The question and answer session is chaired by Leslie Budd.
Leslie Budd: So questions please. I’ll take them in there and then there. I’ll take them in clusters.
Question: Hello, my name’s Stephen Gibson of Surrey Satellite Technology. Now earlier this year George Osborne made a very significant announcement for us in the space industry in that he gave £10 million worth of investment to us to invest in basically R&D new projects. However, this was slightly overshadowed the following day with President Sarkozy announced the investment of €500 million in the French space industry. I’m wondering do you think that when it comes to this sort of investing in new industries and supporting us whether in the UK we traditionally just don’t have the ambition in terms of sort of driving it from a government point of view?
Evan Davis: I have a soft spot for Surrey Space Technology, because my father was an electronic engineer at the University of Surrey, and in fact was the PhD supervisor for Martin Sweeting who was a big player in, is a big player in that sector. I think 15 years ago we would have said if you can’t raise the money privately, why should I as a taxpayer be donating it or lending it to you? And so I think that’s one of the great paradigms that we’re now reviewing. I think one of the things that’s changed in my perspective on the UK economy is that it is much harder for UK companies to raise the finance, even when they’re quite good than I would perhaps like, and that would tell you that there is a case for finding alternative models. It may not just be taxpayer money but it may be some taxpayer money and, so, you know, as someone who was something of a sceptic about that kind of bunging money at little national champions, I think we’ve come to see it as a bit more complicated.
Now, €500 million, I think if we gave you €500 million I think you’d have wonderfully gold plated offices and the best chairs, and I don’t think I would want to give you that much. You know, the French go for that sort of thing, but I think we, what we don’t want to do is make it too easy for you, and so we’ve got to make you sing for your supper. So I don’t, I mean I think we’ve got to be very measured about it, but is it the case that people, that the economic consensus has shifted somewhat towards this kind of government support, undoubtedly.
Leslie Budd: Okay, so there and then...
Question: Peter Cook here. I've never heard such a compelling case first of all for all politicians going on an OU systems thinking course. Leading on from that the public services really and their ability to think between two poles really, do you think that the public services do need to get smaller now, particularly, and in terms of their intervention should they start fiddling with business or let them have their fat salaries and generate wealth?
Leslie Budd: Dominic, there please.
Question: Well my question is one that was floating around on Twitter last night, and I promised to ask you, and it’s this. Is economics too important to be left to economists?
Evan Davis: It’s a huge paradox on economics actually because really economists have never been in so much demand having had the most humiliating three years, and with large parts of economic theory that’s been found to be terribly irrelevant, I mean it’s just. So the whole of market hypothesis has some useful insights, but it’s not as sensible an assumption to make about the world as economists thought. The macroeconomic models which have gone down a particular route towards dynamics, general equilibrium models, DSG models, useless, more or less, absolutely useless. Large swathes of economics have turned out to be very disappointing. And if you look at our best chancellors, being invidious I’m really not allowed to have opinions but let’s suppose that I had an opinion on our best chancellors, you wouldn’t find it difficult to make a case for Alistair Darling and Ken Clarke being exceptionally good chancellors, and they were both lawyers, damn it. You know, in face maybe we could make the economists the lawyers because I don’t like the lawyers when they’re lawyers, but they’re very good when they’re chancellors.
So yes, I think I do agree that economics is too important to be left to the economists. What I do think about economics though is that truly the value of it isn’t forecasting what’s going to happen to the economy next year and telling me what should happen to interest rates - that was never what economists really ought to have been doing. Economics is a wonderful toolkit for analysing issues and problems. Not just economic problems but economics is just a big box of analytical devices and tools and models and insights, insights like opportunity cost and prisoners’ dilemmas and principal-agent problems. Most of you won’t know what these are, but there’s a box of these tools that can be brought to bear on a huge swathe of issues very usefully. And that I think makes it useful to employ economists, but leaving everything to economists, absolute disaster. So no, I agree with you on that.
Peter, your question, does the public sector need to get smaller? It’s a very, the public sector is part of the non-tradable chunk of the UK. It’s not the only part but it is a chunk. If we’ve got this non-tradable sector of the UK, it’s restaurants and hairdressers and firms that look after UK people, care sector, everything, you know. Non-tradable, it doesn’t export really. Doesn’t export, just sits there serving its UK customer base. That sector needs to shrink. Does the public sector need to shrink? Well if the public sector doesn’t shrink then the other bit needs to shrink by more.
So we don’t have to shrink the public sector; we could raise taxes to finance the current side of the public sector if we wanted, but that would clearly leave people with less money to spend on restaurants and hairdressers and all the other non-tradable services. So, absolutely, and I have no view on whether you’d want a bigger public sector or a smaller public sector, but in the long term, if you want to maintain the public sector, then you’re going to use tax rises to get borrowing down, which will mean the squeeze on the rest of the economy will be harder than it’s currently positive.
So, in other words, you can make the shops scream, you know, the shops are domestic services, you can make them scream louder and keep the hospitals open and schools, or you can try and close some schools and save some shops. That is an archetypical political decision on which I don’t have a view. But the non-tradable sector has to go, to shrink. I think it does I’m afraid because we just are basically running our economy, we’re importing more than we’re exporting and we just have to close that gap, it can’t go on as it is.
Leslie Budd: Two questions there, sorry, there’s two there.
Question: You talked about the rebalancing of the economy that’s taken place over the last 20 or 30 years, almost as though it was a planned event. But in reality I don’t think anyone in government or elsewhere actually sat down and decided this is the direction the economy’s going to take; it just happened as a result of thousands of decisions in response to global economic forces. In that light is it possible for public policy to change the economy, to rebalance it in the way you recommend, particularly when all the major political parties believe in the rule of the free market, or will it just happen or not depending on global economic forces?
Evan Davis: That’s one very good question.
Question: I’m interested in the effect that the media has on all of this, and I’ll give you an example. I sell parts into high performance sports car markets, and I can guarantee that if there’s doom and gloom on the BBC my sales disappear for a week or a fortnight, and then magically they come back when people say sod this I’m going to enjoy my car. Now if you multiply that effect right through the country, are we actually making things a lot worse for ourselves by the fact that we are discouraging people from spending money which they would be quite happy to spend and would actually generate some of this recovery that you’re talking about?
Evan Davis: I’ll take that one first. It might be that the media caused your sales to drop by telling people that things were bad, or it might be that things were bad and that caused people to stop buying your parts, and that the media was neither, has no causal effect on this at all. Now certainly there’s a very high correlation between bad things happening and the media reporting bad things. But I don’t think that tells you anything very interesting other than that by and large we sort of do our job. And I fear that because you see the media report and you don’t see abstract things happening to an economy, you’re associating what you see with the cause of the thing that you then feel.
Question: I’d agree with you because...
Evan Davis: I mean I think there are some very subtle questions about media accentuation of cycles, and I think when the house price boom was in effect we accentuated it by telling people it was in effect and everyone thought I’d better buy a house, and that’s fuelled the boom. And I think it is possible for media with an imbalance of bad news relative to good to overdo the bad. So I don’t want to entirely discount what you’re saying. And that comes out of a feature of the media which is we tend to have a single narrative at any particular time, it’s either it’s all going well or it’s all going badly because we don’t do grey and nuance very well. So it might be that we accentuate the cycle.
So I don’t dismiss that. But it’s a far more general problem than just the ups and downs. But I genuinely don’t think it would be right for the media to in any way attempt to kind of jolly the nation up with good news in order to make people spend more. And I think people should make their spending decisions on the basis of the best information about the state of the world that they can, and if there isn’t enough spending, if we have that Keynesian problem, as we clearly do to some extent at the moment, if we have that Keynesian problem then we use monetary policy and fiscal policy to address that. So I don’t like this kind of well why doesn’t the media try and get everybody out shopping, I know that’s not quite what you’re suggesting but.
Question: No, I think the problem is that it’s the perception, because it’s a perceived problem it doesn’t really exist; however it does have physical effects...
Evan Davis: And you get into self reinforcing, there are all sorts of horrible feedback loops where you tell people a bank is going to go bust, and if you tell them that the bank will go bust, you know, and so that sort of thing can occur in the media. But I don’t think that’s really where we are.
Let me take this other question though, because that was a really difficult and thus interesting question. The reorientation that I described wasn’t planned; it was just an evolution that occurred as companies saw the profitable sectors, as individuals saw the profitable jobs, we moved, you know. And can we rely on our economy moving back? Well I think the good news is that yes you can rely on it spontaneously moving back. The bad news is it will probably take about the same amount of time as it took us, well maybe not quite as long but we don’t have to move back the whole way, we only have to move back some of way. So it would take us a very long time indeed if we rely entirely on that.
So I think there is opportunity for trying to force it a little bit, I think there is an opportunity for trying to force it a little bit. I don’t, and it gets us back to my answer to the Surrey Space Technology’s question which is I don’t think one would want to be too doctrinaire about saying, in the way that we might have 20 years ago, you know, the market must decide these things. I think there’s perhaps more of a case than one thought five years ago for saying the market has made quite a lot of mistakes, there was never quite as much of a market as we thought because financial services appear to have been more underpinned by public subsidy than was every understood, and we need to make some compensating adjustments.
So I think it is the question actually, is what useful can government do at a time like this to spend money, to inject it into the economy in a pro-rebalancing way, rather than prolonging imbalancing way? And that is I think, actually I think the Government for all of what they say about sticking to plan A, they are sitting around trying to work out how to do this. I mean I think everybody, the Left and the Right both agree that we need to make sure we spend some money and to promote rebalancing, and the issue is what on earth do we do to do that?
Leslie Budd: Regional rebalancing towards the back of the room, so there, there and then to you, so first please.
Question: What can we do to make this country more entrepreneurial? I mean I saw some figures that during I think the first 10 years of the Labour Government I think were generally accepted to be a pretty prosperous time for us. In I think it was Middlesbrough something like 11,000 jobs were created but all but 21 of them were in the public sector. So does government have a role, what can we do to make that change?
Leslie Budd: And there.
Evan Davis: Good question.
Leslie Budd: And there and then there, you’ll be the last one, so the front there, the gentleman there with the white shirt, sorry you first.
Question: My name David’s Backham with ‘a’ not an ‘e’. My question is we hear a lot about quantitative easing buying up toxic assets to get them out of the system, and you were mentioning about the need to improve the balance sheets. With that money being spent, to me it doesn’t seem like the country as such is getting any value for that money that’s being spent to buy toxic assets; effectively we’re just taking the losses off of the banks’ balance sheets. Wouldn’t we be better off rather than for example digging holes and filling them in again, but actually doing some spending on infrastructure in this country, because when the economy did get going again some of the bottlenecks that we might have in for example road and rail, there could be benefits to the country and to the economy that we could be investing in now with that spend. And also one other little question, it always strikes me that VAT is actually like a brake system on the economy, does having a high VAT rate mean that there’s a disincentive to actually transact business?
Leslie Budd: Good question, and if I can inflate the questions because we’re getting towards the end. You can take that question and then this question and then we can wrap.
Evan Davis: I’m writing them down.
Question: So I work within the energy sector, I could ask a very long convoluted question but I’ll refrain from doing that, but I have a question around the low carbon economy. What does that mean to you in your opinion, and how will that help UK PLC and the man on the street?
Leslie Budd: Gentleman there.
Question: Hi there, Stewart Forrester. I spent nearly 20 years working for blue chip German engineering companies here in the UK, and we never had any problems selling our very expensive German engineering to British companies. And then did a Masters here at the OU and decided to become a flea for a while and leapt off the corporate ladder. And I’m just wondering how important do you think it is for us to find our own home grown manufacturing organisations and entrepreneurs as opposed to attracting perhaps manufacturers from other countries here as a sort of kick start to then exporting the products that they produce themselves?
Evan Davis: Well I've got about a minute to talk through those.
Leslie Budd: Oh you can have five.
Evan Davis: Entrepreneurial, how do we create an entrepreneurial nation? I thought about that quite a lot. I don’t think there’s a silver bullet; I don’t think there’s any very easy way of doing it. I think a bit of cultural change has been very good, and I think, I like to think Dragon’s Den has been both a symptom and a contributor to the cultural change. No one when I was at college thought about setting up their own business, I don’t think it ever, I ever heard it mentioned. Actually no, there was one guy, there was one guy who did actually, but very very unusual. And I think now people do. I think there is a category of people who think that is a worthwhile task. And that one of those where the more who do it the more will do it, because it’s slightly infectious. You know, it’s interesting to observe that the most entrepreneurial corner of the world is Silicone Valley and you get the infrastructure to create entrepreneurs, you get more entrepreneurs and then you get a bigger infrastructure to support entrepreneurs. So it has a sort of hugely self generating feature to it. But I don’t think there’s a silver bullet, I don’t know, every country in the world would like to have a Silicone Valley but there’s only one real Silicone Valley.
In answer to your question, I mean there was a slight misunderstanding I think in your question. Quantitative easing is not buying toxic assets. Quantitative easing, the Bank of England doesn’t want to buy toxic assets; it’s buying government gilts. There are those who think those might be toxic assets, but let’s not go there. No, no, they’re not toxic and no one is, you know, no finger is pointing to us in the way that other countries are getting the finger pointed at them for that. So let me just say that there’s a very important question, should we be spending more on infrastructure? My understanding is that Treasury want to spend more on infrastructure, David Cameron wants to spend more on infrastructure, Ed Miliband and Ed Balls want us to spend more on infrastructure, and the problem is conjuring up infrastructure projects quickly turns out to be surprisingly difficult.
I know the A11 was cancelled and has now suddenly restarted again. I think that’s a classic example of okay get the bulldozers up there on Friday if you possibly can. I think everybody’s onboard with that. And personally I wish a year ago they’d been saying just in case plan A doesn’t work, and we don’t want to go to the Ed Balls plan of just borrowing more to keep nurses in jobs for two years and then closing the hospital, let’s plan now for infrastructure projects in a year’s time. But in fairness though, just in fairness, I believe the world’s biggest infrastructure project is currently occurring in London. No it’s not, it’s Cross Rail; Olympics is more or less done.
What does the low carbon economy mean to me? It means embracing investing in and deploying new technologies that switch us away from fossil fuel use towards other kinds of energy and reducing our energy requirements in total as well. I think it’s self evident how it’s going to help. It won’t help in the short term because the low carbon technologies are more expensive than the tradition carbon technologies. In the long term it will help because the price of the carbon technologies will rise and the price of the low carbon ones will come down.
What should we be doing? I think we should be like perhaps investing in Surrey Space Technologies and key other sectors. I think we should be identifying the ones in the areas where we think we might have something to contribute. I don’t fall in the camp of those who think we should be doing wind turbines because that’s big. I mean if other people are already doing wind turbines and that space is covered, I don’t think we probably should be doing those.
So the key to everything I've been saying today is that economies have to try and do things that others are not doing. That’s why we went into all these industries like banking and law and pharmaceuticals. Those are the things, that was us doing what other people couldn’t do, and that’s where we still need to be looking for things that others can’t do. So doing things that others are already doing is probably not a good idea. But if we can find green technologies to invest in that are UK, we have an advantage in them, let’s go for it.
The final one, Germans and their engineering, so really do we need British companies to do this or not, or can we just rely on foreigners to set up here? I mean I’d be happy to take a bit of either really. I mean I don’t mind, you know, if the Germans want to build factories here I’d say that’s a pretty good thing. Japanese did so much for our car industry. I mean they showed us how to run a car plant didn’t they. Basically, we couldn’t do it and then they showed us and we’ve got quite a strong automotive industry. And it wouldn’t be strong if we didn’t have them here, and if we hadn’t seen them.
So I would say allcomers welcome. We’ll know we’re doing well when we do have a few British companies of our own because it will show not only do we let them come and employ us, but we’ve learned management skills and spin-offs and other things. But I certainly wouldn’t be, I mean it is a very, such a horrible ridiculous teratology but it is a very global world. And I think it’s too late for us now to kind of retreat to autarchy personally, and I think it would just be hugely costly to try and do that. We’re just bound in supply chains and corporate links, we’re just attached to the rest of the world, and pulling back is going to be very difficult.
So basically I think it’s a matter of trying to make foreign companies work for us, trying to make British companies build and grow if they have the potential to do that, that is what we should probably do. But I mean a good point for me to finish on is I mean I actually remain optimistic about the innate skills of the British public and the innate productive potential of the nation. We moved in this direction, as I described upmarket. It made us as rich as the Germans, it wasn’t a disaster but it went too far, and we were caught short in a significant way and need to tack back. That happens. Other countries have made mistakes as well.
The Spanish who were spending, devoting 20% of their economy to construction was a mistake. These are kind of mistakes that economies make; it’s never going to be a smooth path. There isn’t someone whose job it is to say this is what the proportion of our national income should be between builders and hospitals and manufacturing and banks. These are things that economies are going to feel their way. It’s always going to be messy, we are going to go too far and we’re going to tack back. And I would hate it if people thought that the mistakes we’d made of closing factories and pursuing financial services, if they felt that that showed that somehow we were a useless nation of deadbeats who couldn’t make anything anymore.
The real insight of the Made in Britain series was I saw no evidence to think we couldn’t make things, we can make fantastic jet engines and cars, and wonderful metal things, and we can do high fashion, we can do all sorts of things. We’ve got people in more sophisticated ways drilling stuff out the ground off the coast of Scotland and anywhere in the world. We’ve got the best creative industries in the world, and a very disproportionate number of the world’s best universities. So we don’t have to sort of berate ourselves and think what a hopeless bunch we are. We just went off completely in the wrong direction, got sidelined, it was mad, we’re mad and we’re all doomed. I think it is just so the wrong message.
Back to the point we need a balance of self criticism, it didn’t all work out as planned, we were led up a blind path by various false price signals caused by the inflow of money we were borrowing from the Chinese. It set us slightly off course. We now need to shift back. We’re not going to shift back just by spending a bit of extra money, it’s a really hard job shifting real resources from some sectors to other sectors, but hey we’re a medium ranked developed economy. We’re not some sort of, we’re not third world, no danger of being third world, as rich as the Germans, we just chug along rediscovering every 15 years the mistakes of the last 15 years and adjusting course accordingly.
Leslie Budd: Right, I’d now like to ask James Fleck, the Dean of the Faculty of Business and Law to propose a vote of thanks.
James Fleck: Well thank you Evan, that was very enjoyable, and thank all of you who have contributed to the discussion through asking very interesting questions. I think that right at the start our Vice Chancellor, Mark Bean, commented on the mission to inform, to educate and above all to entertain, and I think we’ve been certainly informed, educated and entertained tonight.
I liked your example of babysitting; I do have five children so I’m a veteran of babysitting circles. And what I did notice was the one that worked best of all was the one where we used red kidney beans as a unit for driving the circle, and I’m just reflecting. Now does that allow Keynesian stimulation, because you could always dip into your regular supply of red kidney beans when there’s a shortage, and even better it allows a shift or sector when you’ve got no further use for babysitting because you can make chilli con carne. That was certainly the most successful one.
I think we’ve rambled, we’ve ranged across a whole variety of economic issues, there’s quite a few we could touch on, but the autonomy versus the Keynesian spending was a central one. And above all I think the call for a shift to a more tradable sector or sectors that can, in which the outputs can be more tradable, and I think that that’s something we might like to reflect on. That’s certainly the message I’ll take from the discussion. And here I’m minded that the Business School some 15 years or so did win a Queen’s Award for export, and I do wonder whether the time isn’t arriving yet again for us perhaps to look at more critically and more entrepreneurially at the wide range of excellent products that we have and ways that we have of delivering them, and looking at whether we can drive that at that international market. Not only might we do the UK economy some good, but I think we might help to educate the world and drive up economic development around the world. And I think the OU is in a strong position to do that.
Many people, it is said by many people that economics is a dismal science, and I think that tonight we’ve touched on some elements that seem to be rather dismal. The hard realities of the predicament we find ourselves in, it’s not going to be as easy as following one line or the other, but I think that through it all what struck me is that Evan has scotched the dismallity by his enthusiastic and entertaining presentation. So for me at least suddenly economics has become a lot more interesting and entertaining. So I would like to propose a very warm vote of thanks, and we look forward to many other events from Evan too, so I’d like to propose a vote of thanks for Professor Evan Davis.