A dangerous stagnation threatens the future of the West

Reformists have been derailed by the greatest challenge of our time

The first populist wave has ended not with a whimper but a strangulated whine. Boris Johnson is set to be a surreal footnote rather than a serious figure in British political history. His tiggerish boosterism has made way for the eeyorish sensibilism of Rishi Sunak. As I argued in a recent Telegraph column, Brexit has become the mad woman in the country’s attic — crushed of spirit and left to fester into a national irritant. Meanwhile Donald Trump rages against the dying of the light, as federal charges are levelled against him. 

Clearly, populism’s first coming has ended in what looks to be failure. Brexit is a disappointment to many who voted Leave, even if it is not the disaster many feared. Donald Trump’s election denialism has  undermined faith in Western democracy and pushed a depressing number of Americans towards conspiracy theories. There has been no radical reset of technocratic Third Way politics, or the neoliberal status quo. 

To understand populism’s failures, it is important to put the phenomenon in fair context. It has too often been portrayed as driven by raw xenophobia or an impotent desire to kick against the system. This overlooks the fact that populism was also spurred by a visceral - if not fully formed - realisation that the old neoliberal model is broken and that it needs to make way for a new world order.

And indeed in the smoking ruins of the first populist experiment we see can just about make out the swirling, amorphous shapes of a radically different future. Trump, for all his chaos, presided over a seismic shift in American geopolitical and economic policy, wrenching military focus from counter-terrorism to great power rivalries. Although his trade war against China ultimately failed, a hardened stance in Washington, which treats the country as a strategic rival rather than a strategic partner, has prevailed.

By seeking to foster a symbiotic relationship between weapons development and wider industrial policy, Trump also laid crucial groundwork for a revival of the kind of big hitting Cold War-style projects that led to the invention of the internet and computers, It is exactly this breakthrough that Joe Biden’s $100bn industrial plan builds on.

Given its ongoing nature, the legacy of Brexit is more difficult to assess. As I recently argued, the British political class’s inability to settle the Northern Ireland issue and capitalise leaving the EU has likely rendered the project unsalvageable. Britain may end up returning to the EU fold as polls continue to shift towards Remain — and in any case a closer relationship is almost almost certain.

Nonetheless, Brexit has ensured that legitimate anxieties about the need to find a healthier equilibrium between globalisation and sovereignty can no longer be wholly ignored by the European political mainstream. Global Britain has been dismissed in some quarters as empty sloganeering or empire nostalgia — but as a conceptual populist ideal that aims to both champion the independent nation state and protect a country’s globalised, outward-looking disposition, it could yet prove an influential Western model.

The first wave’s impact on the style of party politics may also prove decisive. True, a mode of populism that centres around a charismatic individual taking on the system — whether it’s Donald Trump or Boris Johnson — has proved its fragility. Still models that combine Blairite managerialism with populist rhetoric may be coming to the fore. Both Keir Starmer and Rishi Sunak are awkwardly groping towards a new kind of technocratic populism which aims to combine a concern for “the people’s priorities” with focused technocratic problem-solving.

Although it is early days for Italy’s Georgia Meloni, her charismatic yet cautious approach may offer something of a blueprint for how the leader of an insurgent party might balance radicalism with pragmatism, keeping their more extremist wings in check as they drive controversial reforms. 

The stagnant elephant in the room

Nonetheless, the fact remains that an economically credible populist alternative to neoliberalism has not proved forthcoming. At the moment we find ourselves fallen between two stools. The old order has imploded (as I wrote in my first substack post, neoliberalism has eaten itself). And yet a new order has yet to come into existence. 

Many reasons have been offered for that failure. Some insist that projects like Brexit were flawed to begin with and have merely collapsed under the weight of whopping false promises and contradictions. Others see populism as a hollow, demotic force driven by directionless rage. On the other end of the spectrum, populism’s sympathisers have identified a range of culprits behind populism’s demise, from a bureaucratic elite opposed to change to plan-scuppering Covid. 

My own view, however, is that the first populist movement failed because it fatally ignored the elephant in the room — the profound economic stagnation that had richer countries in its grips long before the pandemic.

In order to understand just what a serious situation we face, it is worth exploring in some depth the nature of our current situation.  We are stuck in a potentially lengthy era of economic stagnation. Richer countries appear to be stuck in a low-growth trap. Before Covid, the GDP growth of advanced economies was just 2pc. Even America’s real GDP has failed to return to its previously projected path since the financial crash. Productivity is stagnant, or perhaps declining. As a result, living standards are waning. Britain’s GDP per head is closer to Poland’s than that of the USA. Meanwhile the Eurozone is staring down a second “lost decade” of rising debt, austerity cycles and poor innovation. 

A deep dive into the great slowdown

The question is: what on earth is happening? In particular, why is productivity —the main driver of higher living standards — slowing down? When it comes to the long view, there are two main schools of thought. This excellent Ted Talk debate between Robert Gordon and Erik Brynjolfsson pretty much lays things out but I will flesh out details below.

The pessimistic take is that the era of great innovation may be behind us. This view has been laid out by Robert Gordon in The Rise and Fall of American Growth which argues that from the late 19th until about 1970, the USA witnessed “a singular interval of rapid growth” that was only made possible by a “unique clustering” of great inventions, and “will never be repeated”.

Gordon essentially builds on economist Tyler Cowen’s famous argument that in The Great Stagnation that developed countries may have exhausted all the low-hanging fruit for driving up productivity levels, such as getting children spend more time in education or settling new land.

And he does compellingly lay out the truly unique nature of the last period of explosive growth, when life-changing innovations were everywhere. Small electrical machines made production lines possible; electrical lifts allowed buildings to be built upwards, transforming urban land use; motor vehicles replaced horses, and the invention of white goods revolutionised housework forever. Meanwhile, indoor plumbing drastically improved sanitation levels, and breakthroughs like X rays, antibiotics and anesthetics changed the face of medical care.

Gordon argues that in contrast, since 1970, innovation has been less spectacular and more narrowly focused on entertainment, communication and information. Gordon goes even further, arguing America’s technological slowdown will be further aggravated by four growth-sapping headwinds — education, demographics, inequality and government debt. 

This Gordon thesis has been challenged by the more optimistic Stanford academic Erik Brynjolfsson who insists that, in fact, our best days are yet to come as we linger on the verge of a seismic digital revolution. Brynjolfsson sees the current stagnation as mere “growing pains” as we move from a tangible economy centred around production to an intangible economy based on ideas.

He compellingly argues that the notion that we have run out of “low hanging fruit” misunderstands innovation. On the contrary, new ideas are made by combining and recombining existing ideas to create even more value — thus we have a potentially infinite well from which to draw.

Most interestingly though, he draws parallels between our current stagnation rut and the multi-decade lag between electrification of factories and the great takeoff mass industrial production in 1920s America. This lull is explained by the fact that when managers first replaced steam-based motors with electrical motors on the factory floor, they didn’t understand their added value and therefore merely sourced the biggest electrical motors they could and plonked them exactly where the steam-based motors had always been, right in the middle of the factory floor.

It wasn’t until a new generation of managers eventually took over, that the potential to move smaller, more nimble electrified power outlets closer to workers that factories started to realise the potential for the modern production lines. Suddenly, with this knowledge, productivity tripled.

In Brynjolfsson’s view computer power has the potential to be just as transformative as steam or electricity, but it could take several decades to work out how to work with computers and robots in fruitful ways.

I tend to the optimistic “Brynjolfsson view” that we are in a lag period before the fourth industrial revolution — powered by digital and robotics — really takes off. But here’s the rub. The notion that we are in some kind of stagnation waiting room biding our time until the baby boomers retire and computer-savvy Gen-Z can usher in the fourth industrial age is extremely dicey. This is for the simple reason that our ascent to a shiny new phase of AI-fuelled innovation is not guaranteed. 

A frustrating time ahead of us

Quite the contrary, progress could be frustratingly tortoise-like. Contrary to popular belief, growth during the Industrial Revolution was in fact remarkably slow in comparison with that of recently industrialized countries — for example in Asia.

The historian Jeffrey Williams has suggested that this is due to the fact that 20 years of war with Revolutionary France and Napoleon ploughed into the battlefield resources that could have been used for innovating investments. With the West now under pressure to increase their military budgets in light of Russia’s declaration of war on Ukraine and by extension the liberal order, it could be that we are heading for a similar predicament. (Although it could also be that a military technology splurge results in some world-changing spillover invention, as was indeed the case with the internet.)

Then there is the fact that we appear to be in the very early stages of feeling our way around the intangible economy. One of the reasons that property prices have reached record highs is that entrepreneurs and companies have nowhere productive to put their money. They are nervous about investing in the new world of intangible assets, whether it’s branding, design or R&D, because it can harder to assess their value or sell on than physical assets and there is a risk of them being replicated by competitors. (For more on this I recommend Capitalism Without Capital, by Jonathan Haskel and Stian Westlake.)

Progress is not inevitable

An even more important point though — particularly in the context of populism — is that there is nothing inevitable about progress. And there is certainly nothing inevitable about transformational breakthrough eras like our ascent to a new fourth industrial age. Previous industrialising revolutions only occurred due to a unique synergy of ideas, circumstances and raw materials. These include a dynamic synergy between basic science and applied innovation, a competitive market for ideas, a culture of improvement and abundant cheap energy.

Take the agrarian revolution. This only occurred in England because specific material incentives converged with a particular intellectual dynamism. The country’s aristocracy was unusually reliant on the land for wealth, in contrast with the rest of Europe where bourgeois elite derived their wealth from state-allocated seigneurial rights and privileges. Thus they were unusually motivated to improve the productivity of their land through technology.

Just as crucial were the enlightenment-based intellectual breakthroughs of the preceding century — namely the evolution of the fundamental belief that the human lot could be improved by exploiting nature to improve productivity. This breakthrough was, in turn, only possible because of a gradual loosening of religious censorship and the evolution of an environment that tolerated a reasonable amount of free and subversive thinking. The final crucial ingredient was an  abundance of cheap coal to operate steam-based technologies on a mass scale.

Clearly the big challenge of our time is to figure out what new magic combination of circumstances and ideas can drive explosive progress. Anemic productivity, stagnant  wages and low growth reflect our failure to do so. 

Populism’s big failure

And yet the first wave populism ultimately failed to  sufficiently engage with the stagnation conundrum. True, both Brexit boosterism and Trumpian trade wars were, at least partially, responses to the falling living standards and growing disillusionment associated with this productivity slowdown.

By shining a light on left-behind areas, populism also challenged a neoliberal worldview which bizarrely seemed to overlook the notion of stagnation altogether and instead envisage a world on a trajectory of unstoppable integration and globalisation. Surging Populism spoke to the ruling class’s utter mis-framing of challenge of our time –- namely neoliberalism’s tendency to view the unwillingness of certain elements of the population to submit to the elemental forces of change, rather than a stagnation, as the biggest obstacle to progress.

And yet somehow the first populist wave never really got to grips with the stagnation story. Lacking a deep and sober assessment of the West’s current predicament, too often confident bluster or simplistic remedies got the better of reforming movements — from policy-light Boris boosterism to Trump’s bid to make America great again by stoking a trade war with China. And looking back personally, my own tendency to buy into the potential for a short, sharp Schumpeterian reset in Britain was, in hindsight, far too optimistic.

In the UK, the prevalence of a somewhat “analogue” Smithsonian attitude to growth also proved fatal for populism. By that I mean the tendency for Westminster to see economic growth is primarily driven by commerce, overlooking the seismic importance of technological innovation. There is no doubt that in their short window to lay the foundations for Brexit, Leavers have proved overly fixated on free trade deals, neglecting the area where Brexit had real potential — namely to boost technological innovation through regulatory divergence from the EU.

Such lack of engagement with the true economic challenge before us has ultimately proved fatal to populism. Unable to bring the new jobs to the rust belt that he had promised Donald Trump was turfed out after just one term. Unwilling to get its hands dirty with a proper growth plan after so many years of hot air, the Tory party is on the edge of oblivion. 

So far, there is little sign of a second, more mature wave of technocratic populists taking up the mantle either. Labour looks set to frame its imminent stint in Downing Street as dedicated to clearing up the mess of Tories, rather than fixing Britain’s deep problems. It increasingly seems that Meloni’s lack of experience is preventing her from pursuing controversial but necessary reforms in the face of opposition from Italy’s powerful networks of vested interests. In France, Macron’s imperious, bulldozing approach to yanking France into the 21st century look set to backfire.

Cracking the code to reach the next level of progress

Right now we should be doing what the first populist wave failed to do — that is, discussing how we create circumstances to ensure that we reach the fourth Industrial Revolution as quickly as possible. That means encouraging a synergy between basic research and applied technological innovation and being competitive in the global market for ideas. It also means fostering a culture of improvement and supporting a Second Enlightenment in an atmosphere of intellectual freedom.

If progress is spurred by a special alchemy of ideas, incentives and conditions, then we are yet to crack a winning recipe. A rare bright spot is a shift in policy towards investing in big research projects. Joe Biden’s $100bn industrial plan is a chaos of competing aims. Nonetheless, it does excitingly hark back to the DARPA heyday, seeking to extend approaches to innovation in the defence sector to civilian government. This could be a model for the rest of the world if it is successful.

On the other hand, the global market for ideas is in jeopardy. One reason is rising anti-immigrant sentiment, which threaten liberal visa policies for skilled workers. In Britain we see just how dangerous a populist shift in focus from the question of who we let into the country to how many we let in can be. Home Secretary Suella Braverman is mulling cutting the amount of time international students can remain in the UK after finishing their studies. With its already stringent citizenship rules for skilled migrants, the country risks losing talent as it becomes increasingly uncompetitive compared with the likes of Germany.

The EU model also creates a unique problem for Europe’s market of ideas. One of the big reasons that Europe raced ahead of the rest of the world from the early modern period is that Europe was uniquely fragmented, due to the fall of the Holy Roman Empire, which spurred on intellectual and economic competition. In this context, the EU model of economic integration and bloc-based protectionism starts to look misguided.

The detrimental effects have already born out in the Eurozone’s catastrophic record for tech innovation. The EU’s overarching strategy for getting a piece of the tech revolution is also truly bizarre– it does not seem to involve actually creating a competitive environment that encourages incredible innovation but increasing the bloc’s regulatory superpower credentials, as it becomes the standard-setter for tough global digital regulations.

On the intellectual fundamentals, the West looks even more shaky. Far from embracing a culture of improvement, society increasingly rejects the very concept of progress. Focus in stagnating countries like Britain is increasingly not on growth but redistribution. But things are even more serious than that: with the advantages of economic growth less evident to Generation Z and the millennials compared with the baby boomers — not least amid a housing affordability crisis — a tendency to interpret “civilisation” and “enlightened progress” as racist, colonising values have set in. 

In the current stagnation, degrowth eco-movements, which argue that capitalism is driving humanity towards a climate crisis, and we should embrace stagnant of regressive economies, are equally flourishing. 

Nor is a Second Enlightenment particularly forthcoming. In a new era of tribalism and wokeism there are new threats to freedom of thought. The gauntlet laid down by post-modernism is also intriguing. My personal view is that post-modernism is not the bogey man that many on the Right make it out to be.

Think about it for a minute. If conceiving nature as a tool of the human will was the radical intellectual bedrock of the industrial revolution, then it is worth pondering: what breakthrough in human thinking will underpin the digital age? Perhaps it will be a revolution in how we see machines — not so much as tools that we control, but as partners with which humans work in synergy.

Post-modernism could yet prove the first crucial stage of the intellectual awakening that will drive the fourth industrial revolution; after all, the concept of the whole has to first be demolished in order for us to see how the part and the whole can exist in symbiosis. The problem is that we still appear to be stuck in the stage of pulling things apart. The phase where we try and put things back together in a new, constructive way still remains elusive.

Then , of course, is the small matter of affordable energy. It may be that an intangible economy driven by ideas proves less reliant on endless cheap energy than a traditional one driven by production. Nonetheless, it is clear that the West’s chaotic transition to net zero and failure to invest in nuclear could slow progress down significantly, insofar as higher energy prices will prevent new businesses from being born and established ones from expanding. Money that could be used to invest new projects will have to be dedicated to paying the gas bill. Because governments have refused to do open and rigorous cost-benefit analyses, nobody knows just how damaging the current approach could prove in the long term.

The bottom line then is that, for the foreseeable future, we are stuck in a rut. No amount of optimistic rhetoric or tough talk on immigrants from populists will get us out of it. Nor indeed will a return to sensibilism or the EU, contrary to the claims of alt-centrists. It remains to be seen whether a second populist wave is imminent, or what form it will precisely take. But one thing is clear: unless it engages with the stagnation crisis discussed up above, it will fail.