A post-Brexit, post-Covid unstable world: economic progress, trade and politics podcast

Transcript

A post-Brexit, post-Covid unstable world: economic progress, trade and politics

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Thomas Creighton (TC): Hello, welcome to the Emerald Podcast Series. My name is Thomas and my guests today are Richard D. Simmons, a visiting fellow at the University of Hertfordshire in the UK. He specialises in entrepreneurial growth, supply chain dynamics, trade dynamics and monetary policy. And also, Nigel Culkin, who is a senior academic manager at the University of Hertfordshire, UK, recognised as an international expert on entrepreneurial growth and the institutional and policy elements needed to enable it. They are the authors of "COVID, Brexit and The Anglosphere: Frameworks for Future Trade and Economic Growth", and, previously from Emerald, "Tales of Brexit, Past and Present: Understanding the Choices, Threats and Opportunities in our Separation from the EU", as well as "Mastering Brexit Through the Ages: Entrepreneurial Innovators and Small Firms - The Catalysts for Success".

Thank you very much, Nigel, and Richard, for joining me on today's podcast all about your book COVID, Brexit and The Anglosphere. Can I ask you about the structure? Because you design your latest book on COVID and Brexit to be read in a series of different ways, depending on the reader. Can I ask what drew you to that?

Richard D. Simmons (RDS): I think because the book was trying to do different things for different people. This book is intended to be something that can be read by the general reader sitting in their armchair on a Sunday afternoon, after they've had Sunday lunch, hopefully to keep them awake instead of sleep. It's also intended to be to be read by serious students at universities to prompt a discussion and a rethinking of some of the concepts around economic growth within economics which I'd like to return to. It's also been written as a primer for high school students at A-levels, but also for first year undergraduates and second year undergraduates because the depth of the sources that are within this book are actually covering a lot of things which aren’t covered in normal economics syllabuses, if I can put it that way, because it brings together Adam Smith, David Ricardo, thoughts from John Stuart Mill, laissez faire, through to list the idea of infant inventory protection, Alexander Hamilton in the States, through to Keynes, through to Minsky. And it covers such a wide range of economic thought, which is that unified in Schumpeter's concepts of economic development and economic growth, that what we've got here is something that is also, particularly in the chapter on trade theory, intended to be an introduction for economic students that they can use as a guide to get into the literature. So, forming a book that's as broad as that, the idea of it was to give each reader a different route to be able to go through it so they wouldn't get frustrated. Because there's nothing like reading a chapter on trade theory if you feel like sitting in an armchair after Sunday lunch to send you to sleep. But you may well be interested in the conclusion on where we think things are going in the final chapter. They may well find the chapter on the Anglosphere itself very interesting because that's something which you've seen in the media. But it doesn't really mean much and what we've tried to do is to unpack that.

So, the reason why the structure is there is that this is trying to be 57 varieties all at once, in one book, and it's covering a huge space. So, some readers may be a little bit frustrated that it doesn't go into more depth on some issues, but we'd encourage you to look at the extensive endnotes and bibliography with it. Because those are the places where we're pointing you, we’re signposting you, if you want to know more about this. This is where the detailed literature sits behind it. So, the book also acts as the signposting. If you're sitting down and doing something, it's actually a signpost.

Nigel Culkin (NC): I have a daughter who has just entered sixth form in the UK, and she's taking History. And I have a son in the upper Sixth Form who's taking Geography and Economics. And they’ve both have a quick look and both can see things in it for them, but perhaps not the same things in it for them. And my daughter is looking at the Italian government pre-World War Two and we look at today and the new Italian Government is introducing the glory days as part of its rhetoric. So, there's a geographical and place is very important. The history side allows us to look at it from a complex but not complicated perspective. And universities find it difficult, schools find it difficult. Universities find it difficult to think about interdisciplinarity and that's what we're trying to do to weave these points together, but also make life easier for people because I don't like to see my daughter falling asleep on a Sunday, reading my book.

TC: It draws on so many different fields, you mentioned the interdisciplinary aspect of it. The book tales of Brexit past talks about the Roman era and the Reformation era. What directed you to look into these eras?

RDS: History doesn't repeat itself, but it does. It doesn't repeat itself exactly because no set of circumstances is exactly the same. But, if you look at the big underlying themes, those things do come around on a cyclical basis.

So, if we don't look backwards, we can't look forwards. It seems to be if you take Brexit, as expressed by the pure Brexiteer, Brexit is about smashing a plate-glass window. It's not about putting a substitute strand on it to make it reflect the sunlight. It's not about saying I want a slightly different color to it, it's actually about smashing the window, and putting a completely different construction in its place.

Now, that has only happened a few times in history. It happened with the fall of the Roman Empire. It happened with the Reformation, in a different context. It happened during the reconfiguration of Europe after the First World War. And it happened after the fall of the Berlin Wall, and we're still going through the resonance from that. When those big moments of change happen, they completely invalidate the models that people have used because those models are based on, when you look at the IMF studies on forecast accuracy, they're always perfectly accurate until there's a big change, and then the model is all falling apart and they're not accurate about anything because models tend to predict what's happened before going on into the future. Whereas, what we're dealing with Brexit is an intentional discontinuity. It's not just a shock, it's a discontinuity. We've added to that a pandemic, which is an unintentional discontinuity. And we've added to that the war in Ukraine, which is, I don't know whether that's intentional or unintentional, but it's certainly discontinuity. And we now have a further discontinuity, which is becoming more and more evident, which is the strain between China and the United States.

So, somewhere in all of this, you can't go back and look back to economic theory over the period from 1980 and think of continuity. What you have to do is look at other periods of great change to understand the dynamics that are within that. It forces a different way of looking at things because you're dealing with something which is not effectively static equilibrium within a growth path, you're actually dealing with chaos in a dynamic model of change. That means that you've got two completely different worlds which are clashing because the institutional world is well equipped to deal with "Well, tomorrow's going to be roughly the same as today and this is what I need to do." And that is what you've seen is the reaction to the Liz Truss budget that was such a disaster from the point of view of the markets. You've seen people try and go back to something they understand. But going back is never an answer. When you smash the plate glass window, you have to take the next step forward. And the question is: how do you understand what that step forward is when you can only do that if you look at the discontinuities that have happened in the past. And for that, you have to go back to history.

And when you then phase entrepreneurs into that narrative, entrepreneurs provide excellent examples of individuals that have done and dealt with moments of change like that, which is why, in the book, you see a narrative that talks about the stories of some of the entrepreneurs, to actually take us close to people who have actually been through this before. And it's not that we copy them, it's that we learn from them and then we have to revise where we are now and adapt it. So, it's not originalist in the way the Federalist Society would be in the States under the US Constitution. It's something which is evolutionary, but that goes back to original concepts which are learned from history.

TC: You mentioned how we can learn from the past. And, of course, we have had these big discontinuities, as Richard has mentioned. Can I ask what can we learn from the big changes we've seen over the last few years?

RDS: I could turn the question around and I could say, how much have we learned or have we learned nothing? The first lesson of any discontinuity is when the piece of glass is smashed, the world has changed. And that we haven't learned. It happened in 2008, when the financial system collapsed, or nearly collapsed, and we haven't understood what that means in terms of what we have to adapt. Instead, we thought that it needs more regulation. But, actually, what it needed was a return to entrepreneurial capitalism. It needed to move away from where the financial sector takes an increasing set of the resources and feed those back to entrepreneurs.

The financial sector does amazing things for the UK but it has to be anchored into the real economy. Or else, what you have is an Iceland-type situation where you have a financial economy, which acts within global markets, but doesn't link to its local country. Now, when you look at the Boris Johnson levelling-up agenda, which we've heard so much about, that's a reflection of the financial sector in London not linking into the rest of the economic activity within the UK. Because London's role has been as the duo- World Financial Center, rather than as a bridge between being both a dual financial center of the world and being a center of economic activity that actually feeds the regions in a way that actually helps them grow. And one of the key reasons for this is to do with the way that this capital is fortuned. Because it's easy enough to get capital, if you're a big company, if you have a lot of a large number of assets. Or, if you've got a lot of cash in the bank, they'll always give you a loan against the cash you've got in the bank, why wouldn’t they? The problem is that the entrepreneur doesn't have those things. By definition, the starting entrepreneur that’s going to innovate something has usually got pretty well nothing. And the risk capital markets in the UK, they're better than the ones in Europe, but then they're not as evolved as the ones, in say, Silicon Valley. So, there's a question of how capital can reach the people who can innovate. And that's something that I think governments have been struggling with since at least 1911.

There was a seminal report by the Macmillan committee in the 1930s, that Keynes made a very important contribution to. It was a problem that Lord Kaldor contributed to on interest in the study in the late 1950s. It's something that recent governments have tried to handle through the British business bank, which, by the way, seems to have been quite a positive initiative and have made some steps forward. But what we haven't done is we haven't reconfigured the way we think, and the way we approach entrepreneurs and the way that we approach the idea of capital being to support the entrepreneur since 2008. Instead, we've regulated to try and make banks safer. But being an entrepreneur, you've got to take risks. There's the conundrum, isn't it? Yeah, there's the conundrum: entrepreneurs need risk capital, banks need to make sure that your money's safe. And we have skewed ourselves, ever since 1846, into saying we're going to protect savers, but actually we also need to protect entrepreneurs because there won't be any savers if there aren't any entrepreneurs.

TC: I was concerned that sometimes having these big breaks is generational. However, this sounds like a lot more than that, we're stretching over a much longer period of time in terms of lessons we need to learn.

NC: I think that that's true what you're asking and if we go back to our British UK successes right back to the first Queen Elizabeth, we developed into a very strong trading nation across the sea. We supported shipbuilding and we took advantage of routes that had been found before. So, we had a global outreach. We traded. Our Navy was there to support our outposts. So. we viewed it from an entrepreneurial side. But when you now have, within this last six years, Ian Duncan Smith, perhaps talking about buccaneering Brexiteers, it's fine for a simplistic narrative. But it doesn't happen now, think trade, there's a financial trade, there's physical trade, there’s services trade, it's a number of different ways. And using that rhetoric is designed to win over hearts, but not necessarily minds. And that's what we've tried to introduce, both the opportunities, but, more importantly, the pitfalls of that.

So, it's very easy for a government to say, we'll have a global Britain, we'll be looking at new free trade agreements, we'll be looking at free ports. Many of them haven't worked, lots of them have been tried. And we wanted to lay that out in a way that allowed us to put forward different arguments or different paths to the next position. If you're looking at entrepreneurial successes, entrepreneurial development, and right through to entrepreneurial growth. That's a difficult one to deal with. But we took the view that that was what we wanted to do in these books.

RDS: I'd like to pick up a particular example, which is in the book, which has to do with Southwark, because there's a whole chapter that looks at the development of Southwark and Bermondsey over the period from William the Conqueror through to today. And one of the features in this, Nigel talked about how the maritime tradition actually enabled things within the UK, it was more specifically England at that point, is the felt hat industry. In the restoration period, in the 1660s/1670s, felt hats were all the style. They were all sourced from Europe. They were sourced from beaver hair from Russia. And it changed very rapidly into being most of them, certainly in the UK, were sourced from Southwark with a felt hat industry. And that grew on the back of the Hudson's Bay Company, importing beaver pelts into the docks of London, and exporting foodstuffs and essentials for the trading outposts. Now that setting was within a mercantilist empire setting. So, you have a trade theory here for students, undergraduates, where you can see the effects of mercantilism in terms of economic development, because you can see that there is a mercantilist policy, the ships are actually up and navigation active forced into London. And there is a manufacturing industry that grows in Southwark and Bermondsey, partly because they are less regulated than the City of London, but partly because they were also the place where the immigrants came. And so, when there was the persecutions in the Netherlands to do with the religious wars there, and when the Huguenots were expelled from France, they were taken into that area, and it was a very fluid area, but they also bought with them dyeing and weaving skills that weren't there. So, you had this hotbed, this cluster, of textile skills that enable the felt hat industry to grow. It was linked to mercantilism, but it was also linked to open immigration. And it was also linked to, there was a proximate, large proximate market in London. And there was also an easy way of exporting because we were in the quarter. So that tradition, which if we think of Ian Duncan Smith, Buccaneers is maybe what he's thinking of, though, maybe he's thinking more of the things that happen out into Russia or whatever, which is described in our book Tales of Brexit. The thing about all of this is that it also required a political structure of hegemony over some of the territories that you were dealing with. And that links us into why in the title of the book we have the Anglosphere, because you can have free trade, or you can have mercantilism, but someone has to set the rules. And the rules are either set by a hegemony, or they are set by a mercantilist policy. And the question, one of the big questions that we have now, with the rise of China, with the Ukrainian war, with the experience of the pandemic, is what is the role of the United States going to be globally? Because it has been management since 1945. What is going to be the new rule setter, globally, and how is that going to fit? The Anglosphere in the book's title fits to address that question, as one option to address that question, it does not say it's going to work out that way. The only thing it does say is this question is going to arise, it is going to become more and more important to deal with. And we are already seeing it day by day where we're seeing people restrict to trade between different blocks. We're seeing tensions within tariffs, we're seeing things which are being done on semiconductors. What we are seeing at the moment, is it's not really a trade war, it's a struggle for who's going to be the hegemonic rule setter. If you look at telecoms, if you look at G five telecom rules, China has been trying to dominate all the technical committees, committees of the telecoms regulator. The western end of things is catching up and understanding that this is a threat. And so, you are seeing things in response to this, but the idea that everything can be multilateral, it can only be multilateral if you have a political consensus, that there will be a multilateral hegemony, but that never really existed. It was a US hegemony. And then it was a US/USSR hegemony, then it was a US engine. And now we have a multipolar, really confused world where nobody knows what the hegemony is. And that is probably one of the reasons why everything feels such a muddle. And the Anglosphere in the concept of the title of the book is one structure who could possibly offer a way that sits with the traditions of the United States and the traditions of the UK, to come together to provide that stability, and also engage Europe in a way that you can understand.

TC: I know, crystal ball gazing is a dangerous game. But what do you see in the next 5, 10,15 years? Is there a way that a British government, could support entrepreneurs?

RDS: I want to pick up the point that Nigel has schooled me through over the years, which is the question of what is the difference between economic development and economic growth? Economic growth is surely, and Nigel please correct me where I'm wrong on this, something which is sort of incremental. You have existing firms, you have existing products, you have existing markets, you have a new iPhone, that looks a bit different, but actually, it does the same thing. Economic development is where you create new markets, you innovate something completely new. So, if I think about snail mail, in the 1980s, when we used to send letters and making them go faster, well, maybe you have a courier service, that's economic growth. But if I think about email that came in, that is a completely different technology, that is economic development. Its transformed things. We need entrepreneurs and we need support structures, and we need enabling structures that will deal with both. So, the book sets out two innovations in terms of theory, economic theory. The first is, it takes a model which was developed by Nicholas Kaldor and by Gunnar Myrdal, of cumulative causation, which it fuses the two of them together and then updates it for the digital age. Myrdal was talking about the social dimension of change, and a social dimension of entrepreneurship. And his work was extremely important in terms of the civil rights movement in the US, in terms of showing how equality of opportunity helped Black entrepreneurs and Black communities develop, and how those communities were completely disadvantaged unless they could actually be bought into a cumulative model, where they were supported in education, living standards, civil rights and whatever. Kaldor, who worked with Gunnar Myrdal in the UN Commission, in the 1950s took an economic view. And he said, what you need is export-led growth. Productivity comes from manufacturing, under something called Verdoorn’s Law, which is an ever-increasing return to scale. So, your unit cost goes down as you produce more. And he said, what you need to do is you need to export more, to get more volume through your key industries. That gets your unit cost down, and that makes you more competitive. Now, that was the basis of the 1964-70 labor administration's selective employment tax, and also of the early 1970’s thinking in terms of picking winners. But actually, the world is more complex than that. And what we do in cumulative causation model, we use Southwark as an example of showing how that model worked. We don't seek or we don't try in this book to express it mathematically. So, for my economics colleagues, I know you will be frustrated that there are pages of hieroglyphics, but actually, we wanted this to be something which is accessible for people to be able to read and to understand. And its very complexity makes it very, very difficult because you're dealing with something where you're looking for a dynamic equilibrium, rather than a static equilibrium, because you're looking for something which is completely within the concept of change. And the cumulative model we've got says that services, apps, new technologies, all the things in industry 4.0, they matter as much as industry 3.0, industry 2.0, industry 1.0, because actually, productivity gains can come from anywhere.

But to have sequential productivity gain, what you actually have to have is a benign, stable environment. So, smashing the painted dark plate of glass, actually is difficult, because everybody then has to go about how do you repair the window, rather than actually thinking how do you polish the window. The second thing about it is that it is a game very complex. There are lots of different actors. And you get into a benign, a virtuous circle of causation and you get growth, it takes quite a lot to knock it off. But when it gets knocked off, you get in a vicious cycle of decline. And you get Southwark and Bermondsey, which was a very affluent, well-to-do, suburb of London, within 50 years, becomes the Bermondsey of Dickens, when Nancy gets murdered in Oliver Twist. And what an extreme, what a set of extremes. But this is the lesson out of this. And it is a very important policy lesson is that if you want to grow things, you have to enable the intrapreneurs, the entrepreneurs within businesses, for them to be able to keep innovating, that means they need stability, they need to know where things are going. And they need things like tax incentives, which incent them to invest. The UK has the lowest investment business investment level of any OECD country and has done since 2008. Not surprisingly, the UK is at the bottom of the growth in total factor productivity as well. And not surprisingly, its in at the bottom of the growth in real wages. So, there is something about cumulative causation. And then on the other side of it, we have to remember the world is not static. When you pull your phone out of your pocket, think back 30 years, would you have had a mobile phone to pull out, let alone a smartphone. So, what we're talking about there is we're talking about moonshot products, moonshot entrepreneurs, we're talking about economic development, which transforms and creates markets. And we have created what we call a quadruple vortex of innovation, which is a lot of words to say that there's lots of things come together but actually, the entrepreneur, the state, universities, and private capital need to come together to generate success in those huge disrupting those unicorns, those Google's that everybody wants to grow. And you can't have a policy that goes for the cumulative causation. Just make it a little bit better every year. That is going to fit the ones that are going to be the moonshots they are different, and they need supporting in different ways. But all of them come together and say that at the center of it is the entrepreneur. And the central problem is channeling capital to the entrepreneur who can apply it to meet a market need.

NC: Since the 2000/2001 SARS and MARS endemics in the Far East, Oxford University has been supported with funds from the Department of Health to look at ways in which that it can, you know, develop ways to overcome that. Solving this on its own is not enough, and it needs that link to entrepreneurial thinking who can turn that research into saleable products and, and you could argue that that person perhaps was Dame Kate Bingham, who chaired the UK Government Vaccine Task Force, and she's also the managing partner of SV Health Investors. She catchy brought that in, she pulled together the partners the development of the AstraZeneca Oxford biomedical vaccine, supported by the state through search funding to Oxford, encouragement to partner with AstraZeneca, initial orders to assure profitable productions, supported by the multinational AstraZeneca, the technology and Oxford Biomedica had access to the capital needed to grow. So, we have the potential moonshot. If we were to leave it to Truss economics, it will be left to its own devices to float to see where it where it ends, whereas we view it as there is a moonshot, what can we do to promote that? Because since the I think, since around 2000, if you look at R&D on vaccines, on ways in which we deal with such worldwide problems, that R&D has shifted, there's still a lot going on in the US is still going on in the UK. But that has shifted over to the Far East, to Vietnam, to Korea, to China. So, we have to look at this, the positions that we're in and say we've possibly failed, and we haven't done that well out of the pandemic, in terms of dealing with it. But that was one success. And its a success. We do not wish to become a historical artifact. We wish it to be a way to move forward.

TC: And I could say thank you very much to Nigel and Richard, for joining me.

RDS: Thank you very much.

NC: Thanks so much, Thomas.

TC: Thank you for listening to today's episode. For more information about our guests. For a transcript of today's episode, please see our show notes available on our website. I would like to thank Kathy Mathers and Daniel Ridge for their help with today's episode and Alex Jungius, from This is Distorted. You've been listening to the Emerald podcast series