An opportunity for ethical capitalism that comes once in a century

Innovation, as Schumpeter held, is the driver of growth in market economies. But although technical change is constant it is not strictly continuous.

Once or twice in each century the whole economic system is deeply transformed by a technological revolution that changes the patterns of production and consumption. The early decades are characterised by a ruthless process of unfettered free markets and ‘creative destruction’ while the new paradigm is learned.

Major financial bubbles and their collapse announce – as in the 1930s and now – the need for the social shaping of the new potential.

The recessionary times that follow are marked by the rise of populism as the victims of the transformation make their voice heard; populist leaders – left and right – find a passionate following; the traditional parties divide while new ones emerge; finance becomes risk averse, closes in on itself and does not fund the production economy; growth and social peace are threatened and a general sense of instability prevails. And yet, a huge technological potential is available for transforming the whole economy.

History has seen this four times before and the solution has been abandoning market fundamentalism and bringing back the state proactively to tilt the playing field in a synergistic direction. It means setting up a coherent set of policies, as was done with Bretton Woods and the Welfare State when the mass production revolution, installed in the 1920s was ready to be deployed, emerging from the 1930s depression and World War Two. It was an effective win-win game between business and society, where high salaries and social security in the advanced countries created dynamic demand for profitable production.

“As with every technological revolution, the new higher level of productivity is achieved by eliminating many existing jobs, but society must gear the new wealth creating power towards new activities that will create many more new jobs.”

What to do? First of all, we need to understand that the solution is not to try to go back to a previous golden age but to construct a better one with the current technological potential and facing the current problems. It is also important to recognise that solutions don’t come from sheer imagination but from identifying already existing trends in the right direction and accelerating them.

Just as favouring suburbanisation and the Cold War tilted the playing field in favour of home ownership, mass consumerism and high tech military innovation, we can now establish a bold set of policies aimed at smart green growth and full global development. The first would favour services and intangibles and aim to reduce materials, energy and transport, while providing a new aspirational good life aimed at health, caring, education, creativity, collaboration and experiences and based on truly durable products, maintenance, recycling, reuse and conservation. Pigouvian taxation – punishing the ‘bads’– and clear regulation have shown their effectiveness for tilting the playing field and creating synergies in chosen directions.

Digital technologies, with their intangible and globalising nature provide the tools to do this, while also modernising government itself. As with every technological revolution, the new higher level of productivity is achieved by eliminating many existing jobs, but society must gear the new wealth creating power towards new activities that will create many more new jobs. These are often about catering to the new lifestyles that emerge each time. Then it is the socio-political decisions about relative wages, working hours and welfare measures that define how the new wealth is shared across society.

Full global development would be a win-win game. It would create new trade flows across the South while opening market opportunities for the advanced world in environmentally sustainable capital goods, engineering, infrastructure and so on. This would provide a better life for the population of the developing countries and stop both the brain drain and the desperate migrations. Once again taxation, possibly as a global financial transactions tax, would be needed to fund the process.

Obviously, in the case of the developing countries, much responsibility would fall upon the national leaders to rise up to the challenge and make the best of it, eschewing corruption and aiming at the new opportunities. Neither the old ideas about dependency nor the more recent ones about minimal government are valid now. We need institutional and policy innovations, as bold as those of Prebisch, but adequate to the new conditions. Digital solutions that leapfrog the traditional infrastructures – as Kenya has done with mobile telecoms and mobile banking and others with solar energy – are possible in many sectors, including public services.

Setting up a global-smart-green-new-deal is the task at this moment in history. Only if governments do so, will the golden age of the ICT revolution be unleashed. The question is whether market fundamentalism will be abandoned in favour of a new ethical social contract between business and society, between the advanced, emerging and developing worlds and between humanity and the planet.