Meet the new economy, it’s the same as the old one

Companies such as Apple, Facebook and Google are lauded as new economy heroes but their growth isn’t benefitting society

At first glance, few people would question the mojo of a world economy being tugged along by new economy titans such as Google, Apple, Facebook and Amazon.

These four upstarts have revolutionised the way we work, communicate, consume and relate to each other. By any standards these are energetic, innovative companies that are reaping handsome rewards for doing what they do extremely well. Yet these companies lauded as new economy heroes are actually much more ambiguous characters.

The strength of the individual companies is not matched at the level of national economies, where growth refuses to return, well-paid jobs for the middle classes are lacking, and competitiveness and innovation flag. While financial benefits have flowed to shareholders and top employees from their undoubted commercial achievements, those benefits are not only largely unshared, they have also come at cost to the rest of the population.

How has this come about? For a start, there is something wrong with the story of Steve Jobs, Sergey Brin and Jeff Bezos as lone entrepreneurs taming the frontiers of innovation through individual persistence and vision alone. Of course, they could not have succeeded without possessing those qualities. But the account airbrushes out the enabling role of the state.

In their paper the Risk-Reward Nexus, academics William Lazonick and Mariana Mazzucato note that the algorithms used in Google’s search engine and some of the technologies in the Apple iPhone came out of publicly-funded rather than private research. The internet, the enabler for all four companies’ expansion, was also the product of government, in this case defence and research spending. So was nanotechnology.

Putting this a different way: the risks and rewards applying to the different economic actors in the innovation process are out of sync. Increasingly the benefits disproportionately accruing to a few opportunist companies and venture capitalists that have positioned themselves under the public innovation tap, after the early risks have been taken.

Good luck to them, you might say – that’s capitalism. And it is, provided that the winners use their luck and smartness to sustain the overall innovation architecture. But too few of them do.

Jan Rivkin and Michael Porter have stated that competitiveness means not only competing successfully in the global economy, but also sustaining high and rising living standards for the average citizen. That means being innovative, building supportive rather than adversarial supply chains and ceasing to lobby and demand exemptions and tax breaks, while also calling for continuing government support for R&D.

The justification for companies scooping the rewards of public investment in innovation while minimising their contribution to it, is that they maximise returns to shareholders. Until the early 1980s many company executives followed a strategy of “retain and reinvest” – using profits to pay dividends, but also to finance expansion and R&D that in the long term would benefit employees and suppliers, as well as shareholders.

When the ideology of shareholder-value maximisation took hold in the 1980s, resource-allocation switched and all corporate resources are now devoted to increasing earnings to boost share prices. Payments to shareholders went through the roof. In the decade 2001-2010, Lazonick calculates that S&P 500 companies distributed $1.9tn in dividends, equivalent to 40% of their combined net income.

Innovation guru Clayton Christensen notes that in seven recoveries from recession between 1948 and 1981, the economy took six months to return to pre-recession employment levels. In 1990, the recovery took 15 months; in 2001, 39 months. This time the gears have been grinding for more than five years and a return to previous peak performance levels in countries such as the UK is still a long way off.

The trouble is that after three decades of outsourcing and cost-cutting the US no longer possesses the means of creating the next generation of innovative products, according to Gary Pisano and Willy Shih. Amazon couldn’t manufacture its Kindle in the US if it wanted to. The UK, skewed towards the bankrupt financial sector, is even more hollowed out. In the 21st century, the UK’s largest manufacturing sector is food processing.

The idea that there is something economically and socially distinct in fast-moving, internet-enabled, new economy companies is mistaken. Being smart and innovative is important. But if they are not creating what Umair Haque calls “thick value” – new real economic value that is not just captured from customers and suppliers – then they are part of the problem, not the solution.

If they don’t spend their corporate cash to devise new products of real value and create good domestic jobs, it’s not because they can’t but because they don’t want to. Despite its monumental margins, Apple has only just started to create manufacturing jobs in the US and has attracted criticism for working conditions at its manufacturing supply plants in China.

Facebook and Google are accused of extracting profit by exploitation of personal information. While Amazon pays UK warehouse workers less than a living wage (albeit with some shares and a pension). All four are under fire for tax arrangements that minimise their contribution to the social and economic infrastructure.

Unless and until the incentives governing the allocation of corporate resources are altered to favour the broader society rather than shareholders alone, the refrain won’t change. Meet the new economy, same as the old economy.

Simon Caulkin is a fellow at ResPublica

• This article is an edited version of a piece published in the Virtue of Enterprise: Responsible business for a new economy, a ResPublica essay collection arguing for business to be more responsive to social and consumer needs in a new era of accountability and transparency

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