The Future of Capitalism

by Paul Collier

  Development banks

  It is one thing to allocate money to a good objective; it is another to spend it effectively. The agencies that channel public money into investment in firms are development banks, and their mandate is to invest in the private sector to promote some public objective. All major governments have them: the European Union has an enormous one, the European Investment Bank; Japan and China have equivalent agencies. A development bank that was mandated to focus on reviving provincial cities is a potential vehicle for spending the revenues raised from the new taxes on the metropolis. Some development banks have been highly successful in achieving their objectives, others degenerate into troughs of corruption: everything hinges on them having a clear mandate, high standards of public probity, and a motivated staff who believe in the mandate and who face realistic scrutiny. That word ‘realistic’ is critical. Investment in building clusters is a risky and long-term undertaking; whether an investment is successful or not will often not be known for years, and there will be many failures. Unless this is understood by politicians and the public to whom the bank is answerable, it will become too cautious to be effective. A development bank that is trying to revive a broken city, financing activities with the potential to make local workers highly productive, will need to be bold, informed and engaged. As with the venture capital model, its staff will sometimes need to get involved with day-to-day management, and sometimes even highly motivated staff who work on a project for years will end up facing failure. The bank can only be judged on its overall portfolio and its long-term record.* But given the general inadequacies of conventional financial markets (discussed in Chapter 4), with the right staff they are worth trying.

  Preparing for firms: business zones

  Pioneering firms will only come to the city if there is a suitable place from which to operate. Firms can buy an abandoned building and adjust it to their needs, but business zones provide the dedicated space and infrastructure that a cluster is likely to need. Many businesses find it useful to be close together. Quite possibly, in losing its previous cluster, the city has been left with a district of derelict factories. Public money can finance an agency for the city that cleans the district up and administers a new business zone.

  A key issue for such agencies is the price that they pay for the land. Once the agency enters the market, derelict land suddenly becomes more valuable. Not only is it bidding to buy, but the prospect of creating a cluster raises the future value of the land. Evidently, since the agency is responsible for this increase in value, it – and not the landowner – should capture the appreciation. In Britain, this principle was incorporated into the Development Corporations Act of 1981. However, judges are not trained in economics or public policy, and smart barristers try to bend the meaning of the words used in the legislation – a classic instance of rent-seeking by means of ‘motivated reasoning’. In the past smart barristers have succeeded in this looting of the public purse: the interpretation of the law used for land valuations has become a compromise between its value without the agency, and its value with the agency, and landowners are usually able to capture a substantial part of the uplift in value that should accrue to the agency. This is rectifiable, but the drafting of legislation should take care to pre-empt the corrosive effect of barristers and the limited abilities of judges to appreciate, or even care about, the public interest.

  Investment promotion agencies

  The agencies that create and manage business zones look inwards, towards the city and its facilities. Investment promotion agencies look outwards, towards firms that might come to the city. If the market worked seamlessly, as the ideologues of the right suppose, investment promotion agencies would be a waste of money. The Irish know otherwise. Ireland in the 1950s was one of the poorest parts of Europe. To change that the Irish government pioneered an agency to encourage investment, which has been amazingly successful in attracting international firms and jobs.* The agency built a team of people who researched likely industries, forged connections with potential firms, and courted one of the larger ones as a potential ‘anchor’ investor.

  Once such a firm expressed interest, the Irish Investment Authority then worked with it, learning how to anticipate the problems it would face in operating in Ireland. Having gained some understanding of the firm’s business, it tried to address these future problems in advance, advising other public agencies such as local government what they could do to help. Its relationship with the firm did not end once the firm had made its investment. The employee of the agency who had been tasked with getting to understand the firm’s business remained close to it, trying to spot further opportunities. More than half of the foreign investment in Ireland came from such subsequent expansion.

  Clearly, the investment agency and the agency managing the business zone need to co-ordinate with each other, as each has information useful to the other. But their roles are sufficiently distinct to justify being separate agencies.

  Knowledge clusters: local universities

  Most provincial cities now have universities and they should play a prominent role in their city’s recovery. That Sheffield has managed to recover from the collapse of its steel industry owes much to the good fortune of having two respected universities in the city. Some academic subjects are well suited to generating knowledge that has business applications. Knowledge is one of the activities that particularly lends itself to clustering: often knowledge advances when someone links two previously distinct recent advances, and so proximity to other researchers helps. Nor does knowledge simply flow from basic research to applications. Often it is when basic research is applied that people learn where they should be looking for further advances, so proximity to businesses that are applying knowledge helps both the businesses and the universities. The links between Stanford University and Silicon Valley, and between Harvard-MIT and the prosperity of Boston, are the iconic manifestations of this process.

  Academics can, however, be pompous advocates of research uncontaminated by use. Of course, a prosperous society should be spending resources on such knowledge, but universities in broken cities should recognize their obligation to their community. Local universities need to refocus on those departments that have a realistic prospect of forging links with businesses. This is another potential use for public money.

  Universities not only generate knowledge that has business applications, they also teach students; whether these students are equipped to be productive depends both upon what they are taught and how well they are connected to potential employers. At their worst, the universities in crisis-hit provincial cities focus their teaching on subjects that are disconnected from prospects of skilled employment. They are producing people with the academic credential of a degree, but not with a skill. Young people are lured into debt that their qualification does not equip them to repay.

  The obvious location for the formation of new skills in a broken city is its local university and technical college. When things work well, the firms that are attracted to the city and pioneer a new cluster are linked up with the pertinent parts of the local university and college, to work together in the generation of applied research and to train workers. In partnership, firm, university and technical college can develop programmes that retrain older workers in the new skills that they need.

  CONCLUSION: ‘WHATEVER IT TAKES’

  The geographic divide between thriving and broken cities is not inevitable; it is recent and it is reversible. But it cannot be reversed by small adjustments to public policies. Trivially, small is insufficient, but, more fundamentally, spatial dynamics depend upon expectations: firms will locate where they think others will locate. Expectations are currently anchored on the changes of recent decades, and so momentum is self-fulfilling. To change this requires a policy change sufficiently large to shock expectations into a different configuration.

  Given the uncertainties over how effective any particular one of the policies discussed above might be, there is no basis
for a sudden large adoption of any of them. They need to be tested by a cautious process of incremental experiment. But such a process will not produce the necessary shock. How can the need for cautious experiment be reconciled with the need for a shock? The solution is to make an overarching policy commitment to the goal of narrowing geographic inequalities. In 2011 the Eurozone faced the same dilemma: policymakers did not know what policies would prove effective in defending the currency, and they embarked upon a range of experiments. But these experiments were wrapped in an unambiguous commitment made by the President of the European Central Bank: ‘whatever it takes’. This phrase had an instant and enduring impact; speculation subsided because Mario Draghi had left himself no room for failure. We need the equivalent political commitment for cities.

  8

  The Class Divide: Having it All, Falling Apart

  I and my cousin embody avoidable divergence. Why has it happened? What can be done?

  In many families, the adults have acquired more education and skills than ever before in human history; they are more inclined to marry people like themselves than ever before; men have adopted a revolutionary family norm of equality and co-operation never before seen; and parents are nurturing their children more intensively than ever before. Success stabilizes such families; their children inherit the success of the parents. These families are having it all: they are becoming dynasties.

  In many other families, the adults have little education, and the skills they laboriously acquired have lost their value. They too are more likely to marry people like themselves, but this is due to shrinking opportunities: assortative mating among the educated has left women with fewer chances of marrying upwards; men have retained the traditional norm of breadwinner but are no longer able to live up to it; and parents have retained the traditional norm of leaving education to the school. The mounting tensions of failure destabilize the family; children inherit the instabilities of their parents. These families are falling apart.

  Many of the characteristics that are responsible for successful families are not just good for the families themselves, but good for the entire society. Conversely, many of those that are responsible for failing families are not only private tragedies, but social catastrophes. In reversing the new divergence, the place to start is with strengthening the families that are falling apart. We must face the reality that social paternalism has failed: the state cannot substitute for the family. But families need support as never before, an approach that I am going to call social maternalism.* But not all the practices of successful families are benign for society. Since you are reading this, you are likely to be part of this group. In this chapter, you must wait your turn, but your turn will come.

  BOLSTERING STRESSED FAMILIES

  The people who end up in low-productivity jobs often start their lives with parents ill-equipped to raise them. As we saw in Chapter 5, there has been a sharp increase in the number of children raised in households lacking one or both biological parents. Unfortunately, this often does damage that is irreversible. The implication of these brutal facts is that public policies need to begin early in the child’s life, both helping families to stay together, and supplementing parenting with other forms of support.

  Putting the family together

  Somehow, the proposition that two-parent families are something to be encouraged has become identified with the political right: ‘social conservatism’. But only the wildest shores of anarchism have ever espoused free love. As Baroness Alison Wolf, one of Britain’s most revered experts on social policy, says: ‘no known human societies have ever operated a sexual free-for-all. On the contrary, they have all had a well-recognized institution of marriage . . . Society after society has had rules, often draconian, designed to force men who fathered children to wed the mothers.’1 Such rules are well founded. At the time of their baby’s birth, a large majority of unmarried mothers want to marry the father, and most men intend to do so. But five years later, only 35 per cent of these couples are still together, and less than half of these have actually committed to marriage.2 It matters: at last, hard scientific research is able to supplement social science with evidence from damage to chromosomes. Telomeres are the protective caps at the end of DNA: the shorter they are, the more damage is suffered by cells, and health deteriorates. If the mother has unstable relationships, by the age of nine her child’s telomeres have shortened by 40 per cent.3 To understand the sheer scale of this effect, doubling family income only increases telomere length by 5 per cent. The damage done by a lack of paternal commitment is so large that it cannot be offset. For many this may be ‘an inconvenient truth’, but that does not justify denial.

  There is nothing intrinsically conservative about encouraging the commitment of both parents to their children; indeed, as a core aspect of our obligations to others it would seem more naturally to be associated with the communitarianism of the left than the individualism of the right. The wariness of the left is due to the confusion of the obligation of parents to children with both the religious obsession that sexual intercourse outside marriage is a sin and with the history of marriage as an institution for the oppression of women. This has been compounded by the delight that part of the right takes in stigmatizing people.

  Let’s start with sin. Among the many people who regard sin as nonsense, some think that in rejecting it they break the entire link between sex and obligations. Sin is a breach of obligations to God; if there is no God then there is no obligation to be breached. Philip Larkin aptly captured the shift of ideas that happened quite swiftly in the 1960s: ‘No God any more, or sweating in the dark / About hell’; we can all ‘go down the long slide / To happiness’.4 But the ‘death of God’ does not get us off the hook of obligations to others: properly understood, it gets us more firmly onto it. God is not responsible for the human misery of failing children: we are. Just as social narratives shifted radically in the 1960s as youth rejected the ways of the previous generation, a new generation needs to reset them, decisively unlinking sexual obligations from religious belief. Sex, yes; irresponsible parenting, no. As for marriage as female oppression, the viable solution is not to forgo marriage but to change its norms, as has happened in many marriages. Forgoing marriage does not lead to maternal empowerment but to maternal enslavement, as women struggle solo to meet two necessary roles.

  Now for stigma: people make mistakes, and young people facing powerful sexual urges make more than most. While we should do what we can to discourage the mistakes, there will continue to be many of them. Once made, the morally appropriate response of society should be forgiveness, not condemnation. Forgiveness explicitly acknowledges that a mistake has been made, but annuls any need for punishment. Instead of stigma, what two young people with an unplanned child need is encouragement to rear their child as a couple.

  The evidence that decisions are heavily influenced by the opinions of others in the social network suggests that the reactions of families and friends matter a lot: we are social animals.5 But public policy could act as reinforcement. Governments could recognize the huge value added if the two biological parents choose to live together with the child: a tax-credit bonus could reduce the tax burden for those who are taxpayers, and income could be supplemented by an equivalent amount for those who are not. The commitment of young parents to their children benefits us all, and we should be prepared to pay for it. When parents withhold this commitment, the rest of us pay for it – heavily.

  Supporting the family when it most matters: prior to school

  Why are there 70,000 children in ‘care’? Because social paternalism intervenes by waiting until a young woman has a child that she is not equipped to look after, and then removes it from her. This happens repeatedly with the same women. For example, a study of child removal in Hackney found that just 49 women accounted for 205 children removed into care. Social maternalism would not wait and pounce; it would recognize that something was badly wrong with the lives of these women and help them t
o do something about it. In response to those awful statistics, a few people got together and did just that, forming an NGO: Pause.6 The lives of those forty-nine women were indeed quite desperate. All but one of them were dependent upon drugs or alcohol. Half of them had chronic mental health issues. Half of them had themselves been raised in ‘care’, the inter-generational syndrome of failure that social paternalism has accentuated. Pause saw that the vital intervention was to change the lives of these women rather than repeatedly to remove their children, a trauma that pushed them deeper into despair and damaged the child they were bearing.* Changing lives requires both empathy and mentoring, and practical support to manage addiction, housing and abuse by violent men. Success depends upon raising self-esteem, not bullying people off benefits. That is what Pause attempted, gradually spreading its organization around Britain’s stigmatized towns. Does it work?

  Recently, the organization was independently evaluated. It was found that among the 137 women whom Pause had supported, there had been remarkable improvements in lifestyles. Three quarters of those with mental health problems had experienced significant improvements, and substance abuse and domestic violence were both substantially down. In turn, this had led to fewer pregnancies: the best estimate was that each year there were twenty-seven fewer births. Pause was also highly cost-effective: each £1 that the programme cost saved £9 over the following five years. But of course, Pause is tiny: social paternalism still rules the roost, dominating public spending on ‘care’.

  So why is social paternalism still dominant, despite its manifest failures? It is because dedicated professionals on the front line are trapped in the compartmentalized hierarchy designed for control. Here is an illustration of how it frustrates social maternalism; it comes from a psychotherapist managing a community mental health team in a broken city and its hinterland where his patients led lives of humiliation, isolation and stress. Some mothers didn’t dare to take their children to school because of ‘the bullying’ – the victim not being their child at the school, but the mother at the school gate, assaulted by other mothers fighting over the limited pool of men. The team realized that their patients needed a safe space where they could gradually forge friendships with others facing the same stresses. They set up a project to run cafés on the sink estates, renting shops and converting them into attractive spaces. Each café was organized as a co-operative of volunteers from among patients in the community. Because they were attractive, they were well used by a wide cross-section of the community, without any hint of stigma. The impact on the mental and emotional health of the volunteers was assessed by their own testimony, by the professionals involved in their care, and by analysis of the health records. People told of how their isolation had been ended by the new friendships that the work facilitated. If someone failed to turn up, a friend would make it their business to contact them: the cafés incubated reciprocal obligations. The friendships that were struck up enabled people to explore their lives at their own pace, thinking beyond crisis response without fear of humiliation. Gradually, some of them restored coherence to their lives. Relapse and hospital stays decreased, and people developed self-esteem. Gaining qualifications and a future became thinkable: they became better parents; they got jobs. An indication that the cafés were valued is that they did not suffer the vandalism that beset other local businesses. As it developed, the project’s finances improved and it nearly broke even. Its impact was impressive and it became an example used in conferences. And then it was closed.