What’s most important? It isn’t local – it’s small

Don’t just take my word for it.  This is what the Bank of England wrote in a recent report on local currencies and secondary money systems:

‘If non-local goods are cheaper because market prices do not fully factor in the additional costs that they impose on society over locally produced goods — for instance, higher carbon emissions as a result of increased transportation — then local currencies may improve welfare.’

This seems to me to be the core of the mainstream argument for any of the various radical localist approaches to building economic resilience.  Strictly speaking, some of them may be untraditional, or seem to flout some of the narrow rules of open markets – but they may help to tackle some of the intractable issues of market failure.  Even the crustiest orthodox economist could recognise that.

The question is how serious those market failures are at local level, and what is needed to unstick them.

I realise that the term ‘market failure’ is not often gargled with in New Start.  I use it now to mark the launch of the report of our project with the Friends Provident Foundation.  Over the past six months, we have been interviewing economists – with the intention of ending the gulf between the radical economic localisers and mainstream economic policymakers.

And there is a gulf, a series of misunderstandings and disagreements, which are – at the very least – frustrating the efforts of the economic localisers.  The result is a short book, by Tony Greenham and myself, called People Powered Prosperity.

For me, the ultra-local agenda is not really

about ‘local’ at all.  It is about small

I hope it can heal the rift enough to shape a new economic narrative that can turbocharge the revival of local economies, and to genuinely lay the foundations of rebalancing the economy – which, despite the rhetoric five years ago, shows few signs of happening quite yet.

The main purpose was to translate what you might call ultra-local economics – local banks, local energy, local procurement, local currencies – into terms which the mainstream can get enthusiastic about.  We have at least burst out of the conventional divide – the chief secretary to the Treasury has written the foreword.  We will be holding a seminar to discuss it at the Treasury.

But inevitably, it has worked a little the other way as well, translating some of the concerns of the economic mainstream to the radicals.  They may not forgive this.

This may also make People Powered Prosperity potentially as challenging to the radicals as it is to the mainstream.  I have certainly ended up feeling a little sceptical about the word ‘local’, because it seems to obscure the real debate.

Economic policy-makers misunderstand it.  They think it implies trade barriers and protectionism.  Since this isn’t the case – ultra-local seems to me to be more about competition than protectionism – I wonder if it might make sense to start from somewhere else.

For me, the ultra-local agenda is not really about ‘local’ at all.  It is about small.  Small infrastructure, small communities, small business, small institutions, and the failure of the national institutions – and banks in particular – to deal effectively at that scale.

That may imply local institutions, supported by a new ‘mezzo’ level of institutional support, but that is a means to an end and not necessarily an end in itself.

That is why we propose the following test.

Small business now earns 51 per cent of value added in the UK economy.  They should therefore be getting a similar proportion of the business investment available in the UK.  If they are not doing so, then it is a sign of serious market failure and we need to provide the intermediaries and institutions which could make this possible.

In the interim, the government needs to track these numbers regularly – comparing profitability and investment by size of business – and to report on them.

This is not to suggest that small business needs the same kind of investment as big business – that is the kind of assumption that has caused all the problems – but they do require effort, support and some finance.  If half the nation’s wealth derives from small business (and it does), then an effective market would make sure that half the nation’s effort, imagination and wealth was going into developing that half of the economy.

We all know that nothing like that happens.  The vast majority of the effort, imagination and finance bypasses small business altogether.

And therein lies the market failure that a realistic, radical new economic approach, that might tackle to genuinely rebalance the economy – and rebalance the rewards from the economy too.

Only, don’t let’s satisfy ourselves that we few understand that, and feel smug about that.  Let’s make sure it counts in the economic mainstream as well.