It’s the economy, stupid

As US economist Joseph Stiglitz shrewdly observed yesterday, the riots in the UK are evidence not of a "broken society" but of an under-performing economy.

An economy which is failing to deliver rising prosperity to a generation who have previously known nothing but rising prosperity. Unfortunately, as we observed in our earlier comments, the dislocation caused by the arrival of the digital age and it’s multi-layered impact on society is not something that will evaporate quickly.

People have likened the current times to those of the 1930′s but the analogies they make are usually only superficial. What underpinned the problems of the 1930′s was the shift in technology from a steam-based infrastructure to one based on electricity. This caused tremendous dislocation and disorientation within the economy with winners and losers, riots that needed to be contained by the police and other unsavoury outcomes like mass unemployment.

Regretfully the decision to print money taken in 2009 did not help. As we said at the time (see our earlier comments) this would simply create inflation and delay the date at which the adjustment would be needed.

Mervyn King’s statement yesterday that the economy would struggle for years to come needs to be heeded and again accords with the comments we have been making here since 2008. This time it is different and it is different for three reasons: the impact of the digital economy; the need to change the economy to be based on low carbon energy sources; and the reluctance of financiers to lend money. It was no coincidence that it was announced yesterday that the latest available data on bank lending to small businesses showed that, adjusted for inflation, it was at it’s lowest EVER level since they first started publishing the figures in the 1970′s.

So what’s in store?

"Not a lot" you might say after viewing ransacked shops but we need to be practical.

Firstly, Britain is well-placed to adjust to the needs of the digital age. In fact, it has been in the forefront of leading that change for many years. The trick, as ever, is to think global, act local. As we have said before, leverage the technology to find ways to better meet consumer needs at a price that’s lower than it was before.

Secondly, the government are getting some aspects of their policy-making wrong. The decision to expand the money supply was a mistake but is a genie that cannot be put back in the bottle. Expect inflation to continue at a heightened level for at least the next five years. That wil squeeze real incomes making the need to follow point 1 even more important. They are trumpeting traditional manufacturing. But that now accounts for less than 12% of employment. They still haven’t woken up to the fact that that the digital age changes the way we export and that the post-industrial age in which we live has changed the nature of what we export.

Thirdly, think social inclusion. The real winners will be companies who reach out across social divides and avoid an ‘us and them’ culture. In some cases that may mean having multi-branded solutions, in others simply supporting community programmes that help people to orientate themselves in an unfamiliar and evolving situation.

If you want to understand these things better and use them to help navigate your own business in this new post-industrial age please give us a call or drop us a line.

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