How to break out from the great stagnation

The last three years have been so relentlessly dismal — a global pandemic followed by the invasion of Ukraine — that it is tempting to idealize the old days. Just as the survivors of World War I looked back on the Edwardian era as one long country house weekend ("Stands the church clock at ten to three? And is there honey still for tea?"), so we observers of Ukraine's agonies may think of the pre-Wuhan world as one of peace and prosperity. Yet in fact it was an era of sustained disappointment punctuated by the occasional crisis.

For most of the second half of the 20th century, developed countries could rely on real GDP growth of more than 2% a year. From 2000 to 2016, that growth rate halved in America and Europe to 1% a year — and this despite low interest rates, high profits and dizzying technological breakthroughs.

This slowdown was accompanied by a host of morbid symptoms: the reduction in competition as super-firms consolidated their position at the summit of the global economy; a decline in the creation of new businesses, particularly high-growth ones; a massive financial crisis; steadily increasing mark-ups (that is, the difference between the cost of producing things and their market price); a general sense of exhaustion as the mass of people had to run harder to stay in the same place; and a popular culture that endlessly recycled the same tired themes and memes. At times, it seemed that the advanced world had produced a service economy without any service, a creative class without any creative flair, a knowledge elite which knew more and more about less and less. Better than war and plague, but hardly a paradise.

Students of what might be called the great disappointment fall into two camps. Robert Gordon argues that yesterday's high economic growth rates were the result of technological bounty that will not be produced again. Erik Brynjolfsson and Andrew McAfee counter that the low growth rates of 2000 to 2016 were a temporary phenomenon as new technologies bedded down and prepared to unleash their productivity-raising miracles. Just as electricity didn't revolutionize manufacturing until the 1920s, when factories were reorganized, so the computer-plus-internet is still waiting to revolutionize the real economy.

A fascinating new book by Jonathan Haskell, of Imperial College, London, and Stian Westlake, chief executive of the Royal Statistical Society, carves out a third position — conditional optimism. "Restarting the Future: How to Fix the Intangible Economy" argues that we are witnessing the birth of a new kind of economy that is based on intangibles rather than on things that you can kick. Once upon a time firms invested mostly in physical capital: machines, buildings, vehicles and computers. Today most business investment goes on things that you can't touch — research and development, branding, management systems, software and, in place of yesterday's manual workers, people with degrees from fancy schools — and intangible-rich companies dominate the world's stock markets.

Apple's market capitalization in 2018 was around a trillion dollars. But only 9% of that was accounted for by physical things such as buildings and cash. The rest consisted of R&D, design, reputation and carefully cultivated relations with its suppliers. Baruch Lev of New York University and Feng Gu of City University of New York have posited that we are witnessing "The End of Accounting" because formal financial accounts tell us so little about the market value of public companies.

Haskell and Westlake suggest that the reason for the great stagnation is that we are trying to run an intangible economy according to rules laid down for a tangible one, much as the industrial revolution got off to a slow start because institutions designed for a feudal society got in the way. Intangible-intensive companies require capital to install those computer systems and hire those bright-eyed and bushy-tailed graduates. But banks routinely demand physical collateral to secure their investment in the form of buildings and machines. Intangible-intensive companies benefit from being close to each other in dense cities, because that makes it easier to match opportunities with workers and mix ideas together into new combinations ("cities are where ideas go to have sex," as Matt Ridley memorably put it). But a combination of rising house prices and intrusive regulations has made it so difficult to find places to live or offices to rent that, even before the pandemic struck, several of the most attractive cities, such as Paris, London and New York, had stopped expanding. Contrary to popular wisdom, people are now less likely to move from place to place or from job to job than they were three decades ago.

A growing army of parasites is also exploiting the failure of the regulatory system to catch up with the new world. Patent trolls make a living out of claiming ownership over ill-defined intangible assets: Starting in 2000, BlackBerry's owners Research in Motion Ltd. spent six years in costly litigation with NTP Inc., a company that seemed to exist to exploit patent laws, and payed them $612.5 million to settle. In the late 1990s, patent litigation may have accounted for 14% of total R&D costs. NIMBYs make redevelopment in cities so costly and time-consuming that the only people who can build anything are, paradoxically, faceless multinationals.

Haskell and Westlake provide a combination of commonsense and ingenious solutions to the problem they identify. The commonsense ones include making planning permission in cities easier, loosening the patent rules to make patent trolling harder and investing more in public goods such as basic scientific research and technical training. The ingenious ones include creating a super-regulator whose job it is to give a green light, say for five years, to new companies whose business models conflict with existing regulations — the Ubers and Airbnbs of tomorrow. The problem with the commonsense solutions is that we all agree with them until our street is the one threatened with redevelopment; the problem with the ingenious ones is that few people outside the economics profession can understand them.

Haskell and Westlake are also confronted with two big structural problems that stand in the way of the birth of a new world. The first lies in the essence of the intangible economy: Defining, let alone measuring and evaluating, it is hard. I recently found myself walking through Soho at 2:30 in the afternoon on a rare sunny day. The restaurants were packed with creative types enjoying themselves. Were they generating brilliant new ideas for BBC dramas or just bunking off? And what was I doing strolling along on a workday? Crafting a column in my head or just enjoying the sun?

The problem of free riders has led to a frenzy of measurement and evaluation systems. Yet these are not only extremely time-consuming — an academic friend of mine recently spent an aeon explaining the "purpose" of his research to an electronic form only to face a second question asking him to explain his "objectives" — but they can often be counterproductive. Supervisees will focus on things that can be measured even if they don't add any value. And no amount of measurement seems to deal with the bigger problem: the growth in occupations that are more likely to be value-destroying than value-creating, such as academic administrators and human resource professionals. As the anthropologist David Graeber wrote in his classic "Bullshit Jobs": "through some strange alchemy," the number of salaried paper-pushers expands inexorably even while the layoffs and speed-ups fall on the people who make, move and maintain things.

Then there is the problem of demography. Another new book, Paul Morland's "Tomorrow's People: The Future of Humanity in Ten Numbers," reminds us of how dismal our demographic situation has become. It can hardly be a coincidence that the country that led the world into a prolonged stagnation is also the country with the oldest average age. Fully 28% of the Japanese are more than 65 years old — a proportion that Italy will reach in 2030, Germany in about 2035 and China in about 2050. (One of this book's many depressing facts is the doubling in Hamburg between 2007 and 2017 of the number of "public health funerals," where the state organizes and pays for the funeral because there are no living relatives.) Ageing not only squeezes living standards by reducing the ratio of working people to retirees. It reduces the supply of "animal spirits" in the economy, as people who are set in their ways outnumber the young and experimental, and potentially stokes inflation, as a shrinking workforce demands higher wages. The most powerful political coalitions in rich countries are the entitled old: ageing homeowners and pension-eaters who don't want anything to disturb their Hobbit-like lives. Even Vladimir Putin was forced to retreat when he decided to raise the pension age.

Yet "Restarting the Future" is nevertheless an important book that deserves to be widely debated. "Conditional optimism" is a much healthier attitude to the world than either Robert Gordon's fatalism or Brynjolfsson and McAfee's Waiting-for-Godot optimism. Haskell and Westlake identify problems that need to be addressed even if their solutions are not always convincing. Demonstrating that dumb planning laws are holding back economic dynamism and pricing people out of homes only adds to the urgency of addressing them. They also highlight some emerging solutions. The clearest example of this is the venture capital industry which has developed to invest in intangible-rich areas (software, computing, internet services and pharma) shunned by traditional bankers. Entrepreneurs are experimenting with crowd-funding while SPACs are making it easier for new companies to go public.

The two tragedies with which I began this column may also accelerate the transition to a more intangible-friendly economy. The rapid development of new vaccines demonstrated that innovation can be significantly sped up if we set our collective mind to it, just as Britain's lightning quick purchase of vaccines showed how well government can work if you empower the right people. Vladimir Putin's invasion of Ukraine is also bringing a new seriousness to economic policymaking, for speeding up innovation could become a question of winning a new war not just escaping stagnation. Haskell and Westlake argue that the countries that have done best in adapting to the rise of the intangible economy — Israel, Taiwan, Singapore, South Korea and Finland — are characterized by a strong sense of national purpose and a powerful external threat. Perhaps Putin has inadvertently provided the West with exactly what it needs not only to solve its identity problem but also its two-decade long stagnation.

Adrian Wooldridge is the global business columnist for Bloomberg Opinion. He was previously a writer at the Economist. His latest book is "The Aristocracy of Talent: How Meritocracy Made the Modern World."

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.