The Bear’s Lair: The costs of consensus

I have just been researching the politics, ideas and economics of the Restoration period. While political differences were enormous and at times lethal – between outright “Leveller” republicans and followers of Sir Robert Filmer’s “Patriarcha” who believed in absolute monarchy — it was scientifically and economically as creative and entrepreneurial a period as Britain has ever known. Conversely, the half-century of one-party Whig rule under the early Georges was one of the utmost intellectual and technological somnolence. The contrast extends to the present day, as I shall endeavor to demonstrate.

The consensus era of the second and third quarters of the eighteenth century was remarkably lacking in entrepreneurship. Thomas Newcomen, for example, had invented the first economically useful steam engine in 1711, and found plenty of applications for it in the mining sector, pumping water out of mines. Yet this did not lead to a surge in steam engine innovation. Even though Newcomen’s engine was excessively inefficient and far too large for most uses, Newcomen engines were still being installed in the 1780s and indeed formed a majority of the engines installed in the entire eighteenth century. The next significant invention was James Watt’s condenser, and engines with that did not appear in any numbers until around 1784. In other words, there was no significant entrepreneurial improvement of an obviously invaluable but highly inefficient design for three generations. Similarly, the coke-fired iron production of Coalbrookdale, invented by Abraham Darby in 1709, was copied but not improved upon until the 1770s.

The period, 1721-62, during which innovation stagnated, was that of the Whig Supremacy, a one-party state in which all governments were Whig (that period had started with the General Election of 1715, but momentum, the financial South Sea bubble and rivalry between the two leading groups of Whigs kept political arguments alive until Sir Robert Walpole took over definitively in 1721). The period of political stagnation included severe repression of those trying to break out of the working class (the Black Acts of 1723 were notorious) and a retardation of the quality of scientific education and innovation that did not reverse until the formation of the Birmingham Lunar Society in 1762. The contrast with the previous period of political division, social mobility and rapid innovation after the 1660 Restoration could not have been greater. Only once two-party strife returned in the 1760s did the Industrial revolution truly begin to gather momentum.

In U.S. history, the best example of the damage consensus can do was the Eisenhower administration. Policy was changed very little from the previous two decades of Democrat rule, for example keeping the top rate of income tax at an extraordinary 91% (albeit applied only on very high incomes). When Eisenhower assumed office in January 1953, the U.S. economy was at a crossroads. One alternative would have been to use the “peace dividend” from ending the Korean War as an opportunity for an early form of supply-side Reaganomics, reducing the top rate of federal income tax from 91% to 50% or so. That could easily have been afforded; government consumption expenditures as a percentage of GDP fell by 6% in 1953-55, which would have paid for a massive tax cut.

The other alternative was what actually happened. A tight control was kept on non-military expenditure, at least until Eisenhower’s last two years when he was faced with an overwhelming Democrat majority in Congress, but income tax rates were left at their absurdly high levels. The result was a period of remarkably slow economic growth, with no fewer than three recessions in eight years, in 1954, 1957-58 and 1960 – the last of which probably cost Richard Nixon the 1960 election. GDP per capita, the best measure of economic performance, rose at only 0.96% per annum during the 7 years 1953-60, or 0.92% per annum during the 8 years 1953-61, depending on how you want to count the Eisenhower administration’s period of economic control.

There is one mitigating factor, but it shrinks on closer examination. The 1950s were the years of the “baby boom” in which a historically high birthrate brought a massive increase in young people, stressing school facilities and lowering per capita growth, since most of them were not yet working. Conversely, the 1950s, before the liberalized 1965 Immigration Act, saw very little immigration of unskilled workers tending to bring down average productivity, but instead a modest flow of very highly qualified people fleeing the tyrannies of the Soviet bloc or the poverty of East Asia. However even with immigration low the slack Eisenhower-era labor market affected African-Americans disproportionately, slightly reversing their long-term improvement in relative incomes compared to whites and worsening their disadvantage in unemployment rates.

Very little of the intellectual ferment of the Eisenhower years, which manifested itself in magnificent science fiction, translated into entrepreneurial activity. Venture capital was in its infancy; the first such fund American Research and Development was founded by Harvard Business School professor Georges Doriot in 1946 but made its signature investment of a mere $70,000 in Digital Equipment Corporation only in 1957. Most technological activity took place in large companies, with the transistor invented by William Shockley at A.T. & T.’s Bell Laboratories in 1948 and the integrated circuit at Texas Instruments in 1958. The era’s leading technological thinkers were probably Richard Feynman and Shockley; Feynman remained in academia throughout his career, while Shockley’s attempt at entrepreneurship was a dismal failure. Shockley was arrogant and a poor manager, but these qualities would hardly have held him back from success and wealth in the era of Peter Thiel and Mark Zuckerberg.

I come back to the fact that a 1950s Peter Thiel, perhaps juggling advances in semiconductors, would have had great difficulty in getting going, since there were almost no venture capital sources. His own earnings, even if at the top end of what was available in U.S. industry, would (after the punitive Eisenhower-era taxes) not have enabled him to pull together the necessary entrepreneurial grub-stake. After all, the founders of Digital Equipment, had to sell 70% of their company to AR&D to raise a mere $70,000, equivalent to less than $700,000 today – the after-tax bonus of a mid-level employee of Goldman Sachs. In such an environment, why would the 1950s Thiel have bothered with entrepreneurship? – so maybe the world would have gained some incomparable science fiction!

British late Victorian society was also notable for its political consensus and lack of entrepreneurship and innovation. The consensus set in with Lord Palmerston’s second ministry in 1859 and did not really break up until Joseph Chamberlain’s great Tariff Reform campaign of 1903. During that period, Britain lost her industrial lead and saw Germany and the United States pioneer most new industries, most notably in electric power and lighting. Even a technology that Britain had developed, the Bessemer process for producing steel, announced in Cheltenham in 1856, just before consensus draped itself around British politics, was never properly developed; by 1900 all the largest steelworks were in the U.S. and Germany, and Britain was a low-volume, high-cost producer – a position that was to doom its position in the automobile industry for the next half-century.

Japan since 1990 and Germany under Angela Merkel are other societies where political consensus has combined with a slowing in innovation and economic growth – almost the only new Japanese company during the period has been the egregious Softbank, gigantic, but reliant on ebullient international capital markets for its survival.

With the notable exception of the Trump administration, U.S. politics since 2000 has been devoted to a mushy liberal consensus, where interest rates have gone ever downward and budget deficits and regulatory ever upward. Business management has also achieved consensus; the basics include massive stock option grants, rocketing leverage, pervasive outsourcing and as little original research as possible. That too is not a recipe for entrepreneurial sizzle.

Trump’s interlude has successfully de-regulated, and the U.S. people are still seeing the benefit of that but alas, it did not depart from the previous consensus on either interest rates or budget deficits. Consequently, the economy has staged only a partial recovery, although it is reasonable to suppose that another four years of the noisy and combative Trump would have been beneficial.

Instead, we are now to be subjected to four years of President Joe Biden, with Democrat control of both Houses of Congress, and a stated wish to lower the political temperature. I shall have further thoughts on Biden’s likely policies in a week or two, but they are likely to follow the regulatory, climate-change-combating path of President Obama, and to be warmly appraised by the major media, including the Financial Times, with only the occasional squawk from Wall Street Journal editorials. Given this trend, it is likely that, as in 1740s Britain, 1880s Britain and the 1950s United States, innovation will be limited, and opportunities for genuine entrepreneurs (as distinct from predatory rent-seekers) even more so.

After another four years, maybe the U.S. public will be ready again for political combat, start-ups and economic growth.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)