The idea of the life cycle is widely applicable, from products and industries to something as simple as a lighted candle, or even something as complex as a whole economy. It depicts four distinct stages: start up, growth, maturity and decline. The early stages are slow with typically many false starts, but once a particular approach is established, growth takes off. For example, the factory system in 18th century England. During this growth phase innovation dominates, with new technologies applied to produce genuinely new products with more features and better performance. In due course, generally accepted standards of performance emerge as growth slows into maturity. During this critical transition to maturity there will be a radical reassessment of growth projections and fierce competition will force the weakest to withdraw.
During the ensuing, relatively stable mature phase, the emphasis of innovation tends to move from product to process, where innovations are largely aimed at reducing costs and improving efficiency. That phase comes to an end when either a completely new technology takes over or some other structural change eliminates the existing; maybe something like globalisation. Again the reduction in future expectations will cause intensified competition and force out marginal units.
While life cycle models have been used primarily for the analysis of products and industries, their application to whole economies appears instructive. All the basic system characteristics apply without problem.
Britain, being the first industrialiser, has for long been in the stage of decline relative to other economies. In 1914 Britain owned 45% of the world’s foreign direct investment, but has been in decline ever since. America’s share of foreign direct investment peaked at 50% in 1967 and is now less than half that. Today China, including Hong Kong and Macau, has a share of around 9%, and is growing fast. American manufacturing productivity gains also started to decline during the 1960s, averaging 2.8% per annum through the 1960s and 70s, well behind other manufacturing economies such as Germany with 5.4%, and Japan with 8.2%. American R&D expenditures started to decline in the mid-1960s as management turned their attention from strategic investments to short term, low risk quick payback projects.
Manufacturing in Britain has for decades been a declining proportion of GDP as successive governments have looked to the financial sector as their salvation and focused on satisfying the needs and wants of the City of London, rather than the real economy. With the explosive growth of trade in derivative and synthetic financial ‘products’, the sector has grown disproportionately large, has become ‘too big to fail’, and has come to dominate government economic action. Britain has clearly become a post-industrial economy. The Chancellor’s claim to be business friendly applies only to the synthetic, not the real. Similar processes are active in the United States.
By contrast, Japan and Germany have retained their focus on the real economy, manufacturing and distributing physical products, concerned to maintain their position in terms of industrial, rather than purely financial, criteria. China, India and others are still in the relatively early stages of industrialising their economies, with dramatic growth still to be gained.
The processes of globalisation are aided by the open access to free markets ideology, most enthusiastically supported by Britain and the US. Yet ironically, globalisation will ensure the continued relative decline of those economies, in the face of competition from the industrial, and especially, the industrialising nations. If that progression is allowed to continue, relative decline will, in due course, become absolute and the post-industrial waste could become irreversible. The critical components of that waste are people. And they come in two distinct categories: those who could contribute to the real economy but for whom there is no work; and those who are employed in the synthetic sector who could be doing something socially useful in the real economy.
Both give grounds for extreme concern. Neither category is necessary; both have been created by Keynes’s ‘madmen in authority’ listening to ‘voices in the air’, ‘distilling their frenzy from some academic scribbler of a few years back’, one such being Bob Diamond’s ‘favourite economist’: the grievous Milton Friedman.