Podcast: A New Way to Think About Government’s Role in Wealth Creation, With Special Guest David Sainsbury

September 14, 2020

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For too long, economic policy in the U.S. and Commonwealth nations has been guided by the “market efficiency” school. The result has been a widespread unwillingness to view government roles as critical to boosting innovation, growth, and competitiveness. It’s time for a new approach, which Lord David Sainsbury, author of Windows of Opportunity: How Nations Make Wealth, calls the “production capability” school. Under this school, the key question for economic policy is how well it enables enterprises to be more innovative and efficient. Rejecting the old doctrine in favor of the new is perhaps the most economic important task for our time. Rob and Jackie discuss this and the role for government in “picking winners” at the level of technologies and industries with Sainsbury.

 

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Rob Atkinson: Welcome to Innovation Files. I’m Rob Atkinson, founder and president of Information Technology at Innovation Foundation. We’re a DC based think tank that works on technology policy.

Jackie Whisman: And I’m Jackie Whisman. I handle outreach at ITIF, which I’m proud to say is the world’s top ranked think tank for science and technology policy.

Rob Atkinson: And this podcast is about the kinds of issues we cover at ITIF from the broad economics of innovation to specific policy and regulatory questions about new technologies. We’ve got a lot of ground to cover with a great guest today, so let’s get to it.

Jackie Whisman: Yes, Lord David Sainsbury spent the first 30 years of his career running UK retailer J Sainsbury, until he was appointed Minister of Science and Innovation in the UK government, where he spent eight years. He left government to concentrate on his philanthropy work and was elected Chancellor of the University of Cambridge in 2011.

He is the author of Progressive Capitalism, How to Achieve Economic Growth, Liberty and Social Justice, and his most recent book is Windows of Opportunity: How Nations Create Wealth, which Rob was up late tweeting about last night and we’ll talk about it at length.

Thank you for being here.

David Sainsbury: Yeah. Thank you very much for the introduction and also this opportunity to talk about the book and the issues that it raises about economic performance in our two countries.

Rob Atkinson: ITIF has spent more than 15 years working to get policymakers here in the US, and really around the world, to embrace the right policies to drive innovation based growth and our biggest challenge by far has been what you call in your fantastic new book, Windows of Opportunity, the “market efficiency school of thought.”

And that’s a school of thought that most economists of the US or the UK and deeply embrace, which most policymakers don’t really have an alternative to, so they channel it, and it really puts a constraint on the kinds of policies that policymakers can embrace and go forward with.

Can you talk a little bit about that school of thought or what its influence has been, where it came from and why it’s problematic?

David Sainsbury: Well, I think what is interesting here is that the history of economic theory, it’s rather unlike most scientific subjects. In most scientific subjects, you have a discovery, then you have another discovery which builds on it and then a further discovery and you eventually end up with today’s particular view on that scientific area.

If you look at the history of economic theory, growth theory, it’s rather different. You have actually two kinds of theory. One I describe as market efficiency in which it’s seen that market efficiency is really what drives economic growth and that includes people like David Ricardo, Alfred Marshall, Paul Samuelson.

But you then have another school which I’ve described as production capability, which includes people like Alexander Hamilton, Frederick List, the German historical School and Joseph Schumpeter, and these schools are very different. And what you find is at different periods, one or other theory is advanced in particular countries.

So it isn’t a case of you build up discoveries to today’s view, it is that these two theories are at the same time in different places supported. If you look in more detailed who supports which theory, it becomes rather clear. When countries are trying to catch up and grow, they tend to go for a production capability theory because in those circumstances, the people you’re competing against, they have the economies of scale and experience and so on.

So you want to have tariff barriers to grow your industry’s behind that. It’s the sort of classic infant industry argument. Of course, when you become the world’s technologic leader, you tend to take a rather different view, which is, we are the world technology leader and we don’t want any tariff barriers against us and you then become wildly enthusiastic about free markets.

So this is the story in England. It’s not usually understood that in England, we had industrial policies way back in the 16th century. We built up our wool and cloth industry behind tariff barriers and we put taxes on exports of wool which effectively destroyed the wool and cloth industry in Florence.

And we built up our industry till mid 19th century when we were then world technology leader, at which point we said, “Oh, this is all completely wrong. What we want to do is have totally free markets” because that obviously are suited [inaudible 00:00:05:07].

And the American story is the same. It’s not often understood that from the time of Alexander Hamilton onwards, America had quite significant tariff barriers to keep trade out and it was only after the Second World War when America was undisputed world technological leader, that it becomes totally free market and says everyone must take this viewpoint.

Rob Atkinson: So one of the issues in the US today, and I’ve been fighting this fight really since the late eighties and oftentimes feels like a lonely fight because whenever you say anything like, “Well, we need a national industrial strategy or articulated innovation strategy,” their response is, “Well, we should just enable markets and that would get us what we want.”

In fact, there’s not even what we want. The problem with the market economics school is there’s nothing to get, there’s nothing to want, there’s no end point. It’s just, you want efficient markets, and I think as the US economy has struggled, especially vis-a-vis China and some other major competitors, there’s now a growing interest in there’s some kind of alternative school, Neo-Hamiltonianism, if you will.

And I really liked your term, “production capability” because a lot of other terms that people have used, endogenous growth theory, we’ve coined, “innovation economics.” I don’t know what they really mean. Yours is very clear. You want a set of enterprises in your economy that have strong capabilities, that have production capabilities, whether it’s efficiency or innovation and you want to design your policies around that.

Can you say a little bit more about that? What does that actually mean and how is that different?

David Sainsbury: Well I think the basis of the whole thing is, how do you think firms create competitive advantage and in that way, create higher value added? And if you’re a neoclassical economist, you’re not really interested in any of those things, you don’t believe there is a thing called competitive advantage. You believe in perfectly competitive markets in which everyone is selling the same product at the same price, which is what happens in a few commodity markets.

But the reality is anyone in business will tell you what we’re trying to do is create competitive advantage and that way we can get higher value added. And so the question is what drives that? And what I’ve argued in the book is something I’ve called a capability market opportunity dynamic and this really says, if there is an opportunity created by new technology or new demand or both, the important thing is then to have firms with the capability to take advantage of that opportunity and that’s what drives economic growth.

So if you take Henry Ford and the T model, there was an opportunity to create cars, simple cars, which everyone could have, and he invented the production line, which enabled you to create those cars. So he created the capability to do that, and that is quite clearly something which governments can help businesses to do through policies, for example, on education and training, they can help firms create those capabilities.

And so I think that’s the basis of thinking about what governments can do to help create wealth. Also, of course, they can play a part in the opportunities because, of course, you can buy funding R&D and having a very strong science base, then that will produce the new science and the technology which will create new opportunities as well.

Jackie Whisman: And in your book, you say, “In the history of economic growth theory, no issue has been so fiercely debated as the role of governments in creating wealth.” But your view is, government needs to play a key role, including picking winners. I’d love to hear more about specific policies that you had in mind for this.

David Sainsbury: Let me start by saying, I start from a position that market economies are the basis of economic growth and essential to it. So I’m not in any way talking about a planned economy or a directed economy, but the question is, can government help industry, as I say, by helping on opportunities and capabilities?

Now, in some cases, quite obviously they can, like the education and training system, which is vital to this and I think they can too, in terms of R&D. But I think there are also, you need to understand there are very clear things which government shouldn’t do. So for example, it shouldn’t try and pick winning companies and it shouldn’t try and pick winning products.

And the reason for that is you never have in government, the kind of very granular fine, detailed knowledge, which can say, “Look, this company is going to be successful and that isn’t” or that “This product’s going to be successful and this one isn’t.” I mean, governments shouldn’t get involved in that.

But that doesn’t mean they can’t say, “We need to have more people trained as technicians and we will make certain that the government produces them.” There are some rules about how government intervenes and these are very important and they are, as I say, worry about institutions, institutions are very important, like your technical education system, but don’t get involved in specific products or companies because you can’t do that.

Rob Atkinson: ITIF once held a debate, and it was resolved, the government should pick winners, and what we meant was exactly what you meant about not that we should pick General Motors over Ford or this particular narrow product, but a set of broad industries, we all can agree on are important. For example, in the US, there’s a growing consensus that semiconductors are critical to our future.

We don’t really know enough exactly what kind of semiconductor. We shouldn’t be picking Intel over Micron or Texas instruments, but we should be supporting semiconductors. And in the debate, my opponent was Robert Lawrence, who’s a Professor at Harvard, an economics professor, and he was also Chair of the Council of Economic Advisors in the Clinton administration.

And there was a question from the audience, “Should we have a strategy for encouraging more STEM education, engineering and science?” And my response was, “Of course,” and his response was, “No, that would be picking winners. If the market is going to demand French literature majors, that’s what the market wants and there should be no intervention in supporting one academic field more than another.”

And that’s, to me that sort of the level of absurdity that that market efficiency school can go to. I don’t know if you’ve seen similar things like that, or maybe that’s just one of the worst cases, but it makes it harder to have a rational debate.

David Sainsbury: Yeah, I think there is because this whole thing of “leave it to the market” becomes a matter of theology, it doesn’t become a matter of practicality or indeed empirical knowledge. I mean, we know endless examples of countries which have incentivized people to do STEM subjects or have put money into predictive technologies and it’s been hugely successful.

I mean, the most ridiculous view it seems to me, is what you would have in the American view about China at the moment, which is to say any support given for these things like technology by the Chinese government to Chinese industry is disastrous. Clearly it’s picking winners and will be a disaster. Then the next sentence is, and it must be stopped because it’s giving an unfair advantage to Chinese industry.

Now you can run one of these arguments, but you can’t have both and you know, the empirical evidence is amazingly clear, yes, you can put money behind particular technologies, just look at what happens in Taiwan, semiconductors and personal computers.

There is this little island, which has built up a huge position in these technologies, and that was done by the government through ITRI, which was a technology body, supporting these technologies and their diffusion throughout industry. So if you stay at a theological level, like all theological arguments, depends where you start from.

But if you look at it from an empirical point of view, which is what I think you should do in economics, but when you’re talking about growth, then it’s very clear that you can support technologies. You can support people, and if you don’t, you’ll get into real trouble in this highly competitive world we live in.

Rob Atkinson: Funny you mentioned ITRI, the Industrial Technology Research Institute in Taiwan. Just a quick aside on that. In our book that we wrote, Innovation Economics, we discovered that ITRI was actually set up by the US government back in the sixties, under an AID program, because we wanted to bolster the Taiwanese against the red Chinese communists.

David Sainsbury: You’ve got in your history, a couple of examples like that, where when it comes to helping people, I think in South Korea, you did a big thing on quality control, that that was driven by people wanting genuinely to help South Korea against Chinese government.

Rob Atkinson: Exactly.

Jackie Whisman: And much of the discussion often focuses on tools. Should we use this kind of R&D tax credit or this kind of government funding program? But you point out that the more fundamental issue is first getting the right framework and then ensuring that government has the right capabilities to carry out a production capability focused set of policies.

So we were really struck by your discussion of your time in government in the UK and how these capabilities were not fully developed. And you wrote, “Government needs not only to have a vision of what it wants to achieve, but also the capability to develop and implement the policies necessary to put it into practice.”

So how should the UK and US governments go about doing this?

David Sainsbury: Well, I think there are two things. One is, of course, that you need the right people and I can’t talk very specifically, but I think I’m probably on the right lines in the American government, but in the UK, we have a department which covers this area which we refer to as BEIS now. And it just does not have the people within it who could possibly run a proper industrial strategy.

It has very few engineers, very few scientists, very few people with industrial experience, and you can’t devise these policies unless you have people who at least understand the language and the way things work if you’re going to have industrial strategy.

Secondly, we have very poor information systems and we also have another problem which is because the way we reward civil servants, they’re always moving from one job to the next. That’s partly because we have an incentive system which says her at the moment, you can only get a salary increase if you move to another job. Not surprisingly civil servants spend all their time moving between jobs.

But what that means is, of course, none of them have really in depth knowledge of the area, the areas they’re talking about. They don’t know really what industry 4.0 Is and why you need to have programs to improve industries manufacturing performance. So there are some really quite basic things you need to do.

And also, because it is all rather amateur stuff, people don’t look at how other countries have done this and been successful. One of the countries that intrigues me is Singapore because Singapore, small country, in the middle of the ocean, if you like, how is it that they have managed to be, I think the fourth, they’re now the fourth richest country in the world, only beaten by the sort of funnies like Macau and others, which make large gambling profits. So how did they do it?

And they do it because they have very professional people in government who are extremely well-informed and have developed a series of ways of doing these things which are very effective. Like they have transformative maps. They look at what they want to see happening in a particular area in terms of new technologies and so on and they go about then making it happen.

I’ll give you an example of this, which we all ought to be looking at in great detail and that is what Singapore has done in biotechnology or biomedical production. They, and I remember hearing about this, I suppose, 15 years ago, that they were going to go into this area and thinking, “This is a terrible mistake. They don’t understand. This is not an engineering industry, this is a science based industry and you won’t be able to do it unless you have a good scientific base.”

But it turns out they had worked out that it was a scientific based industry and they just simply went out and got the very best biologists, biotechnologists in the world to come to Singapore by giving them brilliant laboratories and untold funds. So people like Sydney Brenner, who I knew from my Cambridge undergraduate days, Nobel prize winner, one of the great biologists of this century, went off and opened a laboratory in Singapore.

Today, they have a very strong biotech industry and I think the figures are that they have... The figures or something like 700 biotech PhDs, which compares with 7,000 biotech PhDs in Biopolis, which is the place they do it. You know, the whole of America, there are only 10,000 PhDs in life sciences and as a result of this, they have a very brilliant, quite large now, biotech industry and that’s something they created and we should just learn that that’s the sort of thing we should do.

You know, it’s funny because the Singaporeans have spent enormous amount of time learning from other countries. I met with a delegation from them six, eight years ago, and it was six or eight Singaporean government officials. Pretty sure many of them had PhDs. They had read every book I had read and more. I mean, they were the smartest people I had ever met with on these issues.

They were so deeply immersed in the scholarly literature, in the policy literature, in what’s going on in other countries, it’s phenomenal. You know and people will say, “Oh, Singapore is a small country. It’s really a city state.” I just don’t buy that. It’s a country. They have national policies.

Rob Atkinson: The one thing we have in the US, David, which I think is a real strength, it was actually my first job out of graduate school was at the National Institute of Standards and Technology, NIST. Very, very solid organization. Most of the folks that are engineers, even the people working on policy had been in industry. And I think building up places like that in the government, whether it’s NIST or DARPA or ARPA-E, you can build up capabilities and attract very, very good people.

One of the reasons why NIST is able to attract good people is it’s not inside the beltway and it has kind of a science and engineering culture. It’s very business oriented. So I’m optimistic that one can do it if one puts their mind to it.

David Sainsbury: Yeah. I mean, I think the interesting thing about Singapore, if you ever talk to them, I had a talk given recently by their Senior Minister and he made a point of the fact of saying, when we went into a particular area, or when we’d go into to areas generally, new areas, we look round the world to see what we can learn from other countries about how we do it.

I would guess, in England, it’s probably 20 years since I had a British Minister say, “We’re not very good at this and we’re going to go out and learn from other countries.”

We assume always either we’re best or unique. I have a terrible feeling America is pretty much in the same position of... I don’t know it a great deal, but I’ve never heard an American politician saying, “We should go and learn from other people.”

And yet, I always found in business, if someone is doing better than you, the first thing you do is find out what they’re doing and you’re not doing and learning from it, or at least knowing about it because it may not apply, you may not be able to do it, but you really should know what other people are doing, who are doing things well and learn from them.

And obviously, one of the problems is that we, not today, and it’s quite a long time past, we did things incredibly well, we were the leaders, and that creates a mindset which says, “We’re the leaders. We don’t need to learn from other people.”

Well, we aren’t the leaders now and we should be learning from other people. I think America is beginning to get into a similar position where it could learn from other people who are doing some of these things incredibly well.

Jackie Whisman: I think that is the perfect tone to wrap up on and we are so happy you were here. I think we could have talked for another two hours. Thank you for doing this.

Rob Atkinson: David, thank you.

David Sainsbury: Thank you very much. That was extremely interesting.

Jackie Whisman: And that is it for this week. If you liked it, please be sure to rate us and subscribe. Feel free to email show ideas or questions to podcast@ITIF.org. You can find the show notes and sign up for our weekly email newsletter on our website, ITIF.org and follow us on Twitter, Facebook and LinkedIn @ITIFdc.

Rob Atkinson: I should also add, as I’ve said before, that I encourage all listeners to pick up a copy of David’s book. You can get it on Amazon, Windows of Opportunity: How Nations Create Wealth. You really won’t be disappointed. It’s not only really interesting, but it’s a very easy and good read. It’s not overly technical, it’s written in a very accessible way. So I think it’s a fun read.

Jackie Whisman: Yeah, we’ll be sure to link to it in the show notes too.

Rob Atkinson: So we have more episodes and great guests lined up. New episodes drop every second Monday morning, so we hope you’ll continue to tune in.

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Podcast: A New Way to Think About Government’s Role in Wealth Creation, With Special Guest David Sainsbury