Reaching the 2.4% R&D intensity target

I had a rather difficult and snowy journey to London yesterday to give evidence to the House of Commons Business, Energy and Industrial Select Committee (video here, from 11.10). The subject was Industrial Strategy, and I was there as a member of the Industrial Strategy Commission, whose final report was published last November.

One of the questions I was asked was about the government’s new target of achieving an overall R&D intensity of 2.4% of GDP by 2027, as set out in its recent Industrial Strategy White Paper. Given that our starting point is about 1.7%, where it has been stuck for many years, was this target achievable? I replied a little non-committally. I’d reminded the committee about the long term fall in the UK’s R&D intensity since 1980, and the failure of what I’ve called “supply side innovation policy”, as I discussed at length in my paper The UK’s innovation deficit and how to repair it, which also highlights earlier governments’ failure to meet similar targets in the past. But it’s worth looking in more detail at the scale of the ambition here. My plot shows actual R&D spending up to 2015, and then the growth that would be required to achieve a 2.4% target.

R&D expenditure in the UK, adjusted for inflation. Data points show actual expenditure up to 2015 (source: ONS GERD statistics, March 2017 release), the lines are the projections of the growth that would be required to meet a target of 2.4% by 2027. Solid lines assume that GDP grows according to the latest predictions of the Office of Budgetary Responsibility up to 2022, and then at 1.6% pa thereafter. Dotted lines assume no growth in GDP at all.

One obvious point (and drawback) about expressing the target as a percentage of GDP is the worse the economy does, the less demanding the target is. I’ve taken account of this effect by modelling two scenarios. In the first one, I’ve assumed the rates of growth predicted out to 2022 by the Office of Budgetary Responsibility in their latest forecasts. These are not particularly optimistic, predicting annual growth rates in the range 1.3% – 1.8%; after 2022 I’ve assumed a constant growth rate of 1.6%, their final forecast value. In the second, I’ve assumed no growth in GDP at all. One hopes that this is a lower bound. In both cases, I’ve assumed that the overall balance between public and private sector funding for R&D remains the same.

Assuming the modest growth scenario, this means that total R&D spending needs to increase by £22 billion (41%) between 2015 and 2027, from £32 billion to £54 billion . To put this into perspective, between 2004 and 2015 spending increased by £6.6 billion (26%) in the 11 years from 2004 to 2015.

Some of this spending is directly controlled by the government. My plot splits the spending by where the research is carried out – in 2015, research in government and research council laboratories and in the universities amounted to one third of the total – £10.7 billion. This would need to increase by £7.4 billion.

As the plot shows, the government’s part of R&D has been essentially flat since 2004. The government has announced in the Autumn budget R&D increases amounting to £2.3 billion by 2021-2022. This is significant, but not enough – it would need to be more like £3.5 billion to meet the trajectory to the target. There is of course an issue about whether the research capacity of the UK is sufficient to absorb sums of this magnitude, and indeed whether we have the ability to make sensible choices about spending it.

But most of the spending is not in the control of the government – it happens in businesses. This needs to rise by about £14 billion, from £21 billion to £35 billion.

How could that happen? Graham Reid has set this out in an excellent article. There are essentially three options: existing businesses could increase their R&D, entirely new R&D intensive businesses could be created, and overseas companies could be persuaded to locate R&D facilities in the UK.

How can the government influence these decisions? One way is through direct subsidy, and it is perhaps not widely enough appreciated how much the government already does this. The R&D tax credit is essentially an indiscriminate subsidy for private sector R&D, whose value currently amounts to £2.9 billion. Importantly, this does not form part of the science budget. More targeted subsidies for private sector R&D come through collaborative research sponsored through InnovateUK (and, for the moment at least, the EU’s Framework Programme). In addition, private sector R&D can be supported indirectly through the provision of translational R&D centres whose costs are shared between government and industry, like Germany’s Fraunhofer Institutes. The UK’s Catapult Centres are an attempt to fill this gap, though on a scale that is as yet much too small.

Business R&D did slowly increase in real terms between 2004 and 2015. It is important to realise, though, that these gradual shifts in the aggregate figure conceal some quite big swings at a sector level.

R&D expenditure in selected sectors, from the November 2017 ONS BERD release. Figures have been adjusted to 2016 constant £s using GDP deflators.

This is illustrated in my second plot, showing inflation corrected business R&D spend from selected sectors. This shows the dramatic fall in pharmaceutical R&D – more than £1 billion, or 22% – from its 2011 peak, and the even more dramatic increase in automotive R&D – £2.5 billion, or 274%, from its 2006 low point. We need to understand what’s behind these swings in order to design policy to support R&D in each sector.

So, is the 2.4% target achievable? Possibly, and it’s certainly worth trying. But I don’t think we know how to do it now. The challenge to industrial strategy and science and innovation policy is to change that.

Technological innovation in the linear age

We’re living in an age where technology is accelerating exponentially, but people’s habits of thought are stuck in an age where progress was only linear. This is the conventional wisdom of the futurists and the Davos-going classes – but it’s wrong. It may have been useful to say this 30 years ago: then we were just starting on an astonishing quarter century of year-on-year, exponential increases in computing power. In fact, the conventional wisdom is doubly wrong – now that that exponential growth in computing power has come to an end, those people who lived through that atypical period are perhaps the least well equipped to deal with what comes next. The exponential age of computing power that the combination of Moore’s law and Dennard scaling gave us, came to an end in the mid-2000’s, but technological progress will continue. But the character of that progress is different – dare I say it, it’s going to be less exponential, more linear. Now, if you need more computer power, you aren’t going to be able to wait for a year or two for Moore’s law to do its work; you’re much more likely to add another core to your CPU, another server to your datacenter. This transition is going to have big implications for business and our economy, which I don’t see being taken very seriously yet.

Just how much faster have computers got? According to the standard textbook on computer architecture, a high-end microprocessor today has nearly 50,000 times the performance of a 1978 mini-computer, at perhaps 0.25% of the cost. But the rate of increase in computing power hasn’t been uniform. A remarkable plot in this book – Computer Architecture: A Quantitative Approach (6th edn) by John Hennessy & David Patterson – makes this clear.

In the early stages of the microprocessor revolution, between 1978 and 1986, computing power was increasing at a very healthy 25% a year – a doubling time of 3 years. It was around 1986 that the rate of change really took off – between 1986 and 2003 computer power increased at an astonishing 52% a year, a doubling time of just a year and a half.

This pace of advance was checked in 2004. The rapid advance had come about from the combination of two mutually reinforcing factors. The well-known Moore’s law dictated the pace at which the transistors in microprocessors were miniaturised. More transistors per chip gives you more computing power. But there was a less well-known factor reinforcing this – Dennard scaling – which says that smaller transistors allow your computer to run faster. It was this second factor, Dennard scaling, which broke down around 2004, as I discussed in a post last year.

With Moore’s law in operation, but Dennard scaling at an end, between 2003 and 2011, computer power counted to grow, but at the slower rate of 23% – back to a 3 year doubling time. But after 2011, according to Hennessy and Patterson, the growth rate slowed further – down to 3.5% a year since 2015. In principle, this corresponds to a doubling time of 20 years – but, as we’ll see, we’re unlikely to see this happen.

This is a generational change in the environment for technological innovation, and as I discussed in my previous post, I’m surprised that it’s economic implications aren’t being discussed more. There have been signs of this stagnation in everyday life – I think people are much more likely to think twice about replacing their four year old lap-top, say, than they were a decade ago, as the benefits of these upgrades get less obvious. But the stagnation has also been disguised by the growth of cloud computing.

The impressive feats of pattern recognition that allow applications like Alexa and Siri to recognise and respond to voice commands provide a good example of the way personal computing devices give the user the impression of great computer power, when in fact the intensive computation that these applications rely on take place, not in the user’s device, but “in the cloud”. What “in the cloud’ means, of course, is that the computation is carried out by the warehouse scale computers that make up the cloud providers’ server farms.

The end of the era of exponential growth in computing power does not, of course, mean the end of innovation in computing. Rather than relying on single, general purpose CPUs to carry out many different tasks, we’ll see many more integrated circuits built with bespoke architectures optimised for specific purposes. The very powerful graphics processing units that were driven by the need to drive higher quality video displays, but which have proved well-suited to the highly parallel computing needs of machine learning are one example. And without automatic speed gains from progress in hardware, there’ll need to be much more attention given to software optimisation.

What will the economic implications be of moving into this new era? The economics of producing microprocessors will change. The cost of CPUs at the moment is dominated by the amortisation of the huge capital cost of the plant needed to make them. Older plants, whose capital costs are already written off, will find their lives being prolonged, so the cost of CPUs a generation or two behind the leading edge will plummet. This collapse in price of CPUs will be a big driver for the “internet of things”. And it will lead to the final end of Moore’s law, as the cost of new generations becomes prohibitive, squeezed between the collapse in price of less advanced processors and the diminishing returns in performance for new generations.

In considering the applications of computers, habits learnt in earlier times will need to be rethought. In the golden age of technological acceleration, between 1986 and 2003, if one had a business plan that looked plausible in principle but that relied on more computer speed than was currently available, one could argue that another few cycles of Moore’s law would soon sort out that difficulty. At the rates of technological progress in computing prevailing then, you’d only need to wait five years or so for the available computing power to increase by a factor of ten.

That’s not going to be the case now. A technology that is limited by the availability of local computing power – as opposed to computer power in the cloud – will only be able to surmount that hurdle by adding more processors, or by waiting for essentially linear growth in computer power. One example of an emerging technology that might fall into this category would be truly autonomous self-driving vehicles, though I don’t know myself whether this is the case.

The more general macro-economic implications are even less certain. One might be tempted to associate the marked slowing in productivity growth that the developed world saw in the mid-2000’s with the breakdown in Dennard scaling and the end of the fastest period of growth in computer power, but I’m not confident that this stacks up, given the widespread rollout of existing technology, coupled with much greater connectivity through broadband and mobile that was happening at that time. That roll-out, of course, has still got further to go.

This paper – by Neil Thompson – does attempt to quantify the productivity hit to ICT using firms caused by the end of Dennard scaling in 2004, finding a permanent hit to total factor productivity of between 0.5 and 0.7 percentage points for those firms that were unable to adapt their software to the new multicore architectures introduced at the time.

What of the future? It seems inconceivable that the end of the biggest driving force in technological progress over the last forty years would not have some significant macroeconomic impact, but I have seen little or no discussion of this from economists (if any readers know different, I would be very interested to hear about it). This seems to be a significant oversight.

Of course, it is the nature of all periods of exponential growth in particular technologies to come to an end, when they run up against physical or economic limits. What guarantees continued economic growth is the appearance of entirely new technologies. Steam power grew in efficiency exponentially through much of the 19th century, and when that growth levelled out (due to the physical limits of Carnot’s law) new technologies – the internal combustion engine and electric motors – came into play to drive growth further. So what new technologies might take over from silicon CMOS based integrated circuits to drive growth from here?

To restrict the discussion to computing, there are at least two ways of trying to look to the future. We can look at those areas where the laws of physics permit further progress, and the economic demand to drive that progress is present. One obvious deficiency of our current computing technology is its energy efficiency – or lack of it. There is a fundamental physical limit on the energy consumption of computing – the Landauer limit – and we’re currently orders of magnitude away from that. So there’s plenty of room at the bottom here, as it were – and as I discussed in my earlier post, if we are to increase the available computing power of the world simply by building more data centres using today’s technology before long this will be using a significant fraction of the world’s energy needs. So much lower power computing is both physically possible and economically (and environmentally) needed.

We can also look at those technologies that currently exist only in the laboratory, but which look like they have a fighting chance of moving into commercial scales sometime soon. Here the obvious candidate is quantum computing; there really does seem to be a groundswell of informed opinion that quantum computing’s time has come. In physics labs around the world there’s a real wave of excitement at that point where condensed matter physics met nanotechnology, in the superconducting properties of nanowires, for example. Experimentalists are chasing the predicted existence of a whole zoo of quasi-particles (that is quantised collective excitations) with interesting properties, with topics such as topological insulators and Majorana fermion states now enormously fashionable. The fact that companies such as Google and Microsoft have been hoovering up the world’s leading research groups in this area give further cause to suspect that something might be going on.

The consensus about quantum computing among experts that I’ve spoken to is that this isn’t going to lead soon to new platforms for general purpose computing (not least because the leading candidate technologies still need liquid helium temperatures), but that it may give users a competitive edge in specialised uses such as large database searches and cryptography. We shall see (though one might want to hesitate before making big long-term bets which rely on current methods of cryptography remaining unbreakable – some cryptocurrencies, for example).

Finally, one should not forget that information and computing isn’t the only place where innovation takes place – a huge amount of economic growth was driven be technological change before computers were invented, and perhaps new non-information based innovation might drive another future wave of economic growth.

For now, what we can say is that the age of exponential growth of computer power is over. It gave us an extraordinary 40 years, but in our world all exponentials come to an end, and we’re now firmly in the final stage of the s-curve. So, until the next thing comes along, welcome to the linear age of innovation.

An intangible economy in a material world

Thirty years ago, Kodak dominated the business of making photographs. It made cameras, sold film, and employed 140,000 people. Now Instagram handles many more images than Kodak ever did, but when it was sold to Facebook in 2012, it employed 13 people. This striking comparison was made by Jaron Lanier in his book “You are not a gadget”, to stress the transition we have made to world in which value is increasingly created, not from plant and factories and manufacturing equipment, but from software, from brands, from business processes – in short, from intangibles. The rise of the intangible economy is the theme of a new book by Jonathan Haskel and Stian Westlake, “Capitalism without Capital”. This is a marvellously clear exposition of what makes investment in intangibles different from investment in the physical capital of plant and factories.

These differences are summed up in a snappily alliterative four S’s. Intangible assets are scalable: having developed a slick business process for selling over-priced coffee, Starbucks could very rapidly expand all over the world. The costs of developing intangible assets are sunk – having spent a lot of money building a brand, if the business doesn’t work out it’s much more difficult to recover much of those costs than it would be to sell a fleet of vans. And intangibles have spillovers – despite best efforts to protect intellectual property and keep the results secret, the new knowledge developed in a company’s research programme inevitably leaks out, benefitting other companies and society at large in ways that the originating firm can’t benefit from. And intangibles demonstrate synergies – the value of many ideas together is usually greater – often very much greater – than the sum of the parts.

These characteristics are a challenge to our conventional way of thinking about how economies work. Haskel and Westlake convincingly argue that these new characteristics could help explain some puzzling and unsatisfactory characteristics of our economy now – the stagnation we’re seeing in productivity growth, and the growth of inequality.

But how has this situation arisen? To what extent is the growth of the intangible economy inevitable, and how much arises from political and economic choices our society has made?

Let’s return to the comparison between Kodak and Instagram that Jaron Lanier makes – a comparison which I think is fundamentally flawed. The impact of mass digitisation of images is obvious to everyone who has a smartphone. But just because the images are digital, doesn’t mean they don’t need physical substrates, to capture the images, store and display them. Instagram may be a company based entirely on intangible assets, but it couldn’t exist without a massive material base. The smartphones themselves are physical artefacts of enormous sophistication, the product of supply chains of great complexity, with materials and components being made in many factories, that themselves use much expensive, sophisticated and very physical plant. Any while we might think of the “cloud” as some disembodied place where the photographs live, the cloud is, as someone said, just someone else’s computer – or more accurately, someone else’s giant, energy-hogging, server farm.

Much of the intangible economy only has value inasmuch as it is embodied in physical products. This, of course, has always been true. The price of an expensive clock made by an 18th century craftsman embodied the skill and knowledge of the craftsmen who made it, itself built up through their investments in learning the trade, the networks of expertise in which so much tacit knowledge was embedded, the value of the brand that the maker had built up. So what’s changed? We still live in a material world, and these intangible investments, important as they are, are still largely realised in physical objects.

It seems to me that the key difference isn’t so much that an intangible economy has grown in place of a material economy, it’s that we’ve moved to a situation in which the relative contributions of the material and the intangible have become much more separable. Airbnb isn’t an entirely ethereal operation; you might book your night away though a slick app, but it’s still bricks and mortar that you stay in. The difference between Airbnb and a hotel chain lies in the way ownership and management of the accommodation is separated from the booking and rating systems. How much this unbundling is inevitable, and how much is the result of political choices? This is the crucial question we need to answer if we are to design policies that will allow our economies and societies to flourish in this new environment.

These questions are dealt with early on in Haskel and Westlake’s book, but I think they deserve more analysis. One factor that Haskel and Westlake correctly point to is simply the continuing decrease in the cost of material stuff as a result of material innovation. This inevitably increases the relative value of services – delivered by humans – relative to material goods, a trend known as Baumol’s cost disease (a very unfortunate and misleading name, as I’ve discussed elsewhere). I think this has to be right, and it surely is an irreversible continuing trend.

But two other factors seem important too – both discussed by Haskel and Westlake, but without drawing out their full implications. One is the way the ICT industry has evolved, in a way that emphasises commodification of components and open standards. This has almost certainly been beneficial, and without it the platform companies that have depended on this huge material base would not have been able to arise and thrive in the same way. Was it inevitable that things turned out this way? I’m not sure, and it’s not obvious to me that if or when a new wave of ICT innovation arises (Majorana fermion based quantum computing, maybe?), to restart the now stuttering growth of computing power, this would unfold in the same way.

The other is the post-1980s business trend to “unbundling the corporation”. We’ve seen a systematic process by which the large, vertically integrated, corporations of the post-war period have outsourced and contracted out many of their functions. This process has been important in making intangible investments visible – in the days of the corporation, many activities (organisational development, staff training, brand building, R&D) were carried out within the firm, essentially outside the market economy – their contributions to the balance sheet being recognised only in that giant accounting fudge factor/balancing item, “goodwill”. As these functions become outsourced, they produce new, highly visible enterprises that specialise entirely in these intangible investments – management consultants, design houses, brand consultants and the like.

This process became supercharged as a result of the wave of globalisation we have just been through. The idea that one could unbundle the intangible and the material has developed in a context where manufacturing, also, could be outsourced to low-cost countries – particularly China. Companies now can do the market research and design to make a new product, outsource its manufacture, and then market it back in the UK. In this way the parts of the value of the product ascribed to the design and marketing can be separated from the value added by manufacturing. I’d argue that this has been a powerful driver of the intangible economy, as we’ve seen it in the developed world. But it may well be a transient.

On the one hand, the advantages of low-cost labour that drove the wave of manufacturing outsourcing will be eroded, both by a tightening labour market in far Eastern economies as they become more prosperous, and by a relative decline in the importance in the contribution of labour to the cost of manufacturing as automation proceeds. On the other hand, the natural tendency of those doing the manufacturing is to attempt to move to capture more of the value by doing their own design and marketing. In smartphones, for example, this road has already been travelled by Korean manufacturer Samsung, and we see Chinese companies like Xiami rapidly moving in the same direction, potentially eroding the margins of that champion of the intangible economy, Apple.

One key driver that might reverse the separation of the material from the intangible is the realisation that this unbundling comes with a cost. The importance of transaction costs in Coase’s theory of the firm is highlighted in Haskel and Westlake’s book, in a very interesting chapter which considers the best form of organisation for a firm operating in the intangible economy. Some argue that a lowering of transaction costs through the application of IT renders the firm more or less redundant, and we should, and will, move to a world where everyone is an independent entrepreneur, contracting out their skills to the highest bidder. As Haskel and Westlake point out, this hasn’t happened; organisations are still important, even in the intangible economy, and organisations need management, though the types of organisation and styles of managements that work best may have evolved. And, power matters, and big organisations can exert power and influence political systems in ways that little ones can not.

One type of friction that I think is particularly important relates to knowledge. The turn to market liberalism has been accompanied by a reification of intellectual property which I think is problematic. This is because the drive to consider chunks of protectable IP – patents – as tradable assets with an easily discoverable market value doesn’t really account for the synergies that Haskel and Westlake correctly identify as central to intangible assets. A single patent rarely has much value on its own – it gets its value as part of a bigger system of knowledge, some of it in the form of other patents, but much more of it as tacit knowledge held in individuals and networks.

The business of manufacturing itself is often the anchor for those knowledge networks. For an example of this, I’ve written elsewhere about the way in which the UK’s early academic lead in organic electronics didn’t translate into a business at scale, despite a strong IP position. The synergies with the many other aspects of the display industry, with its manufacturers and material suppliers already firmly located in the far east, were too powerful.

The unbundling strategy has its limits, and so too, perhaps, does the process of separating the intangible from the material. What is clear is that the way our economy currently deals with intangibles has led to wider problems, as Haskel and Westlake’s book makes clear. Intangible investments, for example into the R&D that underlies the new technologies that drive economic growth, do have special characteristics – spillovers and synergies – which lead our economies to underinvest in them, and that underinvestment must surely be a big driver of our current economic and political woes.

“Capitalism without Capital” really is as good as everyone is saying – it’s clear in its analysis, enormously helpful in clarifying assumptions and definitions that are often left unstated, and full of fascinating insights. It’s also rather a radical book, in an understated way. It’s difficult to read it without concluding that our current variety of capitalism isn’t working for us in the conditions we now find ourselves in, with growing inequality, stuttering innovation and stagnating economies. The remedies for this situation that the book proposes are difficult to disagree with; what I’m not sure about is whether they are far-reaching enough to make much difference.

Industrial strategy roundup

Last week saw the launch of the final report of the Industrial Strategy Commission, of which I’m a member. The full report (running to more than 100 pages) can be found here: Industrial Strategy Commission: Final report and executive summary. For a briefer, personal perspective, I wrote a piece for the Guardian website, concentrating on the aspects relating to science and innovation: The UK has the most regionally unbalanced economy in Europe. Time for change.

Our aim in doing this piece of work was to influence government policy, and that’s influenced the pace and timing of our work. The UK’s productivity problems have been in the news, following the Office of Budgetary Responsibility’s recognition that a return to pre-crisis levels of productivity growth is not happening any time soon. Both major political parties are now committed to the principle of industrial strategy; the current government will publish firm proposals in a White Paper, expected within the next few weeks. Naturally, we hope to influence those proposals, and to that end we’ve engaged over the summer with officials in BEIS and the Treasury.

Our formal launch event took place last week, hosted by the Resolution Foundation. The Business Secretary, Greg Clark, spoke at the event, an encouraging sign that our attempts to influence the policy process might have had some success. Even more encouragingly, the Minister said that he’d read the whole report.

The launch of the final report of the Industrial Strategy Commission, at the Resolution Foundation, London. From L to R, Lord David Willetts (Former Science Minister and chair of the Resolution Foundation), Diane Coyle (Member of the Industrial Strategy Commission), Dame Kate Barker (Chair of the Industrial Strategy Commission), Torsten Bell (Director of the Resolution Foundation), Greg Clark (Secretary of State for Business, Energy and Industrial Strategy), Richard Jones (Member of the Industrial Strategy Commission). Photo: Ruth Arnold.

Our aim was to help build a consensus across the political divide about industrial strategy – one strong conclusion we reached is that strategy will only be effective if it is applied consistently over the long term, beyond the normal political cycle. So it was good to see generally positive coverage in the press, from different political perspectives.

The Guardian focused on our recommendations about infrastructure: Tackle UK’s north-south divide with pledge on infrastructure, say experts. The Daily Telegraph, meanwhile, focused on productivity: Short-termism risks paralysing the UK’s industrial strategy, report warns: “Productivity was a major concern of the report, particularly the disparity between London and the rest of the UK…. Targeted investment to support high-value and technologically led industries was the best way to boost regional productivity, by generating clusters of research and development organisations outside of the London and the South-East, the report suggested.”

The Independent headlined its report with our infrastructure recommendation: UK citizens should be entitled to ‘universal basic infrastructure’, says independent commission. It also highlighted some innovation recommendations: “The state should use its purchasing power to create new markets and drive innovation in healthcare and technology to tackle climate change, the commission said”

Even the far-left paper the Morning Star was approving, though they wrongly reported that our commission had been set up by government (in fact, we are entirely independent, supported only by the Universities of Sheffield and Manchester). Naturally, they focused on our diagnoses of the current weaknesses of the UK economy, quoting comments on our work from Greg Clark’s Labour Party shadow, Rebecca Long Bailey: Use Autumn Statement to address long-term weaknesses in our economy, says Rebecca Long Bailey.

In the more specialist press, Research Fortnight concentrated on our recommendations for government structures, particularly the role of UKRI, the new umbrella organisation for research councils and funding agencies: Treasury should own industrial strategy, academics say.

There are a couple of other personal perspectives on the report from members of the commission. My Sheffield colleague Craig Berry focuses on the need for institutional reform in his blogpost Industrial strategy: here come the British, while Manchester’s Andy Westwood focuses on the regional dimensions of education policy (or lack of them, at present) in the Times Higher: Industrial Strategy Commission: it is time to address UK’s major regional inequalities.

Finally, Andy Westwood wrote a telling piece on the process itself, which resonated very strongly with all the Commission members: Why we wonk – a case study.

Should economists have seen the productivity crisis coming?

The UK’s post-financial crisis stagnation in productivity finally hit the headlines this month. Before the financial crisis, productivity grew at a steady 2.2% a year, but since 2009 growth has averaged only 0.3%. The Office of Budgetary Responsibility, in common with other economic forecasters, have confidently predicted the return of 2.2% growth every year since 2010, and every year they have been disappointed. This year, the OBR has finally faced up to reality – in its 2017 Forecast Evaluation Report, it highlights the failure of productivity growth to recover. The political consequences are severe – lower forecast growth means that there is less scope to relax austerity in public spending, and there is little hope that the current unprecedented stagnation in wage growth will recover.

Are the economists to blame for not seeing this coming? Aditya Chakrabortty thinks so, writing in a recent Guardian article: “A few days ago, the officials paid by the British public to make sure the chancellor’s maths add up admitted they had got their sums badly wrong…. The OBR assumed that post-crash Britain would return to normal and that normal meant Britain’s bubble economy in the mid-2000s. This belief has been rife across our economic establishment.”

The Oxford economist Simon Wren-Lewis has come to the defense of his profession. Explaining the OBR’s position, he writes “Until the GFC, macro forecasters in the UK had not had to think about technical progress and how it became embodied in improvements in labour productivity, because the trend seemed remarkably stable. So when UK productivity growth appeared to come to a halt after the GFC, forecasters were largely in the dark.”

I think this is enormously unconvincing. Economists are unanimous about the importance of productivity growth as the key driver of the economy, and agree that technological progress (sufficiently widely defined) is the key source of that productivity growth. Why, then, should macro forecasters not feel the need to think about technical progress? As a general point, I think that (many) economists should pay much more attention both to the institutions in which innovation takes place (for example, see my critique of Robert Gordon’s book) and to the particular features of the defining technologies of the moment (for example, the post-2004 slowdown in the rate of growth of computer power).

The specific argument here is that the steadiness of the productivity growth trend before the crisis justified the assumption that this trend would be resumed. But this assumption only holds if there was no reason to think anything fundamental in the economy had changed. It should have been clear, though, that the UK economy had indeed changed in the years running up to 2007, and that these changes were in a direction that should have at least raised questions about the sustainability of the pre-crisis productivity trend.

These changes in the economy – summed up as a move to greater financialisation – were what caused the crisis in the first place. But, together with broader ideological shifts connected with the turn to market liberalism, they also undermined the capacity of the economy to innovate.

Our current productivity stagnation undoubtedly has more than one cause. Simon Wren-Lewis, in his discussion of the problem, has focused on the effect of bad macroeconomic policy. It seems entirely plausible that bad policy has made the short-term hit to growth worse than it needed to be. But a decade on from the crisis, we’re not looking at a short-term hit anymore – stagnation is the new normal. My 2016 paper “Innovation, research and the UK’s productivity crisis” discusses in detail the deeper causes of the problem.

One important aspect is the declining research and development intensity of the UK economy. The R&D intensity of the UK economy fell from more than 2% in the early 80’s to a low point of 1.55% in 2004. This was at a time when other countries – particularly the fast-developing countries of the far-east – were significantly increasing their R&D intensities. The decline was particularly striking in business R&D and the applied research carried out in government laboratories; for details of the decline see my own 2013 paper “The UK’s innovation deficit and how to repair it”.

What should have made this change particularly obvious is that it was, at least in part, the result of conscious policy. The historian of science Jon Agar wrote about Margaret Thatcher’s science policy in a recent article
“The curious history of curiosity driven research”. Thatcher and her advisors believed that the government should not be in the business of funding near-market research, and that if the state stepped back from these activities, private industry would step up and fill the gap: “The critical point was that Guise [Thatcher’s science policy advisor] and Thatcher regarded state intervention as deeply undesirable, and this included public funding for near-market research. The ideological desire to remove the state’s role from funding much applied research was the obverse of the new enthusiasm for ‘curiosity-driven research’.”

But stepping back from applied research by the state coincided with a new emphasis on “shareholder value” in public companies, which led industry to cut back on long-term investments with uncertain returns, such as R&D.

Much of this outcome was predictable in economic theory, which predicts that private sector actors will underinvest in R&D due to their inability to capture all of its benefits. Economists’ understanding of innovation and technological change is not yet good enough to quantify the effects of these developments. But, given that, as a result of policy changes, the UK had dismantled a good part of its infrastructure for innovation, a permanent decrease in its potential for productivity growth should not have been entirely unexpected.

The Office of Budgetary Responsibility’s Chart of Despond. From the press conference slides for the October 2017 Forecast Evaluation Report.

The second coming of industrial strategy

A month or so ago I was asked to do the after-dinner speech at the annual plenary meeting of the advisory bodies for the EPSRC (the UK’s government funding body for engineering and the physical sciences). My brief was to discuss what opportunities and pitfalls there might be for the UK Engineering and Physical Sciences community from the new prominence of industrial strategy in UK political discourse, and especially the regional economic growth agenda. Following some requests, here’s the text of my speech.

Thanks for asking me to talk a little bit about industrial strategy and the role of Universities in driving regional economic growth.

Let me start by talking about industrial strategy. This is an important part of the wider political landscape we’re dealing with at the moment, so it is worth giving it some thought.

If there’s a single signal of why it matters to us now, it’s the Industrial Strategy Challenge Fund – in last years Autumn Statement – a very welcome and quite substantial increase in the science budget – but tied in a very explicit way to industrial strategy.

What is that industrial strategy to which it is tied? We don’t know yet. We had a Green Paper in February – (a “very green” green paper, it was described as, which is civil service speak for being a bit half-baked). And we’re expecting a White Paper in “autumn” this year. i.e. before Christmas. I’ll come back to what I think it should be in a moment, but first… Continue reading “The second coming of industrial strategy”

The Life Sciences should not have an Industrial Strategy

The UK government has published the first outcome of the Industrial Strategy “sector deals” announced in the spring’s Industrial Strategy Green Paper. The Life Sciences Industrial Strategy was headed by Sir John Bell; the area is of undoubted importance for the UK, and the document has some very sensible recommendations. But there’s a bigger problem here – the life sciences aren’t an industry, they’re a science area. You wouldn’t describe your policies for the aerospace industry as a Materials Science Industrial Strategy or a Fluid Dynamics Industrial Strategy – industry policy should be driven by and framed in terms of the demand for innovation, not by the science areas which contribute to it.

In its detailed policies, there is much to agree with in the Life Sciences Industrial Strategy. There’s no question that the UK has a strong base in the life sciences, that this is a source of comparative advantage, and that this capacity should be preserved and strengthened. New industrial clusters in medical technology should be developed (especially outside the existing concentration of biomedical life sciences between London, Oxford and Cambridge), and the data the health system generates is an enormously powerful resource that should be exploited more (but with great care and sensitivity). And who could disagree with the proposition that the Home Office should be suppressed (they’re too diplomatic to put it quite like that, of course). There are some less good ideas too, with demands for more distorting tax breaks. The proposal to widen the scope of the “patent box” to include other types of intellectual property is a particularly bad idea, which would take what’s already a very poor piece of public policy and make it worse.

The headline recommendation is politically opportunistic, potentially positive, but not completely thought through in its current form. This is for a “Health Advanced Research Program”, in analogy to the US defense research agency DARPA. It’s politically astute in that it appeals to the current bout of DARPA envy amongst British policy makers (and it’s got a good acronym). As I’ve discussed before, I’m not convinced that this enthusiasm is underpinned by enough understanding of the way DARPA actually operates and the way it sits as one relatively small part in the wider USA innovation system.

One key issue is the question of how to define the problems, and being clear about who owns those problems. Part of DARPA’s success comes from the close connection to the people who own the problems the agency is trying to solve, who in DARPA’s case, are in the USA’s military. This clarity is not yet present in the “HARP” proposal. For healthcare, the key owners of the problems are the NHS, and the local authorities responsible for social care. Industry is important, both as potential providers of solutions, and as beneficiaries of the new business opportunities that the innovations should give rise to, but they don’t own the problems.

The strategy does indeed suggest that the key USP of HARP should be the involvement of the NHS, who, it is envisaged, will provide patient data and opportunities for piloting the resulting technology. The difficulty this leaves unsolved is one that the strategy itself correctly identifies – “Evidence demonstrates that access to and diffusion of products in the NHS is often slower than in some comparable countries. This environment risks creating a negative impression in boardrooms around the world with trials being diverted to geographies deemed more likely to use products. Partnership with industry through this strategy and a subsequent sector deal will be challenging unless there are clear signals that innovation will be encouraged and rewarded, and the challenge of adoption of new innovation at pace and scale is resolved.” The NHS is, as currently configured, structurally inimical to innovation.

How could you frame an industrial strategy in this general area? You could define it in terms of conventional industry sectors. For healthcare, this would include those sectors which develop and supply products – including pharmaceuticals and biotechnology, and the broader area of medical technology, including tools and devices, diagnostics and digital healthcare. Equally, it should include those sectors that actually deliver health and social care, which after all form a large part of the economy, albeit one that remains in large part outside the market. These include social care – a very large sector, which has low productivity and is problematic in some other ways, as well as hospitals and primary care. The interests of these sectors don’t always point in the same direction, as one can see from the constant tussles between NICE and the NHS and pharmaceuticals companies about drug pricing and availability.

Although in reality the Life Sciences strategy does largely read as a sector strategy for the pharmaceuticals and biotechnology sector, calling it a Life Sciences strategy does frame it in terms of the underpinning science. And in this sense Life Sciences is not a great term, being at once too inclusive and not inclusive enough.

What the strategy means by “Life Sciences” is essentially the high status science of biomedical research. But life sciences – biology – doesn’t just include those bits of biology that are relevant to human disease. That would cover the cell biology and physiology of the human organism itself, together with the biology of those organisms that are studied as more experimentally tractable models for humans – whether that’s mice or zebra-fish. And it includes the biology of human parasites and pathogens. What is left out in this narrow definition of “Life Sciences” are those aspects of biology that have other applications – in agriculture, for plant science and animal health, in industrial biotechnology, in environmental science and ecology. And of course we should not be afraid to stress that we should study biology because it is fascinating in its own right and yields insights into some of the biggest outstanding scientific issues that there are – how life started, whether other types of life are possible.

But the focus in “Life Sciences” on high status biomedical research is also too exclusive. Other areas of science and technology are important for healthcare, and are underemphasised in academia. These include engineering and nano-science, data science and IT, and, perhaps above all, the social science of public health and health economics.

The issue, then, is that by calling itself a “Life Sciences” strategy, it gives primacy neither to the relevant industry sectors, nor to the fundamental problem of caring for sick people. I think the ultimate goal here is the big problem of providing affordable health and social care with dignity for the whole UK population, in the context of the changing age profile of the country. The key organisations here are the NHS and the deliverers of social care, and the priority needs to be on enabling those organisations to become more innovative. This will certainly generate opportunities for key industrial sectors like pharmaceuticals and medical technology; improving the connections between the research base, industry, and the clinic remains just as important. But framing the problem right will change some of our priorities.

Climbing stories, climbing fictions

I call myself a rock climber, and sometimes I manage to do some climbing too. This summer I’ve been out a few times with a new climbing partner, Mike. Mike’s a writer – M. John Harrison – whose most famous work is the science fiction trilogy Light, Nova Swing and Empty Space. I’ve written about these brilliant books before. But it’s another novel of his that these climbing trips have brought to mind – his 1989 novel “Climbers”.

“Climbers” is a beautifully written book, formally clever and an utterly perfect evocation of a certain time and place, a certain milieu – the Peak District climbing scene in the late 70’s and early 80’s. This I know, because I was there – at least, as a youth learning to climb myself, I was on the fringes of this scene.

This is how it happened. 1979 was the year I left school. That summer, my friend and climbing companion, Mark, having been expelled from school (the reasons for which are another story), had moved to the Peak District. His parents had divorced, and he went with his mother, first to a mobile home outside Chesterfield, then to the village of Tideswell. I visited him there, staying in his mother’s tiny cottage and hitching to the crags, Mark in a greatcoat, with their Jack Russell sticking its head out of his rucksack, an ancient Karrimor Pinnacle that he’d stolen from school. Continue reading “Climbing stories, climbing fictions”

Economics after Moore’s Law

One of the dominating features of the economy over the last fifty years has been Moore’s law, which has led to exponential growth in computing power and exponential drops in its costs. This period is now coming to an end. This doesn’t mean that technological progress in computing will stop dead, nor that innovation in ICT comes to an end, but it is a pivotal change, and I’m surprised that we’re not seeing more discussion of its economic implications.

This reflects, perhaps, the degree to which some economists seem to be both ill-informed and incurious about the material and technical basis of technological innovation (for a very prominent example, see my review of Robert Gordon’s recent widely read book, The Rise and Fall of American Growth). On the other hand, boosters of the idea of accelerating change are happy to accept it as axiomatic that these technological advances will always continue at the same, or faster rates. Of course, the future is deeply uncertain, and I am not going to attempt to make many predictions. But here’s my attempt to identify some of the issues

How we got here

The era of Moore’s law began with the invention in 1959 of the integrated circuit. Transistors are the basic unit of electronic unit, and in an integrated circuit many transistors could be incorporated on a single component to make a functional device. As the technology for making integrated circuits rapidly improved, Gordon Moore, in 1965 predicted that the number of transistors on a single silicon chip would double every year (the doubling time was later revised to 18 months, but in this form the “law” has well described the products of the semiconductor industry ever since).

The full potential of integrated circuits was realised when, in effect, a complete computer was built on a single chip of silicon – a microprocessor. The first microprocessor was made in 1970, to serve as the flight control computer for the F14 Tomcat. Shortly afterwards a civilian microprocessor was released by Intel – the 4004. This was followed in 1974 by the Intel 8080 and its competitors, which were the devices that launched the personal computer revolution.

The Intel 8080 had transistors with a minimum feature size of 6 µm. Moore’s law was driven by a steady reduction in this feature size – by 2000, Intel’s Pentium 4’s transistors were more than 30 times smaller. This drove the huge increase in computer power between the two chips in two ways. Obviously, more transistors gives you more logic gates, and more is better. Less obviously, another regularity known as Dennard scaling states that as transistor dimensions are shrunk, each transistor operates faster and uses less power. The combination of Moore’s law and Dennard scaling was what led to the golden age of microprocessors, from the mid-1990’s, where every two years a new generation of technology would be introduced, each one giving computers that were cheaper and faster than the last.

This golden age began to break down around 2004. Transistors were still shrinking, but the first physical limit was encountered. Further increases in speed became impossible to sustain, because the processors simply ran too hot. To get round this, a new strategy was introduced – the introduction of multiple cores. The transistors weren’t getting much faster, but more computer power came from having more of them – at the cost of some software complexity. This marked a break in the curve of improvement of computer power with time, as shown in the figure below.

Computer performance trends as measured by the SPECfp2000 standard for floating point performance, normalised to a typical 1985 value. This shows an exponential growth in computer power from 1985 to 2004 at a compound annual rate exceeding 50%, and slower growth between 2004 and 2010. From “The Future of Computing Performance: Game Over or Next Level?”, National Academies Press 2011″

In this period, transistor dimensions were still shrinking, even if they weren’t becoming faster, and the cost per transistor was still going down. But as dimensions shrunk to tens of nanometers, chip designers ran out of space, and further increases in density were only possible by moving into the third dimension. The “FinFET” design, introduced in 2011 essentially stood the transistors on their side. At this point the reduction in cost per transistor began to level off, and since then the development cycle has begun to slow, with Intel announcing a move from a two year cycle to one of three years.

The cost of sustaining Moore’s law can be measured in diminishing returns from R&D efforts (estimated by Bloom et al as a roughly 8-fold increase in research effort, measured as R&D expenditure deflated by researcher salaries, from 1995 to 2015), and above all by rocketing capital costs.

Oligopoly concentration

The cost of the most advanced semiconductor factories (fabs) now exceeds $10 billion, with individual tools approaching $100 million. This rocketing cost of entry means that now only four companies in the world have the capacity to make semiconductor chips at the technological leading edge.

These firms are Intel (USA), Samsung (Korea), TSMC (Taiwan) and Global Foundries (USA/Singapore based, but owned by the Abu Dhabi sovereign wealth fund). Other important names in semiconductors are now “fabless” – they design chips, that are then manufactured in fabs operated by one of these four. These fabless firms include nVidia – famous for the graphical processing units that have been so important for computer games, but which are now becoming important for the high performance computing needed for AI and machine learning, and ARM (until recently UK based and owned, but recently bought by Japan’s SoftBank), designer of low power CPUs for mobile devices.

It’s not clear to me how the landscape evolves from here. Will there be further consolidation? Or in an an environment of increasing economic nationalism, will ambitious nations regard advanced semiconductor manufacture as a necessary sovereign capability, to be acquired even in the teeth of pure economic logic? Of course, I’m thinking mostly of China in this context – its government has a clearly stated policy of attaining technological leadership in advanced semiconductor manufacturing.

Cheap as chips

The flip-side of diminishing returns and slowing development cycles at the technological leading edge is that it will make sense to keep those fabs making less advanced devices in production for longer. And since so much of the cost of an IC is essentially the amortised cost of capital, once that is written off the marginal cost of making more chips in an old fab is small. So we can expect the cost of trailing edge microprocessors to fall precipitously. This provides the economic driving force for the idea of the “internet of things”. Essentially, it will be possible to provide a degree of product differentiation by introducing logic circuits into all sorts of artefacts – putting a microprocessor in every toaster, in other words.

Although there are applications where cheap embedded computing power can be very valuable, I’m not sure this is a universally good idea. There is a danger that we will accept relatively marginal benefits (the ability to switch our home lights on with our smart-phones, for example) at the price of some costs that may not be immediately obvious. There will be a general loss of transparency and robustness of everyday technologies, and the potential for some insidious potential harms, through vulnerability to hostile cyberattacks, for example. Caution is required!

Travelling without a roadmap

Another important feature of the golden age of Moore’s law and Dennard scaling was a social innovation – the International Technology Roadmap for Semiconductors. This was an important (and I think unique) device for coordinating and setting the pace for innovation across a widely dispersed industry, comprising equipment suppliers, semiconductor manufacturers, and systems integrators. The relentless cycle of improvement demanded R&D in all sorts of areas – the materials science of the semiconductors, insulators and metals and their interfaces, the chemistry of resists, the optics underlying the lithography process – and this R&D needed to be started not in time for the next upgrade, but many years in advance of when it was anticipated it would be needed. Meanwhile businesses could plan products that wouldn’t be viable with the computer power available at that time, but which could be expected in the future.

Moore’s law was a self-fulfilling prophecy, and the ITRS was the document that both predicted the future, and made sure that that future happened. I write this in the past tense, because there will be no more roadmaps. Changing industry conditions – especially the concentration of leading edge manufacturing – has brought this phase to an end, and the last International Technology Roadmap for Semiconductors was issued in 2015.

What does all this mean for the broader economy?

The impact of fifty years of exponential technological progress in computing seems obvious, yet quantifying its contribution to the economy is more difficult. In developed countries, the information and communication technology sector has itself been a major part of the economy which has demonstrated very fast productivity growth. In fact, the rapidity of technological change has itself made the measurement of economic growth more difficult, with problems arising in accounting for the huge increases in quality at a given price for personal computers, and the introduction of entirely new devices such as smartphones.

But the effects of these technological advances on the rest of the economy must surely be even larger than the direct contribution of the ICT sector. Indeed, even countries without a significant ICT industry of their own must also have benefitted from these advances. The classical theory of economic growth due to Solow can’t deal with this, as it isn’t able to handle a situation in which different areas of technology are advancing at very different rates (a situation which has been universal since at least the industrial revolution).

One attempt to deal with this was made by Oulton, who used a two-sector model to take into account the the effect of improved ICT technology in other sectors, by increasing the cost-effectiveness of ICT related capital investment in those sectors. This does allow one to make some account for the broader impact of improvements in ICT, but I still don’t think it handles the changes in relative value over time that different rates of technological improvement imply. Nonetheless, it allows one to argue for substantial contributions to economic growth from these developments.

Have we got the power?

I want to conclude with two questions for the future. I’ve already discussed the power consumption – and dissipation – of microprocessors in the context of the mid-2000’s end of Dennard scaling. Any user of a modern laptop is conscious of how much heat they generate. Aggregating the power demands of all the computing devices in the world produces a total that is a significant fraction of total energy use, and which is growing fast.

The plot below shows an estimate for the total world power consumption of ICT. This is highly approximate (and as far as the current situation goes, it looks, if anything, somewhat conservative). But it does make clear that the current trajectory is unsustainable in the context of the need to cut carbon emissions dramatically over the coming decades.

Estimated total world energy consumption for information and communication technology. From Rebooting the IT Revolution: a call to action – Semiconductor Industry Association, 2015

These rising power demands aren’t driven by more lap-tops – its the rising demands of the data centres that power the “cloud”. As smart phones became ubiquitous, we’ve seen the computing and data storage that they need move from the devices themselves, limited as they are by power consumption, to the cloud. A service like Apple’s Siri relies on technologies of natural language processing and machine learning that are much too computer intensive for the processor in the phone, and instead are run on the vast banks of microprocessors in one of Apple’s data centres.

The energy consumption of these data centres is huge and growing. By 2030, a single data centre is expected to be using 2000 MkWh per year, of which 500 MkWh is needed for cooling alone. This amounts to a power consumption of around 0.2 GW, a substantial fraction of the output of a large power station. Computer power is starting to look a little like aluminium, something that is exported from regions where electricity is cheap (and hopefully low carbon in origin). However there are limits to this concentration of computer power – the physical limit on the speed of information transfer imposed by the speed of light is significant, and the volume of information is limited by available bandwidth (especially for wireless access).

The other question is what we need that computing power for. Much of the driving force for increased computing power in recent years has been from gaming – the power needed to simulate and render realistic virtual worlds that has driven the development of powerful graphics processing units. Now it is the demands of artificial intelligence and machine learning that are straining current capacity. Truly autonomous systems, like self-driving cars, will need stupendous amounts of computer power, and presumably for true autonomy much of this computing will need to be done locally rather than in the cloud. I don’t know how big this challenge is.

Where do we go from here?

In the near term, Moore’s law is good for another few cycles of shrinkage, moving more into the third dimension by stacking increasing numbers of layers vertically, shrinking dimensions further by using extreme UV for lithography. How far can this take us? The technical problems of EUV are substantial, and have already absorbed major R&D investments. The current approaches for multiplying transistors will reach their end-point, whether killed by technical or economic problems, perhaps within the next decade.

Other physical substrates for computing are possible and are the subject of R&D at the moment, but none yet has a clear pathway for implementation. Quantum computing excites physicists, but we’re still some way from a manufacturable and useful device for general purpose computing.

There is one cause for optimism, though, which relates to energy consumption. There is a physical lower limit on how much energy it takes to carry out a computation – the Landauer limit. The plot above shows that our current technology for computing consumes energy at a rate which is many orders of magnitude greater than this theoretical limit (and for that matter, it is much more energy intensive than biological computing). There is huge room for improvement – the only question is whether we can deploy R&D resources to pursue this goal on the scale that’s gone into computing as we know it today.

See also Has Moore’s Law been repealed? An economist’s perspective, by Keith Flamm, in Computing in Science and Engineering, 2017

Towards a coherent industrial strategy for the UK

What should a modern industrial strategy for the UK look like? This week the Industrial Strategy Commission, of which I’m a member, published its interim report – Laying the Foundations – which sets out some positive principles which we suggest could form the basis for an Industrial Strategy. This follows the government’s own Green Paper, Building our Industrial Strategy, to which we made a formal response here. I made some personal comments of my own here. The government is expected to publish its formal policy on Industrial Strategy, in a White Paper, in the autumn.

There’s a summary of our report on the website, and my colleague and co-author Diane Coyle has blogged about it here. Here’s my own perspective on the most important points.

Weaknesses of the UK’s economy

The starting point must be a recognition of the multiple and persistent weaknesses of the UK economy, which go back to the financial crisis and beyond. We still hear politicians and commentators asserting that the economy is fundamentally strong, in defiance both of the statistical evidence and the obvious political consequences we’ve seen unfolding over the last year or two. Now we need to face reality.

The UK’s economy has three key weaknesses. Its productivity performance is poor; there’s a big gap between the UK and competitor economies, and since the financial crisis productivity growth has been stagnant. This poor productivity performance translates directly into stagnant wage growth and a persistent government fiscal deficit.

There are very large disparities in economic performance across the country; the core cities outside London, rather than being drivers of economic growth, are (with the exception of Bristol and Aberdeen) below the UK average in GVA per head. De-industrialised regions and rural and coastal peripheries are doing even worse. The UK can’t achieve its potential if large parts of it are held back from fully contributing to economic growth.

The international trading position of the country is weak, with large and persistent deficits in the current account. BREXIT threatens big changes to our trading relationships, so this is not a good place to be starting from.

Inadequacy of previous policy responses

The obvious corollary of the UK’s economic weakness has to be a realisation that whatever we’ve been doing up to now, it hasn’t been working. This isn’t to say that the UK hasn’t had policies for industry and economic growth – it has, and some of them have been good ones. But a collection of policies doesn’t amount to a strategy, and the results tell us that even the good policies haven’t been executed at a scale that makes a material difference to the problems we’ve faced.

A strategy should begin with a widely shared vision

A strategy needs to start with a vision of where the country is going, around which a sense of national purpose can be build. How is the country going to make a living, how is it going to meet the challenges it’s facing? This needs to be clearly articulated and a consensus built that will last longer than one political cycle. It needs to be founded on a realistic understanding of the UK’s place in the world, and of the wider technological changes that are unfolding globally.

Big problems that need to be solved

We suggest six big problems that an industrial strategy should be built around.

  • Decarbonisation of the energy economy whilst maintaining affordability and security of the energy supply.
  • Ensuring adequate investment in infrastructure to meet current and future needs and priorities.
  • Developing a sustainable health and social care system.
  • Unlocking long-term investment – and creating a stable environment for long-term investments.
  • Supporting established and emerging high-value industries – and building export capacity in a changing trading environment.
  • Enabling growth in parts of the UK outside London and the South East in order to increase the UK’s overall productivity and growth.
  • Industrial strategy should be about getting the public and private sectors to work together in a way that simultaneously achieves these goals and creates economic value and growing productivity

    Some policy areas to focus on

    The report highlights a number of areas in which current approaches fail. Here are a few:

  • our government institutions don’t work well enough; they are too centralised in London, and yet departments and agencies don’t cooperate enough with each other in support of bigger goals,
  • the approach government takes to cost-benefit analysis is essentially incremental; it doesn’t account for or aspire to transformative change, which means that in automatically concentrates resources in areas that are already successful,
  • our science and innovation policy doesn’t look widely enough at the whole innovation landscape, including translational research and private sector R&D, and the distribution of R&D capacity across the country,
  • our skills policy has been an extreme example of a more general problem of policy churn, with a continuous stream of new initiatives being introduced before existing policies have had a chance to prove their worth or otherwise.
  • The Industrial Strategy Commission

    The Industrial Strategy Commission is a joint initiative of the Sheffield Political Economy Research Institute and the University of Manchester’s Policy@Manchester unit. My colleagues on the commission are the economist Diane Coyle, the political scientist Craig Berry, policy expert Andy Westwood, and we’re chaired by Dame Kate Barker, a very distinguished business economist and former member of the Bank of England’s powerful Monetary Policy Committee. We benefit from very able research support from Tom Hunt and Marianne Sensier.