2. Plenary
Will Hutton
Chair, Big Innovation Centre,
The Work Foundation

3. Remaking the Social Contract in
the wake of the financial crisis
Will Hutton
London child poverty
conference
December 10th
12/06/12

4. Good capitalism
The future is by definition unknowable. No innovator or entrepreneur can be
sure that a good idea will become a commercial reality – or that wider
framework in which business is being done is stable. This is “Knightian
risk” – risk that cannot be reduced to mathematical probabilities
Consequently there is necessarily unpredictable change in business models –
risk but also opportunity
To lift innovation and investment to optimal levels requires mechanisms for
companies to lay off and socialise risk – and address co-ordination failures
which are embedded in the market economy
Hence the importance of the ecosystem that underpins capitalism – co-
created between public and private, a means of underwriting risk but
which needs an attendant value system: equity
Risk must be socialised for ordinary citiizens – the social contract
12/06/12

5. The rise of bad capitalism….
Size of UK banking sector
Banking sector assets (per cent of GDP)
600
500
400
300
200
100
0
1880 1904 1928 1952 1976 2000
12/06/12

6. Long-run equity capital ratios
Per cent
30
United States 25
20
15
10
United Kingdom
5
0
1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Source: US – Berger, A., Herring, R. and Szegö, G. (1995). UK – Sheppard, D.K. (1971), British
Bankers’ Association, published accounts and Bank calculations.
12/06/12

7. Trading books and leverage balloon
Growth in trading book assets Global banks’ trading portfolios and
financial leverage
Per cent 80 Line of best fit
40
T otal loans to customers as a
70
proportion of total assets
UBS Deutsche
35 60
Financial leverage
50 SocGen
Barclays
30 BNP
40
RBS Credit
30 Suisse
25 Citi
BofA HSBC
20
T otal trading assets as a JPM
proportion of total assets 20 10
0
15 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
00 01 02 03 04 05 06 07 T rading assets/total assets
12/06/12

8. All to create this model…
Major UK banks’ aggregate balance sheet as at
2010
12/06/12

9. Return on equity in finance
Per cent
rose…
35
μ = 21.0
30 σ = 9.0
25
20
μ = 7.0
15
σ = 2.0
10
5
0
1921 1929 1937 1945 1953 1961 1969 1977 1985 1993 2001
-5
-10
12/06/12

10. And remuneration in financial
services boomed…
12/06/12

11. A brave new world: The profile of
recession and recovery
12/06/12

12. Sterling’s Actual Exchange rate ( v
euro) compared to
equilibrium
1.7
1.6
1.5
1.4
Actual
1.3 Equilibrium
1.2
1.1
1
1990
1995
2000
2005
2008
2009
1991
1992
1993
1994
1996
1997
1998
1999
2001
2002
2003
2004
2006
2007
2010
2011
12/06/12

13. A brave new world: A strategic trade gap
Components of the Current Account (% GDP) base projection
12/06/12

14. The West’s Dilemma - Bank assets as
share of GDP
12/06/12
© The Work Foundation.

15. A brave new world: A long
deleveraging process
12/06/12

16. Good capitalism as the way forward
Unproductive entrepreneurship v productive
entrepreneurship
Incumbent v insurgents
“Ownership tourism” v committed owners
Darwinian v Collaborative
Finance sole priority v business purpose and balanced
score-card
Transactional workplace relations v hi trust workplaces
Rent-seeking managements v proportionally rewarded
managers
Social contract as safety net v social contract as social
insurance
12/06/12

17. The times they are a’changing
Biggest Bank of England balance sheet ever – including war-time
Intellectual climate changing - Governor of Bank of England: lets get flexible
about inflation targets and defer lowering public debt/GDP
Professor Michael Woodford at Jackson Hole. Lets drop inflation targets and
adopt targets for Money GDP
The IMF World Economic Outlook. A 1 per cent cut in budget deficit can lead
to a 1.7 per cent loss of output. Keynes was right – too much austerity too
soon is self- defeating.
Antony Jenkins, Elizabeth Murdoch, Jack Welch, Richard Lambert, Alan
Greenspan.
Desperation of Coalition government – funding for lending, Business bank,
Catapaults, infrastructure guarantees. Like the 1930s – reality is breaking
in.
Concern about social mobility
Decline of Tea Party Republicanism and Thatcherite Conservatism
12/06/12

18. Knowledge based industries
defined by the OECD
Note: manufacturing classified by R&D intensity; services classified by ICT use
and employment of graduates. Recreational and cultural industries
recognised as knowledge based by EU but not OECD, and includes libraries
and museums.
12/06/12

19. Knowledge economy and the
1.6 1980s recession and recovery
1.4
1.2
1
index 1980 =100
0.8
0.6
0.4
KE market based KE public based Manufacturing Other Services
0.2
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
12/06/12

20. Knowledge economy and the
1.4 1990s recession and recovery
1.2
1
0.8
index 1990=100
0.6
0.4
KE market based KE public based Manufacturing Other Services
0.2
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
12/06/12

21. Knowledge based sectors leading
the entrepreneurial revival
Note: all figures employees, excluding health employment. Knowledge
service industries are OECD definition and include business, high tech, and
financial services. Other sectors include transport, retailing, hospitality and
other services delivered by non-public organisations. SMEs defined as all
with less than 250 employees.
12/06/12

22. A short history of general
purpose technologies (GPTs)…
12/06/12

23. Revolutions of ‘general
purpose technologies’
Different types of society and different historical circumstances have been
transformed by groups of technologies. Archaeologists have recognised the
crucial importance of ‘key factors’ in economic development in their
classification of the ‘stone age’, ‘bronze age’ and ‘Iron age’
The Economist's special survey "Innovation in Industry“ (20 February 1999)
Economist's Industry“
12/06/12

24. Twenty-first century prospects ?
Grand Challenges
The mobile phone
Nanotechnologies
Energy from fusion
Advanced materials
Carbon sequestration
Space
Manage the nitrogen cycle
Water
Health informatics
Durable customised infrastructure
Customised medicine
The brain
Cyberspace security
Enhance virtual reality
12/06/12 learning
Personalised

25. Innovation as the product
of a system
12/06/12
Source: NESTA

26. The Ecosystem Approach
Division of Labour in reality is necessarily structured through
organisations and institutions
All confront risk which needs to be at the very least to be
mitigated – and at system level risk has to be socialised
There is thus co-dependence and co-creation of business models
both within the private sector and between public and private
sectors.
Price mechanism cannot perform the co-ordination of
relationships, information and idea flows – blockages,
breakdowns and coordination failure thus the norm not a
default possibility.
12/06/12

27. The Ecosystem Approach
( cont )
Public sector is socialiser of risk and
designer/custodian of ecosystem within
private sector – and the public sector
component
The system and actors have to be “open” to
maximise interative flows of
ideas/relationships/information – hence open
innovation and absorptive capacity of firms
crucial
12/06/12

28. The Enterprising State
BIC as a Microcosm of the UK
Innovation Ecosystem
Universities as
interactive Intermediates
partners
University
Consortium (8
Russell Group
members)
Private trusts:
•Lord Sainsbury
•Jon Moulton
Financial
services
Digital and
creative
Professional
services
Manu- FMCG
services
Energy Pharma
12/06/12 Innovative Sectors and Markets

29. New Flexibilities
5/6 transformational GPTs likely during 50 year working
life of a 2012 graduate
Open innovation business models new template – joint
ventures, openness, porousness ( Unilever and “
open innovation orchestrators”)
Average life expectancy of firms around 10 years
All skills and professions likely to become obsolescent
12/06/12

30. What to do – macro
economic policy
Mitigation of unknowable risks and
consequential vicious/virtuous circles in credit
and labour markets heart of Keynesian
economics
Integration of fiscal, monetary and financial
policy
Abandon public debt/GDP ratio target and
replace with debt service ratio
Rewrite Bank of England mandate and replace
inflation target with money GDP target
12/06/12

31. What to do – ownership, investment and
innovation ecosystem
Risk mitigation to bring about more optimal levels of innovation
and investment
Credit flows - indemnify new SME lending, Infrastructure bank
Innovation – Catapault network plus Technology Strategy Board.
Grants and Public R and D spend count!
Ownership engagement and stewardship - tackle high discount
rates, myopia and disengagement
Ownership revolution: re-conceive the idea of the company.
Business purpose/fiduciary duties/voting strength rises the
longer shares held
Support with new 3is and level playing field between debt and
equity ( Mirrlees report )
Develop institutional network for British Mittelstand
12/06/12

32. Potential sectors
“ Manuservices” in aerospace, pharmaceuticals,
defence, high tech engineering( cars, chemicals)
Low carbon economy – energy production, energy
efficiency, green manufacturing plus associated
services
Life sciences
Creative and cultural industries – design,
electronic/digital media and publishing, games
12/06/12

33. What to do – a 21st
century social contract
Socialising risk – but through intermediate
institutions
New trade unions – as employment shock
absorbers and enterprise partners
Social insurance to re-legitimise social security.
Payments more directly linked to benefits
Flexi-security – a new workplace bargain.
Acceptance of less job security in exchange for
12/06/12 training plus lifelong learning, higher
more

34. Internationally …
Support euro survival – banking union, financial
transactions tax etc
Peg pound to euro
Global abandonment of inflation targets
Global implementation of Vickers
Keep trade open – protect four pillars of EU
including free movement of peoples
12/06/12 frightened of the BRICs
Don’t be

35. Appendices and spare slides
12/06/12

36. Potential sectors
“ Manuservices” in aerospace, pharmaceuticals,
defence, high tech engineering( cars, chemicals)
Low carbon economy – energy production, energy
efficiency, green manufacturing plus associated
services
Life sciences
Creative and cultural industries – design,
electronic/digital media and publishing, games
12/06/12

37. New Flexibilities
5/6 transformational GPTs likely during 50 year working
life of a 2012 graduate
Open innovation business models new template – joint
ventures, openness, porousness ( Unilever and “
open innovation orchestrators”)
Average life expectancy of firms around 10 years
All skills and professions likely to become obsolescent
12/06/12

38. The Enterprising State
BIC as a Microcosm of the UK
Innovation Ecosystem
Universities as
interactive Intermediates
partners
University
Consortium (8
Russell Group
members)
Private trusts:
•Lord Sainsbury
•Jon Moulton
Financial
services
Digital and
creative
Professional
services
Manu- FMCG
services
Energy Pharma
12/06/12 Innovative Sectors and Markets

39. approach:
Common methodologies,
theories, and diagnostic tools.
- Integrate open innovation
Competence
approaches and distributed risk
Research themes: blocs:
• Innovative management.
• Big data and
markets, places
and networks digital economy
• Innovation • Bio-Med, life
friendly financial science and
system
12/06/12 health care

40. Partner investment for
working together: An open
innovation hub par
Not just money…
excellence
Partners open their doors to share
people and talent
data
ideas
Research, practice, trial testing, pilot
companies, business and policy
forums, and more….
12/06/12

41. Where have the jobs been coming
from over the last 30 years?
Manufacturing – minus 3.8 million
Health and Social care – 1.9 million
Professional, Scientific and Technical – 1.5 million
Administration and Business Services – 1.3 million
Education – 1.1 million
12/06/12

42. And don’t forget geography
160%
London
Total GVA growth 1995-2008
Milton Keynes
140%
Cambridge
Aldershot Reading
120%
Derby
Edinburgh
100%
Mansfield Swindon
Barnsley
80%
R2 = 0.402
Birkenhead
60%
40%
Blackpool
Stoke-on-Trent
20%
10% 15% 20% 25% 30% 35% 40%
Proportion of employment in Private Sector Knowledge Intensive Industries (2008)
12/06/12