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Supply side puzzle

June 21st, 1992

A letter to the City Editor of the Sunday Telegraph which was published on 21st June 1992.

In his perceptive “Working Brief” (June 14th) on the differences between Anglo-Saxon and Japanese-German capitalism, Tom Lloyd points to the puzzle which the success of the latter poses for the supply-side economists.  This puzzle arises because of the persistent failure of most economists to attach anything like their true weight to two ingredients of an economy besides the common ones of capital and labour.  The two missing ingredients are (a) technology and (b) the competence of the boards of companies in directing the other three ingredients.

Robert Solow (Nobel Prize 1987) has analysed in careful detail the respective contributions of capital, labour and technology to real economic growth in the United States over 40 years to 1969.  He found the ratio of contributions to be about 20:20:60.

With notable exceptions major British companies are dominated by men whose mentality and expertise, if it can be called that, are largely those of traders, who are happiest when engaged in acquiring other companies’ products and markets with borrowed cash, rather than applying themselves to the hard task of thinking and analysing how their own products and processes can be improved.  No effort is spared, on the other hand, in devising reward systems whose effect is to confer scandalously high chunks of wealth on themselves.  The chairman of Nippon Telephones, which has twice the turnover of BT, receives about a third of the pay of the BT chairman.

For the most part growth in real wealth comes from the tangible products.  Banking, financial services and the like have grown from the provision of essentially a simple service into being elaborate ways of spreading the wealth around, usually to the vast benefit of those doing the spreading.  Until Solow’s conclusion is properly understood and acted on, British industry will continue to lose ground, not just to Germany and Japan, but to Korea, Taiwan and beyond, no matter how free the capital markets are.

In 30 years, BMW, whose products are so popular with City types, has grown from a company smaller than Jaguar today, without any expensive City expertise, but with instead the dedicated input of retained capital, technology and hard work from the top.  It is technological capital, not cash capital, that is the most important ingredient of capitalism – and always has been.  That is the solution to the economists’ puzzle.