latter figure was due to the fall of

gva r

and a fall in g in output by a quarter

from the end of 2010 to the end of 2019

output is predicted to fall further in

the future

and downward pressure on the oil price

because of the growth of renewable

energy

and the relative uncompetitive nature of

our sector due to higher extraction

costs

means there's very little chance of the

sector stimulating

uk productivity growth in the future

it is i think surprising in view its

importance for the national growth

figures

that so little attention has been paid

by economists

to the impact of north sea oil

in summary the reason we've had a slow

rate of productivity growth

is that because of global competition

the high value added per capita sectors

of our economy

are today a smaller share of our economy

than in 2000

and the only way we can improve our rate

of growth is by increasing the

innovation and competitive advantage

of the high value added per capita

sectors of our economy

it has been argued that what we need to

do is to improve the productivity and

therefore the value-added per capita

of our low value-added services

this however i believe is wrong because

it's based on a misconception

that these are businesses which could be

high-evaluated businesses

if they were well managed but in reality

they're not they are businesses like

retailing restaurants hairdressing

hotels and news agents

which do a very important job for

society

but where it's very difficult to create

a competitive advantage

and therefore achieve a high level of

value added

increasing the innovation and

competitive advantage of our high value

added per capita businesses

will i will require i believe the

government to bring forward new policies

in four key areas these are technical

education

the regional level in up agenda

corporate governance

and r d and innovation

in the area of technical education i

think there is already extremely

uh valuable programming work being

rolled out

but i am obviously biased having been

involved in the design of it

in the area of r d and innovation there

is also a lot of excellent policies

being developed

though i'm not sure that the role of

that darpa plays in the usa

is well understood also a program for

diffusing the new techniques of industry

fought companies

is extremely poor in the other two areas

however

corporate governance and the leveling up

agenda new policies

need to be developed

i also want to make the point that the

production capability theory of economic

growth

which i've outlined in my book has

implications for the regional leveling

up agenda

of the government there are

substantial regional differences uh

in wealth in the uk but as the work for

the center

of the center for cities has shown this

divide is not simply due to geography

it's not due to workers in the north

working less hard than the south

or being less efficient nor is it the

case that all cities in the north

are less prosperous than those in the

south

it is on the contrary due to the ability

of cities

in different parts of the country to

respond to economic change

and reinvent themselves

government policies in the past which

have explicitly attempted to reduce the

north-south divide

and which can be traced back to 1930s

have not been effective because the

majority of interventions

have tended to reinforce the existing

industrial structure

by supporting low knowledge routine

activities

to reduce unemployment as opposed to

supporting the reinvention of cities

by increasing the number of knowledge

intensive businesses

in them as a result in many cities

in the north jobs in declining

industries have been replaced by

low-skilled routine jobs which are

vulnerable to foreign competition

and technological change

cotton mills and dockyards have been

replaced by call centers

and distribution sheds what we need to

do now

urgently is create more high value-added

per capita firms and jobs

in the poorer regions of the country

the leveling up of the poorer regions of

the country i therefore believe will

require the government

to develop more power in the areas of

skills and transport to mayoral combined

authorities

and also increase and improve the

strength in places fund

so that it can support the growth of

more high value-added clusters and jobs

in the low economic regions of the

country

finally i think that the development

that the policies have

i outlined will not be an easy task

ministers will need to make use of all

the data they have

and think creatively they'll also need

to avoid the temptation to turn to the

remedies of the past

and give ever greater incentives to

managers reduce regulations

or turn more areas of our society into

markets

such policies have their place but in

most cases their value has long ago been

exhausted

instead ministers will need to focus

specifically

on policies to create more firms selling

high value added services and products

in global markets in competition with

foreign firms

and that is a tough task but i believe

a doable one ed balls is now going to

give his

response to david sainsbury's opening

presentation

so let me start by saying this is an

excellent

book after a hugely disappointing decade

of wheat growth even weaker productivity

growth and widening economic

and political divides the book is a call

to arms to policymakers

to try harder to understand the true

drivers of productivity growth and

prosperity

skills innovation and the way firms can

develop competitive advantage and to put

that understanding

to good use both to boost prosperity

and to close the regional divides this

is a vital challenge which makes

uh which is even more vital

given that the current way the coveted

economic crisis

is um is challenging us all

it should be required reading for

cabinet and aspiring cabinet ministers

alike and not just in the uk because

the reach of the books analysis and case

studies

covers not just 300 years of history but

every

region of the globe the book is analytic

it's historically aware it's challenging

to conventional thinking

it's highly critical of past mistakes

but also

thoughtfully constructive about what can

be done

and none of that will be a surprise to

any of us who've worked with lord david

sainsbury

over past years and decades the reason

why the book draws upon such a depth of

both historical

business and government experience is

because david has lived that

experience himself his deep commitment

to putting that experience to work

and at times his frustrations too shined

through every page and having discussed

these issues at length of david

during our work back in 2014 on the

inclusive prosperity commission

which i chaired with larry summers his

warnings at the end of the book

about the dangers of slower of slower

growth and widening ill equality

for politics and social cohesion and

populism in the years to come

are very well made i will admit i did

have some worries

at the start of the book when he

basically rips into

pretty much the entire past history of

the economic profession

and its understanding of the drivers of

economic growth

but on reflection and i'm not sure david

is fully going to like

what i'm about to say in my view his

understanding of the way in which

markets

and the growth process works i've set

out in his book

pretty well reflect the consensus today

amongst modern mainstream economics

indeed the profession was already moving

in david's direction

back in the late 1980s when i was at

harvard

studying economics critiquing the

restrictive assumptions

of the solo growth model what david

calls neoclassical economics

in which growth is div is driven by

levels of investment and population

growth

and some exogenous and therefore under

analyzed factor

called technological progress i hesitate

to use the words neoclassical in any

public setting especially post

neoclassical

because that phrase post neoclassical

endogenous growth theory

included in gordon brown's 1994 speech

at labour's economic conference called

new policies for a new global economy

which was

which was held just a few months after

tony blair became labour leader

got me into some hot water also

into michael hesseltine's it's not

browns it's balls conservative party

conference speech

but the key insight of endogenous growth

theory was that the contribution

of technological progress wasn't

preordained it wasn't exogenous

it actually depended on how firms are

led

and financed and compete the skills of

the workforce

and the wider legal and polity and

policy context set by government

indeed if you read the full gordon brown

quote for the 94 speech

which incidentally i tried to cut and

gordon insisted

on putting back the night before he

delivered it our new economic approach

is rooted in ideas which stress

the importance of macroeconomics post

neoclassical endogenous growth theory

and the symbiotic relationship between

growth and investment and people and

infrastructure

and there you have if you throw

innovation in two a statement which is i

think pretty close

to the heart of david's growth analysis

that we've heard today and which is in

the book

it was i think our emerging

understanding of how markets work how

they interact with entrepreneurs

companies and the skills of the

workforce the way that drives growth

which led gordon brown to deliver very

lengthy sections on enterprise and

entrepreneurship

in his budget speeches but also to

reforms

such as strengthening and then making

competition policy independent

the huge increase in the investment in

science after 1997

introducing the the research and

development tax credit

and establishing the technology strategy

board the the setting up and funding of

the regional development agencies

and the detailed reforms which have

flowed from reviews such as

miners crookshank higgs and lambert into

financial intermediation

competition banking corporate governance

and university business links

reforms many of which david worked

closely on as

a business minister and in his book his

praise for the treasury ginger group

the enterprise and growth unit led back

then by john kingman

and his work on competition science and

innovation policy

is well made a lot of that thinking was

shaped by david as a minister

in the government of course that

government also made mistakes

uh ducking the challenge of tomlinson on

qualification reform

not being bolder on infrastructure

reform um not being bolder on the level

of adult skills but also

failing to give powers to regions to

to enact and and shape that spending and

then of course

and the failures of financial regulation

which happened in britain and all around

the world

in the middle of the um of the that 2000

decade

and those failures are important because

there's a further insight in david's

book

um an insight which i believe we and the

treasury growth unit also

shared and which we all have to

continually learn

and relearn yes the dynamics

yes the dynamism and innovation of

markets are vital for growth

yes the role of government is also vital

to make

markets work better and in the public

interest

but governments can also fail too they

can try to do the wrong things that can

end up

depressing growth that's why one of the

great advocates of endogenous growth

theory

in the early 90s was the chicago and

harvard economist

robert barrow who was to say the least a

government skeptic

and in david in his book certainly does

not fall into the trap

of thinking that governments always get

things right

not just in policy but in its approach

to growth in the economy

his concerns about government overreach

and the dangers of vested interests

capturing government and policy also

shine through

his view that government support should

be about enabling rather than directing

not government picking winners or

picking winning products or companies

but supporting sector leadership at his

view that infant industry arguments for

supporting nascent manufacturing

capacity

in developing countries can quickly be

and should not

be allowed to be taken over to justify

rich country protectionism

both correct insights in my view not

always shared by other

business experience policy commentators

as adam smith

one of david's least favorite economists

in the early part of the book

says in the wealth of nation people of

the same trade

seldom meet together even for merriment

and diversion but the conversation

ends up conspiring against the public or

in some contrivance to raise

prices that is an insight of the market

efficiency school

which may believe too much in the

invisible hand and hadn't understood

the importance of the role of government

in driving the growth and innovation

process but

it's an important insight nonetheless

and an insight which i believe we and

david

share what really strikes me about

david's book is his relentless pursuit

of better outcomes for the future

and after a global financial crisis and

the hugely disappointing

decade of growth and product and

productivity we've seen

since then in the uk around the world

but particularly in the uk

we do need new ideas and policies and

the reality is

i think economics is still puzzled by

what's happened to

to productivity yes we see a decline in

productivity and value added in

financial services but that is across

manufacturing too

the early evidence seems to be that this

has happened

in the high performing firms within

individual sectors as well there was

clearly some labor hoarding

and growth of services in the early part

of the decade

which helps explain this too but at the

moment i don't think we still fully

understand what is going on um i

i read a quote from martin wolf in the

financial times um

who says the good news is that with a

lower rate of growth of employment

in the future it's likely productivity

will rise somewhat

since one explanation for the

productivity stagnation was a lower

marginal product of labor and a rapidly

growing labor force

but that would not be enough to generate

a rapid rise in overall productivity

higher private and public investment and

more dynamic innovation competition will

also be needed

in a country damaged by the coming

brexit shock um

that is going to be a huge challenge

will it be met it will be a great

it will take a great deal of intelligent

and determined effort to do so and what

david's book does

is sent out in four areas the kind of

intelligent and determined effort

that we are going to um to see in skills

and technology

in technical education in r d in an

innovation in corporate governance

and in regions and leveling up

i won't talk in detail about all of

those because you need to buy the book

but on the first david has made a huge

contribution

in particular in recent years again

around technical education um with new

qualifications and

speeches by the prime minister in recent

weeks reflecting the report he did in

2016

will the funding be adequate will in the

end the new qualifications be enough

to overcome the old stigma between

academic and technical roots i think the

jury is still

out but david is still driving that

debate forward and that is very

important

i also agree with his reflections around

regional policy although

i will just add one different dimension

which is if you look in the divides in

our country

in terms of prosperity productivity and

also how that is reflected in people's

voting the growing divide is not simply

between london

a global city and the rest it's also

been

between the cities of our country and

the towns and and and non-urban city

areas the reality was a lot of the old

manufacturing david refers to

was not city based it was in the towns

around the cities

over the last 20 years many of those

cities have prospered

and moved forward think of manchester

think of leeds and moved into many of

the sectors that david advocates they

move into

but it's actually the areas outside the

cities which have fallen behind

increasingly and in my view moving from

a world

where you look across the region and

simply focus on

city leadership has the risk of missing

the areas which

are falling behind and where the

economic and political challenge to give

them

new chances and new opportunities is

still to be properly grasped

one final point i would just make before

we get into the discussion

the other thing which really strikes a

chord with me in david's book is his

frustration

at the chopping and churning and

changing a policy

from one parliament to another as he

says

nationalize privatize nationalize or

scrap the agency set a new one up is it

more than a rename

outsource this outsource that and

i understand that frustration in fact

one of the things i've reflected upon

since being

in government for all of those years is

that

all there's always debate and there's

always division

the only things which actually last and

make a difference

are the things which become consensual

which become part of

what is shared across the country across

parliaments across parties at moments of

change there is often

debate and argument the conservatives

voted against bank of england

independence

in 1997-98 and against the national

minimum wage but they have now become

part of the consensus think of the

astonishing achievement

the forging of consensus in pensions

reform

but in other areas we have we failed to

build a lasting consensus which lasts

beyond parliaments

and across parties and i think david is

right we need to do

better we don't need to think simply

about the right policy

but how we can come together as a

country and forge consensus which which

last

in terms of the policies we pursue but

also the way

in which we uh go about them when i came

out of parliament in 2015

i sat in a harvard hotel room

during the conservative party conference

to discover that george osborne was

announcing to the con

to the conservative party faithful the

setting up

of an independent infrastructure

commission to report directly to

to parliament um something which i spent

the last five years advocating something

which he showed

absolutely no interest in at all

and once i'd gone he announced it and

there's part of which thought

that's a bit unfair but then i thought

actually

in the end if this becomes part of the

consensus

that we need to plan long term for our

infrastructure it doesn't mind it

it doesn't matter who announces it

doesn't matter which government's in

power the question is

are we forging a consensus which can

last i think

as we look forward that's the kind of

consensus we need to forge in so many

areas

david's book sets out the analysis and

the ideas

and his challenge to politics to come

together and actually deliver

is a challenge well made david i wonder

if we should start with the challenge

that you've thrown down

to economist of of all kinds and whether

you think that

ed has entirely picked that up

um well i think he's picked it up and i

think he made a very fair point

which was that actually uh the

government

of which he was a member i think they

didn't

strictly stick to near classical

thinking

and in fact did some extremely sensible

things through the enterprise and growth

team

uh which ia as minister of science and

innovation

benefited hugely from and in fact that

obviously developed my own thinking so i

think

that has to be putting put into the

discussion

having said that i do think uh

neoclassical

economic thinking which is what is

taught

pretty much to every economic student in

england

and in america has not been helpful

to some of these discussions because it

does really have

a number of things built into it which

are just simply

wrong and unhelpful so this point about

uh really you don't think about the

capabilities of firms at all you think

of them just as the representative firm

this this idea of perfect competition

which which says everyone is really a

price taker

um and competitive advantage doesn't

exist

everyone is it's like the the market in

gold everyone is selling the same

product at the same price

i think this does confuse things and it

certainly makes people think

of the economy as just one sector which

has one level of productivity

and as i think the figures i produce

show that is that is a very

mistaken view of the economy a lot of

these things turn on

different levels of value-added and

competitive advantage in different

sectors

and if your theory ignores that

then i think you come up um

you just make the mistakes of not

understanding

what is driving things in different

parts of the economy

ed you're actually teaching a lot of

students at the moment harvard and

and and kings i mean do you accept that

challenge i think the truth is if you

start studying economics as a

an a-level student or as a first-year

undergraduate that's where you begin

you learn the very basic models of

neoclassical economics and you learn

about perfect competition

and how markets clear and um

and if that's when you stop then that

would give you a pretty

narrow warp view of the world and maybe

um the part of what happened politically

if you go to milton friedman who

actually was a brilliant economist

and did some hugely innovative things in

the 50s and 60s

around consumption and around

unemployment he then in the 70s

became more of a of a an advocate

for a particular view of how markets

work

and um and also broader liberal

um right to center liberal political

values

in which the idea of you know the free

market became

the central but the economics i

learned once i've dropped beyond the

first few weeks was about

why those simple stylized free market

models don't reflect the world

and you learn about oligopoly and

monopoly and power

and the way in which um that can distort

things but you then also learn

about how you have frictions in markets

and why they don't clear

and then you learn about how economies

can get stuck in different

equilibria which you know a good

equilibrium a bad equilibrium you can

get stuck

and the market doesn't take you to the

better outcome and then you learn about

how

governments can do things to make the

economy work better

and then you also learn and you should

learn about how governments can do

things badly which could make

the um make economies work badly and the

challenge is always

if you take david's analysis which i

agree with which is

markets by themselves often produce

some optimal outcomes government has to

do

certain things to make markets work in a

competitive way

but also to make sure that you get

around problems of

free market failure or free riders

so that you get the levels of investment

you need in

skills or in infrastructure which

wouldn't be provided simply by the

market system

but governments also have to make sure

that they don't start doing some of the

things which

then starts to make things worse and you

know there was a view about 1970s

industrial policy which is bad

you need governments to make markets

work well you need a certain degree of

of intervention but as david says in his

book without

trying to pick the individual product or

firm

and somehow think that governments are

more

insightful and far-seeing than um than

than um than just leaving things for the

free market so the free market fails

governments can fail too and finding the

right kind of government

to live a better market outcomes is

really really hard

and that's what we i think have been

struggling to do all of our professional

lives

well the only thing i'd say is i mean if

um

you know if if it was that really

near classical economists in our

universities understood this issue

about competitive advantage and so on

it seems to me they should be saying

that and it shouldn't be left to a

person like myself who's not economist

to have to point out that the reason for

the productivity puzzle

is that different sectors are behaving

in different

ways related to their competitive

advantage i mean

that should be something that everyone

understands

and i i think that is because people

religiously stick to this this model of

perfect competition

uh and it just isn't true it doesn't it

isn't

uh a market like that it's one where

competitive advantage

uh is the reality i i accept that

challenge and i think economics has got

to do better until jeremy corbyn became

the leader of the labour party he had

never been described as a neoliberal

before

um but because that was never how i

thought about the world and then until

this moment i've never actually been

accused of being a neoclassical

before but you know it's it's important

to push back

and i'm not equating in any way the two

people making the charge

so if you look back on you on your time

in government what um

what now would you do differently in in

to crack this these kind of issues that

we're talking about

i think um well

when we came into government in 1997

there was some philosophical argument to

be had

there were people in the treasury who

thought it wasn't government's role

to try and think about research and

development or innovation

or to worry about the strength of our

export sector they the kind of people

who thought the word competitiveness

was a dirty word um but i think in

general that wasn't the mainstream view

in the treasury which we inherited and

i don't think that that was um how the

government thought about economics

the reality was if you take skills

policy it wasn't

in the end not thinking skills policy

did

mattered or thinking no but we can take

a near classical view and leave it to

the market it was that

faced by vested interests which were

either departments

or particular parts of the sector

who had an old-fashioned vested interest

stuck in the mud view and resisted

politics sometimes has to take on those

arguments

i think those were the things which got

in the way more than

an analytic failure so these are

obstacles outside if you like these

weren't things that you

uh think looking back we should have

done it's just

i mean i was asking about what you what

you would have done looking back

um seeing how entrenched these problems

have been and

you've given me an answer about the

wonderful vested interests which are

which always encounter all i was saying

was that um

that governments can fail because they

have the wrong analysis

or because they are timid in the face of

people who don't want change

all because they are just short-term

mister and make mistakes

or they have too many other things on

and lose focus

and we made some mistakes right across

that range of areas so somewhere

analytic

some were just time somewhere but if you

take something like adult skills

i think there is a um there's elements

of

all of those in i mean it was a failure

but if you take i mean i think david may

not fully agree with him

with me on this but i think ducking

tomlinson was a mistake

in the end that happened because there

was a business view which is they didn't

want change

and there was a certain wing of the

school's world which didn't want change

and even though pretty much every person

in

government and education did want change

um the prime minister society didn't

want it and therefore we didn't do it

that's not yeah

but i think just just moving away from

from the labour government a moment from

this

um uh where i think you can see the

neoclassical model totally breaking down

and been and being just not been able to

explain the situation was in the

financial crash

uh because it it um you know people say

well actually the economist didn't

predict it

that that i don't think is a crit is a

fair criticism because

unless you were very close to what was

happening um

it would have been very difficult to

predict it what i think is extraordinary

and and is uh a very fair criticism of

the economic profession

is that after the crash when it was

quite clear what were the institutional

failings still the economic profession

doesn't say what the causes are and it

and because and the reason for that

is that really institutions do not play

any part in neoclassical

kind of thinking so when faced with a

financial crash

people said well you know we we can't

think of an explanation

if you understood about institutions

and understood about banks balance

sheets

and um what the banks were doing in

terms of

the amount of equity it was very clear

what what went wrong and i think that is

a criticism

of fair christmas near classical

economics well so it's definitely a fair

criticism

i'm not totally sure whether you could

blame neoclassical economics in the end

non-executive directors of the big banks

with a fiduciary duty

didn't see what was going on in the

institutions which they were supposedly

stewarding

we had done big institutional change

making the banking independent

regulating for an independent statutory

financial services authority

in the end neither the regulators or the

bank dug deep enough into what was going

on

what i'm saying is i'm just not sure you

can blame economics for that i mean

there's a lot of

change but the institutions failed no no

i wasn't i wasn't blaming

um in that sense because

as i say i think was difficult to

predict but subsequently

when the queen asked you know why why

did it go wrong

and the economic profession should have

been able to say

look it went wrong for these three

institutional reasons

and there were institutional reasons

because neoclassical economics really

doesn't

see institutions playing any part in

this

it just failed to have an explanation

and for something as

serious as a financial crash i think

that is that is a criticism

what about some of the answers to this

and it sounds as if

skills uh which we've begun to talk

about is one of the areas where you

very closely agree with david i think so

well i'm not totally sure

um i the funding of adult skills

has been especially in the last 10 years

woeful but we didn't do enough

um there hasn't been enough focus on

high end

technical qualifications and david's

report um addresses that i think he's

also worried about some of the

institutional delivery

questions but the reason i mentioned

tomlinson was because in the end

forcing um schools and young people to

choose between

an academic gcse a level track

or a you know a technical track

worries me and i think that is where

we're going to be

as a result of the kind of government

reforms which are on the table at the

moment we will still have that

bifurcation and i think in our system

that still leaves you open to the the

risk of of second class

technical education well i i i think

that

i don't think that is right actually i

mean they if you look around the world

every every country has pretty much

an academic and a technical education

route

they vary when people split off and

that's very important

they vary about whether people can

switch between the two which is also

very important

but that's not why our technical

education

is is bad because of the split it's bad

because

um you need three things to have a good

really good technical education system

if you look around the world

say who's got a good technical education

system

uh and they have three things the first

is they have a national system

of qualifications which everyone

understands

i said if you're going to do that job

this is the qualification

you have what is in the qualification is

set by

industry so everyone knows

that if you take that course and then

you go to

industry and say i've got this course

you will get appointed rather than

another person because you've got those

skills

if you have us we have had a system

where there are so many qualifications i

mean there are 24 qualifications worth

for plumbing um no one knows what

quality they are

how good they are the poor kid goes and

gets a qualification takes it along to

an employer

and the employer i have no idea whether

this is good or bad yeah

not surprisingly kids say well what on

earth is the point of this

yeah so you've got to have a national

system of qualifications which works in

the marketplace

we've never had that over the

whole century we've been looking at that

for better or worse that's what we now

put in has been put in

and it follows what other countries do

and i think that's what will give

prestige

uh to uh t levels is technical

qualifications necessarily seen as

second class i mean if they if

if they had the rewards in in that

employers um you know really value them

as david's been describing

i think that the um the reality in the

past

is that people have taken the view that

once you go down the

the technical route there isn't the

option to

switch back into the economic route um

that we make those decisions very early

and um the consequences

that the message which young people get

in school

from teachers head teachers careers

advisors

universities and parents is you know

stay on the academic track

and go to university and um

the the diploma which i was um

part of trying to introduce was

everything david described

i mean in the end it failed because the

take-up was too low

but it was going to be a national

qualification

it had been designed by industry

i remember being on a visit with the

head of a

sixth form an fb college i t department

saying it's terrible

disqualification we won't be able to

teach it in the i.t department

they're making us do it jointly with

business studies because apparently

they've got to apply

it in the world and that's not what we

teach and the business guy who was

actually from vodafone said but that's

what we've always wanted

to hire and the deploy the idea with the

diploma was you would be able at 14 to

set off down that track

knowing that within that you could

choose to bias yourself

in a more academic direction at a

university or to take this more

technical route

everybody would do maths and english and

in the end you would come out

with with a qualification which would be

national

and have the same parity and where

people could move between the two

and the reason why in the end it failed

was because the government said

no we're going to keep a levels as

the gold standard but we'll have this

diploma as well

and the schools thought well you know

that so it's not going to be as good

and in the end what did michael gove do

as

education secretary in 2010 the first

thing he announced was he was only going

to give you

the english back if you had

certain gcses and in which music

drama design technology sport

anything technical was all classified as

second class

and not in the english baccalaureate so

this is deep in our system

and everything david's doing i think is

right my worry is

is it enough if we keep telling through

schools

kids don't get the second class route go

the first class route

well i think kids will decide for for

themselves i mean i think

one of the interesting questions to ask

is why is a level

got prestige and i think it's very it's

very clear first

it's national qualification every kid

knows

that if it wants to go to a good

university it has to do well in a levels

and if you go to a good university

that's the route into

a good well-paying job and that's what

in the end counts

so i think if if you can get to a

position where you have a t level

um and you can take that it's part of

national qualifications

you know you get a better job uh if you

if you have that

then that's what we'll give give

prestige and i won't be what people are

told

it's in the end it will turn on the fact

that you know a young person goes into a

pub

and says to a friend don't do that

rubbishy degree

at this third rate university which

won't get you a good job

come and do this t level because if you

get that

then you'll go to a good that's what

will change that is totally the right

approach

when i was secretary of state the number

of times i went to

big companies around the country and you

would meet in their early 20s

people had gone through the

apprenticeship route and ended up with a

level four qualification so they had

they had a university level

qualification they were earning more

money

hugely prestigious within the firm and

you said to them

what advice did you have to get to this

point and all of them

had done it despite the advice of

schools

teachers careers advisors often parents

certainly all the messages from the

universities who are saying well you

know

risky this is what we do in britain

we're going to get a levels if we go to

university so

everything you're doing i agree with but

what i'm worried about

is you send a signal to 12 and 13 year

olds first class second class

and the second class route never second

class inverted the comments because it's

not second class you earn more money

going to do the technical you know

in the end and get rid of the the

british disease you're describing

if you like the british prejudice david

it's it's unfair to ask you

is you've written a whole book on this

of um right uh to

given in a nutshell the things you like

the government to do but i want to get

on to the excellent questions we've

had sent in so what would be your your

um

parting shot if you like well i think um

what my book in the end

says is that the engine engine of

economic growth is

is innovation that can be innovation in

production methods or it can be

innovation in product which gives you

competitive advantage

and so the policies you have to develop

are those that

encourage uh innovation uh

and they're pretty obvious they're r d

um

uh their skills uh i think corporate

governance is

is um uh very important because we've

we've managed to produce

a corporate governance system and

particularly

linking remuneration to share value

which is totally counterproductive to

investment and innovation

which is why in america you're seeing

this appalling amount of share buybacks

which is all about getting the price the

the share price up

nothing to do with investing long-term

and

innovation and then i think

the other the final area is this

question of regional leveling up

because what i think my book shows

and which uh further work i think shows

also

is uh the problem we have in the regions

um is we do not have enough high

value-added companies

we've often replaced uh

declining industries with uh

very low value-added jobs in

distribution centers and you will only

change that if you get

high value-added businesses into those

areas

so that's about how do you get more r d

into the regions

get the training up and i think also

give mayors the ability

to create the right environment in their

cities

to encourage high evaluated businesses

i mean today one in north extraordinary

thing

you would have thought that running a

city one of the

fundamentals was that the person running

it had control over both

spatial planning and transport i.e

that seems to me so obvious if you take

place like manchester uh

spatial planning is done by essentially

local authorities

across manchester and transport is done

by the ministry of transport

now this is no kind of way to run a

major city

so that's an area you've got to get

right

and only if you do that can you begin to

get

some of the particularly cities

where they were based on one kind of

industry

that industries in decline and replace

it with new high value added

industries i i

i i there's one example of this which i

think is really interesting

which is if you take bradford and leeds

which are 10 miles apart

leeds is much more has much more wealth

than bradford

so what what is this due to well it's

it's due to the fact that

bradford was the great wool cloth it was

the place famous for worsted

and west is not the place to be if you

want high

value-added industry these days and it

struggled to get out of that

leeds was always more

[Music]

diverse it went into pr it had some

worsted but it also had

printing tanning and other things

and the result of that is it's moved

into i.t financial services and other

things

and that's what you've got to repeat but

it's

the problem is how do you take cities

and get them to reinvent themselves

with high value-added businesses

that's the challenge again it's not a

challenge

that neoclassical economics understands

at all because

it thinks all industries pretty much

have the same

productivity we can have a whole session

just on that on the cities

or on innovation but actually that leads

directly into our first question

hello i'm professor linda yu an

economist at oxford university

lsc ideas and the london business school

my question for lord sainsbury is this

like the united states the uk has done

well in some tech sectors

for instance fintech but it doesn't have

a significant

advanced manufacturing sector so these

are industries which have high levels of

technology

and r d and skills that's grown well in

the united states

and it's why there's been reassuring

manufacturing

which has returned to u.s shores

so my question is what needs to be done

in the uk

to upgrade manufacturing into advanced

manufacturing

david david you want to take this we

were just talking about it yes i

am well i wouldn't want just to say

first that i don't think there's quite

as much reassuring as

as the question implies uh because

reassuring reshoring

is um used in two different ways one is

bringing

actually bringing manufacturing back

from china or wherever

to america um there's very little of

that i think

and then there's reassuring which is

reassuring profits

because the americans had a system where

it was tax advantageous to keep your

profits offshore

um and which they did in huge quantities

the tax law was changed and they brought

the profits back to

to america that doesn't change anything

really in terms of

competitiveness uh and where

where people are moving things they're

not moving them from china to america

they're moving them from china to

vietnam

so i think one must be a bit careful

about thinking that's

um reworking in terms of bringing it

back

um how do you turn it into advanced

manufacturing

we know how you do that

uh you do it by having institutions to

diffuse

innovation and knowledge to businesses

that's what we did in uh

our agriculture for many many years

and we have the highest productivity in

agriculture

then mrs thatcher abolished adas and we

now don't have

high level productivity so the way you

do that

is to have organizations diffuse

technology

and when i was in government i set up

something with the enterprise

and growth team which was called a

manufacturing advisory service

which was just this which was people

with

a lot of manufacturing experience going

into small businesses

and saying to them look you could do

quality control you could do lean

manufacturing

um and of course that was then abolished

by sevik javid

of no doubt on the argument well

you know rational businessmen know what

they need and should pay for it

and we're now left in a position which

we haven't got

an organization to do this at just the

moment when you really need it

because we're coming up to a period

where industry 4

is really important industry 4 is the

digitalization it's

of of industry and pretty well every

major

advanced country has a program

uh for raising the level of knowledge

it's about diffusion it's not my

research it's about diffusion of these

techniques to industry

what do we have we have one experiment

in the northwest west

bound by a lep which is quite an

inadequate body to do this

that's one experiment every other

country has a perfectly good

cross-national system of diffusing these

new techniques to industry

so that's what you have to do that's

great we're now going on to a question

from gemma tetlow chief economist at the

ifg

i'm gemma tetlow chief economist at the

institute for government

this government has big ambitions for

both more active industrial policy

and reaching net zero greenhouse gas

emissions

in your book you suggest that government

can and should actively intervene to

promote innovation

would it make sense for this government

to do this to promote a shift to greener

technologies

and if so how could policy be designed

to do that effectively

david what do you think of that point

this is an extremely good um

question and i think there are some very

clear policies that

government can adopt to encourage

green products and green energy and so

on

they're pretty pretty obvious ones first

of all there is sporting

technology for example if you have

wooden turbines

just sporting the development of this

generic technology is an important thing

for governments to

to do and you only got to look at the

incredible increase in efficiency of

wind turbines to see how

good this can be the second thing you

need to do

is of course when you start with

certainly these new technologies

is to have feed-in tariffs i need to

give them

very high tires to take off the

electricity

so that they can then build up um to get

the

competitive advantages um and of course

some countries have done this extremely

well

the people by and large sadly they're in

asia so that

if you take solar energy which was

invented

in in calif in america the first market

for it was in

california that solar panel industry is

now

almost entirely in china with a bit in

germany

because they did that of feed-in tariffs

and a feed-in tariffs in the context of

climate change was

stopped by the oil and gas and coal

industry in america

which is why solar power is now going to

be in biotin

uh city in china so those are things you

can do

and what do you think the government

here the uk government should do now

well i think that they should obviously

there's another stage in

wind turbines which

i think the government is looking at

encouraging this

and there's a second stage which is you

can go into deep waters

uh with it um and there is technology to

be developed

for for that so there's that's an issue

and again

uh feed-in tariffs are important i

i think uh tidal power is actually

something the government

should look at because um in fact we

have the best

we have we're very good at wind in in

england we also

are very good in fact in potential for

tidal power

um and actually of course tidal power is

uh

related to some of the areas where you

would like to see

uh economic development and you might

include in it as well nuclear power

i'm not sure that's the thrust of the

question but

the government is another area and of

course

um i think also green products um

is an interesting area

and there you can use

for example public purchasing or

what we developed in government which

was the

sbri scheme which was model on america

where you use creatively use government

purchasing

to encourage products

that was very much related to products

which

government wanted but you could use it

for um

green products as well

and actually while we were in government

we did also a scheme with a design

council i don't know this is just

thinking about it you answer this

question

and which we subsidize we have very good

designers in this country we subsidize

them to help small businesses

design new products i think you could

you could devise

a very interesting product which if

people came up with ideas for green

products

you could um bring in the design

in industry um with some kind of subsidy

to help small businesses design a new

green product

so there are a lot of things you can do

for the

tragedies by and large they've been done

in asia now rather than

in this country this is a classic

example where um

where markets can't deliver there are

clear market failures

both about the provision or the

protecting of a public good

um the climate and the safety of the

planet but also

that we can't see the future we don't

have perfect foresight and markets

to be really efficient need to see the

future and of course

we can't um so you have to have a

government role and the question then is

what is the government's role and what

risk of government failure

do you run because if the the

if if the solution is the funding of

basic research

well that's straightforward once you get

into

very powerfully

interventionally regulatory rules

tax-based incentives which are based

upon

trying to foresee the future which we

can't the chance of getting it wrong

we're talking here in a way about the

thing that both of you have you know

rightly decried which is the government

picking winners or picking you know

winners of technology and saying look

we're going to back this or

or and not that when we were in the

treasury in the

early 2000s when i was there we were we

were

concerned about the amount of money we

were about to spend on renewables

and there was a lot of skepticism about

the ability

of technology and then industry to meet

um

the thresholds being said and they've

been hugely surpassed

and actually the technology has done a

great job and so

that money was very much not wasted but

it's quite easy to waste

money on punts which don't work out and

you know as you move from the general

principle or the here and now just

trying to spend

large amounts of money to punt on the

basis of picking a particular future

but governments are often not very very

good at that and um

if they do it badly and they waste a lot

of money if they do badly you can see

all the advantages going elsewhere so i

think what i say in the book which i

think is

is the good rule which is don't try and

pick

companies and don't hire and pick

products because that

is requires a granular kind of knowledge

which

you simply never having in government

but

picking technologies and picking sectors

where you can see things happening their

governments actually have quite a good

record

of supporting it but don't try and pick

companies and don't try and pick

products because you'll never have

enough granular knowledge to

make even picking technologies i mean

you know some of some of the early

commitments to some of the renewables um

were very very expensive it just

then happened that because of that the

price came down

yeah but if you look at wind turbines in

this country

and you look at solar

in the far east the winners are

the people who actually made those

governments who made those bets

would you say the same for nuclear um

well i think um nuclear there's so many

issues um

there are but it but it but it is you

know it is it is an example of what

we're talking about

where governments um uh tried to pick a

version of the future or try to get into

it early indeed the uk was

uh was one of those yeah i mean um

obviously i mean it's it's true of

companies as well as it's true of

um governments um that if you're going

to innovate

you don't always get it right the

question is do you get it right enough

if you don't try you you of course

you're not in the game at all

um and that's true of business as as in

government

let's go to our final question which is

from giles wilkes senior fellow at the

institute for government

this is giles wilkes i'm senior fellow

at the institute for government

i've been here for about a year but i've

had great pleasure working with you

going back to being a special adviser

for vince cable and

theresa may too and i've got a question

that goes back in time a little bit too

i mean

you've been steadily advising

governments for over 20 years about the

importance of a certain way of thinking

about policy about clusters and

innovation

and understanding how place and research

are entwined

probably long before academic superstars

like ed glazer and gina moretti

now do you think that governments have

heard you but failed to execute or

just not listened hard enough i mean

have your thinking changed over 20 years

because

i've been reading about your knowledge

economy work under mendelssohn and i

i keep this book of yours by the desk to

help me with my industrial strategy work

and

i'm interested to know what your theory

for why it's still a problem is

i i think the answer to to this is as a

whole

that this is where people have

been blinded by uh

to go back to our subject of

neoclassical economics

um and i can give you an example of this

um i mentioned that we when i was in

government

we did introduce with the enterprise and

growth team

a scheme called the manufacturing

advisory services which was modeled on

in fact

manufacturing extension partnerships in

america which has been a very

successful scheme uh diffusing

manufacturing knowledge

to small businesses and we introduced

the

manufacturing advisory services which

worked very well with

experts going into small businesses and

and improving their productivity

and then that was abolished um by savage

javid

as i say on the grounds that i assume

that businessmen now because they're

rational managers

know what technology they need and

therefore should pay for it

and that means we're now at a

significant disadvantage

so i think this is where they're

classical economics which says look you

should never

never get involved in this it's it's

rational managers you know

what the risk and rewards of of

everything is

um you should not interfere in that and

i think that's a mistake because

i've been in um i was a long time in

industry

and if there's one thing i learned that

one was not dealing

as a whole with rational managers

who knew the risks and rewards of each

course of action

i mean it's it's it's a fantasy world

and this is where i think government can

help

and charles also asked whether your

thinking has changed over 20 years

um over 20 years um

well i think i think um the particular

views i've held

um probably haven't changed um

it was only i think um actually after i

came out of government

that um i began to think to what extent

they

actually related to

economic theory because i'd done these

things all on the basis

of what i'd seen in other countries and

what i knew worked from

being in industry and it was only when i

came out of

government that i started thinking of

them in terms of

what is the theoretical economic

position

and they seem to be completely in

conflict with

the kind of economic thinking and that's

when i sat down and wrote the book

well i guess um if i think of the

of sergio java's decision there or

michael gove

abolishing building schools for the

future or educational maintenance

allowances many other things when he

became

secretary of state took over for me in

2010 it just feels a bit unfair

to blame neoclassical economics for what

was actually

a change of government with new people

coming in and thinking

let's rip it all up and do it a

different way so that we can

have our own blueprint and get the

credit i was not sure that i

think that was driven by some big

economic theory but my learning

is that it's partly my fault

because i think one of the things that i

have changed my view on

and um and i feel reading david's book

that he probably shares some of this as

well

is that there is too much discussion of

difference in division

and we don't work hard enough to try and

bring people in

and forge a common view which then lasts

through time and maybe that um the

labour government didn't do enough

to persuade sajid that the mac was a

good

thing and maybe i didn't try hard enough

to put michael gove in a position where

he had to join

our consensus and you know i grew up in

a time in the 70s where consensus was a

dirty word but

it's the only thing which lasts the

things which become consensual

and if we can forge some consensuses on

the idea in david's book

that the world will be a better place

well there is quite a lot of agreement

on this there it is quite a long time

since there was a labour government

no um do you think

do you see the makings of consensus on

this

um well i would like to think that that

could be

because i i don't think um it takes up

it's first of all it it's basically a

book which is

uh based on mark a view that the market

is the is that how you should base your

economies so it's based on a market view

of economies

uh but it does say uh there is a role

for government

this is rather it's not the kind of

extreme labor view of directing industry

it's enabling industry

um and i would like to think that you

could get consensus around that

sort of view mainly because of course as

you look around the world

that's what the successful countries are

doing i mean they

they are doing it on the basis of market

economies

where government plays a big role in

supporting uh the companies and enabling

them to do things by

r d and so on and that really should be

something

uh that you can get a large measure of

consensus about it's also the case

there's not been a labor government for

10

years but at the last election in 2019

there was clearly not a consensus

on these matters between the parties and

whoever wins the next election

i think will be a bet in a better place

for the next 10 years

if around some of these ideas there is a

cross-party consensus such that

a change of parliament doesn't mean

a change of approach and throwing

everything out of the window because

that's just very destructive

on that we're going to have to stop and

we're some way off the next election so

we've

we still got time to see on that thank

you all very much indeed for listening

thank you for the very good question

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