Recovering a Mixed Economy

1. Recovering a Mixed Economy  Stuart Holland Faculty of Economics University of Coimbra sholland@fe.uc.pt Presentation to the FEPS/TASC Conference From Debt to Recovery Croke Park, Dublin October 15th 2011

2. Structure of the Presentation 1. Introduction 2. Myths 3. Owning and Managing 4. State Holding Companies 5. Public-Private Partnerships 6. Regional Development Agencies 7. Infrastructure, Natural Resources and Utilities 8. Innovation and Networking 9. Innovation and Venture Capital 10. Six Principles

3. Introduction What I am going to present are simply some main points. But I shall relate them to some dimensions to European policies and funds which I recommended to and were introduced by Jacques Delors. Or later gained through the European Council by Antonio Guterres, and which are relevant to Ireland now. And which arguably are relevant to defusing market myths and recovering the case for variable geometries within a plural mixed economy framework.

4. 2. Myths One of the dominant myths stemming from Milton Friedman is that public investment and spending �crowds out� the private sector. He offered no evidence for this, with good reason, since the claim was false. Public investment and spending does not drain the private sector but sustains it. It does not �crowd out� the private sector but �crowds it in� to higher levels of investment and income. Friedman also neglected investment, income, employment and fiscal multipliers.

5. Myths 2 A second myth stemming from Friedman is that the private sector always is more efficient than the public sector. The subprime crisis destroyed this. A third myth is that the only alternative to the private sector is �outdated nationalisation�. There are many plural forms for a mixed economy. A fourth is that, as wrongly claimed by Hayek, one step down the mixed economy road to will lead to �serfdom�. Scandinavia disproves this. The new �serfdom� is not of people to governments, but of governments and people to financial markets and to Mammon.

6. 3. Owning and Managing There is no point in owning something unless you either can manage it or influence its management. Gordon Brown was so concerned when salvaging banks to deny that this was not a return to �Old Labour� nationalisation that he refused to manage them and claims that he felt incensed when banks refused any conditions for such salvage. The outcome has been entirely counter productive. Interbank lending is down to one month only, as bad a �credit crunch� in 2008. Banks are not on-lending to small and medium firms but are �recapitalising� themselves by charging up to near 20 per cent on personal overdrafts.

7. Owning and Managing 2 Besides which, Brown was displacing and denying his support in his Red Book for Scotland for Labour�s policies in the 1970s which were for: 1. Selective public shareholdings in leading firms to enable them to sustain long term investment and innovation rather than be dependent on short-term returns demanded by stock markets, and 2. Planning Agreements to gain accountability for public money in and public purchasing from the private sector.

8. Owning and Managing 3 The case for governments both owning and managing is not that civil servants should run industry and finance. They shouldn�t. They don�t know how to do it. Rather, the case is that governments should be able to manage in the sense of gaining strategic outcomes from public ownership that serve rather than disserve the public interest. This was the case with both the successful Italian state holding companies IRI and ENI. Their CEOs reported to the government. No minister could tell the manager of a subsidiary what to do. Strategy, such as a 1957 remit for regional development, was set by governments and agreed by parliament..

9. Owning and Managing 4 The French also have been brilliant in relating the strategic aims that public enterprise should fulfil to planning agreements. In the last hours of New Labour Business Secretary Lord Mandelson declared that it had much to learn from French industrial policy. He denied that this meant a return to �old style� nationalisation. Yet displaced the each of the examples that he gave in the sectors of electricity and nuclear energy, high speed rail transport and aerospace all were publicly owned Without long-term commitment through public ownership to Concorde and the Diamant launcher there would be no Airbus Industrie and no Ariane European launcher

10. State Holding Companies 1 The Labour government in the UK in the 1970s introduced two state holding companies. Labour�s NEB - National Enterprise Board � was modelled on the Italian State Holding Company Industrial Reconstruction Institute IRI. By 1979 the NEB was directly of indirectly safeguarding a million jobs in British manufacturing including in British Leyland in its joint venture with Honda. Companies such as Ferranti gained from being part of the NEB. In 1974 Ferranti had been patenting as many as a hundred ideas per year but only could gain stock market finance to introduce less than a dozen, and sold the rest. With the NEB it could develop and produce more.

11. State Holding Companies 2 Clive Sinclair agreed to come into the National Enterprise Board. In the early 70s Sinclair had 40 per cent of the laptop computer market in the UK but, like Ferranti, could not gain stock market finance for long term development. He also needed to get closer to Silicon Valley. The NEB enabled this and his setting up Inmos and Nexos in the States Margaret Thatcher knighted Clive Sinclair but scrapped the NEB. Within two years Inmos and Nexos had failed and Sinclair was bankrupt.

12. State Holding Companies 3 The other state holding company that Labour introduced in the 70s was the British National Oil Corporation, modelled on the Italian state holding company ENI. The National Oil Corporation quickly learned that the Seven Sisters of the then global oil oligopoly were overstating the costs of extraction in the North Sea by transfer pricing, and informed the Treasury. The failure then was one of political will. The then Chancellor of the Exchequer, Denis Healey, disregarded this. He succumbed to the threat from the private oil majors that if he required higher tax from them they would pull up their rigs and leave.

13. State Holding Companies 4 This was implausible since they already had drilled in the North Sea with what literally were �sunk costs� and would not have quit what at that time was one of the richest oil and gas fields in the world. Labour from 1975 therefore had its own oil corporation which was revealing the real cost and profit structures of the Seven Sisters. Taxing them effectively could have generated the fiscal gains which could have avoided the 1975 cuts of �4 billions that Healey agreed with the IMF. This both was the second major cut in public spending that Labour had undertaken within a decade. It also left the revenues to Thatcher.

14. Aftermath The UK since 1979 has de-industrialised. There are no major private independent companies now in industry in the UK rather than multinational companies such as Toyota, Nissan and BMW which first took over British Leyland and then stripped down to one plant, for the Mini. Major manufacturing in Italy now is in the IRI or ENI Groups. IRI�s Finmeccanica in the 1960s had only some 30.000 jobs in engineering. It now has over 100.000 including, in the UK, what remains of GEC and Westland helicopters, now Westland-Augusta. Icons of private manufacturing in Italy, as in the UK, such as Olivetti or Pirelli no longer are major players. The CEO of FIAT has threatened to relocate it to Brazil

15. 4. Public-Private Partnerships What Labour was proposing in the 70s was a variant on what later became known as public-private partnerships. But with the difference that the criteria would be public rather than private, including: Commitment to locating plant in less developed regions and urban areas. Translating R&D supported by governments into innovation in the UK rather than abroad. Tripartite negotiations of public money in the private sector by government, management and trades unions

16. Public-Private Partnerships 2 This was to involve planning agreements with leading firms to gain better value for public money in the private sector. This was based on European models from France, Belgium and Italy. Tony Benn refused to cite these in Labour Party statements at the time, which did not help gain them credibility. He also did not help by referring to �compulsory planning agreements with the top 100 companies� which made the programme sound like Gosplan and thus Hayek�s �road to serfdom�.

17. 6. Regional Development Agencies One of the cases which I was able to gain in the drafting of the UK 1975 Industry Act was that regional development agencies should be established for Scotland, Northern Ireland and Wales. I then drafted the case for English regional development agencies which were introduced by John Prescott from 1997. But to be effective regional development agencies need to be hands on rather than arms length. They need to encourage the development of joint innovation trajectories, especially by multinational networking, rather than subsidising failure.

18. 7. Infrastructure, Natural Resources and Utilities There is no case for private enterprise to co-finance and gain profit rather than contracts from infrastructure projects. Nor to licence exploitation of natural resources to the private sector to gain profits for shareholder, rather than gains from them for the public. Nor to manage public utilities for private profit rather than for public wellbeing. Ministers who recently have claimed that you can read any economic theory you like and find the contrary are uninformed.

19. Infrastructure, Natural Resources and Utilities 2 Leon Walras has been one of the icons of mainstream economic theory and the author of the general equilibrium theory to which neoclassical economists are addicted. But Walras claimed that governments and social institutions were needed to optimise welfare in a manner that markets alone could not. He worked for several years in the cooperative movement and was deeply committed to the principle of mutual societies as a means of organising production, distribution and credit (Walras, 1865).

20. Infrastructure, Natural Resources and Utilities 3 Walras (1875) castigated the neoliberal Manchester School of his time for its failure to distinguish between pure theory and practice. He stressed that his theory of equilibrium was simply an intellectual construct and bore no relation to realities in a world in which there were dominant firms and external diseconomies. He strongly advocated public ownership of land, railways, water supply, and the production and distribution of electricity and gas supply. He recognised that the most efficient solution for a railway, or gas supply or electricity network was a single owner operator. He recommended a middle way �between a socialism that may involve too much State intervention and a �Manchesterism� that does not make it intervene enough� (Walras, 1898).

21. 8. Innovation and Networking In 1993 I made the case to Jacques Delors that, in terms of competitiveness: Small and medium firms need to gain some of the features of larger multinational companies without first needing to become large to do so. He nominated me to the committee drafting the Fourth Framework Programme to advocate the case. It accepted that all Framework Programmes from then on should be networked.

22. Innovation and Networking 2 The principle was that any successful bid for Framework Programme funding should include A Schedule 1 less developed region or, at that time, entire country such as Ireland, Greece or Portugal. Plus, reinforcing it as an application, a Schedule 2 area of industrial decline or distress. The case was not subsidy for decline or failure, but that Schedule 1 and countries and Schedule 2 areas thereby could be brought within the innovation frontier of the more or most developed regions.

23. Innovation and Networking 3 This is still highly relevant for Ireland and to a European periphery that needs to increase its competitiveness. The periphery cannot simply compete down on costs. Asia has disproved David Ricardo on comparative advantage. When a workforce in Asia and especially China now can combine high levels of literacy and high quality infrastructure with the word�s most advanced technology through foreign direct investment competition now is on Adam Smith�s absolute advantage.

24. Innovation and Networking 4 Ireland gained but then lost some of the world�s most advanced technology through foreign direct investment to central European economies. Yet it has high levels of literacy and high quality infrastructure What it needs to gain are joint ventures and strategic alliances with other peripheral member states within the EU on the basis of innovating up rather than competing down on costs And thereby do so by networking with regional development agencies and innovation centres.

25. 9. Innovation and Venture Capital One of the main needs for networking is a symbiosis at local level between universities, local governments and enterprise. Finland has managed this whereas China as yet has not. There are three constraints 1. Too much research in universities is only in pure rather than applied science. 2. This is aided and abetted by the Framework Programmes of the EU in which far too many projects are signed off without creating a single new high-tech start-up. 3. There also is the constraint of loan finance rather than equity finance.

26. Innovation and Venture Capital 2 Knowing this, I suggested and gained Delors� support that a European Investment Fund should use the issue of Union Bonds to finance European venture capital fund. I based this case on the evidence that three out of four new start ups at the time were dead within three to four years since strangled in infancy by interest demanded by banks. He had enough influence to get the European Investment Fund established in 1994. But DG Economy and Finance and the Bundesbank opposed the issue of Union Bonds, and the EIF was reduced merely to equity guarantees

27. Innovation and Venture Capital 3 I had submitted that such a venture capital fund should be at least 60 billion ecu. By 1999 the EIF had only guaranteed I billion. At Nice in September 2009 Ecofin committed itself to loans rather than only equity guarantees of 30 billion euros The peripheral member states could jointly mobilise within either Ecofin or the Eurogroup to press the case that - net issues of Eurobonds should finance a European venture capital fund which was one of the twin design aims of the European Investment Fund

28. Innovation and Venture Capital 4 They also should press the case that the European Investment Fund and the European Commission should have �one stop shops� in each national capital. that the threshold for applications for venture capital should be lowered to 5 million euros For the EIF at the moment only works through financial sector intermediaries in member states. The are mainly private and therefore do not advertise even its present equity guarantees.

29. Six Principles There are six key principles in the above points which are relevant to learning up and back from plural models of the State and their variable geometry in different countries at different time periods. ? First, the State as an entrepreneur, whether in industry or finance, can directly translate either borrowings or savings into productive investments. ? Second, it can reinforce and promote long-term investment, as with French State enterprise in energy, advanced rail, aircraft and aerospace rather than the imperative of demonstrating short-term financial returns to avoid predation and dismemberment by hedge funds.

30. Six Principles ? Third, it thereby can transform what otherwise may only be research and development of a patented idea into actual technology, and thereby either stay abreast of or advance a global innovation frontier. ? Fourth, it can take account of externalities, offsetting them when they may be negative, such as by direct investment in less developed regions and areas rather than only incentives to invest in them.

31. Six Principles ? Fifth, it can countervail the risk of dominance of a given market by entering and competing in it, as did Airbus by countering the emerging monopoly of Boeing. ? Sixth, by doing so, it can directly gain an understanding of what real costs are in sectors where global corporations and banks otherwise mask them through transfer pricing.

32. Six Principles Most of these six principles have been achieved by the State as entrepreneur by China. The trauma for the US is that in doing this for only a few decades, China has succeeded in long-term finance for industry whereas American banks needed to be salvaged at catastrophic cost from their own folly in speculating in financial products which proved entirely fictitious. But China�s gains from size and scale means that it lacks the advantage of small scale economies of scope for niche and other innovation which Ireland, with other smaller European economies, should be able to exploit by networking innovation.