The writer is the UK’s Financial Secretary to the Treasury, responsible for infrastructure policy
Following the general election, the UK is preparing for major new investment in skills and infrastructure. But this is also a huge opportunity to launch a parallel revolution of ideas. It is an opportunity we must not miss.
At present, the conventional economic wisdom goes like this. Growth is maximised when investment can easily locate and flow to the highest value projects. The function of government, therefore, is to clear away barriers and address market failures that inhibit investment. Capital and people should be free to go to the best opportunities, wherever they are.
This approach has real merits. It creates a hard budget constraint and is easy to understand. And operationally, since capital is almost always in short supply, it is more straightforward for the centre to enforce constraints on public spending under these assumptions than for it to get pulled into the weeds of specific projects and policies.
But there are three serious problems with the conventional wisdom. In the first place, outside some great urban success stories in the north of England, it appears to have done little to combat the overall economic predominance of the south-east.
Second, it is stultifying to new ideas. Imposing a one-size-fits-all investment model pre-empts the long-term local and regional entrepreneurship and capacity-building that Britain needs.
Third, it has nothing to say to those who happen to live outside the favoured areas. It undermines the respect that ought to be due to the Midlands and north, to rural counties and coastal towns.
But the deepest problem is that this conventional economic thinking only tells half the story. Take the much-contested idea of identity, which is central to regional and local policy. To orthodox economic eyes, this is a merely “political” matter, with no role in economic decision-making. Yet the best economists are increasingly recognising that identity really matters.
It creates feelings of pride and belonging which motivate entrepreneurs and civic leaders to better both their own situation and their communities. Identity changes norms, habits and expectations. It lifts spirits and encourages people to get stuck in. Result: greater economic productivity and social improvement. The Victorians understood this — that’s one reason why the great town halls and railway stations of the north are so grand.
Conventional cost-benefit analysis typically neglects these aspects of public investment, which are important but hard to measure. But they highlight why good design can make a huge difference — for civic buildings, commercial space and housing estates alike. The same goes for faster implementation of planning rules, which can help local areas deal with change on the high street.
This points to more decentralisation. But identity matters nationally too. Britain has a huge opportunity to carve out a new national identity for itself: as a global leader in green energy and services, as pound-for-pound the world’s greatest educational hub, as an international beacon of civility, the arts and the rule of law, among much else.
To realise this vision, every part of the UK needs to be buzzing. We are living through a “participation explosion”, in the words of the great development economist Albert Hirschman. Identity economics reminds us that people have a yearning for public service.
But to tap into that we must revolutionise our thinking as well. In the 1950s South Korea could have stuck with the conventional economic wisdom about comparative advantage, and traded farm commodities. Instead it had a transformative vision of national economic renewal, from construction to cars to consumer electronics.
The same transformative imagination and energy will be the keynotes of the government’s infrastructure revolution today.