Government wants growth; shame it knows not how
When the Chancellor introduced his “Growth Plan” in the Commons on 23rd September, he used the word “growth” 142 times but did not mention “innovation” even once. The closest he got to it was:
“Of course, to drive growth, we need new sources of capital investment. To that end, I can announce that we will accelerate reforms to the pension charge cap so that it will no longer apply to well-designed performance fees. That will unlock pension fund investment into UK assets and innovative, high-growth businesses. It will benefit savers and increase growth. And we will provide up to £500 million to support new, innovative funds and attract billions of additional pounds into UK science and technology scale-ups.”
Making money to support innovation is indeed helpful but not the way Business, Energy and Industrial Strategy (BEIS) does it nor stodgy pension funds, nor large companies. Procter & Gamble discovered it had too many committees blocking new product development, so it gave up and restricted itself to buying the new products once they were already doing well in the market. Baileys Irish Cream, one of the most successful drinks brands in the last 100 years, was born because the Irish Finance Minister offered a 10 year tax moratorium on a new product’s exports if the parent company came up with one. They did, but the main board considered it dreadful. Management turned a blind eye and went ahead anyway.
Growth is driven by innovation, sometimes in the form of new, or changes to, products or how they are made, perhaps using new technology, or how the producer businesses are run. Stifling immigration and declining birth rates mean that growth has to come from increasing productivity, i.e. output per capita, and that can only come from innovation. Mathew Syed, in the Sunday Times on 25th September, wrote a misguided article claiming that growth is driven by the availability of energy: “growth in real economic systems (as opposed to abstract economic models) is ultimately determined by thermodynamics — that’s to say, energy.” Of course if we consume more (growth) we have to make and then use more energy, cars for example. But Syed is confusing correlation with causation. Innovation drives growth and that needs more energy. Professor Karl Pearson was teaching the difference between correlation and causality at UCL back in 1911. It is time Syed caught on.
At the Labour Party Conference, Sir Keir Starmer promised to “turn the UK into a growth superpower” although he did not say how and, almost certainly, does not know. Handing more power to the unions will certainly undermine growth. Blocking change, whether by boardrooms or shop floors is the enemy of innovation, and therefore growth.
BEIS means well. It invites people to pitch for money and has middle-aged committees to sit in judgement. Sometimes they get lucky and back winners but usually not. The real-world market does not operate that way. Offering tax breaks is a far better way to go: if the innovation fails, it makes no money and therefore costs the government nothing. If it succeeds, it is a win-win.
The simple truth is that neither Truss nor Starmer have a clue how to achieve innovation, and with it increasing productivity, because they have not studied how innovation, and therefore growth, comes about. It is time they did. Or at least tell BEIS to go find out.