Tuesday, 30 March 2010

Small Is Big In The Post-Credit Economy

Phillip Bond of ResPublica made an interesting comparison on Newsnight between the current economic situation and the Industrial Revolution. He says we lack the decentralised application of capital and encouragement of local entrepreneurs that drove the industrial revolution, although we do have (in the internet) the equivalent of the old periodicals that allowed everyone around the country to learn what worked and did not work in other industries.

This comparison is a little thin. There are lots of theories as to how the Industrial Revolution(s) were unleashed in Britain so successfully (putting aside the 'dark, satanic mills' of course; and child labour; and pollution; and the spread of disease through overcrowding in the cities - apart from those things, the revolutions were a success). But all the theories make Phillip Bond's comparison more instructive in terms of the economic drivers he left out,  rather than the few he mentioned. 

The UK is not in the midst of plundering a massive colonial empire to fill the coffers back home. The banks tried the modern equivalent, but quite literally failed, leaving the economy desperately short of capital. There is not a vast horde of 'cheap labour' - i.e. convicts, slaves and droves of peasants forced off agricultural land. Though there are many employable people out of full-time work who are looking for opportunities. There is little manufacturing that might be improved by inventions that vastly increase productivity. And Britain is not in transition from a low-tech agrarian economy to a relatively low-tech industrial one, where yesterday's farm worker can readily operate any machine without hours of training and health and safety supervision.

In the quest for sustainable capitalism, I suspect Britain will go through another cottage industry phase - a pre-Industrial Revolution, if you will - in which people come to grips with this new post-credit, post-capital reality. The trick is to find small opportunities that pay enough, rather than giant opportunities that pay a fortune. Some of the ensuing small businesses will no doubt grow very large, and eventually the whole cycle will repeat. But even if the pundits are right in saying these cycles are happening faster and faster, it will take a decade to repair the public finances. Life is what happens while you're making plans. For examples of the sort of small opportunities I mean, take a look at Fab Labs (actually invented at MIT): 
"Fab Labs give people the tools they need to create technology, to be creative and make the stuff that they can't buy in the shops. Manchester led the first industrial revolution and now it is at the centre of a new industrial revolution where anyone can make anything, anywhere using digital manufacturing."
But even low cost opportunities require funding. So where is the diffusion of capital to meet these diffuse capital requirements? 

All 3 would-be chancellors last night pushed banks to "lend" more money to small businesses. But what's needed is investment - venture funding that can be lost outright - not credit that operates as a drag on cashflow that would be better reinvested in the business. Trouble is, neither taxpayers nor banks can afford that sort of support in the next few years. Even venture capital funds, which generally raise money from institutions and the wealthy, are finding it tough.

Start-ups have generally always been funded from a lot of different sources: owners' savings, seed capital from angels, venture capital and deals with suppliers. In times of scarcer capital, these sources are going to fragment further, so that it will take many more capital providers to service each opportunity. Similarly, the lack of returns on bank savings deposits and other investments may mean that small venture funding becomes a more common investment amongst those with surplus cash. Already we've seen that at Zopa. Other internet platforms could help in reducing the complexity arising from many sources of capital chasing the same opportunity. A great example are those that enable invoices to be paid early, so that small suppliers can afford to sell to large companies, which are commonly extending the time they take to pay their bills.

After all, necessity is the mother of invention.

PS: It was interesting to see some of these themes in the second part of Paul Mason's Newsnight piece on Britain's economic problems, particularly the idea that we should focus on opportunities that pay 'enough' rather than a fortune - optimising rather than maximising profit.
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