20 May 2014

The Fourth Revolution: the Global Race to Reinvent the State


Adrian Wooldridge, management editor and Schumpeter columnist at The Economist magazine, on his new book, The Fourth Revolution: the Global Race to Reinvent the State, written with John Micklethwait. They argue that global financial problems and technological innovation are forcing states to change the way they operate.

Music: Happytime by Podington Bear

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Brian Kenny: Our guest for this episode of The Business is Adrian Wooldridge, the management editor and Schumpeter columnist for The Economist magazine. In addition to his long tenure writing for The Economist, Adrian is the author of numerous books on finance, globalization and business. Today we're going to talk about the ideas in his latest book, as well as US competitiveness. Welcome Adrian.

Adrian Wooldridge: Thank you.

BK: So your new book is The Fourth Revolution: the Global Race to Reinvent the State, in which you argue that the modern world has experienced three major revolutions in the reinvention of governmental systems, and that we are in the midst of the fourth. Why is the current revolution happening, and why do you believe it’s putting the West at risk?

AW: The state is being reinvented again for several reasons. One is a negative reason, that we're bankrupt. The financial crisis revealed that we've been spending too much on entitlements. We have taken a whole series of commitments to people that we can't really properly afford. So there is a negative reason why the states needs to be reinvented, but there's also a positive reason, which is that we now have this amazing information processing machine, the internet, which allows you to do all sorts of things in radically new ways. The state, as a bureaucratic entity, really was a sort of information gathering and storing machine. Now we have information everywhere, it's ubiquitous.

Some of the most important aspects of the state, such as education, medicine can be radically changed because of this empowering technology.

BK: Lets talk about government’s role. Does it matter?

AW: Absolutely. I think one of the fundamental arguments in this book is that government really matters. There is this sense on the right that government is just a problem. It's an unnecessary evil that you should get rid of. I think that's fundamentally wrong. But there's also a feeling on the left that government is about providing services and jobs for various interest groups. Government matters but government should be an instrument of competitiveness. It should be a way of making society more efficient and more economically prosperous. The second big idea that I'd like to look at is democracy. We have always assumed that democracy was part of the - one of the reasons why the West is very, very successful. Democracy has become much more dysfunctional in the West, and particularly in the United States, I think more than anywhere else. And that is it seems to be completely gridlocked, it seems to be incapable of taking long-term decisions, and it seems to have become a prisoner of various interest groups. That's a huge problem. But there's also a deeper problem than that. I think that democracies have built up huge debts that have increasingly taken on commitments, which they can't afford and they've increasingly introduced deficit financing. At the same time that democracy has become more gridlocked and more burdened by long-term entitlement problems, I think the Chinese have developed a system which has grown rapidly, has modernized rapidly, has delivered the Hobbesian benefits of security and stability, but at the same time can mimic democracy or mimic some of the virtues of democracy. They would argue that they can offer the benefits of democracy without the vices. Now, I do not believe that the Chinese system is better than the Western democratic system. I think democracy is ultimately extraordinarily flexible, ultimately has a way of doing all the worst things and then eventually doing the right thing. Nor do I believe that the Chinese system is a perfect system. The further down the system you go, the more you see it's failing to deliver, the more you see its weaknesses. But what I do think is clearly the case is that the distance between the West and the rest is much, much smaller than it used to be.

BK: So what's a democracy to do then? People have talked about redistricting in the past. They've talked about term limits. There are lots of things that have been discussed, none of which have really come to pass. What can business do on its own to move things forward?

AW: Well, now, I think business has all sorts of things to do. One thing that business has to do is just give a sense of how tough and competitive the world is. Give a sense that the state’s sudden public functions are absolutely vital to the competitiveness process, you know, the education system being one of them. So playing the role as a responsible citizen, I think, is important. Another important tweak is open primaries. I think at the moment with the closed system of primaries you have incentive for the wildest man to win. Once you have open primaries then you have a real incentive to go for the middle. And the other important way in which it can be tweaked is we have a system essentially where anybody can veto the system. There are all sorts of veto points, when I say we, I mean the Americans, have an incredible way of vetoing. It is very hard to push through big legislation attacking big problems like entitlements because any person reacting to any particular pressure group can veto the process. We need a system actually, which quite often removes the power of veto, which centralizes power, which has much more energy to push thought changes to problems. Otherwise, you’re like the frog in the water boiling where massively underfunding infrastructure because you’re spending so much money on salaries, on pensions, on meteor payments. So you can see as you drive around the United States, you can see this fantastic infrastructure, which was developed in the 1950’s, visibly crumbling.

BK: So as we talk about rebuilding the commons and building up infrastructure and those kinds of things, a lot of what we are talking about really is rebuilding the middle class and bringing them back to a position that they haven't seen since the 1970’s.

AW: Yes, absolutely. I think that the fundamental question that confronts us all really as a society at the moment is: What is the value proposition that capitalism is offering to the middle class, the broad mass of people? It used to be the case that you would say that we will control risk, we'll regulate risk. Well, we're not doing a very good job of that.

I'm not saying we're quite in the 1930’s but if we had another financial crisis, I think that we would have a very unstable situation indeed. So we need to rebuild avenues of upward social mobility and we need to create as much security as possible. And I think that the difficulty of doing this is that the most important thing we need to do, I think, from the point of view of my book, is to reinvent the state in various ways and reinvent various building blocks of the state, such as the education system, the health system, the security system. And doing that means taking on actually some of the most secure vested interests in the country. So the most important thing we need to do is to create a more efficient and competitive education system. And we have to focus on an education system that can keep retraining people throughout their lives, not just leave them at the age of 18. I should also add another point because I've been quite pessimistic about things. William Baumol, the great economist, said that there were certain services such as healthcare, such as education, which were inherently getting more expensive. And they're getting inherently more expensive because they're very human intensive. And so, he said that every society, every rich society is going to devote more and more of its resources to these sectors. And he gave the example of a string quartet. He said, if you have a string quartet there's nothing you can do, you've got to have four people play in the string quartet.

BK: Of course.

AW: Now, that's true, obviously, but it's also true if you look at modern technology. You can actually get the sound quality of a string quartet with modern technology without all the coughing and the burden of going to the concert, and you can get access through Spotify or some other device to all the music that's ever been recorded in the world for a relatively small amount of money. So I think what you're seeing is modern technology radically reducing the cost of a lot of talent intensive services. And if this is true, if we're beginning to see technological innovation affecting some of these labor intensive services, making them less labor intensive and much cheaper in the longer term, then you're going to see two of the biggest costs to middle class people, which is their healthcare and their education system. Actually the cost of those could be going down or certainly will not necessarily go up as fast as they have.

BK: That is Adrian Wooldridge of The Economist. His new book is The Fourth Revolution: the Global Race to Reinvent the State. Adrian Wooldridge, thank you for joining us today.

AW: Thank you.

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