Unlocking British Dynamism
Every so often, British political discourse turns to the question of how best to grow the economy. On these rare occasions debates between left and right tend to focus on whether to cut taxes or increase spending on infrastructure and public services. When the left shows interest in economic growth, it usually favors expensive commitments such as “free” broadband, investment in railways, and public sector pay raises. The inevitable tit-for-tat of partisan politics sees them attack Conservatives for “unfunded” tax cuts. What if they are both missing the point, and there is a way to turbocharge economic growth without costing a penny?
Britain suffers from a short-termism that sees politicians and the media preoccupied with the urgent issues that lead the front pages rather than important matters that constrain our long-term potential. The former includes highly visible problems, such as NHS backlogs and queues at Dover, that inconvenience voters. The “important” (though not urgent) issues limit growth, compromise security, and make us poorer—often all three—and as current energy prices show us, they can become urgent themselves if they are left unresolved.
One of the issues that should trouble our elites is the disparity between the European and American economies. In last year’s Fortune Global 500 list, not one of the 17 technology companies featured was based in the European Union or the UK. Nine were in the United States and 8 were in East Asia. When you look at a list of America’s largest companies, you find numerous technology firms, some of them founded within the last 30 years. In comparison, the largest companies in Europe today are still legacy organisations in energy, banking, and car manufacturing. Home to 43 “unicorns” (privately owned companies worth $1 billion), the UK is ahead of Germany (29) and France (24), but even when you adjust for our differing populations, we are dwarfed by the United States (612).
Economic dynamism is not a uniquely American phenomenon, as we can see from East Asian powerhouses and Israel, the “start-up nation,” which at just 74 years old has the highest density of start-ups in the world and 30 times more venture capital investment than Europe. So where are the FAANGs of Europe? Why is it that no European economy has produced a Microsoft, Google, or Facebook? Why is Europe limping behind, and what lessons can the UK learn?
We can look to the United States to see the impact of government policy on the technological innovation that drives economic growth. In the last decade alone, industries such as shale gas and space exploration have been revolutionized by a business environment that promotes investment and experimentation. Thanks to new technologies, the United States has seen shale gas extraction rates soar and is now on the path to energy independence. For several decades this industry was supported by tax credits, making possible the significant upfront investment in research and development that a new industry requires.
We have seen the power of competition at work in America’s leadership of space exploration. Since the 1960s the industry has benefited from considerable deregulation to enable the private sector to take a greater role in space. In recent years, Blue Origin, SpaceX, and Virgin Galactic have competed on speed, cost and efficiency; commercial space flights and reusable rockets are among the achievements this rivalry has produced. Competition drives innovation to the benefit of us all – reducing costs, increasing standards, and in this case, advancing our knowledge of the wonders of space. These are just two high-tech industries where the freedom to innovate has driven economic growth, resulting in high-paid, highly-skilled jobs, as well as billions of dollars in tax revenue, setting the United States apart from its peers and rivals.
This matters because it is the private sector that fuels our economy and ultimately funds public services. The fast-growing technology companies (that have so far evaded Europe) create the high-skilled, high-paying jobs that we desperately need. We often hear righteous discussion of the morality of investing in public services, but it is disappointingly rare for anyone to make the case that it is moral to grow the economy. We are becoming stagnant and poorer, and that means lower wages, less funding for public services, and less influence in the world.
Regulation in the European Union is characterised by the “precautionary principle” that reverses the burden of proof such that rather than having to prove something is dangerous for it to be regulated or banned, you must instead prove beyond reasonable doubt that it is safe. This belies an extreme aversion to risk that hinders innovation, which usually occurs via trial and error. Technological and scientific breakthroughs rarely, if ever, emerge in a single iteration as fully formed ideas that are fully compliant. The point of a breakthrough is to push the limits of what is known. This caution is stopping us from making progress in crucially important areas: medicine, energy, and food safety, to name just a few. Take clinical trials for instance—they require willing participants to take a risk (their health) to better understand medicines that will ultimately improve the health of many people. We saw this caution at work last year when the European Union restricted the use of the Oxford-AstraZeneca COVID vaccine at a time when daily infections were at record highs. This dithering, over a small number of blood clots, surely led to a far higher number of deaths of unvaccinated people contracting COVID than from blood clots arising from the vaccine.
Contrast this approach with that of the United States where, for now at least, inventors and entrepreneurs enjoy “permissionless innovation” with experimentation allowed by default. It is not surprising that when people are free to take risks, to experiment, and crucially, to fail, they learn important lessons that drive progress and accomplish things that they would not if the law and society required them to succeed on the first attempt. The low appetite for risk that defines Europe’s regulatory framework is evident in our culture too. This perhaps explains why, compared to their counterparts in the United States, young people in Europe are more inclined to want to work for a company than start one. If we are to have any chance of keeping pace with the economies of the future, we urgently need to reset the way we consider the trade-off between risk and reward. We must become more comfortable being bolder.
Entrepreneurs and investors often refer to “asymmetric opportunities”; these are decisions we can take where the potential upside far outweighs the consequences of failure. Examples include starting a business, writing a book, attending a party. There is a risk of disappointment in these cases but there is also the potential for enormous success—founding a corporation, publishing a bestseller, making lifelong friendships. The British have lost the buccaneering spirit of our Elizabethan and Victorian ancestors, who pioneered new lands and industries. We must learn from our American and Israeli friends today, who are far more willing to believe in themselves, take risks, and tolerate failures.
Misguided regulations such as the precautionary principle hold us back in lots of ways. They stifle competition by making compliance increasingly difficult and expensive, creating barriers to entry for new enterprises that would otherwise disrupt the market. Regulation enables monopoly so it should come as no surprise that larger companies are often the first to welcome new rules. They can afford to comply and use regulation as a tool to preserve market dominance.
As we reflect on the anaemic growth of recent years, it makes sense that we focus on the monetary and fiscal policies implemented. It is difficult but vital that we also study the impact of the decisions that were not made – because inaction is itself a choice that brings its own costs. Adam Thierer writes in his book on the subject, “permissionless innovation crushed the precautionary principle in the Trans-Atlantic policy wars.” The choice to maintain the precautionary principle has cost Britain and is preventing us from participating in the next industrial revolution.
It is time to accept that it is often riskier not to innovate, than to suffer the downsides of experimentation that fails. This is true of our economy, which is failing to produce the technology giants we see in the United States and Asia, but it is also the case in other fields. What breakthroughs are our world-leading science and technology professionals potentially missing out on because of our approach to risk? In fighting cancer and Alzheimer’s Disease? How much cheaper could our energy bills be if we had mobilised nuclear and fracking? The decision to regulate is often framed as cost-free but we cannot afford to be missing out on the huge gains that come from taking risks.
Americans should not take for granted the prosperity they owe to the free market. When faced with pressure to increase the regulation of easy targets like banks and social media firms, both sides of the aisle should keep in mind that the United States has long been the world’s largest economy precisely because it has promoted free enterprise and innovation. For my own country, our exit from the European Union is the perfect opportunity to differentiate ourselves and present “Global Britain,” an economic powerhouse that permits first and regulates second.