Monthly Archives: June 2015

Learning Societies, Cities and Austerity

In their book, Creating a Learning Society, written by Professors Stiglitz and Greenwald and published last year, they look in detail on the economic benefits of learning. It may seem strange, but up to now most economists have argued that productivity mostly increases because of changes in technology and in capital.

They use their phrase, a learning society, at a number of levels: a country, a city, an organisation, a company. The book is detailed, but some of their main conclusions are that –

1 – most firms operate below optimal productivity, with firms in most sectors showing big differences between the levels of average and best practices (room for improvement)

2 – organisations in some economic sectors are better at learning than those in other sectors

3 – knowledge is about far more than just the law (patents) and universities (research)

4 – tacit knowledge includes how individuals and organisations interact, and the norms of behaviour within organisations, institutions and networks

5 – free market economies alone usually fail to efficiently transmit knowledge,

and that

6 – productivity depends on learning how to do things better, through “the continuous accumulation of small improvements”, rather than, say, working people harder or longer for less pay.

They quote as a case study the position of improving productivity in South Korea. The classic economist’s advice would be for them to become ever more productive in producing rice. But although they would be highly productive, they would still be poor. Instead they chose to develop their semiconductor manufacturing, and became rich.

Enough of the book.

I would just add that tacit knowledge is not captured by asking someone to write down what they do before they leave.

Now, let’s consider a European city, one where austerity is cutting deep into the public sector. We can imagine that many cities are operating below par, but that some others are showing best practice. The best practices would be based on pulling together a number of small improvements, rather than one ‘big bang’. And mostly, these improvements are in behaviours, in norms, in how the people working in the city’s organisations work together.

Now apply austerity to that city’s public sector. Remove experienced people to save money. Ask the remaining staff to “do more with less”.

So, based on the economic theories of learning societies, I’d suggest we can now see how austerity will lead to a decline in the productivity of the city.

To understand 2007 we need to start with the 1970s

The first news of the forthcoming economic crash in 2007 was probably a small article inside the Financial Times on Valentine’s Day, 14 February 2007. The article reported that market analysts in Germany were beginning to notice troubles in the mortgages market in the USA. Within a few months everyone would know what sub-prime meant.

We think of the economic crash of 2007/8 as being a banking crisis, especially because some banks failed completely (Lehman Brothers) and some could only survive with massive injections of public funds (Royal Bank of Scotland). But it is more helpful to see the crash as a credit crisis rather than as a banking crisis – cause rather than effect.

When UK Conservative politicians talk about “overspending” and “the mess of the last Labour government”, it still strikes a chord with much of the electorate. This is despite the technical protests and detailed articles of many economists and commentators. But perhaps the reason that it still strikes a chord is that it touches on a deeper truth.

Essentially from the mid-1990s to 2006 we had a very long credit boom. Even Radio 4 presenters were moaning on-air about all the unsolicited credit cards popping through their letter boxes week after week. Sub-prime mortgages were just the most vulnerable edge of the market. The construction sector in Spain had gone frankly bonkers. Icelandic banks were held up as respectably turning base metal into gold. PhD students in mathematics were being offered silly salaries to present a veneer of plausibility, creating devices such as credit default swaps and fancy models for value at risk.

So it was a private sector credit boom that burst in 2007, and the political twist has been to paint it as a public sector crisis. But if you don’t blame “the last Labour government” then who do you blame instead? The electorate themselves for living high on the never-never? They won’t thank you for trying that one, I fear.

We need to take a longer view.

Worldwide, most people’s incomes in developed economies have stagnated since the 1970s with steadily growing inequality as a super-rich class grew from strength to strength. The decline of many cities (consider Baltimore) and regions (like steel and mining communities) has been the starkest indicator of this trend. The 1995-2007 credit boom was a reprieve, gladly accepted even though we knew it was unsustainable. It gave us some warmth, some days in the sun. And yes, it rebuilt schools that still had outside toilets. Why not?

But rather than admit our own weakness for a temporary reprieve, collectively it is easier to blame a politician for that extra holiday we took, the new car, the early retirement. So we end up being told what we’d like to hear – that if only the local hospital had not had some new wards built, we wouldn’t be in this mess. Really?

But we don’t need to blame ourselves, because we would not have needed that credit if most people’s incomes had not stagnated for nearly two generations. And the fix for this is a combination of progressive taxation and border controls for money.

The downside of globalisation has been the unregulated flow of money across borders. Profits can be legally transferred to tax havens by respectable accountants. Even within the EU we see countries such as Luxembourg shamefully acting as tax shelters for the rich in other countries.

And in the current negotiations between the democratically elected Greek government and the opaque troika of EU, IMF and European Central Bank we see globalised capital’s stark hostility to any tax increases, wanting even further reductions in pensions instead. And VAT on medicines. While questioning the mental health of Greek ministers and portraying Greek people in frankly racist tones.

Still, maybe such extreme announcements are a sign that we are getting near to the truth of the matter.