 Mae gwneud ymlaen i'r Wyffer, ac yn ymweli'r frydyddiau at gyfer rhai gwyntafol a ddysgu yn ymddangos. A rydym yn rhoi cymaint wneud gweinon ni, wedi gweithio bod yn gyfroedogie, yn y gweithio'r gwaith yma. A rydym yn cymaint yn ymddangos, ond byddwn yn cyfrifio'r gweithio eich cyfrifio'r ddyddol bob gyflwyr ein os yw'r cyfrifio'r ysgol, gyfo'r byn argymellai'r ddysgu i. We have guests from many institutions here tonight and we welcome you all to SOAS. We really appreciate your presence here. It all adds to the sense of occasion that is a SOAS inaugural. It's a ceremony, a ry Nico de pasage for the speaker, but most of all it's a celebration. A celebration and an enjoyable intellectual event for the whole SOAS community. ac ydych chi'n ffordd ar gyfer y ffrindio ar gyfer y dyna, rwyf yn ffordd ar gyfer y ffrindio'r ffyrdd hynny ymlaen i ddechrau'r ymlaenol, felly rwyf wedi'i gael chi'n ei bod yn gweithio i'ch ffrindio'r ddechrau'r ddau'r ffyrdd ymlaenol, a'r bydd yn ddau'r ymlaen o gyfer y ffyrdd rhan o'r rhan. Rwy'n ddatblygu'n gweithio'n ffordd o'r lechau yn cyfnod o'r 12-13 lechau. Os ystod y bydd yma ymdweud y 3 gweithio ar gyfer yma'r ystod. Ystod y bydd hynny'r cyfrannol, yw y profiad yr economi ac ymdweud yma yw'r gwirionedd a'u gweithio'n gweithio. Yr hyn yn ychydig ar gyfer ymdweud, ymgyrch, ymdweud a'r gyfrannol yn gweithio'n gweithio. He has held visiting posts at the Australian National University, has been attached to several global business schools and has advised UK and Irish public bodies on capital investment policies. He is the co-author of the book, The Unbalanced Economy, a policy appraisal with Dr Paul Temple, who is here this evening. In fact it's Dr Temple who will introduce Professor Driver tonight. Dr Temple graduated from Cambridge in 1973 and obtained an MA economics from Manchester in 1975. He has worked in a variety of academic posts and taught both in the UK and the US up until 1989. After that he worked as an economic advisor to the National Economic Development Council working on issues such as labour market performance and international competitiveness. In 1993 he was appointed as a research fellow in the centre of a business strategy at the London Business School. He joined the Department of Economics at Surrey in 1997 and was promoted to Reader in 2007. So Dr Paul Temple will introduce our main speaker and the vote of thanks at the end will be given by Professor David Soskis. Recently Professor Soskis has joined the LSE as the school professor to the government. Professor Soskis has been a visiting professor at Harvard, Yale, Stanford, Berkeley, Cornell and every spring semester at Duke University. Between 2004 and 2007 he was appointed centennial professor at the London School of Economics. He has provided advice to the OECD, the British Labour Party and the governments of the United Kingdom, France and Germany on questions of employment and education. We are enormously grateful both to Dr Temple and to Professor Soskis for being part of this evening's event. Finally at the end you will be invited upstairs to the reception in the Brunei Suite for some wine and canapes. To introduce Professor Driver I will now call upon Dr Paul Temple. Thank you. Well welcome everybody to the latest as I understand it in a whole series of SOS lectures as truly excellent tradition which I'm sure is going to be extended in this lecture today. And it's a great honour to be introducing this lecture which justly recognises Ciaran's outstanding contribution, not just I think to economics as a discipline, but perhaps more importantly to the ongoing policy debate that from where we stand today with the economy continuing to grind along the bottom is providing an ever greater challenge to those who care about our welfare. The metrics of Ciaran's achievements spanning well over 30 years are of course excellent. Five books, innumerable book chapters and on my count some 36 journal articles, many of these in journals at the very pinnacle of international recognition. The economic journal, the journal of business economics and statistics and a comment in the American economic review to which I should come to shortly. But of all these metrics it's the extent of Ciaran's collaboration in all this research activity that should provide him with the most satisfaction. For journal articles alone I managed to count over well over 20 co-authors. I am proud to be one of them. In our joint endeavours I always found him the most generous of colleagues, insightful, resourceful, always willing to exchange ideas but with just the merest hint of a scything wit underneath it all. I'm certain that I can extend my own debt of gratitude to everybody who has benefited from Ciaran's support, collegiality and friendship. If the surname happens to be appropriate then so much the better. I believe I met Ciaran more than 20 years ago. The circumstance was the Christmas party of the economic section of a body called the National Economic Development Office or Nedi as it was once dubbed and some of us might remember it. Two things were notable. First Ciaran was leaving just as I was arriving, doubtless because he was now a strong family man that he is still today to be perhaps with his young children but later perhaps getting down to the serious work again on one of the themes of his long research career. The second was that the economic situation at that time had a very, very familiar ring. The economy was booming, consumption had grown by nearly 8% in a single year and the current account deficit amounted to nearly 5% of GDP still I believe a post-war record and that together with rising inflation had become central policy concerns. The chief problem it seemed to many of us in the office as we called it was one of the competitiveness of the tradeable sector of the economy and especially something called non-price competitiveness. Over the years Ciaran convinced me that I was slightly out in that judgement. This was a symptom of a more deeper problem. The demise of the office a couple of years after I arrived we were told as an outdated institution, a relic of a bygone age of corporatism permitted the first of my own collaborations with Ciaran. His and several of the other contributions to a book called Britain's Economic Performance highlighted the deeper problem that it was the allocation of resources between consumption on the one hand and investment on the other. That was paramount or fundamental to understanding Britain's deep-seated economic problems. Uncertainty and attitudes to risk, managerial short-termism, capital market short-termism were just some of the ideas being tossed around that Ciaran's looked into in his long career. Over the years Ciaran has tackled this fundamental issue of the balance between consumption investment from many angles but always within sight. He was always willing to embrace the latest theoretical innovations as for example in real options theory where his joint work with David Morton and later others on the implications of uncertainty and the reversibility for understanding the determinants of investment broke new ground. It also prompted his own deeper philosophical consideration of the meaning of uncertainty and this brought a note in the American Economic Review which I know has given Ciaran considerable satisfaction. These were indeed promising lines of attack but there were several others. One of the most important was a belief that the UK in particular has suffered from a rather neglected problem, that of capacity shortage, something that has become rather worse than better over the decades and which was at the root of various macroeconomic ills. If there are any booms in investment spending in Britain's economic societal, they were always too little and too late and almost certainly in the wrong sectors and areas. I was one who was brought up in the belief that capacity shortage was bound up with low levels of economic development that Ciaran has managed convincingly to think to prove otherwise. As today we look on at the piling up of corporate profits and where the best thing to do seems to be and certainly for an easy life simply to return funds to shareholders and the capital markets we can I think reflect on the relevance of Ciaran's approach. His current concerns with the changing nature of the business corporation and its governance have great resonance today. As far as the implications of investment behaviour are concerned, Ciaran has always been interested in establishing the nature of the so-called spillovers that arise from investments of different kinds, the externalities, but I would like to mention here the spillovers that come from his own work. The need to generate new measures of capacity and capacity shortage prompted Ciaran's use of CBI survey data, every subtle nuance about which I can assure the audience he knows backwards. His work in developing survey based measures for serious empirical analysis has been substantial. Now, long after Ciaran helped pioneer the use of these surveys, their use has become part of mainstream economics. I could of course go on, but I have certainly no intention of delaying the feast. To return us to where we began, the most important feature of Ciaran's achievement has been in his ability to straddle both the world of economics as discipline and the world of economics as policy. Recognised contributions to policy both here and in Ireland, but in all this he has never ceased to be interesting. I have been unbalanced in my emphasis on Ciaran's work on investment and whatever the balance of tonight's talk be assured that this evening's lecture will be no exception. So without further ado, I shall leave you in the much more capable hands of Ciaran himself. Professor Driver. Thank you very much Paul for those kind words and also for the stimulating intellectual collaboration that we've had over the many years that we've worked together and right up to our latest book which you'll see outside. Thanks also to Pyle Gaglani Bart and others at SOAS who have organised this event tonight. So co-director, guests, colleagues, students, family and friends, it's a very great pleasure to give this inaugural lecture at SOAS. Normal academic output is quite properly bent towards caring about footnotes and caveats and referee comments. And it's therefore vital that we have occasions such as this, when we can speak straightforwardly about the important issues that we all care about. So let me begin with three simple points about the markets. Economists believe in diminishing returns, the idea that each added unit of input for each added unit you get less out. But we don't often apply this to markets themselves. At least since the 1980s, economists have argued that more markets and less planning is desirable with no mention of diminishing returns nor costs. The evidence base for this is not strong and there is some good evidence against. The econometrician Badi Baltaji writing in the Journal of Development Economics has shown that gains from trade and financial liberalisation while generally positive give the biggest gains to countries that are starting from a low base. So indeed markets too experience diminishing returns. A second simple point, market success stories are often built upon non-market inputs. Franco Millarbo, Bill Lizzonic, William Janeway have all explained how industries such as aerospace and semiconductors, the internet, biotechnology, green energy, nanotechnology and many others have all been the outcome of non-market forces and public support. Not just in terms of the finance that they've provided but often in terms of the initial prototypes. And a third interesting message in markets comes from the Nobel laureate Joseph Stiglitz. In his great book, Wither Socialism, he argues that the message on markets from the fall of the Soviet Union has been misunderstood. The point he makes is that the Soviet central planning models were a programme to mimic the textbook operation of markets, devoid of institutions. Markets in his view can only work with supportive institutions because pure markets don't carry enough information. Not as much information as we might think. Now markets do often bring liberty and economic gains. But the glorification of markets as an allocation mechanism has less to do with economics than with ideology. Marketisation, as one might call it, is often a metaphor for the privileging of the interests of capital over labour. And in this talk I want to look at a polar case of market liberalisation that of the UK which has transformed itself into an outlier among liberal market economies. The last major retrospective that I know of on this experiment was published on the 25th anniversary of the First Thatcher Administration. The editors, David Card and Richard Freeman remarked that Britain had become one of the most market friendly economies in the world. Beginning with Margaret Thatcher and continuing under John Major and Tony Blair, these reforms sought to increase the efficacy of labour and product markets and limit government and institutional involvement in economic decision making. So Card and Freeman correctly know two points. The continuity of the project across administrations and in fact one could say even further to this very day. And secondly and importantly the rejection of institutional supports. Now as noted earlier, in Stiglitz's analysis at least such marketisation without institutions could not be expected to work. And tonight I'll review the historical evidence on this question. But first I want to begin with some comments about the current situation. Today's economic debates, as anyone who reads the newspapers will know, are dominated by a clash of Keynesian and Pre-Keynesian ideas. Focusing on the question how much governments should counter private sector falls in output. And this important but maybe narrow question has taken a lot of intellectual energy. Some of us took a position in signing the Skidelsky letter to the Financial Times in 2010. My own views then were based partly on comparing all recent episodes of fiscal contraction, that's austerity if you will in Europe, with corresponding data on business confidence indicators for firms. Confidence hardly ever rises at any stage in a fiscal contraction. There's now I think growing support for the argument that UK austerity has been overdone. And attention is turning to wider matters such as the effectiveness of monetary policy and the need for a growth strategy. The chief economist of HSBC remarked six weeks ago that strategic investment by UK companies was being held back either by credit constraints or lack of confidence. It seems important to differentiate between these alternatives because if there is just a credit constraint it directs attention back to the banks. But otherwise we need a wider frame of reference. On credit it's not obvious that finance availability for business is the problem. I'm going to show you a chart using the Bank of England credit condition survey introduced after the financial crisis to track the availability and the demand for credit. So this is for small firms. The data series is short because the disaggregation into different size firms was only done from 2009. The chart shows in blue the credit supply and in red it shows the demand for credit. So we see that although the supply of credit has remained tight the demand for credit is also subdued and lending margins have also remained fairly constant. So while some companies may be credit constrained others are choosing not to expand for reasons other than credit availability. In fact the same is true for large firms at least over the last two years. We can get a longer term perspective using the CBI industrial trends survey data that Paul talked about earlier. This suggests also that small firms face no worse financial constraints in this crisis than previous ones once account is taken of business conditions. So this is the kind of chart that summarises and presents fairly simply a statistical analysis showing how various factors feed into manufacturing capital investment. The survey is only on manufacturing so we look at that. We find that business optimism short term optimism matters yes. We find that this crisis business optimism doesn't matter as much as it did before probably because short term confidence is treated more carefully once uncertainty is so deep. Financial constraints matter yes but not the interaction financial constraint in the current crisis. So finance constraints matter but they're not biting more than would be expected given the degree of contraction than in previous outcomes. Finance may not be the biggest problem even for small firms and we shouldn't forget this is for small firms we shouldn't forget that in relation to large firms they are now literally a wash with cash. As the head of the mergers and acquisitions at UBS remark last month balance sheets are flush borrowing capacity is extensive and debt financing is cheap. This reluctance by firms to spend cash partly explains our UK GDP has fallen faster than others. UK is shown there as the dark blue line which ends up in 2012 lower than any country except Italy. This is so despite a considerable devaluation since the start of the period relative control over monetary policy favorable government bond maturities and the fact that the UK is among the most market friendly economies in the world. Now these five year short comparisons reflect both the demand conditions that result from the austerity measures taken in each country and also the supply conditions that reflect the variety of capitalism. But the UK case is simpler than most because the extreme form of market capitalism in the UK combines demand austerity and a stunted supply side capability. In particular there has been a weak supply response to fairly robust business earnings. UK business investment has fallen by about a sixth since the start of the crisis. So here we see virtually flat since 2009. Growth fixed capital formation is commonly known as capital investment. And this pattern of a weak response is nothing new for the UK. In fact Harold Wilson's economic adviser Lord Baloch identified the problem as others had well before the market period began. The fear of excess capacity the dread of investing in new plant when the old would do is notable. This means that the limits of expansion are reached at an increasingly early stage of the upswing. But at least the problem then was recognized. It was talked about. The curious thing is that economists stopped talking like this in the 1980s. Criticism like this of business for its failings was set to one side as the mindset of economists and political theorists and policy makers changed radically in a market direction. According to this new view we'd all put the cart before the horse. Investment would follow market led reforms and was itself a very little use without such reform. I want to argue that this is wrong but first we must understand the new thinking both in its general philosophy and its economics. So here's how I conceptualize the change that happened in the 1980s. Prior to that there were institutions that sought consensus in the different parties particular labour and capital and reducing unit labour costs which fed through to productivity and exports in particular. Since the 1980s the emphasis has been on labour market reform aiming to increase the supply of labour to generate lower inflationary pressure. Which is seen as having the same effect the virtuous cycle of growth. The old had seemingly failed and it was in with the new. And according to this way of thinking, the new way of thinking, labour market reform was sufficient and technology policy was pointless. Since the labour unions would sabotage as the historian Nicholas Crafts put it, the realization of gains from technological change. There's no doubt that the old approach had many problems. But nevertheless you might want to ask, was there an alternative? Would successful corporatist policies have allowed more gain and less pain? Well the question was asked early on by the current Deputy Governor of the Bank of England Charles Bean. And it's a good question but the answer given I think was less good. The basic structure of the British economy was not conducive to Scandinavian type solutions. Well evidence based policy is it's true a new mantra. But even so you may think that this conclusion is a little hasty. Old hands among you may even be reminded of Gateskill's famous quote in a different context. My goodness it's a decision that needs a little care and thought. For one thing there is much that has changed over the years with the basic structure of British capitalism. It's turned out to be quite malleable in fact. And for another it's now recognized that varieties of capitalism can and do change within countries. I hesitate to talk too much about this in the presence of the world expert David Soskis and maybe Bob Hunkers in the audience somewhere. But we now know that the Nordic variety of capitalism has been quite fluid from a liberal system in the 19th century to very coordinated in the mid 20th century and less coordinated towards the close of the century. So it may not have been sensible to have charted a whole new economic strategy and a supposedly immutable basic structure. Even David Cameron now says that he wants us to be a little bit more like Sweden. So what about the economics? Not all of your economics so I've invented a little seesaw diagram here. A seesaw diagram summarizes the simplest version of something called the narrow model. And the idea here is to represent economist's contribution to the new way of thinking. Which embeds Keynesian ideas which were coming under attack in a more general long term market led model. And the centerpiece of this is a natural rate of unemployment called the narrow. Demand stimulus to raise employment will only work temporarily before the seesaw has to be righted by price inflation having to be counted and thus returning the economy to equilibrium. A permanent reduction in the narrow, permanent reduction in the natural rate of unemployment can only be achieved in this model by labour market reform to lower inflation. In the British version of the narrow in particular there is no role for other supply led policies such as capital investment or technology which are seen as the outcome of success on the labour market front. Now the narrow had of course problems. One problem noted at an early stage was that estimates of the natural rate had a habit of turning out to be whatever the last weeks unemployment figures were. In other words there's a ratchet effect whereby the narrow tracked the actual unemployment rate. Suggesting that demand influences were more persistent than originally thought and probably it will strike you there's a very good reason for that as unemployment rises, employment going down here. Then people will drop out of the labour market and that may very well result in a higher natural rate of unemployment rate that's needed to keep the economy, to keep the seesaw level. Now this criticism is not fatal to the model but it does make it harder to pinpoint empirically the structural determinants of the narrow and it actually makes it harder to identify labour market reform as the central issue. None of the academic articles, many hundreds if not thousands of academic articles on this have been able to make a convincing case for that. But nevertheless despite a lack of convincing empirical support the narrow approach was a phenomenal marketing success. In one shape or form it features in the textbooks from school to university and as one of the originators of the model claimed not so long ago, policy makers think along the lines we set down. They certainly do here in the Bank of England, they do in the Treasury. This was just ten years ago and there has been no great change since then. As Cardin Freeman noted there has been continuity across administrations. Even new labour would eight years of hundred plus majorities accepted this economics as immutable. So summing up the narrow ideas, UK economic policy since 1979 is a break with national bargaining or some might call corporatism. Capital investment is seen at worst as a threat involving hold up by the labour unions or at best as an irrelevance. Capital investment in the UK version of the narrow model cannot change the narrow. Only labour market reforms can do that. Labour market reforms will automatically solve other supply problems such as low investment. Now you may think I'm exaggerating a little. You may think that I'm exaggerating that there was no attention paid to non-labour supply side. Perhaps you think that the irrelevance of investment in technology issues just appeared in the textbooks and they didn't actually bother or concern the policy makers. But policy makers and policy oriented economists also took the idea seriously. As this quote from again the current deputy governor of the bank makes clear. So Bean argues the resurgence in investment will arise automatically. The real obstacles to a rapid return to full employment lie elsewhere particularly in the labour market. Capacity shortage doesn't justify policy measures discriminating favour of investment for there is no obvious market failure involved. So the claim here after ten years of thaturism was that labour market reform was not just necessary but sufficient. I believe Bean was wrong about automatic adjustment. As David Shepherd and I showed in an article in the Cambridge Journal in 2005. UK industry had by the late 1980s permanently increased its target capacity utilisation level reflecting a reluctance to invest. And another contribution in the Oxford economic paper in the same year. Paul and I with Giovanni Ogre showed that borrowing rates and profitability had moved in opposite directions for 20 years. Contradicting the idea of automatic adjustment where these variables should track each other. Bean's view wasn't an isolated example. The main focus of economic policy continued to be on labour reform. Senior treasury economists for example casually assumed that worker insecurity would be beneficial for the economy by putting downward pressure on the narrow. Employees feel that their jobs have become more insecure in recent years. This must be expected to persist and consequently to exert downward pressure on the narrow. But is this true and does it make sense? Well the first part of it is true. But what about the result? The result part hinges on the reinvestment of profits so that when you bear down on labour employers will begin to add capacity. Supposing however that capacity responds less to profits and is more responsive to uncertainty and confidence. Then perhaps the story is not true. In such a case worker insecurity may amplify uncertainty, undermine demand expectations, reduce training, innovation, investment and capacity. The result may be more inflationary pressure and lower growth. There is actually quite a lot of evidence in the literature to support this view. Here is a graph of labour share, the proportion of the national income that is taken by labour in the UK. It is certainly true that labour reform, insecurity and other features of the market area led to a lower share of labour in national income in the UK and in other Anglophone countries. And indeed the latest figures, if we extended the graph to today, would show a further fall with real wages having fallen 15% since the onset of the financial crisis. Such redistribution from labour to capital could only create growth if the profits were reinvested. Did this happen over the longer term? Did such redistribution lead to higher investment, innovation and growth? Well, here we have in black, we have the profit, profit rate and we have in red the investment. We can see that at least since the 80s higher profits have tended not to be reinvested. The two are trended somewhat differently. This is in keeping with the evidence mentioned a few moments ago that UK industry had implemented a step increase in its required rate of borrowing or its hurdle rate. Even as borrowing costs were falling. Now, some writers such as Philip Aggie on questions whether capital investment is a key variable for advanced countries today. I disagree and there's more on this in the book. But even if you think that, look instead at the research and development figures. So here we have a chart for G7 countries again and the British case is shown in brown orange, the thick line. Research and development isn't the only form of innovation. I hope that hasn't killed anyone. But it's generally the most expensive form of innovation and so it's quite important. And this shows that the UK has been falling while most other countries have been flatter in the case of Japan has been rising since the 1980s. We have next another chart this time of output growth. And here we have a long time series since the Second World War showing the cycle split by the red line showing the period after it that I have referred to as the market period. There is no growth rate miracle. It's true stop go of the early period has been replaced by something else while the stop go had some higher growth rates. It's been replaced by what economists call the great moderation but which is clearly characterized by quite a moderate downturns. Not also that the growth up to 2007 beginning of the financial crash is flattered by the weight of boom sectors such as banking. Not just banking but also the associated industries such as business services. On productivity it's true there may have been some one off gains from low hanging fruit after the 1980s and there would have been a rise in productivity. But not it seems it does not seem to have translated itself into an increase in the productivity growth rate. The best that can be said is that there may have been some convergence with other countries other similar competitor countries up until the financial crisis. But the period here still has to take account of the banking and the related sectors. Some people at the LSE have produced an article with some people previously at number 10 which claims that if you even if you strip out banking that the productivity in the UK will still showing gains relative to some other European countries. And I'm afraid you don't you can't just strip out banking because all and I have done some work which has shown that feeding into banking 25% of business services 25% of all business services fed into banking and business services were one of the fastest growing sectors of the economy. So these all these graphs and information on the supply side responses to the market era. Or of course aggregated up from thousands of individual business decisions. How have employers responded to labour reforms in the UK? Badly I think is the answer. So don't just take my word for it. A leading consultancy firm Mackenzie was happy to tell us that we needed to change costs over a decade ago. So the Treasury view that worker insecurity would lower the narrow doesn't seem to be the full story after all. Indeed a lower narrow seems in this reasoning to be quite compatible with a low wage and a vulnerable economy. Policy makers however at least those outside the DTI in the late 90s who I think of as the people who did understand what was going on. Never took on board the Mackenzie message and they remain puzzled by the lack of investment in the economy. One of those who expressed his puzzlement was Sir John Geave, the Deputy Governor of the Bank at the time. In this speech Sir John Geave, Deputy Governor and Member of the Monetary Policy Committee discusses the possible reasons behind the relatively low level of British investment in recent years. But confesses that it still remains a puzzle. Geave's question which remained unanswered in his article was how could such propitious circumstances, a three decade fall in macroeconomic volatility and historically high ratio financial surplus to GDP on precedented low borrowing costs, how could that have ended up the lowest whole economy investment right since the 1960s. Capital investment remained a puzzle for policy makers because they remained imprisoned in a world where markets provided all the answers. There was too little understanding of how firms actually make investment decisions and how it involves unknown unknowns. Let's have a think about this. Yn article in the Harvard Business Review this year reports on a large survey of American financial professionals, all qualified personnel. These are the guys that make the decisions, write the checks. The authors point out that no survey questions about the technical details of calculating investment borrowing costs receive the same answer from a majority of respondents. But this is quite puzzling. The rule is that investment should be pursued until returns equal borrowing costs. If you don't know your borrowing costs you can't do this. Well if they couldn't agree among themselves how to calculate borrowing costs there's a good chance they don't actually either care or no. It might reasonably be claimed that companies don't worry too much about borrowing costs because they adjust the borrowing rate in various ways anyway to get a hurdle rate that they use to authorise new projects. But this just compounds the difficulty. Slide for the economists here. The problem is we don't really know how much, how the adjustment is or should be done. Janice Eberle, who's the current US Assistant Treasury Secretary, suggested this correction factor about 15 years ago. And Paul and I have used it in some of our work. But this is theory. None of these terms are immediately available. You can't look up a book and find them. They have to be modelled or estimated and they all require more assumptions. And in any case this theory seems only able to explain empirically a small part of the discrepancy between borrowing costs and hurdle rates. In a study that Paul and myself published in the Cambridge Journal in 2010 we analysed perceived hurdle rates and borrowing rates of about 2,000 business units of large multinationals. 40% had set hurdle rates that were 5 percentage points or more different from their borrowing rates in either direction. Only some of which was explainable by theory or any theory that I know about. The takeaway from this is that investment appraisal cannot be conceived as a textbook exercise. There are concerns over the accuracy of borrowing rates, accuracy of hurdle rates and accuracy of estimated returns. But business must go on and the response then is often some conventional framework that is known to be wrong but everyone agrees on. And it probably won't do much harm because the right answer is only right anyway to the extent that you've guessed correctly what others are doing. Now note that investment confidence doesn't usually arise from market information alone. There are a lot of behavioural issues here we don't really understand very well. Where there's irreversibility and uncertainty coming together as with all capital projects it's more likely that a planning framework inside and outside the firm is needed to coordinate investment decisions. So, recall the Deputy Governor's observation that there was no obvious market failure attached to capital investment? I would argue not so. If there's any component to final expenditure without market failure it is certainly not capital investment with all of its uncertainties, its interdependencies and its irreversibility. One person who knew this in the 1930s was Keynes. Keynes stressed how fragile were the expectations that underpinned investment decision making. By the end of the general theory and especially in Chapter 12 he had put this in uncertainty generally at the centre of his theory using the term animal spirits to convey the sense in which forward commitments such as investment and innovation were based on a conventional or shared viewpoint that at certain times would break suddenly because there couldn't be any fundamental equilibrium where a forward market's worth thing. The implication accepted by many until the 1980s but seemingly forgotten now was that markets needed to be supported by government action and not just in times of crisis. There was a BBC interview with Stephanie Flanders last month in which Mervyn King said, referred to animal spirits as a phrase that I found it very hard to relate to until the onset of the financial crisis. Mervyn's eyes have been open to this issue but only recently. Keynes' main point was that investment is capricious. This means that it is the most important variable because as he put it, it's usual in a complex system to regard the cause of cause ends as that factor which is prone to sudden and wide fluctuation. But that hasn't been a plank of UK economic policy for a very long time. So it all adds up to a consistent picture. The view that there's no obvious market failure, market response will be automatic, the puzzle that this has not occurred, the unfamiliarity with animal spirits and the way in which investment is capricious. Some of you may argue that I underestimate the change in thinking that has occurred since the financial crisis. Certainly it's true that the financial crisis has acted as a wake-up call. CBI has returned to arguing for a balanced economy for the first time since the mid 1990s. The Engineering Employers Federation is sounding on occasions more like the TUC and several industrialists have come out in favour of an industrial strategy, arguing that we are on the wrong track economically. Well, we may be on the wrong track but none of this criticism of the market-led approach will matter much if it isn't given institutional form. We argue in the book for the establishment of a framework of national planning that was largely dismantled in the 1980s and without that framework seems to me none of these bits and pieces of objection or enlightenment that we've seen over the last short number of years are going to make much difference. I want now to turn to a slightly different theme. The market-led approach has had consequences not just for macroeconomics, not just for industry issues but also for the firm as well, for the institution of the firm. Marketisation ideas fit in with attacking the firm as an institution and in particular the firm's role in allocating capital to different uses and projects came under attack from those who believed that markets were always better than planning. We know from the theory of the firm that the firm is a planning unit. Shareholder value ideology believes that a pound left in the company is worth less than a pound returned to shareholders and recirculated through stock markets which are held to be more efficient allocations. Stock markets have been around for a long time. This one is Amsterdam in the early 17th century and since then ideas have evolved in the relationship between owners and managers and on how engaged financiers should be with the enterprises that they own. A mid 20th century view from Burl, of the Berlin means duo, refers to shareholders as supine and passive with the implication that they could be ignored. But all this changed in the 1980s. With modern shareholder primacy only financiers matter. Why is that? The reasons tend to change over time but the current fashion is to say they only matter because they are the only suppliers to the firm who take any risk. Workers and other suppliers are paid contractually so that in theory therefore what's known as residual income after these contractual payments are being paid and which goes to shareholders, all of this means that what's good for shareholders is also good for the enterprise. Of course to a large degree this is nonsense. Note that today's owners are generally uninvolved with the company. The shareholder value thinking means that their interests are nevertheless paramount. Corporate governance codes which have been proliferating since the 1980s are ways in which firms commit to shareholder value. They're supposed to work by increasing independent oversight of the managers. Sometimes this whole process of distrusting your managers is known as a dispossession idea. You're afraid that your managers are going to run off with your hard earned cash. So corporate governance codes being brought in especially since the 1980s in order to increase independent oversight of managers through the requirement for example to have outside directors on the boards. My empirical work fails to find any pattern of result, any general pattern of result from these codes. But there is evidence that increasing shareholder orientation in countries that are already shareholder friendly may not be beneficial but damaging. This is important for the UK which is more shareholder oriented than most including the US mainly because of the ease of hostile takeover in the UK. I've done some work with Maria Gwyddeish showing in a recent paper how attention to corporate governance codes which is a proxy for shareholder orientation is associated with lower R&D intensities when other influences are accounted for. This is actually quite a simple graph. The good governance theory of shareholder primacy which is that we should all have more oversight and so on so that the investors can be more reassured and will supply more finance. It shows the supplier finance moving to the right, the blue line there. But of course it's quite possible that we also get a movement in the demand for finance for R&D. Now, the blue arrow moving to the right may be true for Russia. But our work for the UK showed that such lower financial constraints, lower financial constraints that exist in the period resulted from lower R&D carried out. In other words, governance was operating through pressure on managers to rein in R&D spending. The issue here is that CEOs are increasingly playing the role of yes men to short-term investors. The ideology of shareholder primacy is now difficult to reverse. Executives are now incentivised to think of how much surplus they can transfer out of the company as quickly as possible rather than growing the firm. Financial institutions are happy to ask for more. There's been a trend growth in dividends and a trend growth in share buybacks. Even a Deutsche Bank survey in 2006 noted that CEOs were complicit in this in an attempt to raise earnings per share and thus their own pay. A nice way of representing what's going on was given in a study by Cambridge sociologists who showed how CEOs prepare for fund managers meetings by shedding their own identity. Executives come to transform themselves, their understanding of their actions and the images of the investors' desires. Autonomy is realised not against but through meeting the demand for shareholder value. What this means is that they go to these meetings shedding their own identity, suppressing their own knowledge of the firm and assuming the identity of the shareholder representative that they want to impress. And particularly important there of course is the issue of the information that they suppress because managers and CEOs have either the information or the capacity to elicit the information about new projects that they know that the shareholders may not want to hear. Now the answer to this strange situation we can turn to what might be done is surely not for more power for owners to dictate to managers but the answer should be for managers to be more responsible and creative. We've seen that the way things have worked out in a very short space of time, 30 years or so, is that shareholder primacy has led to effectively the loss of autonomy for managers and growing companies. Well the problem is the current thinking even in progressive circles tends to favour the idea of engaging owners. So here's a question for you. What do these people have in common? Well I thought some of the feminists among you were going to answer me. Which actually isn't quite true because Professor Matsakato is down there sharing words with you. But that wasn't what I had in mind. They've all produced like-minded reports and interventions on these issues. Some of the proposals I have to say quite progressive, Will Hutton for example, argues that long term company planning is impeded by the takeover laws and he almost goes as far as saying that they should be changed. But central issue for many of these reports is whether owners can be prodded to be more hands on and engaged. And this goes by the name of stewardship. In my view this is unlikely to work and is a distraction from real reform. Diversity of ownership, yes, but I don't think that stewardship is a realistic option for most circumstances. And the problem is really one of information. Even existing private equity groups fail to engage seriously with many enterprises because the information asymmetry and information load is simply too high in relation to the capacity of their oversight teams. And in any case many owners don't want to be engaged as Lord Minow found out some years ago. So the stewardship idea I think sets up unrealistic expectations of trustees and monashers. Whose job should really be to bear down on fraud rather than to engage with strategy. The rule of firms, on the other hand, is to act as a search engine. Is to act as a search engine for new ideas and to motivate employees. And this can't be done satisfactorily by outsiders any more than an impact agenda can be forced to turn universities from above. There is a progressive agenda that is more radical and thus often not heard about. And it's a form of bottom-up governance. Here we insist on the idea that strategy decisions should remain with the firm. Accompanied by steps to facilitate this and to guard against abuse. So we have here restrictions on takeovers. These are necessary, as Hatten has said, in order to ensure long-term planning, in order to give a career structure within the firm where people can remain for many years. We need some form of monitoring. If it's not going to be external, it has to be internal. So we have to have some mutual monitoring by middle and senior managers. A good form of monitoring is seats on the board for employees. And we can, of course, have to persuade companies to adopt this form by a tax system. Which favours retention and organic growth over takeovers. We need a new approach to incorporation, which would allow a voluntary stakeholder model with favourable concessions for those opting in. And a national planning system to coordinate the plans, at least if those opted into the new firm. These new arrangements would be voluntary. New forms of governance cannot be realistically be imposed. And in any case, not every firm needs the same form of governance. These proposals would ensure that firms took account of the wider and longer term interests would receive some favourable treatment perhaps through the tax system. And these ideas have some precedence. Other countries allow different forms of board structure. In France, for example, you can have a one-tier board or a two-tier board, or different voting arrangements for boards and so on. So we don't have to stick with a unitary model for how our governance system ought to work. Well, I'm moving on to summing up. The UK model of capitalism has emphasised labour market reform and neglected other supply-side issues, investment and innovation. These problems were compounded by a corporate governance regime that boosted shareholder orientation at the expense of organic firm growth. Reform will require changes to the takeover rules and a voluntary form of stakeholder model as part of a national bargaining framework and coordinated decision-making. There's a lot going on at the moment but we can perhaps have some time to do that later. Let me thank the market economy, and Palgrave in particular, for making our book available and hope some of you will enjoy pursuing the issues further. Well, it's a great pleasure for me being at SOAS and at Curens inaugural board. Now we've come to the end of his lecture, which I think is, I'm going to explain why, important and inspiring. I should say that, and I meant to remind you, that will shortly be a reception in the beautiful Brunei Gallery. I'm going to say that I'm going to remind you that will shortly be a reception in the beautiful Brunei Gallery and in the five minutes between the end of Curens lecture and the commencement of the reception, I hope no more than that, I want to move a vote of thanks to Curens. I assume when I'm moving a vote of thanks it must be to Curens but if that's a great relief. Let me explain why I see as so important this lecture and more generally the work which Curens has been doing for a long time and culminating in this splendid book with Paul Temple, The Unbalanced Economy. I will talk as though a lot of people I'm talking to are not professional economists to try and give some impression of just how important this work is. The way professional economics has moved in the past 25 years or so, among people who regard perfectly decent people, decent human beings for the most part, mainly men, has been one which has really focused on the notion that the big problems with Britain are labour markets are inflexible, they need to be made flexible and companies are inefficient and slowly you need to have a system of corporate governments where financial markets forced companies to change the first hint of losses and scratch the surface of most economists. There's not a crazy neoclassical saying that. Scratch the surface of most economists and there will be a grudging acceptance. Yes, that's actually unfortunately had to be done. I know we're not that right but yes she got quite a lot of things right. Now Curens is not just one of my closest friends, he is, but he's someone who speaks with a remarkably independent and powerful voice, indeed in my view he's one of the most, the very most significant unorthodox economists in the UK today. And indeed he's increasingly persuaded many more orthodox economists to take his pretty forceful analysis and objections to the way in which current orthodoxy works seriously. In my view Curens' major point is that we have moved away from thinking about companies and companies as relatively long-going organisations where there are many employees with long-term, skilled employees with long-term commitments to the company, managers with long-term commitments to the company, companies who attach real importance to investment, who attach real importance to research and development. His real view is that this picture of the importance of the organisational stability and long-term perspective of companies has been completely pushed aside. His arguments have been based, I think there's one reason why, one reason why I find his arguments very powerful in going through them is they're based on a huge amount of very detailed research on how companies work. He knows how companies work. He knows a whole number of industries well. And this puts him quite apart from the way most economists think. Most economists just have statistics and do econometrics. Curens really knows a lot of the facts. I think that's what has given him the growing influence that he's had in his work. Well, I actually think having, I'd rather more to say, but I realise I'm just going to be repeating things that Curens has said. I think what's obviously got his most interesting has been his move to the way in which he ended up the talk to the notion that you actually have to have a cogent activist policy which is directed to a way in which companies operate, which is directed towards changing corporate governance to give companies an incentive to take a longer-term perspective, to give them an incentive to take investment and research and development seriously, to give employees within companies a much more serious say in the way in which companies operate so as to tie them into longer-term relationships with companies and that doing those things is going to require at least for us to start to think back to the way in which Paul started his introduction, the way in which we used to think a long time ago about high investment planning and those sorts of things, forbidden language nowadays as it's been, actually operate. So, I hope I have given enough reasons to move a vote of thanks to Curens for his splendid inaugural and to persuade you to vote in favour of this motion. Thank you very much.