Germany remains some 30% more productive than the UK; France and the US some 25%. This is in part because business investment has stalled, not helped by a retrenchment of public sector capital spending in the years following the crisis. Without investment, innovation atrophies, and with it growth.

R&D expenditure in the UK stands at a paltry 1.67% of GDP – below the European average of just over 2%, and well below world leaders Israel and Japan, both of whom spend over 4%. And within this total R&D, government spends just £10 billion per annum, or a disappointing 0.6% of GDP.

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China's entrepreneurial state has lessons for the West

By Michael Burleigh

The latest industrial strategy pledges to increase the total spend to 2.4% by 2027 – clearly indicating that the Government sees innovation as a ‘public good’ – but whether that can be achieved remains to be seen.

The worry is that individual companies would not, if left to themselves, make the level of investment needed to boost the economy as a whole. Businesses take a narrow definition of benefits, they do not price in any positive ‘spillover’ effects (seemingly unconnected benefits) or ‘externalities’ (benefits to others) that flow to the rest of the economy as a result of investment.

If the market is failing to innovate adequately, to the detriment of the economy, does that mean that state intervention is justified? In my mind the answer is a resounding: yes! The dilemma, of course, is how best to intervene.

The ideal, surely, would be to change market incentives by putting more emphasis on long-term returns. But that would require changing accepted norms and cultures. Even though R&D spending should increase innovation, efficiency and productivity, such benefits take time. In the short term, profits are cut – and that isn’t always favoured by institutional investors.

Perhaps it would be better to just alter the fiscal framework, or increase government subsidies. But that requires an understanding of ‘additionality’ – in other words, whether the desired outcomes would have happened anyway, meaning that taxpayers’ money is wasted. Was it worth, for example, the UK government introducing in 2013 a low tax ‘patent box’ to encourage companies (like big pharma) to invest in R&D and commercialise their patents, or would firms have invested in the UK anyway? A better focus for taxpayer investment might be small and medium size businesses where the need is likely to be greater and the impact wider.

Or perhaps greater competition is the answer. Large monopolies, or oligopolies, enjoying high profits have little incentive to invest. While on the other hand, the difference innovation can make for a competitive firm can be significant. Research clearly shows a positive relationship between competition and innovation.[1. See for example Richard Bundell et al., ‘Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms’, The Review of Economic Studies, 1999; Paul Geroski, ‘Innovation, Technological Opportunity and Market Structure’, Oxford Economic Papers, 1990].

This all suggests that a mix of better conditions for innovation, and a series of targeted but properly costed and evaluated interventions may help boost the UK’s lagging productivity – and with it, all important economic growth.

The UK has done a number of things already. The Technology Strategy Board, now Innovate UK, emerged from the first innovation strategy produced in the early 2000s. In 2016-17 it provided some £560 million worth of project funding, and also attracted large private funding, to assist collaborative research in areas such as emerging and enabling technologies, life sciences, scientific instruments and manufacturing and materials.

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By Nigel Cameron

There is now also a £725 million Industrial Strategy Challenge Fund focused on innovation, announced in the 2017 Industrial Strategy White Paper, and ten ‘catapults’ which are not-for-profit centres aimed at promoting innovation by connecting businesses with universities and other research organisations.

These are positive steps, but more needs to be done and the sums are still small. Academics like Mariana Mazzucato would argue that an obsession with limiting state intervention to correcting market failure is misplaced. Instead, the state should be actively shaping markets.

That implies, however, that government knows best, and there’s not much evidence that it has been particularly successful at picking winners so far. Current suggestions for a National Investment Bank, for example, would only make sense if it functions at arm’s length from politicians, and it is staffed by experts with banking and commercial skills.

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The French 'internet' – when state innovation goes wrong

By Peter Franklin

But as Mazzucato suggests, “building dynamic public-private partnerships” to drive innovation makes sense, particularly if that partnership shares the risks and profits. Sadly, the UK is behind the curve. It missed out on developing a sovereign wealth fund, for example, as Norway did so successfully with the oil and gas proceeds when they were at their height in the 1970s and 1980s.

To that end, taking a strategic stake in firms as Mazzucato proposes, and investing in innovation though the process, may indeed be the way forward. Perhaps the UK should take a leaf out of France’s book. The most state-controlled country in Western Europe is, under Macron’s Presidency, about to sell off state shares in companies, partly to raise funds for – you guessed it – a €10 billion Innovation Fund.

What the pay gaps expose, more than anything else, is the lack of women in senior positions in most organisations. Some will argue progress is being made, citing, for example, the increasing proportion of women on the boards of the UK’s 100 biggest companies. But that hasn’t happened unaided, and the numbers largely reflect the appointment of more female non-executive directors, who often sit on multiple boards. The proportion of senior women executive directors in boardrooms has barely changed in a decade, and is still below 10%. And the proportion of senior business posts more generally held by women in the UK actually fell 2% last year, to 19%.

It is not that women are less ambitious. But their social conditioning plays a part. A recent study  looked at the attitudes of women in China who grew up under the communist regime where gender equality was emphasised, compared to the attitudes of those who grew up during the post-1978 reform era or in capitalist Taiwan.[1. Alison Booth, Elliott Fan, Xin Meng and Dandan Zhang, ‘Gender Differences in Competitiveness: Evidence from China’, Royal Economic Society conference, March 2018] It found that those exposed to strong messages of gender equality, even for a short period, were more competitively inclined: culture and institutions matter in women’s willingness to compete.

Where capitalism fails to provide an environment conducive to equality, communism seems, at least on the surface, to get much closer. This is not to defend communism as a system, women in communist states such as the former Soviet Union who struggled to acquire the basic necessities for their family did not enjoy a better life. But what they did enjoy was an equal expectation that they would work, underpinned by free childcare, education and training. According to a New York Times investigation, male chauvinism in the Warsaw Pact countries was seen as a remnant of the pre-socialist era. And although wage disparities were still prevalent, women were represented in bigger numbers in senior positions.

Why are senior women role models lacking under capitalism?

The Anglo-Saxon capitalist system as practised in the UK and the US tends to favour aiming for short-term returns, driven by increased quarterly reporting and continued analysts’ scrutiny. Institutional investors themselves often contribute to the excessively short-term focus by corporate boards.[2. Davis, Lukpmnik and Pitt-Warson, What They Do With Your Money, Yale, 2016] Bringing about the cultural change required to make women want to stay at work and fully use their skills doesn’t fit with that model – it requires dedication and long-term investment in childcare, training, and incentives to encourage women to go back to work (for example using “returnship” programmes). It also means fundamentally altering the way an organisation works, including the way men structure their days and their attitudes towards women co-workers.

This is an obvious market failure where talents are lost to the economy because the system doesn’t respond in an efficient way. Skills are a major contributor to productivity – in fact the most important one. And it is productivity that determines an economy’s long term sustainable growth rate and prosperity. But as with Corporate Social Responsibility, or caring for the environment, we know that even though acting in accordance with those principles makes good long-term business sense, firms won’t do it unless pushed – just look at how long it has taken to increase the proportion of women on boards despite the evidence that diverse teams perform better.

Some people will explain away this gender disparity by blaming women’s reproductive tendencies. But that is only half the story – there is ample documented evidence of both conscious and unconscious bias in organisations which discriminates against women irrespective of whether they are mothers. One 2014 survey for example found that  40% of managers were wary of hiring “women of childbearing age”. And according to a 2018 YouGov survey one third of senior managers think it is acceptable to ask women in interviews whether they intend to have children. Indeed a quarter of women have been asked, at work, whether they plan to have children.

Business culture and practice is the problem, not women having children

That is not to ignore the fact that many women do choose to take time out of the workplace to have children. But the cost to them is significant. A 2016 report by the Institute for Fiscal studies showed that when women enter the labour force the gap in mean average hourly pay between men and women is virtually non-existent. By the time women are in their late 20s, the gap has risen to 10%, and it continues rising steadily thereafter. For mothers the gap carries on increasing to 33% by year 12 after the birth of their first child. Those mothers miss out on workplace skills and experience, and therefore promotion prospects, and that is especially the case if they return to work part time. The economy loses out permanently as the system does not seem to either value them or want to invest in them on their return ­– which is a double loss given firms have already invested in the training and development of those women.

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Capitalism is suffering a crisis of care

By Victoria Bateman

Childcare provision is key to tackling this female brain-drain. Evidence from Germany suggests that where regional or local government provided childcare is available it allows women to both earn higher salaries and progress up the career path more easily.[3. Vidhi Chhaochharia, ‘Childcare policies boost women’s wages and careers: Evidence from Germany’, Royal Economic Society’s annual conference at the University of Sussex, March 2018] A study of mothers in Italy showed that those who decided to shorten their maternity leave taking advantage of state-subsidised childcare were much less likely to leave the labour market and thus be lost to the economy.[4. Enrica Maria Martino, ‘The labour cost of motherhood: Evidence from Italy’, Royal Economic Society’s annual conference at the University of Sussex in Brighton in March 2018] And of course childcare can pay its way over the long term. Women who work earn more, receive less in benefits, consume more, and pay more direct and indirect taxes than would otherwise be the case.

Women will still want to have the flexibility to look after children – but so would many men if the long-hours culture which tends to put women off, yet still seems to be the route to promotion, was discouraged. Macho enclaves that still frown upon flexible working should have no place in the modern workplace.

As Cambridge University Professor Mary Beard has pointed out, mechanisms that sever women from the centres of power are deeply embedded in Western culture.[5. Mary Beard, ‘Women & Power’, Profile Books, 2017] Every meaningful change in the UK has required state intervention – the Equal Pay Act, the Equality Act, Pay Audits, etc. As long as the system prevents women from achieving economic equality, gender power imbalances will remain. #MeToo and similar movements are not going to fix that.