Pursuing the Knowledge Economy: A Sympathetic History of High-Skill, High-Wage Hubris

By Nick O'Donovan

In the 1990s, the “knowledge economy” was hailed by policy-makers in developed democracies as an antidote to the anxieties arising from the era of market liberalization – an era characterized by the decline of skilled blue-collar work, increasing levels of social exclusion and widening regional inequality. The shift to knowledge-driven growth appeared to offer policymakers a way of harnessing technological progress and global economic integration for progressive purposes, and justifying progressive policies in terms of the economic benefits that they would produce.

Nick O’Donovan tells the story of how the techno-optimism once associated with the rise of the knowledge economy came to be supplanted by widespread anxiety about technological progress, and how the political consensus that formed around a knowledge-driven growth agenda has unravelled, paving the way for the electoral upheavals experienced by many developed democracies in recent years. By examining the rhetoric and reality of knowledge-driven growth over the last three decades, the book highlights the flawed assumptions underpinning this policy agenda, showing how its economic shortcomings map on to patterns of political discontent evident today. It assesses whether there is scope for rebooting this policy agenda in the wake of the Covid-19 pandemic, or whether politicians will need to reach beyond it if they are to deliver inclusive prosperity and equitable growth in the future.

• Language: English
• Publisher: Agenda Publishing
• Release date: May 26, 2022
• ISBN: 9781788215176

Nick O'Donovan

Nick O'Donovan is a Senior Lecturer in the Future Economies Research Centre at Manchester Metropolitan University. With a background in public policy, he has worked on questions of taxation, public financial management, economic development and decentralization for organizations including the European Commission and the UK Labour Party, as well as in the context of developing countries and emerging economies.

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Building Progressive Alternatives

Series Editors: David Coates†, Ben Rosamond and Matthew Watson

Bringing together economists, political economists and other social scientists, this series offers pathways to a coherent, credible and progressive economic growth strategy which, when accompanied by an associated set of wider public policies, can inspire and underpin the revival of a successful centre-left politics in advanced capitalist societies.

Published

Corbynism in Perspective: The Labour Party under Jeremy Corbyn

Edited by Andrew S. Roe-Crines

The European Social Question: Tackling Key Controversies

Amandine Crespy

Flawed Capitalism: The Anglo-American Condition and its Resolution

David Coates

The Political Economy of Industrial Strategy in the UK: From Productivity Problems to Development Dilemmas

Edited by Craig Berry, Julie Froud and Tom Barker

Pursuing the Knowledge Economy: A Sympathetic History of High-Skill High-Wage Hubris

Nick O’Donovan

Race and the Undeserving Poor: From Abolition to Brexit

Robbie Shilliam

Reflections on the Future of the Left

Edited by David Coates

For Theo and Arthur, with love

© Nick O’Donovan 2022

This book is in copyright under the Berne Convention.

No reproduction without permission.

All rights reserved.

First published in 2022 by Agenda Publishing

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CONTENTS

Acknowledgements

Introduction

Part I The rise of the knowledge economy

1. The invention of the knowledge economy

2. Knowledge 2000

3. Taming the market

4. Continuity and change

Part II The knowledge economy in crisis

5. The crisis of growth

6. The crisis of work

7. The crisis of inclusion

8. The new world order

Part III Beyond the knowledge economy

9. Political backlash

10. Paradigm shift

Notes

Index

ACKNOWLEDGEMENTS

First and foremost, I would like to thank my social worker mum and my computer geek dad for inspiring a lifelong interest in public policy, politics and technology. Without their love and support, I would not be in a position to write anything; without their particular idiosyncrasies, I would not have written this book.

I am also hugely indebted to the teachers who encouraged and inspired me throughout two-and-a-half decades of formal education: from the first day of infant school through to the end of high school, from the start of my undergraduate studies through to the completion of my PhD. I am particularly grateful to Peter Hall and Nancy Rosenblum: not only did I learn a great deal from them over the course of graduate school, but they both continued to advocate for me long after I had finished my studies. Without them (and the reams of recommendation letters that they wrote on my behalf), I would not have been able to return to academia almost a decade later.

I have benefited from many people’s advice and suggestions while writing this book. Peter Hall provided invaluable feedback on an early sketch of these ideas, as did Colin Hay and two anonymous reviewers for New Political Economy. Members of the Future Economies Research Centre at Manchester Metropolitan University have been a vital source of ideas and support, sharing their own insights and guiding me towards literature and data that I would never have discovered otherwise. Particular thanks are due to Dan Bailey, David Beel, Craig Berry, Will Cook, Matthew Gobey, Tim Jackson, Sabaa Jahangir, Sophia Kuehnlenz, Donna Lee, Claire Levison, Sean McDaniel, Jonny Rae, Rory Shand, Kathryn Simpson, Christian Spence and Richard Whittle. I am also indebted to Uta Kohl and Jacob Eisler, who helped me to refine the book’s analysis of the digital sector during a workshop at the University of Southampton and the development of an essay for their edited volume, Data-Driven Personalisation in Markets, Politics and Law. Thanks also to Sir Derek Morris, for permission to quote his joke poem about post-neoclassical endogenous growth theory, which provides a better explanation of debates in academic economics in the space of 314 words than I manage in 3,140.

During the pandemic, I was extremely lucky to take part in a series of illuminating conversations about the future of economic policy: many thanks to Arun Advani, Emma Chamberlain and Andy Summers for inviting me to contribute to the UK Wealth Tax Commission, to Sayantan Ghosal and Adrian Pabst for involving me in a National Institute of Economic and Social Research workshop on populism and to Robert Palmer of Tax Justice UK. David Hope and Julian Limberg pointed me in the direction of excellent recent research on the knowledge economy. Although geography and life mean that we do not speak as often as we used to, this book owes much to exchanges and conversations with old friends from graduate school, including Ed Baring, Daniela Cammack, Sam Goldman, David Grewal and Yascha Mounk. Thanks are also due to friends outside the world of academia who discussed ideas, read drafts and advised on how to make this book more intelligible, in particular Adam Barnard, Aidan Miller and John Wrathmell. I am hugely grateful to Craig Berry, Paul Cammack and Sean McDaniel, who not only read the whole thing from start to finish but also provided copious notes that have made this book substantially better than it would otherwise have been. Needless to say, all remaining faults are entirely my responsibility.

It has been a genuine pleasure to work with Agenda Publishing, who have from the first moment onwards made the process of creating this book both straightforward and enjoyable. Thanks to everyone involved, including Steven Gerrard, series editors Ben Rosamond and Mat Watson, and above all Alison Howson, who has been a constant source of advice and encouragement.

At various points over the course of my career, I have had the immense privilege of studying and working with three people who played important roles in the development of New Labour’s economic agenda: Ed Balls, Ed Miliband and Chris Wales. All three helped me to appreciate the sincerity of the ideals that informed mainstream progressive politics over the 1990s and 2000s, as well as the extent to which architects of knowledge-driven growth were already aware of – and sought to address – the limitations of this policy approach.

Finally, my biggest debt of all is to Louise Cowen, who has been both unstinting supporter and meticulous critic, not just during the writing of this book but throughout the best part of my adult life. There are no words.

Nick O’Donovan

INTRODUCTION

On 19 October 2015, Bill Clinton took the floor at a fundraiser in Potomac, Maryland. A few months earlier, his wife, Hillary Rodham Clinton, had launched her campaign to become the Democratic Party’s candidate for the 2016 US presidential election. At first, the erstwhile senator and secretary of state was the clear favourite in the primary race. Polls showed that she consistently commanded the support of more than 60 per cent of potential voters.¹ The Democratic establishment, including both prominent elected politicians and major donors, overwhelmingly backed her candidacy. And yet by that day in mid-October – somewhat chilly for the time of year – her lead had begun to slip away, eroded by the challenge of Bernie Sanders, a self-described socialist who offered a radical break with the economic consensus of the recent past.

Addressing attendees at that fundraiser in Maryland, the former president was dismissive of Sanders’ campaign. Bracketing the veteran Vermont senator with the ex-communists of Greece’s Syriza and the hard-left leader of the UK’s Labour Party, Clinton described all these political outsiders as reflective of the fact that, when people feel they’ve been shafted and they don’t expect anything to happen anyway, they just want the maddest person in the room to represent them. According to Clinton, Sanders was a symptom of economic discontent, but he was not the solution to America’s problems. In place of Sanders’ radical agenda, the former president offered his own alternative plan for the people and places that had been bypassed by prosperity:

If we had universal, affordable broadband, it would do more than anything else to help growth to return to areas that have been left out and left behind … So if all those people in eastern Kentucky and West Virginia and southwest Ohio and southwest Pennsylvania had universal broadband, you could give people incentives to invest there and they’d actually be able to hook on to the global economy and sell what they’re doing.²

This argument was reminiscent of Bill Clinton’s own presidential bid more than two decades earlier: a campaign that was built around a similar kind of outward-looking, technology-enabled approach to growth. In a 1992 campaign brochure entitled Fighting for the Forgotten Middle Class, Clinton vowed to shift America towards a high-skill, high-wage economy. Through investment in research and development and world-class education, he claimed that the USA would be able to compete and prosper in the world.³ Armed with this vision, Clinton wrested the support of electors in Kentucky, Ohio and Pennsylvania away from his Republican rival George H. W. Bush.

Twenty-four years later, Hillary Clinton would go on to win the Democratic primaries, seeing off Sanders’ challenge with the support of the Democratic establishment and a policy offer that paralleled her husband’s earlier campaign. She pledged to restore America to the cutting edge of innovation, science, and research by increasing both public and private investments, as well as to invest … in our most important asset, our people, without which our country won’t be competitive or fair.⁴ Yet on the night of the presidential election itself, all four of the left-behind states identified by her husband in that speech in Maryland would vote against her candidacy and throw their support behind Donald Trump. By 2016, the vision of growth that the Democrats had sold so successfully in 1992 no longer appealed to a decisive proportion of the American electorate.

This book charts the rise and fall of that vision: of a high-skill, high-wage economy based on innovation, openness and social investment. It explores both how this policy agenda appealed to a broad coalition of voters within diverse developed democracies and how that coalition has fallen apart as the shortcomings of those policies (and the understanding of the economy that underpinned them) have become increasingly apparent. It explains how these political and economic shifts have created electoral space for radical outsiders touting unconventional (and in some cases unpalatable) policy alternatives.

Three decades of hubris

The Clintons were far from alone in championing this high-tech approach to growth. Since the early 1990s, similar ideas have found favour with policy elites in democracies the world over, leading politicians of diverse nationalities and partisan loyalties to pursue remarkably similar economic strategies. These strategies were characterized by the belief that social investment in education, infrastructure and research will not simply upgrade the productive capacity of the economy but also deliver social justice; that dynamic markets and international openness combine to drive technological progress and global competitiveness; that individual economic security no longer depends on trade unions or formal employment rights but can instead be achieved by investment in skills coupled with expanding demand for knowledge workers. At the same time, policy-makers have insisted that this reform agenda must be pursued within a wider framework of fiscal prudence, lowering taxes to attract highly mobile knowledge workers and the businesses they work for, controlling public borrowing to avoid crowding out private investment in innovation.

To be sure, different politicians and parties have emphasized different aspects of this agenda, but the basic analysis remains broadly the same. In words that might have been lifted directly from the campaign literature of either Clinton, President Obama argued in a 2010 speech to the America’s Promise Alliance that for America to compete and to win in the twenty-first century, we know that we will need a highly educated workforce that is second to none. And we know that the success of every American will be tied more closely than ever before to the level of education that they achieve. The jobs will go to the people with the knowledge and the skills to do them – it’s that simple.⁵ Two days later, on the other side of the Atlantic, the European Commission announced its new economic strategy. The foremost priority in its Europe 2020 agenda was smart growth: developing an economy based on knowledge and innovation, an objective that was to be achieved by increasing research and development (R&D) spending, improving education systems and accelerating the roll-out of high-speed internet.⁶ The Organisation for Economic Co-operation and Development (OECD), in its 2015 report on The Future of Productivity, argued that economic stagnation could be tackled by encouraging research, removing labour market rigidities, easing regulation of services, increasing cross-border trade and improving the international mobility of skilled workers.⁷ The UK’s 2017 White Paper on Industrial Strategy emphasized R&D spending and skills investments in order to put the UK at the forefront of the artificial intelligence and data revolution.⁸ That same year, ahead of the French presidential election, Emmanuel Macron’s En Marche! party outlined an economic project at the centre of which stood a €15 billion investment in skills to reduce unemployment by enabling people to retrain for the jobs of the future and fast-growing industries while simultaneously liberalizing French employment regulations to allow for a more dynamic allocation of labour to productive businesses.⁹ Across the border in Germany, Angela Merkel’s Christian Democratic Union was campaigning on a manifesto that pledged to attract new jobs in digital services, biotechnology, green industries and healthcare by improving the education of German citizens and reforming immigration to meet rising demand for highly skilled workers.¹⁰

Proposals such as these are now so commonplace as to constitute conventional wisdom. Less charitable commentators might dismiss them as platitudes. Yet they were not always so self-evident, and, as the declining electoral fortunes of politicians and parties that espouse these ideas suggest, they may no longer be as self-evident as once they were.

New economy, new policies

The origins of this policy agenda can be traced back to debates about the so-called knowledge economy, the term used by policy-makers in the 1990s and early 2000s to refer to the rapid technological, social, economic and political changes taking place in developed democracies. These debates are easily overlooked, forgotten or mocked: by the mid-2000s, commentators already spoke dismissively of the heady optimism of the late 1990s about the then trendy knowledge economy.¹¹ Since the heyday of the knowledge economy concept, developed democracies have been wracked by terrorist atrocities, financial crisis, political turmoil and a global pandemic, developments that make the 1990s seem like ancient history. Nevertheless, this book argues that these earlier debates decisively shaped the way in which policy-makers have pursued economic growth ever since, that this approach to economic growth has proved to be remarkably resilient despite the intervening upheavals and that it remains highly influential today. Even though present-day politicians and policy-makers rarely refer to the knowledge economy, ideas that first rose to political prominence in the 1990s are still visible in contemporary policy debates about productivity growth, the divide between skilled and unskilled workers and the economic importance of high-tech industries.¹² The assumptions that this earlier generation of policy-makers made continue to inform efforts to build back better, to level up economically marginalized regions and to create a high-wage, high-skill economy.¹³

What was the knowledge economy? According to its proponents, the knowledge economy marked a new phase of economic growth, in which workers would increasingly produce ideas rather than tangible goods and services. These ideas might take the form of code for a new computer programme, the formula for a new medicine, the recipe for a new burger or the script for a new movie. The concept of the knowledge economy encompassed industries ranging from software development to film production, from financial services to pharmaceuticals research: anywhere highly skilled workers were needed in order to produce new knowledge, to capture and analyse new data, to design new products embodying ever more sophisticated ideas or to create new instructions for people and machines to execute. Indeed, the rise of the knowledge economy ultimately extended to all kinds of organizations, in so far as they deployed new technologies (and staff with the expertise to use them) in functions ranging from supply chain management to marketing, from finance to HR.

The knowledge economy concept rose to prominence against a backdrop of innovation-inspired economic optimism. In the 1990s, policy-makers argued that the explosive growth of knowledge-intensive industries such as information technology (IT), life sciences and advanced manufacturing heralded a paradigm shift, which could help to overcome the economic anxieties of the preceding years: years in which economic policy had been dominated by a fundamentalist view of the benefits of free markets, years that saw skilled blue-collar jobs decline, unemployment spike, inequality between regions widen and levels of social exclusion rise. Capitalizing on the rapid adoption of advanced computing and telecommunications technologies over the 1980s and early 1990s, and a boom in demand for highly skilled knowledge workers capable of using these new technologies, a policy programme predicated on knowledge-based growth appeared to offer an alternative to the market-focused economic agenda of the 1980s. In this brave new paradigm, private enterprise, technological progress and global economic integration could all be harnessed for progressive purposes, and progressive policies could be justified in terms of their positive effects on prosperity, productivity and competitiveness in the global marketplace.

Proponents of the knowledge economy argued that traditional forms of capital, such as plant and machinery, would become increasingly irrelevant in this era of knowledge-based growth: you do not need a factory in order to produce ideas and manipulate data. Instead, the new economy would empower human capital and the workers who possessed it, offering them both prosperity and security. High-speed internet connections would enable knowledge workers to telecommute to the virtual offices of cutting-edge companies, with public investment in skills, research and digital infrastructure sufficing to spread wealth to previously marginalized people and places.

Evangelists of knowledge-based growth claimed that the rise of the knowledge economy was an inevitable consequence of technological progress. At an advanced stage of economic development, they argued, more and more workers would find employment in knowledge-intensive roles. This shift to knowledge work would occur whether governments liked it or not; indeed, it was already under way. The only question was how countries would respond to this development. Would they cultivate the well-educated employees and citizens needed to carry out knowledge work, or would they fall behind because of their unwillingness to invest? Would they open their economies and societies to new ideas from outside, or would they instead opt for stagnant isolation?

Politicians constructed detailed policy platforms on the back of the knowledge economy concept, claiming that their proposals could position their countries at the technological frontier, allowing them and their citizens to reap the lion’s share of the rewards. They argued that growth in cognitively demanding, well-paid work was in principle unbounded and could compensate those who had lost out from the preceding wave of deindustrialization and globalization, provided only that these economically marginalized groups were connected up to global markets and equipped with the skills necessary to compete. This new economic agenda was not tainted by association with the discredited policies of previous left-of-centre governments: namely, the postwar consensus in favour of a mixed economy of private enterprise and state-managed growth, which came to be associated with economic stagnation and rampant inflation during the 1970s. Instead, prominent politicians including the US President Bill Clinton, the German Chancellor Gerhard Schröder and the UK Prime Minister Tony Blair, as well as international institutions such as the European Union and the OECD, claimed that knowledge-based growth offered at once a synthesis and a supersession of traditional left- and right-wing policy, a Third Way or New Centre in which the ideological dogmas of the past would give way to evidence-based pragmatism.

This policy agenda involved four key components. Through social investment in skills, infrastructure and research, governments would provide the foundations for knowledge-intensive industries to thrive while simultaneously combating poverty and enabling everyone (regardless of class background or geographic location) to share in the proceeds of growth. By removing obstacles to market dynamism, governments could encourage innovation and entrepreneurialism. Macroeconomic stability was essential to giving high-tech businesses the confidence necessary to invest in long-term research projects. Finally, international openness would enable firms and workers to draw on cutting-edge technologies, expertise and insight from around the world. The precise policy mix required was a matter of debate, sometimes necessitating trade-offs between competing priorities, and different countries adopted different approaches to knowledge-driven growth at different times. Nevertheless, proponents of knowledge-driven growth claimed that some permutation of these four elements would position developed democracies at the forefront of the global knowledge economy and counteract the social fallout caused by deindustrialization and globalization.

From optimism to anxiety

With hindsight, it is easy to dismiss these claims as hubris. Today, technological progress is more likely to be seen as a source of job destruction rather than job creation, with advances in automation and artificial intelligence threatening to render many existing roles redundant. Looking back over the last 30 years, it seems that the emergence of the knowledge economy has not been associated with social inclusion but rather with rising income and wealth inequality, declining social mobility and widening disparities between economically successful regions and their more marginalized counterparts. Even the pace of growth has disappointed. Yet the policy agenda of knowledge-driven growth continues to be seen as a remedy to these problems, albeit with diminished expectations about the degree of economic prosperity and social inclusion that it can achieve.

This book tells the story of how the techno-optimism of the knowledge economy came to be supplanted by the anxieties of the present day. It shows how key assumptions made by policy-makers back in the 1990s proved to be unfounded or misguided, and how these failings meant that the knowledge-based growth agenda has produced unintended consequences, consequences that are only now becoming fully apparent. Far from alleviating the economic dislocations, inequality and insecurity that sprung from the era of market liberalization and globalization, in many respects the emergence of the knowledge economy – and, crucially, the ways in which policy-makers chose to respond to it – has ended up exacerbating those problems. This book explores how the gulf between the promise and the reality of knowledge-based growth has fed popular discontent, destabilizing the political systems of developed democracies, shifting the centre ground and creating opportunities for radicals and racists alike.

At the same time, it documents how knowledge-driven growth remains the default setting for mainstream policy-makers in many advanced capitalist democracies today. To be sure, many of today’s policy-makers are highly critical of their forebears, arguing that their plans fell short of the truly transformative level of social investment that the challenges of the knowledge economy era required. Nevertheless, in their pursuit of social justice and economic growth through a strategy of social investment, coupled with policies to encourage private sector enterprise and innovation, contemporary policy-makers are following a template that is already three decades old – one that has played a key role in creating the patterns of economic exclusion and political discontent that characterize developed democracies today.

The Covid-19 pandemic has thrown these issues into even sharper relief. The lockdowns introduced in many developed democracies highlighted the disparity between office-based knowledge workers – who could often continue to work remotely from the relative safety of their own homes – and other members of the workforce, who risked exposure to the virus if they were able to continue working or penury if they were not. The pandemic has revealed how, in developed democracies, knowledge-based growth has bypassed a large number of people: because they have not secured one of the limited number of knowledge jobs available, because they do not live in the places where those jobs are concentrated or because they lack the social networks, education and capital necessary to access those jobs. At the same time, lockdown has prompted more and more people to shift more and more of their social and economic activities online, sending the share price of technology stocks to new highs, despite the wider global slump.

As countries emerge from the emergency, governments face urgent decisions about how to rebuild, what economic strategies and policies they should put in place to facilitate recovery and what kind of society they want to create. Confronted by the comparative resilience of tech businesses and knowledge workers during the crisis, as well as the enhanced reputation of research-intensive parts of the economy (and the healthcare sector in particular), some politicians and policy-makers are already reaching for the rhetoric of knowledge-based growth, following the template provided by the policy consensus of the last three decades. In 2020, for example, the former head of the European Central Bank (and soon-to-be Italian prime minister) Mario Draghi exhorted developed democracies to invest in human capital, in crucial infrastructure for production, in research, in order to rebuild in the wake of the Covid-19 pandemic.¹⁴ Heralding his government’s post-pandemic levelling-up agenda in 2021, the UK Prime Minister Boris Johnson argued that having the right skills and training is the route to better, well-paid jobs.¹⁵ The idea of a high-skill, high-pay economy – with people highly paid because they are highly skilled – is presented both as a solution to inequality and as a shortcut to economic recovery in a post-pandemic world.¹⁶ In making these claims, policy-makers implicitly assume that the political and economic problems of the knowledge economy era to date can be attributed to the inadequate implementation of social investment strategies: that a more wholehearted approach will draw more and more people into secure, well-paid, empowering knowledge work, closing the social, economic and political divisions that have characterized developed democracies over recent years.

There is some merit to such arguments. In retracing the history of the knowledge economy concept, it will become clear that there were moments over the last 30 years where better implementation of knowledge-based growth strategies could have led to better outcomes (as well as countries where better implementation of these strategies did lead to better outcomes). Even today, a more robust approach to social investment would still prove beneficial. Furthermore, as we will see, the knowledge economy concept was not monolithic but rather encompassed a range of competing understandings of knowledge-driven growth. Although politicians in most developed democracies ultimately gravitated towards a relatively modest policy agenda, more radical alternatives were available. Perhaps, rather than abandoning the pursuit of the knowledge economy altogether, what developed democracies need is a different approach to knowledge-driven growth.

Yet this book also provides evidence that the reality of knowledge-driven growth over the last three decades has departed from the models dreamed up by early advocates of the knowledge economy, in ways that this