Why Doesn’t the UK Innovate Anymore?

18/6/2022

The Great Exhibition in Hyde Park in 1851, featuring the best of British inventions, seemed to mark the golden age of British innovation

The United Kingdom has always had a very particular sense of its own genius. Germans might be effortless poets and philosophers, French and Italians international style icons, but ours is an altogether more practical national mythos. Ever since the late 18th century, when the industrial revolution exploded on the back of the spinning jenny and the power loom, the coke furnace and the steam engine, we have seen ourselves as a land of tinkerers, inventors; innovation by innovation, we have cemented our place as “the workshop of the world.”

 

Now, however, when people in the UK speak of “innovation”, they are more likely to be lamenting its decline. The government’s own in-house reports barely bother to conceal their desperation any more: “transformative research has slowed, or at least become far less efficient, suggesting broader problems with the way that we innovate.” In a recent article for the Financial Times, meanwhile, Business Secretary Kwasi Kwarteng (hardly a skeptic when it comes to business guff) complained that “innovation is not just about waving our hands at high-tech sectors and using the phrase ‘machine learning’ a lot.” British innovation really does seem to be faltering.

 

Just how bad is the situation, really? By some official measures, the slump doesn’t look too severe: the official indices concocted by the IMF and Bloomberg, for instance, certainly look respectable (if not exactly optimistic). But even if we leave aside the IMF’s fondness for data-rigging, the fact remains that all innovation indices are made up of disparate ingredients – “manufacturing productivity” statistics, for instance, which these days have as much to do with the price of raw materials as the technological sophistication of the average production line. For most of the UK’s major industrial competitors, it’s pretty easy to find an area of technological pre-eminence: Germany has its automotive industry, Switzerland its biotech, South Korea and Japan their electronics, and the US the great futurist theme park of Silicon Valley; those that don’t – like Sweden, for instance – are incredibly diversified, with valuable new businesses in a host of exciting new industries: electric and self-driving cars, lithium batteries, video games, eye-tracking technology, as well as digital platforms like Spotify.

 

The picture in the UK, by contrast, looks very bleak indeed. One interesting illustration is the UK’s batch of “unicorns” – that is, the 37 British start-ups that have been valued at over a billion dollars – which some view as an encouraging sign. Yet even the most cursory look down the complete list reveals a different story. Most of it is taken up by FinTech companies, which are simply new, digital middlemen in the UK’s financial sector; most of the remainder are really just glorified online shopping platforms – shameless knock-offs of eBay and Amazon used to hawk property, or cars, or pet insurance. Of the few that remain, the real standouts – Brewdog (a beer brand), Gymshark (a sportswear manufacturer) – are just good old-fashioned retail companies whose real distinction is their deft marketing. Don’t believe the hype. The very language the British entrepreneurial classes use to trumpet their success provides the evidence for their own decline.

What, we might reasonably ask, is going wrong? In many ways, the UK has the deck stacked in its favor: it boasts strong institutions founded on a whole slave trade’s worth of capital accumulation, political stability, world-class universities, a Commonwealth of eager trading partners, the privilege of having drawn the world’s international date line, and a mother tongue that everyone in business or research from San Francisco to Seoul is expected to speak. It should be an absolute factory for talent – bursting with a new crop of Richard Arkwrights and James Watts, clamoring to make the world anew.

The steam engine, one of the technologies that powered the industrial revolution, developed by British inventors Thomas Savery, Thomas Newcomen, and James Watt

But it isn’t. All the data suggest young, bright-eyed, entrepreneurially-minded graduates emerge from higher education into a desert of professional services: consultancy, marketing, PR, HR, corporate law, and, above all, finance. The Graduate Outcomes Report from my own alma mater, Oxford University (itself relatively balanced compared to financial battery farms like the London School of Economics), makes this abundantly clear. As with almost every top university in the world, the highest numbers of graduates still appear to remain in education, pursuing postgraduate study. Apart from that, however, the trend is clear: professional services, all the way down.

 

This should be no surprise. It goes to the heart of what the UK really is: more than any other major country in the world, ours is an economy dominated by professional services in the fields enumerated above. According to the UK parliament’s Professional and Business Services Sector Report, the sector accounts for almost 11% ($223 billion) of the UK economy’s gross value added (that is, the marginal value of goods and services that have been produced in a country, minus procurement and labor costs), and 13% of employment (around 5.5 million jobs) – dwarfing countries like Germany, Japan, and South Korea, and even coming close to the notoriously service-oriented US, at least in percentage terms. Notably, too, this excludes people who work in professional services capacities in other sectors – in-house lawyers at manufacturing firms, for example, or HR people at universities.

Canary Wharf, London

At the heart of the problem is the financialized growth model that the UK has been pioneering for the last 40 years. We don’t produce assets any more, not in any classical sense; we frame assets, hire an army of professional services drones to surround them with rules and procedures that increase their exchange or rental value. An economy, in other words, of paperwork. Bankers dream up new derivatives – paperwork that allows them to bet on the future prices of stocks or commodities. Lawyers do the paperwork that passes these new derivatives into law, along with a host of other legal fictions that make assets even more profitable. Management consultants help companies drowning in paperwork by giving them paperwork suggesting they organize their paperwork in a different way; HR people colonize the industry by making it seem like their own brand of paperwork is necessary for their bosses not to get sued. It really is endless. Paper-pushing is the great engine of UK’s economic growth, and no-one seems able, or willing, to stop it.

At the heart of the problem is the financialized growth model that the UK has been pioneering for the last 40 years.

Sure enough, other places which have pursued financialization with similar gusto are suffering in exactly the same way: Hong Kong, for instance, which has been scrabbling since 1999 trying to stoke new tech initiatives with $12.74 billion of state funding to little avail; or Singapore, where, despite massive state investment in fields like AI and machine learning, graduates still prefer the well-trodden career paths offered by professional services to the gamble of entrepreneurship. Meanwhile, countries with notoriously stunted professional services sectors, like Israel, end up with nicknames like “Startup Nation.”

 

Yet though the brain-drain into professional services is certainly part of the story, it doesn’t explain everything. Sure, the UK’s current growth model is largely sterile, but there is no reason in principle why basically sterile forms of wealth creation can’t provide a bedrock for real innovation down the line. Every sociologist from Marx to Weber has agreed that some form of capital accumulation is necessary for nations to innovate: after all, if everyone is living hand to mouth without capital surpluses, then they can hardly tinker their way towards the first spinning jenny or experiment with mechanical looms, let alone enlist others to help them build the next coke furnace. It’s no surprise, then, that the two great centers of the industrial revolution were England and the Netherlands – the two countries with the most developed and extractive East India Companies. Intellectual elites were siphoned off to Molucca and Bengal, but the remittances they sent back sowed the seeds of an industrial revolution at home.

The Great Exhibition of 1851

The real question is why the UK – today one of the great global centres of financial tribute-taking – isn’t enjoying the same dynamic. Why isn’t the accumulated capital being invested in something more useful? Clearly, the UK has a private-sector funding problem: according to Cambridge University’s 2021 UK Innovation Report, private companies contribute less to Research and Development (under 55% of total expenditure) than in any major competitor nation (in Germany the figure is 66%, in Korea 76.6%, and in Japan 79.1%). In a sense, the deficiency is entirely predictable. Manufacturing is always the sector that is most liberal with its R&D money, and since the 1970s, the UK’s manufacturing base has all but withered away. Professional services firms, by contrast, have a very different way of investing their profits. As of June 2020, according to a report by the Institute of Chartered Accountants in England and Wales, UK “private non-financial corporations” had accumulated gross cash reserves of almost $1.139 trillion, equivalent to 40% of the UK’s GDP. The delicate ecosystem of profit and reinvestment has given way, quite simply, to hoarding.

Manufacturing is always the sector that is most liberal with its R&D money, and since the 1970s, the UK’s manufacturing base has all but withered away.

Indeed, even when they do reinvest their profits, British companies tend to do so very differently from their counterparts abroad. The Cambridge study makes it abundantly clear: there is, in fact, only one source of research and development funding which the UK really administers in a world-leading way, and that is venture capital. Venture capital really is what plugs the UK’s yawning R&D gap: between 2007 and 2019, UK VC firms dished out $20.4 billion (or 1.2% of annual GDP) to various projects and flights of fancy – a rate well above all other European and Asian competitors except Finland, and comparable to that of the US.

 

Venture capital, however, has its own biases and idiosyncrasies. In fact, if we look at the numerous “incubators” and “accelerators” this glut of VC money has produced, we find exactly the same set of biases that haunt the list of unicorns – the preference for charismatic CEOs and marketing guff over fundamentals that ultimately leads to more of the same: FinTech platforms, eBay knockoffs, pet insurance websites. This is not to say that VC managers are stupid – just that their incentives are necessarily warped. During the Industrial Revolution, when stock trading was in its infancy and investors were reared on the Labor Theory of Value, those who helped finance new textiles or steam technologies did so in the expectation that the ensuing industries would make a profit. Today, in the wake of the marginalist revolution, VC treats its equity as a speculative asset – an abstraction determined by the vicissitudes of supply and demand, rather than a share in something with any intrinsic value. Perhaps this is why so many of the British unicorns, like Deliveroo, have made their investors billions without ever actually breaking even.

Manufacturing an airplane engine, England, 1918

This is the true peril of financialization. The logic of the financial sector has been carried through to start-ups: what people are really interested in is riding out a bubble and selling at the right time, rather than keeping an eye on long-term profitability. Inventors themselves, meanwhile, are put off pursuing anything that seems too complicated to be flashed up on a pitch deck or trotted out in a boardroom amidst a fog of buzzwords. No wonder the stagnation has set in; no wonder, too, that UK’s most hyped new start-up, Gousto, is a service that offers to deliver fresh ingredients to your door – not via drone or 3D printing, but via post.

 

There is, however, a way out. One or two countries really have managed to blend financialization with a steady churn of important new technologies: Switzerland, for instance which took the top spot on the World Intellectual Property Organization’s 2021 innovation index, and the US, where the great financialized behemoth of Wall Street is balanced out by the leviathan of Silicon Valley. But if we look closely at such outliers, we see a huge effort on the part of the state to keep the wheels of innovation turning: a steady drip feed of state money and technology into targeted industries, and the promise of lucrative state contracts to those that use them wisely. Silicon Valley had its roots in the Cold War defense industry; Switzerland, meanwhile, maintains its formidable Biotech sector by parcelling up new technologies forged in its world-class, state-funded research universities for private development. It’s particularly striking that the one UK unicorn that can really stand up to its American and Swiss rivals is the Biotech firm Touchlight – which uses technology developed by Californian state-funded Salk Laboratory, and whose valuation soared during the COVID-19 pandemic as investors began to salivate over the prospect of the NHS state becoming a buyer. The message is clear. If you want to stay innovative as a financialized nation, then you need a robust state to step in.

 

Yet it is precisely this responsibility that the British state has been shirking. Since the beginning of David Cameron’s austerity experiment in 2010, the UK government has taken an incredibly minimalist approach to R&D funding: according to the Cambridge survey, the UK’s Gross Expenditure of 2.4% of its GDP on Research and Development (GERD) remains below the 2018 OECD average, and far, far below the levels of its most dynamic competitors: 82% of France’s, 46% of Korea’s, 40% of Germany’s and only 28% of Japan’s. The one area of state-funded research which does hold its own is the higher education sector – and sure enough, universities have been at the vanguard of most of the most exciting recent projects the UK has had to offer (the AstraZeneca vaccine, for instance). But pre-eminent universities do not make up for deficiencies elsewhere – and indeed, as the late anthropologist David Graeber famously argued, university research is increasingly dominated by a paperwork and self-promotion culture of its own, where the researcher has to justify her worth to a web of committees and funding allocators before being allowed to carry it out.

 

In fact, if we consider the UK economy as a whole, one type of research environment is conspicuously missing. Publicly funded research labs, dedicated private-sector R&D departments, and old-fashioned, unbureaucratic university faculties all have one thing in common: they give their would-be innovators space to breathe, away from the churn of self-promotion and asset-price inflation that characterizes everything else. VC culture, and the orgy of hype and marketing it demands from its supplicants, is a poor substitute: it encourages researchers to derive their notion of what’s valuable from investor demand, and the results, sure enough, are uninteresting in the extreme.

 

There are, of course, many, many ways the UK could try and claw some of this dynamism back: a more expansive monetary policy, basic income models, bringing its state funding for R&D in line with that of other countries, taxing corporate cash reserves. Given that the UK already offers substantial tax breaks for R&D, we could even speculate that increasing corporate tax would promote research spending as a means of avoiding it (in the 20th-century United States, at least, this correlation definitely held true). We could also try and curb some of the worst excesses of VC-ism – not least by scrapping Chancellor Rishi Sunak’s hugely irresponsible plans to open up pension funds to venture capital funds in the next few years. But the key thing to bear in mind is that all of these measures would take political will – to break our addiction to financial services, and end our thrall to the financial lobby that has made a very small number of Britons very rich indeed.

 

Perhaps, in a sense, the problem lies in the word “innovation” itself. Oddly enough, though it was coined by Joseph Schumpeter in the 1930s, it really took off in the lexicon in the mid 1970s, replacing rough synonyms like “invention” at exactly the time that the first ripples of financialization were felt. And in a way, it’s no coincidence: the two words, “invention” and “innovation,” connote radically different philosophies of human progress. “Innovation” lumps in managerial processes with productive ones: a management consultant could never be an inventor, but she could be an innovator, projecting her market-shaping genius around the globe from the comfort of her desk. No wonder so many tech and business gurus have taken up Schumpeter’s word, especially in the UK. It equates the smarmy VC exec with the local artisan, painstakingly tinkering with cotton looms in his shed; it reinforces the very delusions about productive activity on which our economy now rests. It is part of the patter of finance, the aura of marketing, and lives on in our brains and on our pitch decks, the final, formidable buttress that keeps progress just out of reach.

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