Laying the Foundations
A case for productive Fat Cats?
There is a very good report out by Sam Bowman, Samuel Hughes, and Ben Southwood. Titled “Foundations”, it outlines in meticulous detail why Britain, which for so long was at the apex of economic performance and technological progress, is now a laggard. Its thesis is simple and correct: Britain has very low productivity and investment, and this is due to a failure to get the foundational things: energy generation, infrastructure, and housing, right.
It says everything right about our energy situation. It also points out that the much-vaunted push towards an intermittent-dominated grid will likely increase prices further and is not going to make us more industrially competitive. It is also pro-nuclear. I have myself argued that a major buildout of nuclear generation is the best route for Britain’s energy needs.
All the right people like the piece. The main question that, understandably, goes unanswered is: What kind of political economy could get the big things right? The report implies that Britain, to a great extent, has to think like a developing economy: i.e. more investment and infrastructure spending.
This is at the same time that we are saddled with an aging population, a budget increasingly dominated by healthcare, welfare, and debt repayments. Turning this around is like undertaking the industrialization of Meiji Japan with the aging population of modern Japan. Add to that a chronic current account deficit and a very high exposure to international markets, and reversing British stagnation is probably one of the most fiendishly complex problems any group of smart people could focus on.
Britain’s unproductive elite configuration
What configuration of elites would be invested in solving this problem, and how might they get into a position to begin the process? We understand that most British elites would want the country to do well, but that is not enough.
Where is Britain’s current elite right now?
Labour and Tory political leadership: Desperately struggling to attract talent. Media-driven, more interested in holding residence than wielding actual power. Liable to argue how powerless they are in the face of government fiscal rules.
Treasury and the wider civil service: They are skeptical of any new spending given previous records of overspending, but won’t advocate cuts to existing spending. They generally think they are the only ones being serious about the state of public finances.
Other parties: The Lib Dems are for well-off people who don’t want to have power or be bothered. They are the Breakfast Tea Party. The Greens harbor primitivists who don’t think low economic growth is a problem. For them, any issue of welfare can just be solved through more taxation of the bankers. Reform’s biggest problem is that they are a small-business party when Britain’s corporate problems have to be solved at scale.
Celtic regions and the North: Pockets of excellence, but increasingly unproductive. Falling further behind, and moving into an almost explicit degrowth mindset, particularly in Wales. Further devolution might make them more productive, or might just create worse incentives for local elites.
London: A world-class city, but as a recent report highlights, it is stagnating in terms of productivity. Much of the value is eaten up by the housing sector and rent-seeking classes. The productive young workers who hold the city up are neither rich enough to acquire wealth, nor poor enough to have access to subsidized housing.
The South: The obvious non-London case for place-based industrial policy is not the North or Scotland, but areas like Kent, Surrey, Somerset, Oxford, and Cambridge. These places already account for the most productive parts of the country but are still visibly held back, partially by their own nimbyism.
British industry: Most British commercial elites are global in their thinking. British industrialists like Jim Ratcliffe, Anthony Bamford, and James Dyson have rebelled via their support for Brexit, but they have virtually zero institutional power over government decision-making. They increasingly don’t see Britain as a strong prospect for economic growth. For example, Ratcliffe is divesting from British gas refining, while putting more money into Manchester United — a global consumer product. They have virtually no representation in parliament or the civil service.
In summary, the current relationship between the central government, local authorities, and the corporate world is not set up to solve any major problems. Given the challenge of the task, a new compact is required between bureaucracies and industrialists.
French family corporatism
The report goes on to ask why France, which is in so many ways less optimized for commerce than Britain, is still about as rich, and quite a bit more productive. The answer is they get energy, housing, and infrastructure largely right. There are caveats to this of course. But broadly, France is more productive than Britain and certainly has cheaper electricity.
One reason for this, perhaps, is that France is genuinely more plutocratic. Fundamentally, wealthy French industrialists are bigger players at home than their counterparts in Britain. The most prominent is Bernard Arnault, patriarch of the Arnault family and the owner of Louis Vuitton Moet Hennessey (LVMH), the world’s largest luxury goods empire. He has a net worth of $185 billion, compared to the $40 billion of the Hinduja brothers and the $30 billion of Sir Jim Ratcliffe.
Imagine the seething resentment a British Arnault would incur. Besides being one of the wealthiest men in the world, he is intimately connected to political life in both Paris and the national government. He has been the best man at one of Sarkozy’s many weddings and is a prominent supporter of Macron. LVMH hired France’s former top spy to conduct “business intelligence”. He is the owner of Paris media outlet Le Parisien and financial broadsheet Los Echos, while his son-in-law and fellow billionaire Xavier Niel is the proud proprietor of Le Monde, France’s most prominent newspaper.
The Arnaults are flanked by the Pinault family, owners of the Kering Group, and the Dumas family, owners of the Hermes conglomerate. Together, these families control the majority of the $1 trillion global luxury goods industry. They manufacture watches in Switzerland, build chemical factories in the Loire Valley, make jewelry in Tuscany, outsource shoemaking to Transylvania, and farm crocodile leather in Southeast Asia. Though their supply chains are global, a great deal of the manufacturing remains in France itself.
Prominent families dominate other sectors. The Dassault family’s aviation business builds France’s indigenous fighter jets, a capability Britain does not possess. The manufacturing company, Dassault Systems, builds computer-aided design software. For good measure, the family also owns Le Figaro, France’s rightwing paper of record.
Many prominent French families are not Parisians, but buccaneering provincials. The Bolloré family hails from Brittany. The family’s patriarch Vincent Bolloré has sold his previous stake in several West African ports but is still the owner of Vivendi, a major media conglomerate. The tyre giant Michelin, still part-owned by the eponymous family, is based in Clermont-Ferrand and has temporarily bought the local Rugby team to see it through financial difficulties.
Of course, it could be argued these dynasties have too much influence in France. The same could also be said of the Wallenbergs in Sweden, who hold considerable sway over the country’s political class. But backhanders aside, these billionaires do have an interest in getting the “foundations” right. They cannot easily outsource their industries to China or Malaysia, and their government patrons actively pressure them not to.
The power of these families is balanced by some very powerful bureaucracies. Airbus, nominally a publicly traded company, is dominated by defense officials. The current CEO, Guilliame Faury, started his career at the Direction Générale de l’Armement (DGA), France’s military procurement office.
France’s initial success in building out nuclear power is in no small part down to the empowerment of a large nuclear bureaucracy stretching from the Atomic Energy Commission, the military, the state utility EDF, and an indigenous supply chain. While there were attempts to reduce nuclear power’s role in French energy production, that sentiment seems to have subsided.
The French Nuclear Industry. Source.
In short, France has a wide array of powerful bureaucracies with their own power bases and a large number of plutocrats whose assets and interests are still anchored in their home country. This leads to a reputation for inefficiency, obstructionism, and corruption. But it also tilts the balance of power toward investment.
The deal before the prize
So if we are to think about what sort of country would remedy the foundational problems we face, we are best off starting with the view that we need to empower and encourage domestic, productive capitalists, even if it means enriching them greatly and allowing for some skimming off the top and for the formation of dynasties.
The British elite was configured this way in the past. Reading David Edgerton’s book on the British Nation, it is remarkable just how tied to industry the British political class was in the interwar years. The Seventh Marquess of Londonderry, a unionist MP and air minister between 1931 and 1935, also owned the Londonderry Collieries. David Davies, a Liberal MP from 1906 to 1929, owned the Ocean Coal company in Wales. Stanley Baldwin was a successor to a major iron and steel company.
Despite the predominance of the landowning class in the commons and the Lords during the latter decades of the Empire, Britain accepted free trade on food imports, highlighting how the elite of the time were not dependent on agricultural output, but on industrial production and consumption.
Of course today we have business veterans in politics, but they have generally not held senior roles. Owen Smith, the forgotten Labour leadership challenger to Jeremy Corbyn in 2016, previously worked as a lobbyist for Pfizer. Kemi Badenoch has highlighted her engineering background, but her career outside of politics was short.
If we are to learn anything from France, maybe it is that it is best to have a few plutocrats in your corner. Any successful laying of the aforementioned foundations probably involves a political economy where a group of nationally aligned productive capitalists gets to live large, with certain strings attached.
This might seem a grubby deal, not just to social democrats and insiders but to classical liberals and free trade advocates. But any successful succesful period of industrial development has generally rested on this crude transactional relationship.
I think the diagnosis of Britain’s problem has been conducted quite thoroughly. We know the current configuration of elites will not fix it. The task now is to determine who we are going to incentivize the lay the foundations, what is their cut, and what are the conditions for their enrichment.