Financial crisis management – what would the Queen have said?

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It’s always worth reading the memoirs of a former Chancellor of the Exchequer if you are interested in how policy works outside the textbooks, particularly for the way the political pressures and economic analysis interact. It is usually the economics that loses any contest, of course. Nigel Lawson’s tome, The View From Number 11, is a terrific read, partly because of the sheer interest of the radical approach the Thatcher government took to economic policy, and partly because the account of his clashes with Mrs T and her adviser Alan Walters is gripping. One of the best lines is:

“I recall telling the Queen, the one person to whom I could unburden myself in complete confidence, during my usual pre-Budget audience with her… that I thought the 1988 Budget would be my last, because the Prime Minister was making the conduct of policy impossible.” (p799)

When he was Chancellor, Alastair Darling, from afar (I’ve not met him in person), seemed nice, obviously competent, but dull. He had obviously been dealt a rough hand in having to deal with the combination of Gordon Brown as his PM and the onset of the financial crisis. A few chapters in to his memoir, Back from the Brink, my respect for him has increased enormously. Despite its rather measured tone, the book has some jaw-dropping material. I quite liked the scene with Fred Goodwin turning up at Mr Darling’s constituency home just before Christmas 2007, bearing a gift-wrapped panettone and a warning about RBS’s need for liquidity.

But most extraordinary (so far) is what happened when Mervyn King told the Treasury Select Committee in 2009 that further fiscal stimulus could not be afforded. Mr Darling, watching it live on TV from his office, was – not surprisingly – furious. Gordon Brown was so apoplectic, however, that he phoned: “He asked me what I was going to do about it and suggested that I should go in and stop him there and then.” One can’t begin to imagine the scene, and the results, mid-financial crisis, had the Chancellor of the Exchequer stormed into a select committee hearing with the Governor of the Bank of England, as it was being televised, to stop proceedings. What would the Queen have said?

 

Back to the brink

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For various reasons – related to the dog, the weather, and unreasonable demands being made by colleagues – I’m in a grumpy mood today. What a good thing I’m reading Alastair Darling’s Back From the Brink, his account of being Gordon Brown’s Chancellor of the Exchequer through the first phase of the financial crisis. Talk about unreasonable demands of the job! It certainly helps restore one’s perspective. The book starts:

“I don’t believe in panicking before it’s absolutely necessary but I came close to considering it on the morning of 7 October 2008.”

I wonder how the various European presidents, premiers and finance ministers are feeling right now? You know, thinking about the brink they are all peering over the edge of this week, I’m feeling a much greater sense of equanimity about my own challenges.

Made in everywhere

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Building Boeing’s Dreamliner used 16,000 gigabytes-worth of information, equivalent to a library of 16 million books, according to Peter Marsh’s new book The New Industrial Revolution: Consumers, Globalization and the End of Mass Production. He quotes one historian’s comment about the original Industrial Revolution: “About 1760, a wave of gadgets swept over England.” A wave of gadgets is now sweeping over the world. The general purpose technology of the microprocessor and the other innovations it has enabled has launched us into another industrial revolution – indeed, the history of capitalism is one damn technological revolution after another.

The book sets out these successive waves, but its interest lies in the mass of examples Marsh gives to illustrate the thesis of a new revolution. He has been covering manufacturing around the world for many years as a Financial Times journalist, and has a more or less unrivalled range of experience. One of his supplementary arguments is that manufacturing is of vital importance for economic growth because it is the route for innovation to enter everyday life. His description of the specifics of how companies actually innovate is very interesting. The organisation of the manufacturing process is one key, and one chapter looks at the Toyota Production System in some detail. Not only did this famously introduce the concepts of just-in-time and constant improvement, it also enabled huge variety by the switching of standard components – Marsh calculates that out of 8.6 million units made by the company in one year, there are 1.7 million variants.

Another element is specialisation in specific gatekeeper technologies. Industrial clustering is as old as industry, and Marshall famously described the role of know-how in explaining clusters. However, many older clusters are explained by the location of resources or by transport. Knowledge clusters are the new norm. Marsh’s example is Poole in Dorset, which turns out – who knew? – to be the world centre for the manufacture of air spindles. These are small electric motors whose shaft rotates on an air bearing rather than a metal bearing. They are essential for making circuit boards. In 2010, two firms in Poole accounted for 80% of the world’s supply. One has a factory in China as well as Dorset, but the other does not, and both have their R&D in their southern English home. We tend to talk down UK manufacturing and, heaven knows, we need more of it; but this story chimes with my own experience of there being many uniquely innovative and productive specialist manufacturers in the UK. Here, as another example, is a encouraging tale about the revival of the Lancashire cotton industry – my parents and aunties and uncles worked in the old version;  Lancashire Cotton 2.0 is a remarkable story.

Between 2006 and 2010 the UK slipped from 5th to 10th in the world league table of manufacturing nations. It wasn’t alone in this slide – China, S Korea, Brazil and India have also pushed France down the rankings with us. But Italy is hanging on with a slightly larger share of world manufacturing output, and apart from the US, Japan and Germany have substantial shares. What lessons do the success stories hold? Marsh highlights scientific and technical education, R&D spending, the accumulation of specialist knowledge – including practical know-how -  in niche areas (a highly effective barrier to entry by new competitors), added-value activities such as design or customer support surrounding the manufacturing, and strategic thinking about supply chains.

The redrawing of the manufacturing map into complex global supply chains is another interesting part of his account. Indeed, one of the main messages I took away was the massive interdependence of the various countries’ manufacturing industries. You can see its visible expression in the marvellous atlas of economic complexity. Marsh does not go on to consider the implications of this interdependence, which – for all the industrial upheaval and job losses -  has been the source of huge gains in productivity and prosperity over the decades. On the other hand, it is also a vulnerability. China needs those two factories in Poole to continue improving living standards there. We need other factories sited outside Bangkok or in Shenzen just as much. There has been less of a move to protectionism than one might have feared in the aftermath of the Great Financial Crisis, but if we do now see a turning away from globalization, the implosion of living standards around the world will be absolutely catastrophic.

The book does not go in for this kind of analysis, however. It is a book of reportage, stuffed with interesting examples that illustrate the history of manufacturing and its present, globalised state. I love the kinds of facts it offers – in 2010, six out of every 10 large crawler excavators of the kind needed for big construction projects went to Chinese customers (they are made by Komatsu of Japan and Caterpillar of the US but these manufacture them in China). There’s more on every page. This book is a great companion to Made in Britain by Evan Davis. Wearing global rather than national spectacles, it offers the same policy lessons for the UK or for any country needing to ensure the long term health of manufacturing industry.

The limits of markets

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I reviewed Michael Sandel’s new book, What Money Can’t Buy: The Moral Limits of Markets, for The Independent.

His recent BBC Radio 4 lectures, The Public Philosopher, are available as podcasts. The great man is back in the UK in a couple of weeks so no doubt there will be more events.

My conclusion?

“He ends the book with a question: “Are there certain moral and civic goods that markets do not honour and money cannot buy?” This is rhetorical. Of course the answer is, yes. But how do we know what they are?”

And I don’t think he actually answers that.

Notes from beneath the duvet

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It will not have escaped the notice of British readers of this blog (about half the total) that it is still raining; and if you’ve looked at a long-range weather forecast with a sense of mild desperation, that it will continue raining for the rest of May. The only possible reaction is to curl up under a blanket or duvet with a book or several. Luckily, my ‘just read’ pile of books is outweighed by the ‘in pile’.

Just read vs still to read

There’s plenty in the weekend papers, too. The new British Library exhibition on landscape and British literature looks very enticing, and is featured in the Guardian Review. The illustration is from Remains of Elmet by Ted Hughes and photographer Faye Godwin. It’s one of my favourite landscape books, not least because I’m from more or less that part of the world, the Pennines in between Lancashire and Yorkshire, & find it so evocative of my childhood wandering around the moors. The feature also mentions a terrific book I reviewed here, Edgelands, by Michael Symmons Roberts and Paul Farley.

Faye Godwin's Elmet

Meanwhile, over at the FT, there is an analysis of the e-books market and publishing, and some enticing reviews. I very much want to read E.O.Wilson’s The Social Conquest of Earth, reviewed here. (It was the economist Alan Kirman who first got me very interested in ants thanks to his classic QJE article, Ants, Rationality and Recruitment.)

Ferdinand Mount’s The New Few: Or A Very British Oligarchy also looks like an excellent, angry-making book about the way a business elite has creamed off for itself so much of the productivity growth of the past couple of decades via their bonus scam. Thank goodness it seems to be the beginning of the end for that. The Telegraph has an article on the woman behind the institutional investors’ revolt, Michelle Edkins  of Black Rock.