Sunday, 27 March 2016

Not Invented Here

A few weeks ago, Chris Dillow asked in respect of the UK economy: "do we have the right set of institutions to foster the socio-organizational change that beget productivity growth?" Institutions in this context includes markets, the financial system, property rights and state intervention. The premise of Chris's question is that the macro-level institutions that support and regulate the individual or firm have a significant bearing on innovation and thus productivity. The same is true of micro-level institutions, i.e. the components within firms that govern innovation, from product development labs to suggestion boxes. A further assumption is that institutions, in freezing social relations at a particular point in time, can pass their sell-by-date, even to the point of becoming counter-productive. As Marx put it, "From forms of development of the productive forces these relations turn into their fetters". This raises the problem of institutional change. My focus here is not the process of change, or the specific institutions that Chris recommends, but the degree of variety in institutional choice

History has many examples of states that imported institutional models, from Peter the Great to Meji-era Japan, not to mention those who exported their institutions through hostile takeover. Globalisation and neoliberalism, in homogenising organisational and technical best practice, have gradually reduced this diversity in many areas of the economy, though not across all parts of society. One of the delusions of the 90s "end of history" meme was that it would apply to politics as much as finance or law - that liberal democracy was the future for all - but in fact domestic political institutions have proved more resilient, from Havana to Beijing, suggesting that they need to be thought of more as cultural artefacts than the instrumental "executive committee of the bourgeoisie" that Marx described. A similar reduction in diversity can be seen at the micro-level as businesses have focused on their "core competence" and outsourced support services. While there is no shortage of "bullshit jobs" in the typical corporation, there is much less variety among them. Where a large office might once have had an inhouse electrician in blue overalls, a diversity policy officer is (ironically) just another suit.

Once there is no "elsewhere" whose proven tools and refined techniques we can adopt, and assuming aliens don't suddenly appear in our star system, productivity growth will largely depend on endogenous innovation (whose long-term rate has been a little over 1%). This raises the troubling thought that our current relative stagnation may be (at least in part) a result of globalisation in that opportunities for significant catch-up have now been reduced due to the pervasive spread of technologies and techniques. This is not to say that there is no potential for further "institutional arbitrage" between developed and developing nations, but that the rapid growth experienced by the former during les trente glorieuses was partly the consequence of rapid institutional change during the postwar years, much of it state-led and not a little imposed from outside, notably in continental Europe and Japan, and that similar scale opportunities do not exist today. The "opening up" of Cuba is hardly on a par with Deng Xiaoping's reforms in China.

The claim, advanced from the 1970s onwards, that deregulation would liberate market innovation and drive economic growth through higher productivity has been disproved by history. Financial deregulation led to speculation and asset bubbles, not more productive investment, while labour market reforms have produced job polarisation and greater income inequality, rather than the efficient allocation of workers. The recent emergence of labour-capital substitution, through the medium of increased self-employment and limited hours contracts, has actually helped drive productivity down, which should hardly have come as a surprise. When labour is expensive, productivity growth is at a premium, prompting capital investment and factor optimisation. When labour is cheap, productivity growth becomes less important for maintaining or increasing profit margins. Systematically exploiting the workforce, in the manner of Sports Direct, becomes more important.

The counter-argument to deregulation, that innovation and productivity growth depend on state intervention, never went away, however it has undergone a transformation from the idea of the state as a social employer (i.e. nationalisation) to a facilitator with aspirations to be a venture capitalist. What is notable about the institutional forms advanced in support of the "entrepreneurial state" is their lack of novelty - it's the same old mix of academia, centralised investment banks (though with a topical "green" colouring) and golden shares in strategically important businesses. This ignores that much of the success of these institutions was historically-specific, relying not only on the massive financial boost of wartime and postwar reconstruction but also on social values that directed talent to science rather than finance, considered patience a virtue, and compensated modestly paid professionals like researchers with esteem. We live in a different world, one where innovation and productivity is likely to be better served by a basic income than a green bank.

At the micro-level, the term "disruption" conjures up images of young software developers surrounded by half-eaten pizzas, or abrasive companies like Uber cannibalising old industries, but its more typical environment is the modern corporation where it has evolved into a synonym for executive-led change. What tends to get disrupted are not competitors but internal functions, particularly ones that show independence of thought. In many businesses, the fetishisation of innovation is a compensation for the declining return from 80s nostrums such as "adopting best practice", but this is a stylistic evolution not a change in substance. One phrase that hasn't yet gone out of fashion is the sneering "not invented here", applied to those sceptical of the value of imported ideas, despite its apparent contradiction to the ideal of innovation. This is because "innovation" in business-speak doesn't mean endogenous development or uniqueness but buying-in the same components as everyone else. In other words, "adopting best practice".

The influence of business schools and consultancies since the 80s, and the informal spread of ideas through increased job-hopping and executive promiscuity, means that there are few pockets of the large business sector where anything other than "standard best practice" is now followed. Turning round small businesses (where eccentric behaviour is reliably rife and generic problems are tractable) has become a TV genre, reinforcing conventional corporate wisdom about finance, marketing and human resources. Documentaries on larger businesses (as opposed to public services with their human interest angle) are rare because there isn't the variety to engage viewers, while comedies like The Office work because of the generic familiarity. Meanwhile the not-so-new economy of software startups and hipster commerce celebrates over-work and the emotional satisfaction of commodities, completely missing the point of Mad Men. Despite the scooters and informality, the modern office does not represent an institutional advance likely to promote productivity.

The "liberation" of business from state intervention since the 70s has produced not greater institutional variety, as market optimists hoped, but greater conformity. Business process engineering and "the quality revolution" flattened out the kinks in many firms, and unquestionably improved productivity during their initial adoption (along with IT) in the 80s, but in so doing they removed much of the organisational grit that might have produced pearls of innovation. Outsourcing and offshoring exacerbated this in the 90s, reducing the potential for synergies that naturally arose through informal worker collaboration. The growth of the "gig economy" since the millennium means that fewer people are in a position to be innovative in their work, or likely to be motivated to make improvements. It's worth remembering that job security and corporate loyalty are themselves institutional components.

At the macro-level, neoliberal hegemony has fuelled a countervailing appetite for difference, which has been a common theme since the emergence of "antiglobalisation" in the 1990s. There is a thread that runs from the Seattle protests to Donald Trump. His message is that he wants the USA to "invent here": to value homegrown talent and restore the global standing of native genius ("make America great again"). The irony is that he is a perfect emblem of the neoliberal economy in his personal brand franchising and outsourcing. If he ever gets the chance to build his own Great Wall on the Mexican border, you suspect he'll give the job to the Chinese after clinching a "great deal" on the price. In the UK, both supporters and enemies of Corbyn imagine that he and John McDonnell offer a return to the state intervention of yore but with added iPads. What attracts and repels each side is not the specific measures (which means they aren't adequately critiqued) but the determination to offer a national solution rather than accept the global orthodoxy. In other words, to invent it here.

1 comment:

  1. Fully in agreement with the general thrust of the argument, though I'd probably add to this:

    'One of the delusions of the 90s "end of history" meme was that it would apply to politics as much as finance or law - that liberal democracy was the future for all - but in fact domestic political institutions have proved more resilient, from Havana to Beijing, suggesting that they need to be thought of more as cultural artefacts than the instrumental "executive committee of the bourgeoisie" that Marx described.'

    I'm not sure you have to go down the route of 'culture' to describe this diversity, merely that the role of a state- essentially to provide political authority for the dominant classes- differs according to the balance of political and social forces within a country. Almost all countries play a role in the world economy and are dependent on it, but not all have the same class structure or economic make-up. Consequently, it makes sense that some types of regime have a 'competitive advantage' in certain areas. I think that the sheer variety within 'liberal democracies' of governing forms, institutions, voting systems and public administration has served to disguise this, as well as the fact that in many socio-economic traits, such as working conditions, consumption patterns and the like, there is often little difference between democracies and dictatorships.