The NS Essay - Towards the knowledge society

Markets are too cruel, communities too stifling, third ways too much of a fudge. Charles Leadbeatero

I will start with myself. I do not work for a company or a university. I am neither a business consultant nor a civil servant. I have no job title nor job description, no office nor expense account and I do not belong to a clearly defined occupational group. When people ask me, "What do you do?", I find it hard to come up with a clear, concise answer. I work from home, sometimes writing books, sometimes reports, often for a think-tank, sometimes for the government or a company. My father had a steady, predictable career, which carried him through to a well-earned, properly funded and enjoyable retirement. In contrast, although I am not yet 40 I have already had several mini-careers, in television and newspapers. Now I am one of Charles Handy's portfolio workers, armed with a laptop, a modem and some contacts. Peter Drucker christened people such as me "knowledge workers". Put it another way: I live on my wits.

At times, I do yearn for the security of a large organisation: something solid, dependable, with a recognised brand name. But never for more than a minute. Most large organisations seem pretty soulless, increasingly focused, driven, lean machines, designed to deliver shareholder value. The lights never go out these days in modern companies: no sooner have you found a cosy corner of the organisation in which to settle down than some ambitious manager points the spotlight at you, questioning your contribution to profitability. Employees have to live with the threat of downsizing, reorganisation or merger. They are no more secure than I am.

And that is the dilemma that faces most people. To go it alone is risky, demanding and stressful. Yet to rely upon larger organisations and institutions - companies and trade unions - isn't much of an improvement, because they seem either too cumbersome or too callous. Our societies and governments have simply failed to develop the institutions that can respond both to human needs and to the needs of the new economy. We are weighed down by organisations, laws and cultures largely inherited from the industrial 19th century: joint-stock companies, local authorities, trade unions, schools and universities. That century was as revolutionary as it was because technological innovation went hand in hand with institutional innovation. By contrast, we are scientific radicals but institutional conservatives. The Victorians had a grand political and social imagination to match their achievements in science and industry. Our era, thus far, has failed that test.

To understand the scale of the renewal we need, we must understand the three forces driving change in the economies of modern societies. The first is finance capitalism, the most obvious and maligned force, which sends a shiver down most people's spines. It is the disruptive power of deregulated, interconnected global financial markets, which swill around the world in pursuit of shareholder value. This is familiar ground: the recent crisis that has plunged millions of Asians into poverty and sent commodity prices plummeting is only the latest in a long line. Since the collapse in 1973 of the Bretton Woods system, which was set up after the second world war to regulate world financial markets, there have been 69 banking crises and 87 currency crises. As Martin Wolf, the chief economic commentator at the Financial Times, put it: "Financial systems are not so much an accident waiting to happen, as one that is constantly happening."

But a second force driving the new world economy, though just as pervasive and powerful as financial capitalism, is less well recognised. This is knowledge capitalism: the drive to generate new ideas and turn them speedily into commercial products and services. When you buy products today, you often pay mainly not for the materials used, but for the intelligence embedded in their software and technology. Radios became smaller as transistors replaced vacuum tubes. Thin fibre-optic cable has replaced tons of copper wire. When Henry Ford began mass-manufacturing cars, the miracle was that all those materials - iron, steel, rubber, glass - could be brought together in the same place. The steel in the latest luxury cars in the US costs $1,000; the electronics cost $3,000. The laptop I now use weighs a little less than the old laptop I bought five years ago. The two machines have broadly the same ingredients - plastic, copper, gold, silicon and a variety of other metals. Yet the new machine is ten times more powerful, far faster and more adaptable than the old machine. None of this extra power comes from new materials, but from human intelligence, which has allowed the makers to reorganise the available materials in minutely different ways. And it is this kind of creativity that now fuels economic advance.

Scientific research is far more productive than in the past, and its results are being translated into commercial products at a far greater speed. We are in the early stages of the development of families of entirely new products and industries: materials that mimic biology; genetic treatments for major diseases; drugs that can target the specific parts of the brain that produce emotions; and miniature robots that could work inside the human body. Every day, we use tools - computers, cars, telephones, microwaves - that embody the intelligence of thousands of our fellow human beings. Modern economies are a system for distributing intelligence.

The third driving force - and, again, one that is less widely recognised than financial capitalism - is social capitalism. The idea behind it is very simple. Making your living in a market economy involves risk. When you buy a product in a shop, you run the risk that it may not work. When you invest in a company, you take the risk that it may go belly up. When you agree to partner someone in a venture, you run the risk that they may let you down. Unless you are prepared to take risks, you cannot get much done as a consumer, investor or producer. But you will be more likely to take risks if you feel you can depend on other people - or at least on rules, institutions and procedures - to provide you with guarantees.

In other words, successful economies will help people to collaborate, will build up social capital. Think of the dense web of relationships between banks and businesses in Japan and Germany, the co-operative relationships among craft producers in northern Italy or the social networks that thread through Silicon Valley in California. An ethic of trust and collaboration is as important in the new economy as individualism and self-interest.

That is why we need to reinvigorate and revive organisations capable of creating social solidarity. Any society that writes off a third of its people, through poor schooling, family breakdown, poverty and unemployment, is throwing away precious assets: brainpower, intelligence and creativity. Our tolerance of this social failure is akin to the Victorians choosing to dump millions of tons of coal at sea, or to Henry Ford leaving machinery to rust out in the rain.

The goal of social solidarity is all the more important because the forces promoting inequality are so powerful. Inequalities have increased as knowledge has become more important in economic growth. This is true both internationally (in The Wealth and Poverty of Nations, David Landes estimates that the income per head in the richest nations is now bigger than that in the poorest nations by a factor of 400, compared with a factor of five in the mid-18th century) and domestically. In almost every profession, an elite is pulling away from the middle and leaving the bottom trailing. Markets for many goods - computer games, books, films and legal services - are becoming more international. Larger markets mean larger rewards for the people that win. Being the winner in a local market - a school sports day - may bring you a small cup; winning in a global market - the Olympics - brings you vast rewards. As more markets internationalise, there will be a few very big winners.

But there is a creative as well as a defensive case for social capital. Ideas for new products usually emerge from teams of people, drawing together different types of expertise. Few companies have the resources to make global products that combine several different technologies. That is why partnerships and alliances are proliferating. Cities such as London and Los Angeles, where ideas and people circulate at great velocity, will be at the heart of the knowledge economy. Collaboration is driving progress in science. The great innovations of the 19th century often came from an isolated stroke of inventive genius. The development of the microprocessor and the computer chip took the combined work of hundreds of researchers. Now, argues Sir Alec Broers, the vice- chancellor of Cambridge University, researchers, no matter how good their ideas, are unlikely to succeed unless they are part of a world network. In scientific research, Broers has written, "this is perhaps the area of greatest change over the last 100 years".

It is no coincidence that all the three forces I have identified are intangible: they cannot be weighed or touched, they do not travel in railway wagons and cannot be stockpiled in ports. The critical factors of production in this new economy are not oil, raw materials, armies of cheap labour or physical plants and equipment. Those traditional assets still matter but they are a source of competitive advantage only when they are vehicles for ideas and intelligence.

When the three forces of modern economic growth work together, the economy hums, and society seems strong and creative. When they are at odds, as they have seemed to be for much of the past 20 years, society seems in danger of fragmentation. The challenge is to combine financial, knowledge and social capital in a virtuous circle of innovation, growth and social progress.

The argument of the new right was that this was best done through the market. Self-interest, in that view, was the best motive force. The more people looked after their income, housing, welfare, education and health, the better off we would all be. That argument has run its course. A free-market society puts us at the mercy of the financial markets, widens inequalities and underinvests in the public goods on which we all rely.

Many on the left, by contrast, have argued that society should be organised to maximise a sense of community. Stakeholder economists, such as Will Hutton, say that companies should be forced to recognise obligations to communities and employees, as well as to shareholders. Communitarians, such as Amitai Etzioni, say that individuals can realise themselves only within a strong, supportive community.

That critique of market capitalism is superficially appealing but ultimately disappointing. Strong communities can be pockets of intolerance and prejudice. Settled, stable communities are the enemies of innovation, talent, creativity, diversity and experimentation. They are often hostile to outsiders, dissenters, young upstarts and immigrants. They can easily, in short, become the enemies of knowledge creation.

This battle between market and community has been central to the politics of the 1990s. The clash between market and community encouraged a string of attempts, none entirely convincing, to reconcile them: Tony Blair's and Bill Clinton's Third Way, Gerhard Schroder's radical centre, Lionel Jospin's hope to create a market economy but not a market society, George Bush Jnr's compassionate conservatism. Governments of the right and the left have continued with broadly pro-market policies while strengthening social institutions. This middle way is better than the market extremism that went before. But it is essentially a compromise and it leads to piecemeal, cautious reform: one step forward, half a step back. It does not produce a new vision of how society should be organised nor a radically new kind of politics.

The way ahead, I believe, is not to navigate a middle course between the old left and the new right, the community and the market. The way ahead is to adopt a different destination altogether. The goal of politics in the 21st century should be to create societies that maximise knowledge, the wellspring of economic growth and democratic self-governance. Markets and communities, companies and social institutions should be devoted to that larger goal. Financial and social capital should be harnessed to the goal of advancing and spreading knowledge. That will make us better off, more in charge of our lives and better able to look after ourselves.

The goal of becoming a knowledge-driven society, however, is radical and emancipatory. It has far-reaching implications for how companies are owned, organised and managed; for the ways in which rewards are distributed to match talent, creativity and contribution; for how learning and research are organised; and for the constitution of the welfare state and the political system.

Knowledge is our most precious resource: we should organise society to maximise its creation and use. Our aim should not be a third way, to balance the demands of the market against those of the community. Our aim should be to harness the power of both markets and community to the more fundamental goal of creating and spreading knowledge.

This article is an edited extract from Charles Leadbeater's "Living on Thin Air: the new economy", published this month by Viking, £17.99