Industrial strategy or foundational economy approach?

Abstract

I want to compare what I take to be a standard industrial strategy approach to meeting the challenges of improving the lives of people and decarbonisation to a foundational economy approach. There is a profound difference between them, not just in focus but also in theory, in ways of knowing and acting.1 Any overlap or alignment is thus difficult.

Industrial policy, or strategy, is back in fashion. At the core of the claim in its favour is that globalisation is over, that dealing with climate change requires direct industrial action, and so does the challenge of China, and perhaps possible pandemics too. It is a policy imaginatively focussed on part of manufacturing industry, and ‘tech’ and international competition, with the aim of being world leading or even world beating.

The chosen focus of policy is also inappropriate. It is focussed on the idea that the UK is (or ought to be and could be) a science superpower, and that new industries will flow from this if things are finally arranged properly. This view is doubly doubtful: not only is the strength of UK innovation overestimated, but the whole model of national transformation through innovation is dubious. Actually, this policy has been followed in the UK for 40 years with very little success. What, realistically, can a country with 2 per cent of world R&D and manufacturing output, which is not world leading in the level of productivity, hope to control?

Take the case of Britishvolt, a start-up supposed to take British battery technology and triumph over the very strongly established largely Asian battery industry. This was the pure politics of hype, of fake it till you make it, or in this case don't: the whole project collapsed unbuilt in 2022.2

This is not to say that there is nothing to the spin-out start-up model. The British AstraZeneca Covid-19 vaccine came out of the University of Oxford. But it was mainly produced, on a vast scale, in India, for the poor world. That was a very good thing. But the UK was a net importer of Covid-19 vaccines, mostly from the US and the EU (and some from India). AstraZeneca turned out not to be the vaccine of choice even in the UK, let alone the US or the EU. The British success was in buying early, from around the world, of many different types of vaccine, thus managing risk and uncertainty, and making use of global expertise. The UK bought from start-ups and from established pharma giants. In both batteries and the Covid-19 vaccine, the UK has in fact relied on the rest of the world.

It is important to note that, away from the hype, some of the key expenditures on decarbonisation have involved supporting foreign firms and foreign technology. There has since been a decisive switch to subsidising an Indian car firm (Tata) to make batteries using Chinese technology. There are huge subsidies (in effect) to Électricité de France (EDF) to build a large nuclear power station to a French design, and subsidies to an Indian-owned steel company (Tata again) for switching to electric furnaces. This experience, and indeed lessons from the past, point to some salutary lessons about the possibilities of industrial and innovation strategy for the UK, which need to be learned over again.

First, it is much easier to have an industrial strategy for national self-sufficiency than for conquering the markets of the world. The UK produced more nuclear electricity than anyone into the 1970s, with British reactors, but its reactors were not world beating and did not sell.

Third, what is sovereignty over an industry or set of techniques? Does it mean using, maintaining, making or designing? At which point is one secure? Clearly it would be absurd, and indeed impossible, for the UK to design and make everything it uses. So, what should it aim to be able to do?

Fourth, does sovereignty mean we want nationally owned firms only? Do we want these British-owned firms to have their key facilities at home only? Or is industrial sovereignty about dealing with friends, with friendly companies operating in friendly shores? In which case, which friends, and with what sort of interdependence? It makes a huge difference.

The range of industrial policies that follow from differing answers to these questions is immense. Most are very expensive. The cheap one, which has been followed for decades and is the most popular – the support of R&D and start-ups – has hardly been a success, and we should not expect it to become one.

But, even if a policy of innovation and start-ups were to work, or even a more plausible and expensive industrial policy, it is important to recognise its limits. At best, industrial policy applies to a small proportion of the whole economy.

A new book from from Foundational Economy Research Limited (FERL) represents one of the most hopeful and important developments in political economy for a long time.3 It suggests a new way of knowing, of understanding the world, which means we see things differently, and we see things we did not see before. It also suggests a new way of acting, very different from that on offer from the two main political parties.

The authors criticise the policy of growing GDP through industrial strategy. What they call techno-centrist and free-market partisans both want more GDP growth and higher wages (that is, higher productivity). The techno-centrists favour supply-side action on innovation and entrepreneurs. To these programmes are added measures to narrow geographical productivity differences, which themselves typically focus on encouraging local invention and entrepreneurship. This is the application of a programme that has essentially failed at national level to a regional level, and one which is more likely to fail in future given constraints on burning carbon. It is also a programme that does not get to grips with the essentials of today's economy and its challenges. Among them are persistent low growth despite an industrial strategy promoting innovation and entrepreneurship going back decades, the trickling up of income and wealth, and the challenge of decarbonisation and low investment in infrastructure and public services.

First, there is a renewal of focus on the household rather than the individual, on the distribution of household income and how it has changed over time. This leads to the realisation that, broadly speaking, today the single breadwinner household implies poverty for dependants (those not earning in a household). It also leads to the conclusion that, if we were to return to levels of income inequality in the 1970s, most households would be considerably richer today. In other words, we live in a world where the family wage has gone and one where capital has been taking a much greater share of the GDP cake.

Second, what the authors call ‘foundational empirics’ show the importance of bought essential services (from the internet to buses to food) and free services like health and education, which for the poorest are worth more than either wages or benefits, and social infrastructures, which cannot be bought. A proper economics has to be about much more than the income of individuals (even aggregated) but one about the structures people live in (households) and the multiple infrastructures that sustain a decent life. What this shows is a multifaceted set of problems, going very much further than stagnation in per-capita GDP. It shows the effects of driving down wages, and social security benefits, the impacts of the drive for cost reduction on the quality and quantity of services, and the depredations due to the extractivism of much capitalism in the UK, not least that which is involved in the ownership and financing of housing. It also highlights the importance of the quality of services, public and private, which we depend on.

Second, we need this kind of approach when thinking about decarbonisation. This clearly requires action (both because it is desirable, and because if we will be on a path to net zero internationally, the UK will be under various forms of pressure to decarbonise) focussed on transforming infrastructures. It directly affects key household costs and the quality of services and indeed physical connections to households and household equipment. We need to consider interconnected heating, transport and other systems directly, and the challenge of change without imposing impossible upfront costs on people. Industrial strategy does not begin to do this.

Decarbonising electricity and cars, the focus of industrial strategy, is the easy bit. For the rest we will need coordinated intervention and investment on a vaster scale than the conversion from town gas to North Sea natural gas in the 1970s. You cannot think of it as just a programme or subsidies for producers of new equipment, or a green industrial revolution, or as a programme for new R&D programmes and entrepreneurial start-ups.

First, we should end our fixation on the manufacturing-centred economy of the past. Furthermore, it forces us to have a more realistic understanding of what manufacturing actually is – for example, that much of it is concerned with making food, and that the favoured and visible high-tech sectors are only a small part of it. We should also focus on what we do and consume, and its quality. For example, we should do something about the appalling quality and costs and extortionate profits in the building industry.4 We might focus on the installation, maintenance and repair of new infrastructures and be less concerned about where the steel, the cables, the turbines should come from. But where we do, it should be on the basis of a properly thought-through objective.

Finally, focussing on the people, on the household, on the mundane, allows us to get away from fantasies that stand in the way of sensible policy. What shines through the foundational economy approach is the need to understand where we really are, and that includes not just the problem, but also the possible solutions. This is important because too much of our politics revolves around delusions, not just about Brexit, but also about being or becoming a science superpower, dreaming of having the fastest rate of growth in the G7, or boasting about being a world leader in green technology. We need a policy of doing better, not falsely claiming to be the best. We desperately need a more modest politics, a politics of improvement and imitation, rather than one of rhetorical excess and deepening social misery. Thinking in terms of the foundational economy will help us do all of this.