It is ironic that one of the most productive areas of policy focus at the moment is the UK’s lack of productivity.  

From thoughtful commentary in the FT, through the Productivity Institute’s call for an independent and statutory ‘Office for Productive Responsibility’, to the Resolution Foundation’s final report on The Economy 2030 Inquiry – Ending Stagnation – policy wonks are looking at how to tackle what Martin Wolf calls the “poisonous combination of stalled productivity and high inequality” within the UK.

The majority of these contributions acknowledge the fact the UK needs to source more investment capital to fund the productivity pivot the UK needs.  

No fewer than 12 think-tanks (and the Labour Party) have proposed some form of national wealth fund crowding private money in with public funds.  But as Sarah Gordon of the LSE notes, few of these take into account the realities of aligning the interests of public policy and private investment and instead seemingly operate on the basis of ‘if we build it, they will come’.

This is clearly a problematically optimistic assumption, and one currently compounded by the ongoing absence of a UK industry strategy towards which public-private capital can be directed with any degree of certainty.  

But it is also flawed insofar that it fails to take into account the critical task that will be asked of the UK’s financial system in supplying private capital.   

“There’s so much talk about the system and so little understanding” – Robert Persig, Zen and the Art of Motorcycle Maintenance

As the third Lord Rothschild noted the financial system is specifically designed “to take money from point A where it is, to point B, where it is needed”.  But do we know whether the system is up to the task of connecting today’s savings and investments to the specifically productive growth the UK needs?  

This is the exam question that New Capital Consensus (NCC) has set itself as its contribution to the wider debate – is the UK’s financial system ‘fit for productive purpose’?

Our starting point is that it is all very well pointing out that there are large pools of patient capital within the financial system.  

But without an understanding of how these pools develop, what form they take (public securities, private assets, government debt, cash, foreign assets…) – and crucially why they take that form and how capital moves through the system, we will be left with ‘capital lakes’ and ‘capital deserts’ that the system is incapable of moving towards productive ends.  

“You can’t manage what you can’t measure” – Peter Drucker, Management Guru

By using systems thinking we can conceive of the UK’s capital pools as ‘stocks’ available for deployment.  NCC’s first task, powered by academic research from Leeds University Business School, is therefore to accurately quantify these stocks which we think will itself move debate move on from its current dependence on ‘guesstimation’.

But systems thinking teaches that an understanding of a system’s ‘stocks’ is useless without a correlative understanding of the ‘flows’ that fill and empty ‘stocks’ – together with an analysis of the ‘incentives’ that dictate those flows.  According to this logic, even the largest UK capital pool is useless for productivity if it allocates its capital to non-productive assets.  

“In the City they sell and buy / And nobody ever asks them why” – Humbert Woolfe, The Uncelestial City

Understanding how capital flows through the financial system –  but more crucially why it flows the way it does – is the second of NCC’s tasks.   Our behavioural workstream will look to map out the UK financial systems current ‘stocks’, ‘flows’ and ‘incentives’ by undertaking interviews with industry stakeholders, trade bodies and think-tanks from all points of the financial map.  

We will then present our findings back to our interviewees, as well as to members of the press and political stakeholders.  First, as a map of the current financial system’s capacity (or incapacity) to move money from Rothschild’s point A to point B productively.  But secondly, as a means of understanding where policy reform might best be applied to reinvigorate productive ‘flow’.  That is, where the best ‘leverage points’ are within the system, and how policy might best bear down on them.

“Most of our assumptions have outlived their uselessness” – Marshal McLuhan, Understanding Media

The key tenet of systems theory is that systems operate to their own often irrational and self-derived logic.  As Dana Meadows writes:

“A system is a set of things—people, cells, molecules, or whatever—interconnected in such a way that they produce their own pattern of behaviour over time. The system may be buffeted, constricted, triggered, or driven by outside forces. But the system’s response to these forces is characteristic of itself, and that response is seldom simple in the real world.“

Our behavioural work will also look to identify the ‘systems traps’ which ensnare the financial system in the form of the ‘false beliefs’, ingrained assumptions and self-interested habits that drive its current perverse ‘flows’.  These false axioms tend to be the hardest to grasp but almost always provide the longest levers.  

“For him who sees no wood for trees / And yet is busie as the bees” – John Heywood, Proverbes

Ultimately, we want to provide both a policy tool and a set of policy proposals to UK policymakers as they open the ‘Overton Window’ of political possibility in search of productivity.  

Policymakers are busy people and so we hope to offer something of a ‘groundwork’ on which government can begin to build a more systematic and less piecemeal form of policymaking – with industry, consumers and other stakeholders going forward.  

Together, we can hopefully begin to move UK economic thinking away from its 200 years of ‘muddling through’ by looking simultaneously at the wood and the trees.  NCC also wants to establish a benchmark against which the UK can judge improvements in the financial system’s capacity to connect A to B going forward.

In the meantime, we are working to position our systems-based approach within the wider productivity debate.  Our next event is a cross-initiative meeting with other productive initiatives across the think-tank and academic world to do just that.  

“A journey of a thousand miles begins with a single step”  – Chairman Mao Tse Tung

The application of systems thinking to the financial system is not new.  Philip Coggan has succinctly delineated how the City works (and why); John Kay has asked how financial actors have managed to transform themselves from ‘servants of the people’ to ‘masters of the universe’; David Pitt-Watson and others have examined the dual problems of excessive rent extraction from Rothschild’s intermediation by the system and its failure to effectively steward the economy for its investors; and Nick Silver has questioned how best to get the system working for the economy, people and planet.  

NCC hopes to build on such approaches within the current context of decreasing productivity and increasing equality in the UK.  We want to help delineate a more productive and prosperous ‘social licence’ for the financial system going forward.