Thursday 5 March 2015

Not small enough? Just how inefficient our economy is

I’ve been interviewing economists and radicals for the last six months about the conundrum of local economics, and why they don’t see eye to eye on it – given that they want the same thing (more prosperity).

The result has been my co-written book People Powered Prosperity.

One of the things I realised while I researched it is that, actually, the word ‘local’ is neither very accurate nor very useful.

It is inaccurate because the real problem isn’t so much the lack of local financial and enterprise institutions (though that is a problem too), but how to scale them up without losing the access to local information and relationships which makes them so effective.

The answer is to network them together to a new mezzo level, between local and national, but making sure that their control remains local.

It is misleading because the word ‘local’ screams to conventional economists the implication ‘protectionism’. It appears to be about borders. They worry about wholly irrelevant issues – the kind that obsess the official mind – like defining ‘local’.

No, the kind of ultra-local economic revitalisation I’m interested is designed to encourage more competition, not less. More choice, not less. It is about small-scale before it is about local.

One of the interviews I carried out was with the American pioneer of local economics Michael Shuman, and it was he who encouraged me to make the extent of the market failure visible – because it is precisely that that big banks and mainstream policy-makers deny.

He suggested I look up the comparative value-added figures for the UK for big business and SMEs.

Sure enough, the OECD tables are pretty clear. SMEs earn 51 per cent of the profit in the UK. A properly functioning economy would therefore be funnelling about half the investment in their direction.

In fact, only 11 per cent of big bank investment is going to SMEs according to BIS.

You might reasonably answer that small businesses don’t need the same kind of investment. This is true, but they do need something – even if it is just mentoring – which the mainstream financial world manifestly assumes it will somehow provide for itself.

Look at national resources and see where they are concentrated. We continue to rely on half the value in the economy coming from small business, but do nothing about it.

There is the extent of the market failure that the current system is so blind to.

The solution? Provide the UK with the kind of local financial institutions most other nations have. Don’t take the enterprising innovators for granted.

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1 comment:

Lidl Janus said...

The arrow of causality might point either way on this one - perhaps SMEs only make around half the profit because they get such lousy backing.