Innovation, productivity and growth have slowed down since the 1970s. Our global, free-market economy isn’t as dynamic and entrepreneurial as we’re lead to believe.
I saw this beauty parked outside my daughter’s nursery the other day. It’s a 1973 Citroën DS20. It’s striking how modern it looks for a car that’s almost as old as me. Even more striking is that this is one of the last DS models ever built. Introduced in 1955, the DS is a sixty year-old design — closer in time to the positively Edwardian-looking Model-T Ford than to the two-year old Vauxhall Corsa parked next to it.
By any standards, the DS was a revolutionary vehicle. To the French writer Roland Barthès, seeing it for the first time at the 1955 Paris motor show, it seemed to have “fallen from the sky”. But the DS didn’t just look futuristic. It was the first mass production car with disk brakes. With its ingenious hydropneumatic suspension, it set new standards for ride quality, handling and braking. Some models came with a semi-automatic gearbox (where you move the gearstick yourself but don’t have to use a clutch) and power steering, something that only became standard in most cars about forty years later. It even had headlights that swivelled when you turned.
The DS came third in the Car of the Century competition, behind only the Model T itself and the Mini (another revolutionary design from the same era as the DS). It quickly became a French cultural icon; General De Gaulle claimed it had saved his life during the 1962 assassination attempt and it has played a role in more than 2,000 films (including, of course, The Day of the Jackal, based on Frederick Forsyth’s novel about an attempt on De Gaulle’s life).
It’s hard not to feel that if the auto industry had carried on producing vehicles as innovative as the DS, by now we’d all be driving flying cars with zero emissions that cost nothing to run. There’s nothing much wrong with that Vauxhall Corsa but, next to the DS, it looks a poor return for almost 60 years of engineering progress.
How can this be? Quite simply, Citroën in the period the French call les trente glorieuses — basically, the years of strong state-led economic growth from 1945 to 1975 — was a different sort of firm to those we’re used to today. Large businesses invested much more of their cash in research and development, rather than spending it on share buy-backs or pointless takeovers of companies doing much the same thing (which only reduces diversity, competition and the incentive to develop new products and technologies). But even by the standards of the time, Citroën was obsessed with innovation. It spent so much money trying to develop a front-wheel drive car in the 1930s that it bankrupted itself and had to be rescued by its largest creditor, the tyre maker Michelin. Rather than strip the company down to sellable assets, as most firms would do today, Michelin invested in Citroën as a sort of research arm. Citroën went bust again in 1974 and had to be rescued by rival carmaker Peugeot in a deal brokered and financed by the French state.
Not everything Citroën did was as successful as the DS. Numerous attempts to develop a model between the spartan 2CV and the expensive DS never got beyond the prototype stage. The innovative but frankly bizarre SM sports coupé, introduced in 1970, proved too idiosyncratic (and expensive) for most drivers, and was axed after just 115 models were sold in 1975. And the temperamental CX series, which replaced the DS in 1974, couldn’t repeat its predecessor’s success (nevertheless many enthusiasts regard the CX as the last “real” Citroën, before Peugeot suppressed its avant-garde soul). But these sort of failures are inevitable if we’re going to get real innovation. The problem is that firms today simply can’t afford to make the kind of mistakes Citroën made.
One of the biggest myths in economic discussion today is that firms, competing in global markets, free from the heavy hand of state intervention and driven by shareholders’ demands for quick profits, are more innovative and risk-taking than they used to be. In most cases, nothing could be further from the truth. Today’s business environment makes them risk averse, and reluctant to invest in research and development. Instead of improving the quality of their products or developing new ones, most firms focus almost entirely on boosting short-term profits by cutting jobs and wages, and by outdoing each other’s marketing campaigns. Shouting a lot and sacking people isn’t really entrepreneurial; it’s just the safe option.
This isn’t just a feeling I have, it’s there in the figures. In 1970, British firms, for example, typically paid out around 10% of their profits to shareholders in dividends, retaining most of the rest for investment and innovation. Today that figure is 60-70%; it should be no surprise that investment, innovation and productivity have all slumped — there simply isn’t any money left for it (Britain, by the way, invests less — at 15% of GDP — than any other major economy).
As the Observer columnist Will Hutton argues, attitudes have changed. Even among start-ups, where we might expect a commitment to innovation, there seems to be little interest in building a business long-term by developing good products and services. Instead, the main goal is often to turn the business as quickly as possible into a vehicle that can be sold.
Even the Bank of England’s chief economist, Andy Haldane, has condemned the short-term focus of modern capitalism. “The nature of shareholding today is fundamentally different than what it was a generation ago,” he explained on telly in July. “The average share was held by the average shareholder, just after the war, for around six years. Today, that average share is held by the average shareholder for less than six months. Of course, many shareholders these days are holding shares for less than a second.” Haldane warned that firms “are almost eating themselves” and blamed the lack of business investment for the “sub-par” economic growth of recent decades.
The big exception to this is, of course, tech firms like Apple, Facebook, Google and Linked In, who have been able to innovate even in this harsh, short-termist environment for two important reasons. Firstly, most refuse to play the game by the normal rules. They knew that if they wanted to foster an ethos that favoured investment and innovation over cost-cutting and short-term profit taking, they would need a different structure to conventional private companies. This is why many Silicon Valley firms reserve voting shares for their founders, long-term investors and sometimes staff. Other investors can have a piece of the action (i.e. profits), but they don’t get the final say over how the firm is run. Secondly, many of the key technologies these firms have deployed so successfully were not developed by private enterprise at all, but by the supposedly inefficient and unenterprising state.
Take the iPhone, probably the iconic product of the digital age. All the key technologies that make an iPhone what it is were developed by state institutions or state-led partnerships: GPS satellite and touch-screen technology, the lithium-ion battery, voice recognition software, the liquid crystal display as well as the world wide web and the basic architecture of the internet itself.
The economist Mariana Mazzucato has written extensively about how, freed from purely commercial considerations, state institutions and state-led partnerships (and sometimes non-profit organisations like research institutes), can take bigger risks, invest in innovation and operate on much longer time horizons. The state is better placed to be a venture capitalist than most venture capitalists. Whatever sector you look at — biotechnology, pharmaceuticals, nanotechnology, or broadcasting (the BBC, for example, invests a staggering eight times as much of its revenue in new programmes as commercial broadcasters) says Mazzucato, it’s usually the state that’s “funding the difficult stuff”. (Mariana’s excellent ten-minute TED talk explains all this much better than I can.)
“In the history of modern capitalism the state has not only fixed market failures, but has also actively shaped and created markets,” says Mazzucato. “In doing so, it sometimes wins and sometimes fails.” Real innovation means being free to fail, but today’s private corporations aren’t free to fail for very long.
We’ve been sold the idea that what economists and political scientists call “neoliberalism” — free markets and the idea that almost everything is best done by profit-maximising private corporations — is dynamic and innovative, when the opposite has proved to be the case. Neoliberalism stifles innovation because it encourages monopoly and cartels, and eliminates diversity and complexity. It encourages firms to drive down wages to compete rather than invest in developing new and better stuff. As Channel 4’s economics editor Paul Mason says, “neoliberalism did not produce Silicon Valley”.
It didn’t produce the Citroën DS either. Citroën was absorbed by Peugeot in 1976 and now makes mostly bland vehicles with little to distinguish them from those produced by its parent company. Car making is now dominated by a handful of global corporations, and innovation and choice have suffered as a result. In the 1950s there were more than a dozen independent mass car producers in Britain, and they designed and built some of the most important vehicles in motoring history: the groundbreaking Mini, Range Rover and Land Rover, the stylish Rover P6 range, the beautiful Triumph Stag, and the iconic MG and E-Type Jaguar sports cars, to name but a few. What’s left of the British car industry is still living off these past glories.
There’s nothing inevitable about this. We can have more companies like the old Citroën if we want to. We can bring about change in the way companies are owned, run and how they treat their staff. We can build new partnerships between the state and the private sector, and invest much more in research and development if we choose to. As Mason says, “the low-wage, low-skill and low quality corporations that have flourished since 1990s exist because the space for them was ruthlessly carved out by the state. All we need to do is throw that process into reverse gear.” 1
- Paul Mason, Postcapitalism (2015), p277. ↩︎