The Future of Capitalism

by Paul Collier

  The advice of the head is not complicated. The neighbouring society is best placed to provide haven. It is close and so easy to reach and to return from, and is probably sufficiently similar to provide a familiar setting; as I write, the latest refugee movement is from Venezuela to neighbouring Colombia. Affluent societies have the international firms that can bring in jobs, and the money both to help refugee households in the transition to self-sufficiency and to compensate the host society for any costs incurred. This, rather than the chaos of refugee policy of recent years, is the strategy of the future.

  The HIV positive*

  Usually, the potency of reciprocity within a society generates obligations to fellow-citizens that exceed those we have globally. But sometimes we have obligations to some citizens of another country that exceed those of their fellow-citizens. HIV sufferers in poor countries are in this category. With modern anti-retroviral drugs, people infected with HIV can lead normal lives for many years, at the cost of less than $1,000 per year. To their moral credit, Presidents Chirac of France and George W. Bush of the USA recognized that, if ever there was a duty of rescue, this was it. Without the money, thousands of identifiable poor people in Africa would be left to certain, imminent death. They saw that their countries were rich enough that people would be willing, collectively, to finance this life-giving expenditure.

  So, what was the response of the WEIRD? Health economists, imbued with Utilitarian ideology, opposed this use of money. Completely overlooking the moral force of the duty of rescue, they argued that more life-years could be saved for the same money by slightly reducing risks of mortality through preventative interventions for a range of other diseases. It would be more cost-effective to let all the people with HIV die. Meanwhile, the headless-heart populists agitated against another obvious way in which lives could be saved. HIV is usually transmitted through sexual intercourse. If people could be persuaded not to have multiple partners, simultaneously the transmission rate would decline massively; this is what President Museveni of Uganda achieved through broadcasts to the nation. But campaigns for behaviour change were opposed because they might inadvertently stigmatize those with HIV by implying that potentially they had some moral responsibility for the consequences of their actions. Remember, victims cannot be moral actors.

  The duty of rescue from mass despair

  Currently, many African youth have a vision of hope: escape to Europe. This is a tragedy. It is manifestly unviable as a solution to mass despair, and the exodus of the brightest and best can often compound the problems of a poor society. In an ethical world, each society should be in a position to offer credible hope to its youth. The role of affluent societies is not to tempt a few bright young people to lives of marginality in our own societies, but to bring opportunities to the many remaining at home in their societies.

  All duties of rescue begin with respect for those being rescued. Rescue is about restoring and augmenting autonomy, not about asserting authority over people. Instead of a pious ragbag of social and political conditions, international support should be aimed at attracting ethical companies to societies that are desperately short of them, while curtailing the activities of corrupt business. Fragile countries desperately need the jobs that modern firms can provide, but few decent firms want to go to them: small markets and high risks keep firms away. To change this, public money is needed to compensate firms for the public benefit they bring by creating jobs. In 2017, the World Bank and Britain pioneered using aid to support their agencies – IFC and CDC, respectively – that work with firms. The response of the headless heart populists was horror: aid was being diverted from their own photogenic priorities.

  CONCLUSION

  The head combined with the heart can pragmatically guide us to new reciprocal clubs that can address the looming global anxieties, and to provide effective redress for those in need of rescue. A previous generation of global leaders inherited a far more alarming situation and yet achieved both, bequeathing to the next generation a much better world, still far from perfect, but transformed. That inheritance lulled their successors into the indulgences of ideology and populism. We are now paying a price for the resulting weakening of the clubs and contamination of the duties of rescue. But if we return to a pragmatic approach, we can not only restore the ethical world, we can make it better than ever before.

  Part Three

  Restoring the Inclusive Society

  7

  The Geographic Divide: Booming Metropolis, Broken Cities

  London, New York, Tokyo, Paris, Milan. Around the Western world, the metropolis has been leaping ahead of the rest of the country, and this widening divide is there whether we measure it in incomes, jobs growth, or house prices. It is relatively recent, dating from around 1980; until then income differences between regions had been narrowing. America was typical; for a century, differences had been narrowing at a rate of nearly 2 per cent a year. Since 1980, however, alongside the surging success found in the metropolis, many provincial cities have suffered abrupt economic declines. New analysis by the OECD finds that, in the high-income countries, over the past two decades the productivity gap between the top regions and the majority has widened by 60 per cent. Britain is typical: the population has been drifting from north to south every year since 1977, and the income gap has continued to widen. In 1997, the total economy of provincial Britain was 4.3 times larger than that of London. By 2015 that had become 3.3 times.

  Unsurprisingly, this has played out in a new political divide. The resentful grievances of the provinces have been met by the disdainful confidence of the metropolis: ‘flyover cities’, the American phrase of disdain, has recently been topped by ‘shackled to a corpse’ from the political commentator of the Financial Times, Janan Ganesh. Where, in these phrases, is empathy? Where is a sense of reciprocal obligation? They have been brutally dismissed, evaporated with the loss of shared identity that previously united metropolis and provinces. Reflecting this, the metropolis voted heavily against the insurgent campaigns of Trump, Brexit, Le Pen and Five Star, while the broken cities found them appealing.

  So, what are the economic forces that have been driving this new divide, and what can be done about it?

  WHAT IS DRIVING THE NEW DIVERGENCE?

  Underlying the forces that are causing the new divergence are two simple relationships that date back to the industrial revolution. One is between productivity and specialization, and the common phrase for it is ‘learning by doing’. When people specialize at fewer tasks they are able to develop deeper skills. The other relationship is between productivity and scale: the common phrase for this is ‘economies of scale’.

  To harness scale and specialization people need to cluster together in cities. For a company to operate at scale it needs to have a large pool of workers, a large pool of customers, and to be located near other similar companies. As workers specialize, they need to work near others with complementary specialist skills. Cities provide the proximity that enables all these connections. But connected cities need enormous investments in metros, roads, multi-storey buildings, airports and rail hubs. Until the 1980s, only the cities of Europe and North America were able to afford them.

  The productivity pay-offs from this easy connectivity were staggering, and many cities developed a cluster of firms in some particular industry that enabled them to be world-beating. My own home city of Sheffield established such a constellation of specialist steel manufacturers, and a correspondingly highly specialized workforce. By around 1980 the typical worker in these cities was astonishingly more productive than workers in those parts of the world that lacked industrial clusters. Since incomes tend to correspond to productivity, people were astonishingly more prosperous too.

  Starting around 1980, this situation was disrupted by two coincident but distinct processes: an explosion in knowledge, and globalization. The explosion in knowledge turbo-charged the old relationship between specialization and urbanization, leading to spectacular growth in the l
argest cities. Globalization opened up new possibilities for harnessing the gains from scale, but also exposed the established clusters to new competition, sometimes leading to their demise.

  The knowledge revolution and the rise of the metropolis

  Since the 1980s the knowledge economy has expanded exponentially. This has been driven partly by unprecedented growth in the fundamental research conducted in universities and partly by a complementary expansion in the applied research conducted in firms. The potential to harness matter to human advantage is limited only by the fundamental laws of physics. We are still in the foothills of this process because mastering the material world is extremely complex. Discovery-by-discovery we are venturing into this complex world, which may gradually revolutionize productivity. But the only way that our limited human capabilities can master complexity is through our most able people becoming ever more specialized. The last person with any serious claim to know all that was known died sometime in the fifteenth century. Today, our cleverest people know vastly more about the one narrow area in which they have reached the knowledge frontier, and are correspondingly further from the frontier in all other areas. This is true not just of research, but of commercially valuable skills. For example, the law has become more complex, so that legal specialism has become more finely delineated. The expansion of universities has generated not only research, but the graduates who are equipped to master such skills.

  But the fundamental relationship between specialization and cities still applies. Extreme specialization only becomes productive if different specialists are near each other. So, greater specialization requires larger clusters of complementary specialists, and access to a correspondingly larger pool of potential customers. In London, a specialist lawyer is close to colleagues with other specialisms, to clients in demand of her specialism, and to the courts. The same lawyer based in a small town would be idle for much of the year.

  This clustering of specialisms depends on the metropolis offering excellent connectivity. London and its environs contain both of Britain’s major international airports; the capital has the high-speed Eurostar rail link, connecting to Paris and Brussels, running into it; it is the nexus of all of Britain’s mainline railways, and of most of its motorways. It has the Underground: in Central London, the average worker can connect with any of 2.5 million other workers within 45 minutes. It is also the location of government, so any activity that depends upon proximity to public policy is best located there.

  The removal of barriers to international commerce has geared up the benefits of clustering highly specialized people together by enlarging the potential market from national to global. The main market for the services clustered in London used to be Britain; now it is the world. So, the market now supports lawyers who are even more specialized, and their skill and productivity are correspondingly enhanced. In consequence, their earnings are spectacular.

  In turn, a large population of very high earners creates a market for services to entertain them. Proximity matters: restaurants, theatres, shops crowd in to satisfy every whim of people flush with money but short of time. And this cluster of luxury attracts a further influx: the global rich. London, New York, Paris all have billionaire residents who made their fortune elsewhere but enjoy spending it in them.

  Voila – the booming metropolis!

  The globalization revolution and the demise of provincial cities

  This does not describe what has happened in Sheffield, or Detroit, or Lille. I remember a visitor to the Sheffield of 1960 saying: ‘Goodness, this is a prosperous city!’ By 1990 nobody would have said that.

  Clusters of world-beating firms, such as that in the Sheffield of the 1960s, had a large advantage over new competitors but they were not invulnerable. Sheffield had no natural advantage in steel production. The feature that had induced firms to cluster in the city had been its fast-running streams to power grinding wheels: by the twentieth century its only advantage was that the firms and skilled workers were already there. Each company stayed there because others were there. The workforce was productive, but that was reflected in their wages, so firms were not especially profitable.

  On the other side of the world, an emerging market economy, South Korea, was building a new steel industry. As it built its own cluster, it had a different advantage: much cheaper labour. By 1980, it had become a little more profitable to make steel in South Korea than in Sheffield, so Korean firms were starting to outcompete Sheffield firms in world markets. The Sheffield steel industry began to contract, and the Korean industry to expand. As Sheffield’s cluster shrank, the gains from many interdependent firms being in close proximity, known as ‘economies of agglomeration’, diminished. As a result, costs went up. As the Korean cluster expanded, its costs fell. The result was explosive: Sheffield’s steel industry, first noted in Chaucer’s The Canterbury Tales, collapsed with astonishing speed. Skilled workers, themselves the sons of skilled workers, found themselves unemployed with no prospects of a skilled job. The human tragedy of this co-ordinated shock was sufficiently noteworthy to be memorialized in a film, The Full Monty. Its poignant, self-mocking humour against the backdrop of disaster well captures what happened. Being my home town I felt this experience bitterly, but it has been repeated across many once-prosperous cities, such as Stoke, where the pottery cluster pioneered by Josiah Wedgwood imploded. These, and all other examples, are dwarfed by what has happened to Detroit since the 1980s.

  Do such cities recover? The ideologues of the right believe that, as long as governments do not interfere, market forces will address the problem. Unfortunately, this is merely an ideological belief. For actual knowledge, we need experts.

  The market responds to the collapse of a cluster, but not by replacing it with a new one. Instead, the initial response is a sharp drop in the price of residential and commercial property. Home owners become trapped by negative equity, and struggle to move to the booming cities where homes are much more expensive. The fall in the price of commercial property indeed attracts some activities, but they are the stuff that forms the underbelly of the national economy: warehouses that serve the local region; low-productivity manufacturers that can only survive if their premises are very cheap; call centres that rely upon cheap premises and low-waged, casual labour. As the city fills up with such activities, property prices and wages partially recover, but the city has stumbled into a cul-de-sac. These activities are low skilled, and so the workforce is no longer participating in the ever-rising productivity of complex specialization.1 The superstar firms in the metropolis remain at the technology frontier and so the metropolitan population benefits from rising incomes, but neither the technology nor the incomes trickle down to the broken cities. For example, new data for America shows that high-wage, high-technology jobs are becoming progressively more concentrated in the biggest clusters.2 More fancily expressed, the rate of diffusion of technology from the leaders to the laggards has slowed.3

  There, minus the exuberance of ‘voila!’, is the broken city.

  ADDRESSING THE NEW DIVERGENCE

  The preceding analysis helps explain why, across the advanced economies, the metropoles are surging ahead while many provincial cities have suffered humiliating decline. What can be done about it? There have been plenty of familiar-sounding ‘solutions’. Ideologues churn them out, though they lead up a blind alley of overconfidence.

  In addressing the new divergence, the populists have the easiest time of it. Since the divergence is new, they propose putting the clock back to before it happened. Their policy for doing so is protectionism, to reverse the globalization of markets. Before readers sneer at this response, we should recognize that it is not self-evidently stupid. If in some important respects the past was better than the present for many people, it will indeed seem both feasible and safe to adopt the strategy of restoring the past economy. The same people have learned not to trust the breezy reassurances that if they accept further change everything will end up better.

&nb
sp; Nevertheless, the strategy of putting the clock back is doomed to failure. The key reason why is that the Emerging Market economies, like South Korea, that have established the new world-beating clusters, have no interest whatsoever in putting the clock back. Globalization has enabled them to achieve unprecedented reductions in poverty. If South Korea continues to dominate the steel industry, no amount of protectionism by Britain can restore the pre-eminence of Sheffield in the world market. At most it could deliver the British steel market to Sheffield, but this would not be large enough to restore the high productivity that Sheffield once had, and in the process the higher cost of steel in Britain would handicap all the industries that needed it.

  While protectionism cannot restore Sheffield, a range of restrictive policies could potentially reverse the prosperity of London. Just as the Sheffield steel cluster proved to be vulnerable to relocation, so the London finance cluster could be demolished. Its flashy prosperity is an affront to the gritty endeavours of provincial England, and so demolishing it would be greeted quite gleefully in some parts of the country. But this too would be a foolish strategy. A metropolis such as London is even better than an oilfield – it need never be exhausted. Irritating as this golden goose might be, there are better strategies than wringing its neck. Unfortunately, at the time of writing, Britain is set to do just that through a Brexit strategy that could cause a co-ordinated shift of the financial sector to other European cities.

  Why not pick up the eggs instead? In other words, why not use revenues gained from taxing the metropolis to revive provincial cities?