Restarting the Future

How to Fix the Intangible Economy

Jonathan Haskel, Stian Westlake

• Publisher: Princeton University Press
• Year: 2022
• ISBN:
  9780691236025
• Topic: Economia
• Subtopic: Teoria economica

From the acclaimed authors of Capitalism without Capital, r adical ideas for restoring prosperity in today's intangible economy The past two decades have witnessed sluggish economic growth, mounting inequality, dysfunctional competition, and a host of other ills that have left people wondering what has happened to the future they were promised. Restarting the Future reveals how these problems arise from a failure to develop the institutions demanded by an economy now reliant on intangible capital such as ideas, relationships, brands, and knowledge.In this groundbreaking and provocative book, Jonathan Haskel and Stian Westlake argue that the great economic disappointment of the century is the result of an incomplete transition from an economy based on physical capital, and show how the vital institutions that underpin our economy remain geared to an outmoded way of doing business. The growth of intangible investment has slowed significantly in recent years, making the world poorer, less fair, and more vulnerable to existential threats. Haskel and Westlake present exciting new ideas to help us catch up with the intangible revolution, offering a road map for how to finance businesses, improve our cities, fund more science and research, reform monetary policy, and reshape intellectual property rules for the better.Drawing on Haskel and Westlake's experience at the forefront of finance and economic policymaking, Restarting the Future sets out a host of radical but practical solutions that can lead us into the future.

PART I

What’s Gone Wrong, and Why?

1

The Great Economic Disappointment

Since the early years of the twenty-first century, developed economies have been wrestling with a host of big problems: stagnation, inequality, fragility, dysfunctional competition, and a general sense of what we might call inauthenticity. In this chapter we describe these problems and some of the standard narratives used to explain them. These narratives are characterised by nostalgia, fatalism, or both. We offer an alternative explanation: that the problems should be seen as the result of the difficult transition of advanced economies from a reliance on tangible assets to a reliance on intangible assets.

Right now it is hard to view the modern economy other than through the prism of the COVID-19 pandemic and its aftermath. So much is wrong and different that the world’s problems before COVID-19 seem like a sepia photo of a vanished world.

But cast your mind back to 2019 and you will recall that even then there was a widespread feeling that something was wrong in advanced economies. This worry was ubiquitous and multifaceted. From the keynotes of Davos to the rallies of populist politicians, it formed a sort of wallpaper for how we talked about modern life. It expressed itself in the big-picture stories we tell about our national economies (Why is economic growth so low? Why don’t we make anything anymore?) and the way we think about our personal lives (Why is working life ever more stressful? Why does my job involve so much bullshit?). It united unimpeachably mainstream economists debating secular stagnation and market concentration with critical voices asking whether capitalism is destroying our planet and creating an unbridgeable gulf between rich and poor. When people talked about the economy, they did so with a sense of disappointment, as if we lived in an age of lead.

Faced with the challenges of recovery from a global health crisis, these concerns may seem quaint and dated. Who cares about secular stagnation when output has fallen by 25 percent? Who cares about the structure of the economy when the immediate challenge is to protect public health and consumer and investor confidence? But we must continue to care because these long-term concerns have not gone away. They have a common cause that is grounded in long-run changes occurring in our economy. Our ability to understand and respond will determine our ability to rebuild our economy. Like a lightning storm on a dark night, the COVID-19 crisis helps illuminates some of the long-standing problems we face, making hidden issues clear. It also provides an opportunity to put them right. Furthermore, COVID-19 illustrates the vital necessity of getting right the long-run features of the economy. Just as innovation in World War II built on the stock of basic research before the war, such as radar, COVID-19 vaccines are based on past discoveries, such as Katalin Kariko’s research into synthetic messenger RNA.¹ And, of course, paying down the debt buildup created by COVID-19 will require faster economic growth.

Five Symptoms of the Great Economic Disappointment

Sometimes the most familiar and ubiquitous phenomena are unexpectedly difficult to recognise and describe. We must ask the same questions that a doctor treating a patient with many symptoms asks: Which symptoms are linked? Which ones should we disregard as extraneous? Our first task, then, is to itemise the long-run concerns about the twenty-first-century economy.

As noted in the introduction, we propose that people are concerned with five negative characteristics of the twenty-first-century economy: stagnation, inequality, dysfunctional competition, fragility, and inauthenticity. We’ll explain each of these in turn.

Stagnation

The dramatic fall in output following the COVID-19 outbreak in 2020 is the most dramatic shock to economic growth in living memory. But the rich world was hardly in good economic health beforehand.

Figure 1.1 shows what output per capita would have been if growth had continued at its trend from the start of the century to the financial crisis: advanced economies would have been 20 to 30 percent richer.

The disappointment is all the more acute if we look over a longer period. For most of the second half of the twentieth century, developed countries could rely on average real GDP growth of over 2 percent a year. The turn of the century saw a drastic 50 percent reduction in economic growth. Between 2000 and 2016, growth in real GDP per capita in the United States was around 1 percent per year (see table 1.1 later in the chapter). If we focus on the period of the global financial crisis and afterwards, the figures are even worse, with growth from 2006 to 2016 at a feeble 0.6 percent per year. European countries experienced similarly low levels of growth. Towards the end of 2019, the United Kingdom’s Royal Statistical Society selected low productivity growth as its statistic of the decade.

Low growth is so familiar to us now that even before COVID-19, experts took it for granted. But it would have been truly shocking to observers as recently as twenty or thirty years ago. One vivid way to get a feel for how disappointing current levels of growth are is to look at long-range economic forecasts prepared in the early years of this century and earlier. The last report of the US Congressional Budget Office before the start of the global financial crisis predicted growth of 2.5 percent per year in the mid-2010s.² Most other central banks seem to have assumed the same.

FIGURE 1.1: Output per Capita Relative to Prefinancial Crisis Trends. Source: Authors’ calculations using Organisation for Economic Co-operation and Development data.

A decade earlier, pundits seem to have been even more optimistic. A detailed survey by the Organisation for Economic Co-operation and Development (OECD) from 1992 set out several scenarios for US economic growth in the 2010s. Its two business-as-usual forecasts predicted the American economy would grow between 3.1 percent and 3.4 percent per year. Even its gloomiest case (called, with some prescience, “Global Crisis”) predicted growth of 2.3 percent per year. Peter Schwartz, the father of scenario planning, provided an even more optimistic perspective in a widely read piece in Wired magazine in 1997, predicting the US economy would grow at 4 percent per year until 2020.³ Paul Krugman’s explicitly downbeat book The Age of Diminished Expectations, reprinted several times in the 1990s, was overoptimistic too, presenting a base-case forecast that the US economy would grow at just over 2 percent a year in the coming decades.⁴ Even Keynes would have been disappointed. In 1930, when he wrote “Economic Possibilities for Our Grandchildren,” he estimated that GDP would grow eightfold between 1930 and 2030.⁵ Based on growth to date, even excluding the effect of the COVID-19 pandemic, the UK and US economies have managed to grow by a factor of 5 and 6.4, respectively.

But the problem with economic growth is not just that it has slowed down. It has slowed down in a way that has defied many standard economic explanations. The weak growth of the early twenty-first century coexisted with low interest rates and, until the COVID-19 crisis, high corporate valuations. Economists call this phenomenon secular stagnation. We can see those high valuations in figure 1.2: Tobin’s Q (a measure of how optimistic investors are about future corporate profits) is not quite at the dizzying heights of the dot-com boom, but it is way above its 1980s lows.

FIGURE 1.2: Tobin’s Q in the United States. Source: Federal Reserve Economic Data.

This state of affairs is surprising. Normally, high corporate profits are a sign that businesses are reaping good returns from their investments. If money is cheap, then we would expect businesses to raise funds and invest more in the opportunities available to them, which would cause economic growth to recover. But interest rates have been low for over a decade, and growth remains low. What’s more, this slow growth is happening during a period of widespread belief that a lot of exciting technological progress is being made. If this is true (a question we consider in more detail in chapter 4), then slow economic growth is th...