Dominic Cummings’ trillion dollar tech fantasy

We all got a laugh a couple of weeks ago upon learning why Dominic Cummings, the Dick Cheney of Boris Johnson’s government, wants the UK government free to provide state aid to companies (it’s one of the principal reaons for wanting to violate the EU Exit Agreement Johnson had pushed through Parliament just last year). The reason, as Robert Peston quotes Cummings, is:

Countries that were late to industrialisation were owned/coerced by those early (to it). The same will happen to countries without trillion dollar tech companies over the next 20 years.

The most obvious response to Cummings is best put by the inimitable Marina Hyde, who asks us to imagine a friend of Cummings looking him in the eye and saying ““Mate, with the best will in the world, what on EARTH about the last six months makes you think you can build the next Apple?”

Others have allowed mere doubt about Cummings’ competence rather than denial of it, and then given him the benefit of that doubt; instead, they criticise his trillion-dollar tech company scheme on the grounds that the countries usually classed “late industrializers” – from Germany and the USA in the late 19th century to Korea in the late 20th – are often reckoned to have done pretty well for themselves, and to have avoided ownership and coercion by Britain. In this regard, though, I think Cummings assertion is entirely correct, even if (for reasons I’ll get to) his idea is bad. Britain did use its position as the first industrial power to both own and coerce much of the world, and it did so successfully for over a century. And Britain’s success in this does offer some parallels with America’s, and the trillion-dollar tech companies of the Silicon Valley and Seattle, today. But does that mean Britain can, or should, try to follow that model today? Let me tell you why not.

From the late 18th century through the early 20th, Britain strove to keep its industrial head start by protecting the position of its manufacturers in international markets, in ways familiar to any student of history. For many decades, when it was the workshop of the world and controlled most of the cutting edge technologies, it forbade both the export of industrial machinery and the emigration of people who knew anything about making it. Eventually, the secrets leaked out anyway and Britain began to lose its manufacturing monopolies to rivals like Germany and the USA. Britain responded by building a larger empire, so that the sun never set on its captive market. Within the empire there was a strict division of labor, with manufactured products coming from the home country; parts of the empire had already developed internationally competitive manufacturing industries, and those had to go – India’s textile and shipbuilding industries, for example, were destroyed so that they would no longer threaten Britain’s industrial (and military) monopoly. So, yes, plenty of control and coercion, as Cummings says.

Today, the international monopolists are American the tech giants. These giants – the trillion or near-trillion dollar companies – are not the foremost technological innovators, but are companies which have become as rich by carving out monopolies in software and the Web, digital gardens large or small with walls to keep competitors out. Google dominates search, Amazon online retail, Microsoft office applications and personal computer operating systems, Google and Facebook online advertising, Google and Apple phone apps, and so on.

It is important to distinguish between what these tech giants have done, and technological innovation. There are many, many tech companies in the world, but only four (Google, Apple, Amazon and Microsoft) at or near the trillion dollar mark in market capitalization (Facebook is also very valuable, the fifth most valuable tech company, but in this league it’s mini-me). Take phone apps as an example. Google’s and Apple’s phone operating systems are based on sophisticated open source software others have written and given away; the phones, marvels of electronics and miniaturization, are made by others; the apps on the phones are written and sold by thousands of individuals and companies around the world; Google and Apple, in their positions as gatekeepers, take generous cuts from each sale of an app. Many, many tech companies are involved in phones, phone software and phone apps, but only two are anything close to being trillion dollar companies; that’s because they’ve established strong monopoly positions, just as Britain did for its world-serving workshop about two hundred years ago.

When he says “trillion-dollar tech companies”, that is the sort of business Cummings wants to get.

Cummings’ fascination with trillion-dollar tech companies, then, does fit nicely with the characteristic Brexiteer’s nostalgia for empire; he is seeing, accurately, today’s analogue. The question then is, should the UK try to join in the game America is playing?

Some would say not on the grounds that, in the long run, the imperial-monopoly strategy left Britain weak. To succeed in a world dominated by Britain, its late-industrialist rivals devised superior industrial systems: Britain was out-produced by the USA, out-engineered by Germany, out-managed by many countries; sheltered behind its imperial market and the returns from previous overseas investments, it clung to a strong pound to prop up the value of a diminishing stream of income from overseas. Many would say that the US is doing something analogous today, its considerable diplomatic powers devoted to protecting Silicon Valley and a few other sectors, at the expense of hollowing out the rest of its industries (see Dani Rodrik on this point). But is that really failure? Nothing lasts forever; Britain had a very good run, as now America has had as well.

But Britain is not going to be able to do it again.

One thing Cummings has right is that if the UK were to attempt this strategy, it’s probably good that it’s left the European Union, because Brussels – the European Commission and all those nasty bureaucrats – are the only force on the planet making a serious effort to tame and regulate the monopoly power of Big Tech. That’s not the game Cummings wants to play.

But, being out of the EU leaves the UK with the problem of having a relatively small domestic market. The classic late industrializer response to Britain’s power was to use a protected domestic market as a greenhouse in which to develop new firms, which can then compete globally when they’re big and strong. China is doing exactly that for its own web giants. The UK domestic market, however, is nowhere near big enough to do what China is doing.

An alternative version says that the UK’s imagined tech titans would neither be exposed at birth to the fierce storms of global competition, nor confined in the UK’s too-small domestic market, because the post-Brexit UK will somehow become part of a new Atlantic or Anglo-zone economy – Airstrip One, as Orwell had it. This vision of course gets a reality check every time Nancy Pelosi has to remind the British government that it won’t have any trade deal with the US if it allows its Brexit extremism to undermine the Good Friday Agreement. But let’s say for the sake of argument that the government can solve the problem of creating a hard border around the UK without creating one on the island of Ireland and, following further triumphs of diplomacy, the UK’s emerging tech companies find themselves within a very large protected market which includes the United States.

Now, one place Cummings’ thinking does make contact with reality is in understanding that the UK – and in particular, London, Cambridge and the Southeast of England generally – does have great strengths in the tech giants’ sectors – software, web applications, business services; it has the skills, the financing, the start-ups, and the very close links with the American tech giants themselves. It is already part of that industrial eco-system. Surely all it lacks is to itself be the home base of couple of very rich companies? Perhaps, as the West Coast becomes uninhabitable due to smoke from forest fires, opportunities to form the next generation of tech monopolies will shift back to the mother country?

Many places, though, offer themselves up to become the new center of tech gravity, should it ever shift; if there were a new center and it were not in Asia, it would more likely be someplace else in the United States; Boston, New York, or even North Carolina would be more likely than London, even if the UK were part of a seamless Atlantic market. That’s because UK has never been good at building big businesses. From the late nineteenth century onwards, the US, Germany, Japan, the Netherlands, France, Sweden, and Switzerland all have been better at building big companies with sustained internal programs of innovation and investment, and with global reach; in recent decades, Korea and China have joined those ranks. We have seen this in steel, chemicals and electrical equipment in the 1870s-1890s; in automobiles and other mass production industries in the early to mid twentieth century; the computer, semiconductor and telecommunications industries in the late twentieth century. We see it again in the software, web and business service giants of today.

The roots of Britain’s relative weakness at building and sustaining big companies lie in institutions which served it well as an empire: powerful financial institutions which invest with a focus on short-term gains; financial and govenment decisions in the hands of a narrow national elite with generalist educations and little grounding in the particulars of any industry – but born to rule; companies which stay light on management, on capital investment, on training, and on research and development.

That these proclivities stay stubornly in place is a classic problem of path dependency, of the interlocking and mutually supporting nature of any set of established institutions which restrict the range of choices as things change. However you understand the reasons, however, the fact is that the US is far, far better at building and sustaining big companies than the UK, and if the UK is operating within the US sphere it is not the UK that will be the home of the trillion dollar companies.

Is it a bad thing that the UK will not become the home of several trillion dollar tech companies? Not really. America’s tech empire, like Britain’s empire of yore, is a system of appropriation which makes one corner of the world rich at the expense of the rest. And it can’t even be said that it makes the US, as a country, rich: within the US, these tech monopolists and their financial and political enablers enrich particular places – particular cities and regions – at the expense of the rest of the country, as Maryann Feldman, Simona Iammarino and I discuss (with lots of nice maps) in this paper. There’s a similar pattern in the UK, with divides between South and North; between those paid well enough to live well in overpriced gentrifying tech+finance cities, and everybody else. Becoming home to one or more trillion-dollar tech companies would only exacerbate these divides. Cummings and his ilk would do well in that bargain, but for the UK as a whole it would not be a good thing, so we can be glad that Cummings is wrong.

Unfortunately, with Cummings’ strategy out the window, we are left with the question of what sort of post-Brexit economic strategy would work for the UK. I can’t answer that one.

 

San Francisco, New York, Washington: Iron Triangle of Rent

This map show where the higher paid jobs in the USA were concentrated in 2016.

top20incwage_2016

Continue reading

Amazon HQ in DC area: a rampart for the defense of monopoly

A: A monopolist’s most valuable asset is a government which tolerates its existence.

Q: Why is Amazon establishing a “second headquarters” in the high-cost suburbs of a city better known for bureaucracy and politics than for information technology, retailing, or logistics?

Is Trump really alone in supporting Putin? Sadly, no.

Will Putin’s victory in Helsinki sink his friend Trump back home? Jeremy Shapiro thinks so – interesting article in Foreign Policy (retweeted by Mark Leonard, then by Branko Milanovic who for some reason thinks “hysteria” over the Trump-Putin connection threatens war, like the nationalist hysteria in Yugoslavia in 1987-88 & in the US post 9/11 – go figure).

IMO, however, Shapiro underestimates support for the Russian oligarchy within the US power structure. This because he frames Russian state interests and objectives in a very abstract, general way. Russia today is not a superpower but a fossil fuel power which happens to have a legacy nuclear arsenal: net fuel exports are 17% of Russia’s GDP, extraordinarily high for such a large country. Stabilizing earth’s climate requires leaving fossil fuels in the ground, and that would shatter the Russian oligarchy. Putin’s interests thus align with the know-nothing, no-action position taken by the GOP, and Trump, on climate. That is the material basis for a political relationship between the Russian state and conservative US politicians, which has been developing for some time. The historic antipathy of the Republican Party to Russia is based on anti-communism, not anti-petro-fascism.

Have-your-cake-and-eat-it, Lexit style: Paul Mason gives a master class in the transitional demand

Paul Mason, writing in the New Statesman last week,  gave a nice rendition of Jeremy Corbyn’s rule-maker-not-rule-taker position on Europe. Mason, like Corbyn, focuses on the EU’s regulations on state aid, which both men claim conflicts with Labour’s plans.

Mason makes a kind of have-your-cake-and-eat-it argument. But unlike the sunny Tory-Brexit vision of the benefits of being in and being out both arriving effortlessly, Mason demands having the cake and eating it. He’s ready for battle, though the battle is all for show – he knows his demands won’t be met; indeed, he makes the demands because he knows they won’t be met.

European law places substantial restrictions on subsidising and aiding individual companies, though there is considerable disagreement as to whether the measures in Labour’s platform would fall foul of this: for a view contrary to Mason’s see Biondi and Tarrant. What is clear to all is that the rules on state aid are evolving through the EU’s internal processes, and that leaving the EU would mean leaving losing influence over the evolution of the rules. It is also clear that the closer the UK remains to the EU – is in particular, the closer its integration with the Single Market – the more closely it will need to align with EU regulations, not least those on state aid. That’s the quandary. Now see what Mason does with it.

Mason says he wants the UK to be in the Single Market but with an agreement which allows the state to “subsidise, aid, restructure and, where necessary, nationalise companies”. He acknowledges that it is not clear whether, as things now stand, EU state aid regulations would actually conflict with Labour’s programme, but he raises two spectres: one is that Brussels even now is planning to exact vengeance on the UK because it’s leaving, and that Brussels’ wrath would be redoubled with the advent of the long-awaited left-wing Labour government; the other is that Brussels will fall under the sway of a “right/far-right coalition” (though the far right of course is also hostile to the EU’s state aid restrictions…).

So what does Mason want, in return for his precious support for remaining under single market rules?  “I want an advance, legal and binding agreement that European rules will not now, and cannot in the future, sabotage a Labour government’s programme.” (the underlining is Mason’s)

Sure, and I want a unicorn for Christmas.

Consider first that we’re talking about an international treaty. Treaties don’t work like commercial contracts – governments withdraw from them as they choose, and there’s really no way to hold them to account for it. And, as Mason correctly notes, the EU’s own treatment of the state aid problem keeps evolving. He frames the problem as one in which the UK, having renounced its right to help write the rules, should make its participation contingent on rules being frozen in place for the UK, even as they evolve for other Single Market members. That simply won’t happen: “legal and binding” is a unicorn.

Second, even if HM Government could find and capture such a unicorn, Mason is writing as a partisan of a Labour party that does not have the privilege of negotiating the details. Whatever concessions this government does negotiate, they will certainly not be specially geared to facilitate the implementation of the Labour election manifesto. For the same reason, we can’t credit the Times’ report linked by Mason, of an anonymous “senior Brussels source” (how vague is that attribution) claiming that the “real battle” in the negotiations with Britain is over state aid rules due to Brussels’ fear of Labour: does the Times want us to think the reason for lack of progress in Brexit negotiations is that the Tories are not allowing Brussels to construct an agreement that will protect Margaret Thatcher’s legacy from a future Jeremy Corbyn government? (I know that the previous sentence is strange, but that does seem to be what the Times, and Mason, are claiming.) The best explanation for the Times story is that it is an attempt to plant a meme helpful to the Tory soft Brexit camp, in their battle with the hard Brexit camp: the Times is telling fellow Tories that Brussels is just offering them tough love, protecting them from the spectre of corbynism. Only a fool would believe this, but Mason seems to put his readers in that category.

Third: even if there were to be a pre-Brexit general election which resulted in a Labour majority, and that election were to occur soon enough that Labour could negotiate the final deal with the EU, and Brussels were not as determined as Mason claims it is to sabotage Labour… even if all of those things, why on earth would the EU agree to allow any Single Market member to provide whatever state aid it wanted? We need to keep in mind why restrictions on state aid are so important to the functioning of the single market.

The fundamental reason for state aid restrictions in the Single Market is to prevent races to the bottom: mutually destructive subsidy wars. Countries can shield themselves from subsidy wars with trade barriers, but the Single Market abolishes those – that’s why the EU’s internal restrictions on state aid are so much more exacting than those of the WTO.

To accede to Mason’s demand of an unfettered right to “subsidise, aid…” etc. UK companies, public or private, would be to let the UK act like a state or city in the USA. That means giving massive tax subsidies to particular companies in exchange for building (or not closing) a plant or an office. For a taste of what that means read about the long-drawn-out beauty contest of American cities offering free everything to Amazon in return for the privilege of hosting its “second headquarters” (its home city of Seattle having become too small for the company), and bear in mind that this is just one current example of something that happens every day, all over the USA. It starves local public services in the USA of revenue, and undercuts small businesses that don’t have the bargaining power that big corporations do. Of course the EU would, and should, refuse to allow this within the Single Market. It’s not about whether nationalization can happen within the EU (it can): it’s about whether individual corporations can hold up the Exchequer for bespoke tax rebates. The EU has no reason whatsoever to let the UK use this tool for “industrial policy” as it steps (halfway) out the door.

Mason is a clever and well-informed person, who cannot possibly believe that his demand has any chance of being met. I believe that, technically, he is making what in the Trotskyist political tradition is called a transitional demand. That’s a demand that you know cannot be met. Often, of course, people make demands that won’t be met, as a bargaining position, expecting or hoping for compromise. The transitional demand is different: it is made to be rejected, to demonstrate that the end you seek cannot be achieved within the current system.

Mason’s demand on state aid is a perfect example of this. It is meant to achieve two things: first, for Mason to be able to claim to support Single Market membership while not in fact doing so in any meaningful way; second, to show –  when the Tory-EU negotiators fail t accede to Mason’s demand – that the UK has no place in the European single market. This would be comical if it were not so close to the position of the Labour leadership.

 

Transformational leadership education

Attention conservation notice: nerdish.

Marking papers about papers, sometimes one needs to read the latter. So I’ve just read Tourish, Craig & Amernic’s paper “Transformational Leadership Education and Agency Perspectives in Business School Pedagogy” (British Journal of Management 2010). Everything grim they say about transformational leadership and the cult of the rock strar CEO and the role of business schools in promoting and legitimating it is, I think, correct. What they miss Continue reading

Trump, Putin, CO2 and EU, redux

Open Democracy has just published a my piece on Trump, Putin, climate change and the EU (the connection is perhaps not blindingly obvious – I hope that list of items has piqued your curiosity. You can read more here). Continue reading

Email from Ouaga, plus Charlottesville

This morning my friend Sabrina, in Bukima Faso for work on sustainable irrigation, circulated this by email:

the horrible terrorist attacks took place in a hotel less than a km away.

I am fine, and have been advised not to go out today, as the office is near an area that was cordoned off for a search for perpetrators.

It’s strange to be here in this situation – I am for now confined, but to a calm and lovely guest house, surrounded by trees and birdsong, and yet so close by, there was such unspeakable carnage. Continue reading