Speech: The New Innovation Economy: Productive Business and Active Government

Thank you

 

It’s a great pleasure to be here, to host this event and to welcome this report.

 

I probably shouldn’t say this to an audience of finance and economic academics but –  I have been somewhat disappointed by the finance and economics communities recently

 

There are many incredibly intelligent people in finance and economics.

 

I know that because at Imperial College back in the 80s  the vast majority of my fellow engineering students went into finance, or accountancy or management consultancy.

 

When I took my MBA at Manchester Business School in the 90s I was very  impressed by the comprehensive literature on responsible capitalism as well as risk management.

 

I think that Black Scholes is possibly the most beautiful equation I have ever come across.

 

And when working for Ofcom I helped pioneer the use of real options in regulation.

 

So why I wondered, was it that after the biggest financial crisis the world has ever known, the most far reaching indictment of the capitalist system ever seen there was no immediate and  vocal response?

 

When Ed gave his speech at Conference on the productive economy he was attacked in the media for saying the very things the Prime Minister is now claiming as his own.

 

But I knew whole libraries of  management and finance literature supported what he was saying – and that it represented best practise in the best businesses!

 

Which is why I am so pleased to see Finnov now setting out the case for that new economic reality – and  with intellectual rigour and evidence based analysis.

 

And the public is crying out for it too.

 

We see that in the big news story of this week.

 

As Ed Miliband said on Monday

 

“the RBS issue has shown the gap between the lives and behaviour of a few at the top and the deep commitment to fairness and responsibility among Britain’s working families.”

 

And as Chuka Umunna, Labour’s Shadow Business Secretary said last month

 

“The economy is the issue of this parliament not simply because of the lack of growth and the highest rate of unemployment for 17 years… But also because of the long term structural trends in an economy which has failed to deliver incomes to keep pace with rising living costs.”

 

We recognise that the Labour Party did not get everything right in Government and there are challenges that successive governments have not overcome

 

But at the heart of the Labour movement  has always been a belief in shared investment and shared reward.

 

At the heart of the public outrage at Hesketh’s bonus was the realisation that the consequences of the financial crisis were not being shared.

 

People feel that in the good times they didn’t see much benefit, but then in the bad times they are being made to shoulder most of the burden.

 

That is why our priority, as a party, is to build an economy which is more productive, more resilient, broader based within and across regions and sectors, and, critically,  has  fairness at its heart, delivering not just for those at the top, but every hardworking person in our society.

 

A new innovation economy which supports value creation.

 

So the work that Finnov are doing on the nature of risk, reward and value creation is critical.

 

We have a system where innovative businesses with long-term business models struggle to access capital from banks that pay out bonuses to executives who have presided over huge, and often nationalised, losses.

 

This isn’t about greed, or the politics of envy; it is a structural issue in our economy.

For me, the most interesting part of the Finnov work is that which deals with the nature of value. The difference if you like between engineering and financial engineering.

 

Adding zeros to numbers on screens by moving them backwards and forwards between subsidiary companies, with no positive change in the underlying asset,  should that really be so highly rewarded by the markets?

 

Investing in innovation which will mean, for example,  releasing the energy trapped in the  tidal current at Cullercoats near my constituency, should that be penalised by rating agencies who consider long term investment a liability?

 

The work  of Finnov in defining value is critical to understanding what signals and incentives an active Government should be promoting.

 

We currently have a situation where short-termism is encouraged by a number of perverse incentives.

 

So for example in the last Budget, the Chancellor chose to pay for a cut in corporation tax by slashing investment allowances.

 

This essentially abolishes tax breaks for companies that invest in the long term.

 

We need to rebalance incentives to create a more productive and fairer economy, based a partnership between an active government and responsible businesses.

 

In the shadow BIS team this is a key part of our work . Our interim review that we launched in November looks at the challenges we face and how we build a new economy to support the long-term.

 

Some believe that the only thing Government can do is to get out of the way.  Mariana has recently convinced me that Schumpeter wasn’t one of them.

 

We believe to keep the UK competitive, globally we must use the right levers to  support innovative and productive businesses: framing the rules of the game so that the business which is most productive and valuable to society is also most profitable.

 

Our competitor countries- like the US and Germany –  know this.  For example they recognise the inherent market failure in the supply of credit and equity to small businesses, and use state guarantees to catalyse access to finance for small businesses on a much broader scale than they have ever been in the UK.

 

An active Government has a number of levers at their disposal – in discussions with key stakeholders we have identified four key areas.

 

Ensuring competitive markets is one.   So creating institutions at the meso-level to coordinate and support innovation helps small companies compete and reduce the impacts of vested interest.

 

Government also has a key role investing  in skills and infrastructure.

 

And of course, finance. Using its power as the biggest purchaser in the country Government can leverage private sector investment in green technologies for example.

 

Labour’s innovative SPRI programme supports our procurement needs by targeting support directly at innovative activity within businesses, rather than at businesses of a particular size or in a particular sector.

 

Nigel Doughty’s interim report of the small business taskforce, published in December, proposed scaling this up as one of a number of areas for improving the financial system to support innovation.

 

And I look forward to your views on the right types of tax credits, the effectiveness of the patent box, and how a British Investment Bank could support small business growth.

 

The credit crisis struck in 2008.  It came just as we were getting to grips with the terrible long term consequence of the first industrial revolution –  man-made climate change

 

Some might see this as the tragic conspiracy of fate. Others might see in it a  huge opportunity.

 

A chance to ensure  both the financial and the physical basis of our economy are sustainable in the long term.

 

The stakes are high but the rewards exceptional.

 

If you can help us achieve that then the beginning of the 21st Century might be known not for the financial crisis, not for the tottering of the eurozone, not even for the emergence of the BRICS, but for the moment in history when we finally understood the real foundations of a sustainable, fair and productive economy.

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