Growth is still the answer to the world’s economic problems

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In 1931, John Maynard Keynes published a short essay entitled “Economic Possibilities for Our Grandchildren” in which he considered the feasibility of solving what he called “the economic problem”. According to Keynes, the issue of scarcity ought to have been dealt with by the early 21st century. Decades of capitalist progress would leave society with the capacity to produce the resources needed to guarantee everyone a good standard of living. The problem, at this point, would be finding ways to spend well-earned leisure time.

More than 90 years later, it is fair to say that Keynes’ prediction of abundance was not wrong: the scale of production possibilities available to us in 2022 is well beyond what he probably imagined in 1931. But “economic problems” have not gone away. In fact, there is an intellectual debate raging over how to define our primary issues and what to do about them. Is finding a way to create more growth still the key to a good society? Or is our primary economic problem finding a way to deal with inequality and environmental degradation?

The most recent contribution to this debate comes from Jonathan Haskel, professor of economics at Imperial College Business School, and Stian Westlake, chief executive of the Royal Statistical Society. They situate themselves firmly in the “more growth” camp. Their book, Restarting the Future, suggests that capitalism can be revitalised by promoting “further investment” in what they call “intangible capital”. This thesis builds on their last collective effort, Capitalism without Capital, published in 2017. In that book, Haskel and Westlake outlined how the capitalist system has shifted from investment in physical capital, such as machines and factories, towards intangible capital, such as software. Importantly, this kind of capital behaves differently from physical assets: the more it makes up the economy, the more it can change the dynamics of capitalism itself.

In their latest outing, Haskel and Westlake argue that the speed of these changes in capitalism has not been matched by developments in the institutions that govern the economy. For example, government research and development spending is still based on producing more brand new research when good quality innovation now derives from unique combinations of different kinds of existing capital. The result of these “institutional lags” has been sub-par investment in intangibles and low economic growth. The solution Haskel and Westlake propose is a range of institutional fixes that will drive prosperity in the new, intangible-rich economy.

The book is strongest when it deftly explores the policies that could help enliven investment. Here, as economists, the authors can play on home turf — exploring the best way to squeeze juice out of the intangible orange. In a series of policy discussions on cities, finance, competition and R&D funding, they outline how intangibles can be harnessed to create growth and what more can be done to manage the undesirable impacts of economic transformation — such as the increasing divide between cities and towns.

More controversial is their argument that enlivening the growth engine of intangible capital will produce a solution to our current political economic woes. This idea relies on a theory of social change where political and economic stability is essentially unlocked through growth. This growth in turn relies on finding the right institutional “code” to unlock the kind of market exchange which brings prosperity, happy citizens and a flourishing society.

It is interesting to speculate what Keynes would have made of this argument. It is undoubtedly the case that he would have been impressed by Haskel and Westlake’s vision of a prosperous society, harnessing the power of “intangible” investment to create great leaps in productivity and output. He may also, one suspects, have been sceptical of whether further growth in an era of relative historical abundance is still the primary “economic problem”. This is especially the case in an era where capitalism’s growth orientation is increasingly indivisible from some of the overlapping, existential environmental crises confronting us. 

The insights of Haskel and Westlake on how institutions currently inhibit an economy dominated by intangibles are valuable. Their recommendations, if adopted, may well unlock further growth. But this alone cannot create a better future: the “economic problem” is now far more complex than that.

Restarting the Future: How to Fix the Intangible Economy by Jonathan Haskel and Stian Westlake, Princeton University Press, £22, 320 pages

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