David Willetts explains the government's role in supporting society through public funding.
What calories tell us about fairness between the generations
It is a great honour to be invited to give this lecture. It is an opportunity for me, a free market Conservative, to explain the useful things Government can do. Especially when this government is having to get a grip on the public finances, as anyone would with the deficit we inherited, there is a particular need to step back and be clear about what Governments can do and why. I am not going to start with abstract principles and then deduce the consequences for public policy. That sort of argument does not persuade people any more, if it ever did. Instead I am going to start by counting calories.
Calories are a universal measure which enable us to get to the human fundamentals behind calculations of money, tax and benefits. Anthropologists have studied primitive tribes of hunter-gatherers in New Guinea and the Amazon, measuring the calories individuals consume as against the calories they obtain by hunting and gathering during their lives. When you are a young child you are a net consumer of calories, as any parent knows. Then as the children grow older they do some hunting but still can’t meet their full calorie needs themselves: mankind goes for diverse food of high nutritional value which is quite hard to obtain so you need a long time learning how to catch fish or which berries are poisonous. Then in adulthood you become a net producer of calories. As their physical powers decline older people become once more net recipients of calories collected by others. So out in the Amazonian rain forest at this moment a 40 year-old hunter is probably carrying six fish back to his tribal encampment thinking he has done a hard morning’s work but after he has given two fish to the kids and two more to his elderly parents there will only be two left, one of which he will give to his partner though at least she will provide in return for the sweet potatoes she has been collecting.
Experts like Ronald Lee also calculate the ages of these transitions to being a net producer of calories and then back to being a consumer. They reckon that in these tribes you become a net producer of calories at around the age of 16 to 18. You are a net contributor through your adult years becoming again a net recipient of calories obtained by others when you are about sixty years old. These are ages which we might recognise.
This observation about tribes in the Amazonian rain forest therefore tells us something rather important about the modern welfare state and its roots in fundamental features of human existence. Most income tax is paid by people in middle age and publicly financed services like education health care and benefits go particularly to people aged under 16 or over 60. During their lives each member of the tribe of hunter-gatherers is both a contributor and a recipient. On average when they die the transactions over their lives should net out at perfect balance. At any one moment you might be paying in or be a dependant but overall it balances. This is what holds human society together: if we were born able to fend for ourselves from the first day then none of this would have developed. This cat’s cradle of exchanges and obligations is, at any one moment, a shift of resource from one generation to another. But equally, if we look over the life cycle, it is how any one generation can spread its own consumption through its life.
The family is the most important of these exchange mechanisms, though it matters to us all far more than that. We do things for our children and our elderly parents because we love them. But in doing so we are also protecting a network of reciprocal altruism by which we hope we will get support from our children when we are old. It is also the logic of the modern welfare state. At any one moment it can look like a device to take from people earning a lot to those with less. But on a longer view it enables us to shift our individual consumption to times when our earnings are less. But the exchanges across the generations can also be thought of as a mechanism for us to reallocate our own income over time. A toddler cannot go into a bank and borrow the full amount for their education because as the economists would say, capital markets are imperfect. We need the welfare state to do some of this for us.
This is the logic of our reforms of higher education. Students do not pay fees upfront: unlike many countries we provide loans for this on terms far better than commercial. In fact it is more like a requirement to pay back through a 9% higher rate of income tax on earnings above £21,000. In general going to university does boost your earnings so it is reasonable to expect graduates to pay back out of their earnings. If they are in low paid jobs then they do not pay back. It is a good example of the smoothing of income and spending over the life cycle which is just what Government can and should do.
In his classic paper on pensions the Nobel prize-winning economist Paul Samuelson said, “Giving goods to an older person is figuratively giving goods to yourself when old.” The modern welfare state is part of this reciprocal relationship. That is why everyone gets understandably angry if they think people who have not paid in and not participated in the network of obligations are claiming the benefits. These networks extend beyond families to wider groups. In my simplified example everyone had the same life course but actually there are many uncertainties - you don’t know exactly when you will be unable to hunt any more or exactly how many children you will have. It is efficient for these risks to be pooled. And by and large the nation is the biggest pooler of risk we have got. Provided we are clear about the risks we are expecting Government to take on and why, the welfare state can carry out a very valuable function indeed.
The trouble is that welfare is an expression which is half-American and half-English and this generates a lot of confusion. The idea of the welfare state was originally popularised in Britain in the 1930s, as a contrast with what was called the Nazi warfare state. Welfare then meant wellbeing so the idea was that British governments saw their role as being to serve their citizens whereas Hitler used the German people as cannon fodder to fight his wars. But in America welfare has the more specific meaning of means-tested non-contributory benefits which you get without paying in to the insurance pool; they are in contrast to contributory social security which has much more popular support and legitimacy - and gets far more public spending. The danger is that all the negative associations which in the US go with a specific form of means-tested welfare payments are attributed to a far wider range of public programmes which we have in every modern economy including the US itself.
Sometimes people fear that we are not committed to maintaining the basic principles of the welfare state with tax financed education and health and pensions. Let’s be clear: those programmes of the welfare state which shift spending between the different stages of the life cycle and pool shared risks make sense and Conservatives therefore back them. They are part of the exchange between the generations of which we can be proud. As I argue in my book, The Pinch, the contract between the generations is fundamental to society be it a tribe of hunter-gatherers or in the modern welfare state. There is a Conservative case for the welfare state. But of course, the welfare state always needs reform - to reflect our values and changing circumstances. It’s why we have to raise the pension age as life expectancy is increasing so fast.
How economic growth changes things
The classical political tradition assumes a static world without economic growth. But if there is growth you can argue that the next generation is going to be better off than us and so our obligation to help them is weakened. We can load more obligations onto future generations confident they can take the burden. I do not agree with this approach. Disraeli was right when he criticised a opponent because “He seems to think posterity is a pack-horse, always ready to be loaded.” Politics falls into disrepute when citizens think Governments are just shifting problems out into the future and never tackling them today: this Coalition can be proud of our long term reform agenda.
We can hope that future generations will be richer than us but this does not excuse us from our obligation to them. We enjoy the fruits of investment by earlier generations who were poorer than us and we have a similar obligation to generations coming after us. The Victorians did not build their sewers and public buildings out of cheap plaster because we would be richer than them and could afford to do our own rebuilding. Instead they built for future generations despite hoping that future would be richer than them. As the African proverb has it, “The world was not left to us by our parents. It was lent to us by our children.”
When we were working out the science budget in the last comprehensive spending review I appreciated the argument that we were beneficiaries of a great tradition of British scientific enquiry and had a duty to pass it on in good shape to the next generation, and not to be remembered as the generation that undermined it. It is also of course one of the most powerful reasons bringing down the deficit.
We are beginning to see a role for government. It helps to sustain the contract between the generations. This contract provides the mutual insurance pool from which we can all draw. And as we have benefitted from the extraordinary engine of modern economic growth we have an obligation to ensure it still works for generations coming after us.
You can think of this obligation not in terms of income but in terms of assets. We have an obligation as a minimum to maintain the assets of our society - natural, physical and human. That was Margaret Thatcher’s famous observation that, “we do not have a freehold on the Earth only a full repairing lease.” So growth achieved by consuming not investing, and by destroying the environment rather than improving it, is no growth at all. This line of argument leads economists like Dieter Helm to argue for a full measure of assets so we can check we are indeed growing them not destroying them. It’s why sustainability matters so much. The work you do here measuring climate change is of course an important part of that.
The challenge we face is very stark. What if we are not passing on to the next generation valuable assets they can develop but liabilities and costs which will burden them? One very vivid measure of this is the £1 trillion of government debt that has now accumulated - roughly half of it during the 13 years of the last Government. There is only one right way of easing this burden on future generations. We must get a grip on public borrowing and get the economy growing.
There are few things more important we can do for our future and for future generations than get the real economy right. Whilst we over-estimate the power of Government to change things in the short term if anything we underestimate what it can do in the longer term. This is what industrial policy is all about and in the rest of this lecture I want to set out how the Coalition’s thinking has developed here. We are having to do so much to reduce the budget deficit that the scale and ambition of our developing industrial strategy is being overlooked. But both parties in the Coalition understand the importance of rebalancing the economy to investment and exports away from borrowing and domestic consumption: it is a crucial part of our shared mission.
Raising the growth rate in a mature Western economy is one of the hardest challenges facing any Government. That is why it is so tempting to believe that a boom fuelled by borrowing represents an increase in the underlying growth rate. This is an illusion to which Governments succumbed in the 1980s and again in the last decade. We will not fall for such mistakes again. That is why we are raising standards in education and skills. That is why we are tackling the financing of companies especially small companies where classic models of bank finance appear to have broken down, not least because of barriers to entry facing new banks. That is why we are clearing away the barriers in the jobs market or the planning system for example which obstruct growth. This is Government getting out of the way. But we cannot just remove barriers - we have to be builders too. This is where our industrial strategy comes in.
We must not be crippled by a fear that any industrial strategy cannot possibly work because it must mean repeating the mistakes of the 1960s and 1970s. I am the proud possessor of a copy of the 1965 National Plan. Looking at it now one is struck by the extraordinary and absurd detail of the calculations for the future performance of particular sectors. This was sheer hubris. Nobody can or should plan like that. That is why I entered Government assuming that industrial policy begins as governments trying to pick winners but soon becomes governments rescuing losers. Vince Cable and I agree that in an economy threatened by low growth Government can and must deliver an industrial strategy. Michael Heseltine is helping us do just that. Most of what we are proposing is what they already do across America.
Today I want to focus on a crucial part of that, our strategy for high tech growth, drawing on my particular responsibilities for science and innovation. Promoting the technologies of the future has already emerged as one of the crucial themes of the review of industrial policy launched by George Osborne in the Budget. There are three elements to what we are doing.
1. Securing the research base
We start with the securing the research base. It benefits from ring fenced cash protection for current spending of £4.6 billion a year over this Parliament. I detect an anxiety that we are not supporting blue sky research but let me be clear that we do. The Research Councils distinguish between responsive mode grants which start with an approach from a researcher and challenge grants which are in streams of funding specifically for national and global challenges, though of course here smart original ideas are rewarded too. Across the research councils overall, approximately two-thirds of spending is on responsive mode and one third is on directed mode.
The Government can bear the big risks of scientific innovation, which are too great for any individual company. It is another example of that risk pooling I talked about earlier. Then, as we lower the risks of new technologies, companies step in and do their bit.
It is right that scientists should range freely and do blue sky research. Civilised advanced societies should support that sort of activity. But there are utilitarian arguments too. Even the purest blue sky research is likely to end up with practical impact, though nobody can predict what that will be in advance.
2. Creating stronger links between academic researchers and business
We cannot just support pure research. Our second task is to make stronger links between academic researchers and business. Cutting-edge science often requires technological developments for research and these can themselves generate new applications. For example, the fundamental advances in DNA have both driven and depended on technological advances in genetic sequencing. Britain has great strengths in this area with firms like Solexa Sequencing, now part of Illumina, and more recently Oxford Nanopore. Both of these businesses are spin offs from academic research which received public funding.
We are now broadening the training of researchers so they have more opportunities than ever before to experience the world of business. The Research Councils have increased their investment in collaborative training which involves private, public or charity research partners by a fifth.
Earlier this year, for example, I announced around £60 million of investment for the BBSRC’s Doctoral Training Partnerships, which will give the next generation of researchers an opportunity to take up professional internships in business. Today I can announce a new programme of manufacturing fellowships that were first outlined in the Growth Review. The EPSRC has initially awarded four prestigious fellowships to scientists making the transition from industry to academia: from Qinetic and IBM to Exeter, BAE to Cranfield and Talecris Biotherapeutics to UCL. Each fellow will lead a £1 million research programme with clear commercial potential, lending their business expertise to enhance collaboration with the science base. EPSRC will also be funding additional manufacturing fellowships, to enable business access to state of-the-art technologies.
3. Systematically identifying new technologies
These initiatives quite rightly encourage individual initiative but we also need a systematic look at the technological advances on the horizon. That is the third element in our policy. In July 2010 we published a Foresight report, Technology and Innovation Futures: UK Growth Opportunities for the 2020s. That report revealed a clear pattern with technological advance in four areas neatly summarised as BNIC - Bio, Nano, Info and Carbo which I set out in a speech in January. They provide a useful framework to make sure we do not ignore major new technologies. One of the most exciting developments is the convergence of technologies, for example linking advance in information technology and in biological sciences - dry and wet coming together. One reason why we need to sustain our broad science base is so we can make these connections. And we must never overlook the role of the humanities and social sciences here. So for example rapid advances in haptic technologies - using touch-based interaction - require us to understand human behaviour as well as physical science.
I can report today that I have commissioned the Government Office for Science to review and refresh their earlier report: it should be available in the summer so it can feed in to the development of our industrial strategy. It would be surprising and indeed rather worrying if this new report were radically different from the one we published two years ago - it would suggest we had no reliable handle on developments in science and technology. But we have to remain alert to new developments.
Public funds are inevitably limited so exercises like this enable us to fund the work with the greatest potential. So the Technology Strategy Board then assesses which of these technologies are likely to have the great commercial potential and backs them in particular - energy efficient computing and energy harvesting are particular priorities.
In another priority area, synthetic biology, I’m pleased to make two announcements. The TSB, together with the BBSRC, EPSRC and ESRC, is investing up to £6.5 million to encourage businesses to explore new industrial applications for synthetic biology. Separately, the EPSRC is leading on a £6 million grant to a consortium comprising Imperial, Cambridge, Edinburgh, Newcastle and King’s to develop a new platform technology for the production and commercialisation of new products.
One of the many reasons why people are sceptical of industrial strategy is the false dawns promised as new technology developments never quite happen. I do wonder why we aren’t yet flying in to work on our personal jet-packs, having seen Sean Connery’s James Bond use one in Thunderball in the 1960s. But sometimes we can deliver what used to be science fiction - those automatic doors in Star Trek slid open because stage hands operated pulleys but the technology soon caught up. Every week I get to see the most amazing advances in our laboratories and research labs which give me confidence we can remain at the cutting edge of new technologies.
At Fylingdales on the Yorkshire Moors we can track an object the size of a tennis ball 3,000 miles out in space. Earlier this month I opened the new robotic labs in Bristol which are probably the largest and most sophisticated in Europe. A robot picked up a packet of crackers. Not much new there I thought, until it was explained that it had picked the packet up to get it in its eyeline so it could read the name on the packet and respond to instructions from the user to collect a particular item.
Two weeks ago I attended the handover of a piece of British and European kit for the James Webb telescope so sensitive that when it is in orbit, it could see the light of a single candle on one of the satellites of Jupiter. We are sometimes so cool and sceptical that we lose our capacity for wonder at what science and technology right here in Britain can achieve. Our Foresight reports enable us review these developments systematically.
Government playing a creative role to drive innovation and generate output
All this adds up to Government playing a creative and constructive role working with researchers, universities and business to promote innovation and achieve the greatest possible economic value. Increasingly I think of this less as the passing of a baton in relay race and more as a partnership in which both Government and business and other players are all active at the same time. With my combined responsibilities for universities and science all within BIS we can harness the power of Government to play a far more constructive role than I would have envisaged two years ago. It is what they do not just in Germany or South Korea but in the USA too. We should not let myths about free market America inhibit us from doing the same here.
There are some basic steps we can take which are far more effective than I imagined two years ago. So here is Industrial Strategy 101. We set up a leadership council probably co-chaired by a BIS minister and a senior industry figure in which researchers, businesses perhaps regulators and major public purchasers come together. We use it to get them talking to each other frankly. Then we commission a trusted expert to prepare a technology road map which assesses where the relevant technologies are heading over the next five years or so, what publicly funded research is going in to drive it, and what business is likely to do. Just this exercise, with no increase in public funding, can transform behaviour. Some of the big companies for example might have a HQ abroad and it means British managers and indeed BIS ministers can show to head office what we are doing and so encourage more investment here. It can encourage businesses sitting on piles of cash to invest when they see how it fits in alongside investment others are committed to putting in. I have done it with, amongst others, space technologies, regenerative medicine, high-performance computing, and now with synthetic biology. Only last week Vince Cable and Mark Prisk, who do something very similar with big advanced manufacturing sectors, showed how triumphantly effective our approach can be. Their work with the Automotive Council was crucial in giving GM the confidence to invest more in the UK.
But even this is not enough on its own. Here are ten further new things we are doing as part of our high tech industrial strategy.
- We are creating seven Catapult Centres linking business and public funding for new research projects.
- We are introducing one of the world’s most generous tax incentives for R&D with tax credit worth up to 225 per cent.
- We are changing the tax reliefs for investment in start-ups so academics can stay in academia and work part time for a company and still enjoy tax relief.
- We are liberalising the rules so research councils fund co-operative research groups like Imanova in Hammersmith in which UCL, Kings, Imperial and MRC together take over and run a medical research facility.
- We are using inducement prizes to reward innovation through a new centre opening at NESTA this year.
- We are using procurement to encourage innovation by increasing spend through initiatives like the Small Business Research Initiative.
- We have brought back the Smart awards first introduced by David Young to help start-ups with the cost of getting proof of concept and proof of market so they can get commercial investors in.
- We have backed venture capital with public investment in to the tune of £200m over four years through the Enterprise Capital Fund programme.
- We are developing improved access to publicly funded research so individuals and companies can get more out from the research we finance.
- We are backing clusters like Harwell and Daresbury which are now enterprise zones, Tech City, and of course the excellent Babraham and Norwich research and innovation campus clusters here in which we are investing an extra £70m.
These are all new initiatives for growth and innovation which this Coalition is implementing. It is not an exhaustive list either. There is a lot more going on. Now we are applying this approach to our biggest manufacturing sector which can also gain a lot from applying high technology. That is the big sprawling part of our economy encompassing food and drink manufacturing and agriculture.
The other half of the life sciences agenda
Almost exactly six months ago the PM gave a powerful speech on life sciences. It reverberated across the sector and I know it has registered with companies headquarters in Japan, the US and Switzerland as well. That focussed on the role of life sciences in human health. But there is the other half of the bio-sciences - from animals to agri-foods.
It draws on many of the same scientific advances notably genomics as human health. It also has important links to human well-being. The epidemics of the future may be zoonotic - the result of a pathogen in crossing the species barrier and attacking humans. We still do not do enough to link veterinary science and medical science in a shared research endeavour of comparative clinical science. And the security of food supplies is a real challenge as the population grows and climate change threatens some traditional agricultural areas. We really would be failing to deliver on our obligation to future generations if we left them with a public health crisis and a deterioration in food supplies.
That means sophisticated scientific research. We all like to think of food and agriculture as natural. But the only reason we can feed ourselves now is generations of scientific research, selective breeding and industrial advance - our Industrial Revolution proceeded in parallel with an Agricultural Revolution.
We are experiencing a period of scientific revolution now. Advances in rapid gene sequencing technology allow for the identification of desirable traits that can give rise to an accelerated natural selection process. This science of genomics has great potential to revolutionise plant breeding and crop development in future. GM is already a part of this in many countries. Here, there are still decisions for us to take - and I realise people have different views. But well-informed decisions require evidence. The scientific experiments going on at Rothamsted and elsewhere are essential for gathering that evidence. The independent regulators say that the risks are tiny. Whatever our personal views on GM, everyone must surely want to protect the integrity and freedom of British science - and allow these experiments to proceed.
One reason for the anxiety around GM is the belief that our food just grows naturally. It’s a bit more complicated than that. Compare Apple and the tomato. Apple is one of the great innovators. A lot of sophisticated science and engineering goes into an iPad or an iPhone. We like to think of the humble tomato as vey different. But the modern tomato is equally the product of generations of scientific advance which has developed genetic traits that give it the colour, taste, and shape we want as well as the capacity to stay ripe for longer. Since January this year, according to Google Scholar, well over 1,000 academic publications on tomato genetics have been published. We should all be a bit more willing to take pride in this scientific achievement rather than ignore it.
Agri-science challenges our assumptions in another important way too. One of the challenges to the case for a high tech industrial strategy is that high tech is always going to be a small part of the economy and the real challenge is to raise the performance of the basic bread and butter sectors. The OECD definition of a high tech sector is one which devotes more than 4% of turnover to research. This does mean that most of the big sectors of most economies are not defined officially as high tech. But this ignores the pervasive effects of advances in general purpose technologies which are the very ones we are trying to back in our high tech growth strategy. One of the biggest single drivers of American productivity growth in the past decade was a transformation of performance in retailing, notably Walmart. It may not be officially high tech but it was using advances in IT systems that certainly were in order to transform its performance. The same can be true of agriculture and food manufacturing which can gain enormously from advances in biosciences. And it is not just us who gain. Some of the poorest parts of the world facing rapid climate change depend on rapid advances in agri-science to avoid famine. That is why our partnership in BIS is not just with DEFRA but also DFID who offer enlightened support for agricultural research.
Because of the importance of this, I am announcing today very substantial grants from the BBSRC worth £250 million to our leading research institutes. They include £14.5 million for the world-class Genome Analysis Centre here in Norwich. Here is an example of what this is all about. At the moment we can grow just over 12 tonnes of wheat on a hectare of land in the most productive and efficient parts of the country. The BBSRC have set the challenge of getting that up to 20 tonnes of wheat by 2020. It really will be the next Agricultural Revolution. The research we are funding will help make this happen.
This commitment by Government to research in the biological sciences is only a first step however. We need to do much better at linking our upstream research to the practical needs of farmers and the food industry. We will be working with them and DEFRA to ensure this research is applied as effectively as possible. I know that industry is keen to work with us to do just this.
So we have ended up where we started - producing and consuming calories. But I hope that in the course of this lecture you have seen how these basic human needs show what Government can do. We are not detached and above the fray. Instead we are engaged, creative and constructive.
I’ve made five announcements today: the £250 million of BBSRC grants; the EPSRC manufacturing fellowships, each worth £1 million; the two separate investments in synthetic biology; and a refreshed report from the Government Office for Science on future technologies, to inform the evolving industrial strategy.
We are backing the risk takers, and are willing to take a risk ourselves. As Government is an insurance pool, we can take bigger risks than any other player. It is this attitude to risk that I will consider in a lecture at Imperial next month. Meanwhile I thank you for your hospitality and congratulate again on your research network here which brings together the university, the hospital and institutes. It is one of the finest in the country and we can all take great pride in it.