A focus on production rather than exchange is the key to national prosperity: Professor Robert Wade

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In the Financial Times (April 2, 2017), *Robert Wade summarised the effects of acquiring and running a global empire for more than 200 years on Britain’s economic development strategy and the dominant paradigm of economics.

The empire encouraged British business to invest in colonial or quasi-colonial territories relatively more than at home, in contrast to German, Japanese, US competitors — and to neglect the physical and educational infrastructure for continuous industrial upgrading at home.

From early on, finance acquired an outsized role, with its demands that British companies give priority to short-term success targets such as profits, dividends, and share prices.

These trends were sanctioned by the emerging economics paradigm, focused on the role of government in facilitating “exchange” as the key to national competitiveness — even to the point of making belief in comparative advantage and free trade the litmus test of competence to be an economist.

The government, having put the right exchange-based incentive structure in place, should get out of the way, assuming that whatever production structure emerged from the profit-seeking investment decisions of private companies, domestic and foreign equally, would be for the best.

Again, this approach contrasts with the more production-based paradigm that guided German, Japanese and US economic thinking.

British manufacturing was slow to introduce interchangeable parts, a culture of “continuous improvement”, profit-sharing reward incentives, team-based multi-skilled work organisation, minimal separation between managers and workers, and heavy investment in vocational education.

It remained stuck with piece-rate incentive systems, elaborate job classifications, sharp hierarchical separation between managers and workers, even as manufacturing companies lost more and more market share.

The government undertook ad hoc industrial policy with subsidies, tax concessions and material infrastructure driven less by national or regional strategy than by electoral calculation to save “lame ducks”.

The fact of empire predisposed British policymakers and economists to think, wrongly, that improving exchange (rather than production at home) was the key to national prosperity.

 We still live with this mindset. 

*Robert H Wade is currently Professor of Global Political Economy at the Department of International Development, London School of Economics. He has worked at the Institute of Development Studies (IDS), Sussex from 1972–1995. On leave from IDS, he worked at the World Bank 1984-88; the Office of Technology Assessment (US Congress) 1988 and has undertaken fieldwork in a range of countries including Italy, India, Korea and Taiwan.

 

 

 

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