British writer, broadcaster, and expert on global megatrends. He studied PPP at Oxford and took an MBA at INSEAD before working for a decade at the World Bank. His work promotes progressive disruption — innovation that matters — grounded in practical optimism, a vision of good economic growth that works for both society and business. Leo was the Co-Founder of Sustainable Finance Ltd, now a part of the PwC Group. He is a Business Fellow of the Smith School of Enterprise & Environment at the University of Oxford, and has presented a number of programmes for BBC World News, including ‘Down to Business’ and ‘One Square Mile’. He is the co-host of the BBC Radio 4 series, ‘FutureProofing’, examining the impact on business and society of the big ideas coming down the track, from Synthetic Biology to Block Chain and the Sharing Economy.
1. Why does economics matter?
I think economics matters because it’s getting it so wrong at the moment. I think we have a, you know, third industrial revolution design for economics, which is based around a model of high volume, low margin businesses, which are all anchored around helping people, get some parents in their pockets to buy cheap mass-produced goods. And that was a model that was absolutely great, emerging from the second industrial revolution, emerging from artisanal poverty, from a context where there was resource abundance and where people absolutely needed stuff to improve their lives.
I think we’re now at this moment where, you know, after a century of capitalism and economics based on Henry Ford’s principles of mass production, the economics that aligned with it, it’s kind of lost its grounding in reality. And I think we’ve got an assumption that, what we’re solving for is utility defined by consumption and that’s what’s going make us thrive. And that we can attain that utility by consuming a whole series of things independent of their social and environmental impacts. And economics based on this beautiful simplification of the externality is stuff that didn’t quite fit in the mathematical models, therefore, had to be put as a footnote at best. And if anything emerges as the big lesson from covid-19 is that that little externality, you know, call it one bat, they’ve got infected with a virus, that little externality, actually, it kind of matters rather a lot and it’s tanked a whole economic system. So economics matters because it’s the operating system and it’s out of date.
2. What are the differences between economic science (academic economics) and economic engineering (policymaking)?
I think one of the interesting things that COVID has done is: it’s busted out economic practice into something that diverge from economic theory, but at the same time corresponded more with the reality of the world, that the world has needed. And I’m reminded actually of the greatest racing driver of all time, Tazio Nuvolari, the guy who Ferdinand Porsche said was the greatest racing driver of the past, the present or the future. And how did he learn how to become a racing driver? He had this technique, which is called drifting the curve, where you just slam yourself into the band and let gravity slice off the circle.
And he did it because he was an ambulance driver in World War One in the trenches. And he was told, you’ve got to dodge those shells and forget about safety, forget about applying your brakes. You just got to find a way to slide through the corners. And it was the emergency hand-brake turn, the crisis lab, that formed his ingenuity.
And I think in the crisis lab of COVID, economics has also figured out how to drift the curve. And, what we’ve had is, across different political spectrums, not just a vision of spend, spend, spend. We have not just the vision of spend, spend, spend coming in the crisis lab of economics. We’ve had a vision of directed spending where you can manage to persuade the bond markets to sustain this level of sovereign debt precisely because it looks like there is an actual sustainable productivity boost that you’re creating.
So what you’re starting to see is the scale of government intervention succeeding precisely because it’s actually supported by some broader economic fundamentals of a level of growth into, for example, a new hydrogen economy or into a jobs building economy, or into green conditionality around the airlines. In other words, of a type of economic growth that recognizes that these social and environmental externalities are actually out there. So this is one of the crazy and rather hope-giving surprises of COVID: that it’s orienting economics back into productive investments where, you know, governments are doing the jobs that governments, if you talk to some of the great theoreticians, like Carlota Perez, that they’re identifying what is the next direction of growth that fits the world around it and anchoring industrial innovation supported by government intervention into those new categories of growth.
3. What role does economics play in society? Does it serve the common good?
So what role does economics play in society? Of course, you know, the traditional observation is that ideology is invisible, that it’s the oxygen we breathe. And it performs this role, which is the most unnoticed and important role of all, which is the anchoring direction, the vision of the good life and a sense of linked incentive systems and cultural norms and economic norms that guide us towards it. So you have an economic ideology which, of course, shapes our behaviors, shapes our normal life, but we also have an economic ideology that if you ask about the common good, it’s kind of showing that the wheels are coming off it in terms of its ability to deliver on the common good.
Of course, in the past it’s lifted hundreds of millions of people out of artisanal poverty. It’s now become a crisis-generating machine. Covid-19 was not a black swan. It was the product of a crisis generating machine, of a model of economics that gave us systemic habitat displacement, that gave us mass urbanization with four point nine billion people expected to be in Asian and African megacities by 2035. That’s given us climate change, that’s given us a broken field.
It’s given us cramped, unsanitary conditions in which pandemics spread. It’s given us the global supply chains to maximize disease transmission. It’s given us the maximum individual corporate and national debt to leverage the instability and give us this combination of demand and supply shocks in a fragile economic system. The Covid-19, of course, is this symptom of an economic model that this crisis-generating machine has being anything but supporting the common good. And the question is going to be, what do we do next?
What does it look like? And I see to pursue this motoring analogy, if capitalism is this extraordinary machine for unlocking human ingenuity. But right now, with the conventional economics assumptions of the externality as a footnote, it’s like a Mustang with the wrong destination plugged into the satnav and the giant cliff that’s in the way of the Mustang and its destination. And it will always go over the cliff of the boundaries of the ecosystem, both people and planet.
If it assumes that there are no boundaries, if it assumes that economics is in some way superordinate to the planet and the people within it, and of course, it will go over the cliff. So the question and the challenge is for an unorthodox alternative economics, humanitarian economics, if you like, that recognizes that people on planet, they do exist and they do matter, and actually economics is subordinate to them and for us to get that wiring of economics right to orient innovation back once again to delivering on the big problems that surround us.
4. Economics provides answers to problems related to markets, efficiency, profits, consumption and economic growth. Does economics do a good job in addressing the other issues people care about: climate change and the wider environment, the role of technology in society, issues of race and class, pandemics, etc.?
I would have to say there’s a relatively simple answer to that which begins with the letter n and, you know, the last letter is O.
And let me stop there.
5. As we live in an age of economics and economists – in which economic developments feature prominently in our lives and economists have major influence over a wide range of policy and people – should economists be held accountable for their advice?
Oh, I mean, I love this idea that they shouldn’t. Where would you come up with the idea that they shouldn’t? Yeah, why industry. Who among us apart from futurologists? Futurologists, of course, are totally in the clear. I think they could have missed something here as well around this academization, if that’s even a word, and ivorytowerification of the economics business, that creates the possibility that’s even a legitimate question, because actually that’s the reality.
It’s a legitimate question and it’s the reality. We do have. An academic practice, which, by the way, is way over my head most of the time, I hardly understand any of it. That is divorced from its economic consequences and must be divorced from that, I think in order to sustain itself logically, you must be distanced from the consequences of an economic model that thinks that the externalities of climate change are irrelevant to policy in order to sustain it and to credibly put it forward.
You’re not looking in the eyeballs if you think it doesn’t exist. And there’s something here again around, a crucial switch from a long distance, top down, centralized, bureaucratic third industrial revolution model of how we examine the world to a distributed, localized, interdependent and therefore much more accountable model of economics, where decisions are not taken by a center and expected to have long term impacts on groups that are far flung and in the future.
But are distributed and local and consensual and responsive to the local conditions. And that’s where I think, you know, this notion of the small this notion of the distributed, which the same technological powers which could be creating a form of platform capitalism, which creates a class of the big useless and creates levels of economic inequality with Gini Coefficients approaching the perfection of one. These same technological forces could also create these highly distributed, very powerful, low code often tools that would unlock the cognitive surplus, the capabilities of the hundreds of billions around the world and allow exactly that low barrier to entry innovation and set of economic decision making, except that sets of economic decisions to be made at the local level where they really belong. I mean, that shift from the highly centralized distributed leveraging technology, I think is one of the critical questions for economics in particular around the question of intellectual property and how can it manage to break some intellectual property gridlock and monopolies that we’ve currently got that are inhibiting that transition.
6. Does economics explain Capitalism? How would you define Capitalism?
I think economics fits with capitalism and shifts with the model of capitalism. No, I mean, this question is way above my pay grade. But I think we’ve had the economics of Henry Ford’s capitalism. And now the question is, are we going to have the economics of platform capitalism or are we going to have the economics of something better than the current model of the fourth industrial revolution?
And that’s the doorbell, or we can have something better than… hold on, if that’s my daughter, she is a very persuasive doorbell ringer… Let me get the doorbell off…
7. No human system to date has so far been able to endure indefinitely - not ancient Egypt or Rome, not Feudal China or Europe, not the USSR. What about global Capitalism: can it survive in its current form?
I think there’s a question of where we locate intelligence, which is the crucial dynamic here. I think as we move out of the third industrial revolution towards a fourth, there’s a chance to move towards a model of capitalism, which has a continuation of the trend that Marx predicted back in the 1850s, where the substitution of capital for labor, technology for jobs, creates such a level of unemployment that, in the end, aggregate demand just drops to the point where there just aren’t enough people with pounds in their pockets to buy the goods that capitalism needs to sustain. Model, which no amount of universal basic income is ever going to sustain. There’s no sort of balance sheet that’s going to be able to support that. And that’s a model where capitalism does eats its tail. But I think what you’re seeing at the moment is the emergence of a very strong countertrend to that centralization and consolidation of the new powers of the fourth industrial revolution into the hands of a few platform capitalist owners, companies and countries.
You’re seeing exactly the countertrend emerging, which is this new set of fourth industrial revolution technologies, which are low cost, distributable, matchable, extraordinarily powerful, also starting to reemerge in the hands of those with no formal training, no skills, no capital who are standing up their own businesses, who are deploying these tools to start solving problems and solving these problems, they’re creating new frontiers in welfare. They’re starting to improve people’s productivity, their access to water through sensor- based, drip-feed, climate-smart based crops with satellite data telling where are the markets that they can sell into to to optimize their prices.
They’re suddenly seeing livelihoods increasing, welfare increasing, and capitalism actually doing what it should say on the tin, which is improving and increasing the stock of capital, both financial and economic and social and natural at the same time. So I think this next 10, 15, 20 years is going to be an extraordinary battle to see which of these two forms of capitalism will start to really thrive, and dominate.
8. Is Capitalism, or whatever we should call the current system, the best one to serve the needs of humanity, or can we imagine another one?
If capitalism is a system to unlock ingenuity and to reward its fit with the world around it, then bring it on, right now. Under a model of power… So let’s start, again: if capitalism is the system to unlock human ingenuity and deploy it to solve the problems that confront us, then bring it on. Right now, we’re at this crossroads. We’re either going to be a class of big useless, where our only function is to click and swipe and wait for some product to be delivered to us. And our cognitive capacities will atrophy or we’re going to unlock that talent.
My hunch is capitalism got the potential to do to… My hunch is that capitalism has absolutely got the potential to be both. Which way we go… Actually, this whole answer is a repeat of the last answer. So forget it.