THE EVOLUTION OF ECONOMICS
In the first 20 years of Frontier’s life, markets have changed hugely – stretching the science used to explain and regulate them. The development of electronic communication and the computing power to manage large datasets have been shifting economic activity online at an ever-increasing pace, mowing down traditional companies, systems of social organisation and government regulators in their path. Economics needed to evolve to keep pace; and meanwhile the prevailing economic philosophy would be severely challenged by events.
DIGITAL PROGRESS IN MOTION
In 1999 the digital revolution was already well on its way, the dot-com bubble was sending the Nasdaq into orbit, and Amazon’s founder, Jeff Bezos, was Time magazine’s Person of the Year. Mobile phones were becoming ubiquitous, but there were no smartphones, Facebook did not exist and social media was a virtually unknown concept. Similarly Wikipedia had not been created, Google was only a year-old minnow and Alibaba’s online market was still a few months from launch. Blockchain and Bitcoin were, as yet, unthought of, at least in the public sphere. Deregulation helped to stimulate these multiple revolutions. Frontier was born at the height of belief that efficient markets could deliver the best outcomes for citizens.
OPENING THE FLOOD GATES
Governments’ main contribution to economic growth was to keep out of the market’s way, or open the gates to its stimulating force. In the UK, even a government of the (centre) left seemed to have had no difficulty in subscribing to its predecessor’s faith in choice and competition, and the use of competing private sector companies to provide public services. Throughout Europe, policy was driven by the EU’s commitment to encourage cross-border competition by dismantling national trade barriers within a “single market”. Indirect barriers – distortions of competition such as state aids to ailing domestic industries – were also prohibited. Barriers were coming down outside Europe, too.
In 1995, the last successful global effort to remove protectionist barriers had given birth to the World Trade Organisation, with authority to police commitments to freer trade. In 2001, China joined the WTO, an even more momentous event in the globalisation of world markets, since by then it was already the world’s second largest economy – and soon its biggest manufacturer and exporter of goods. The cold wind of competition was felt in all the “old” developed economies. But throughout the early years of the new millennium, governments in most of them continued, more or less grudgingly, to place their faith in markets. To be sure, they acknowledged, markets might overshoot: Nasdaq price–earnings ratios reached a fantastical 2000:1 before the dot-com bubble burst. But the casualties among investors and entrepreneurs did not do much to shake policy-makers’ faith.
FINANCIAL CRISIS HITS
Failures were seen as an essential part of the capitalist eco-system, keeping entrepreneurs on their toes and switching human and financial resources to where they could be used most efficiently. So the US continued the liberalisation of financial and telecoms markets and encouraged mortgage lending even to sub-prime borrowers. And at its Lisbon summit in 2000, the leaders of the European Union had vowed to make it “the most competitive and dynamic knowledge-based economy in the world” by 2010. And then, of course, came the financial crisis. The queues of frightened depositors in a northern British city became an enduring image of the banking system’s fragility. With the dawning realisation that some financial institutions were “too big to fail”, reliance on the market to resolve crises and restore equilibrium gave way to direct intervention, state support and wholesale reform of banking regulation. In Europe, “Anglo-Saxon capitalism” became a term of abuse rather than admiration, and financial institutions passed into public hands.
CALM AFTER THE STORM
More than ten years later, a sizeable chunk of one of the UK’s largest banks is still owned by the government. Even so, faith in competition survived. Throughout Europe, market-based approaches to policy are still far more prevalent than they were in the 1990s, with policy-makers focused on creating the conditions for effective competition and addressing the risks of market failure through regulatory policy. True, regulators have become more questioning about when, and how much, market competition can be relied on to drive good outcomes for consumers; but it is still, more often than not, the medicine of choice.
Governments have continued to privatise state enterprises (such as airports), with the pace stepping up in France. But the overall picture has become far more diverse, and in the UK, once at the forefront of liberalisation, political opposition to private ownership of public infrastructure has sharpened. Technology and the increasing digitisation of our economies has had a transformative effect on many traditional markets as well as on the ways companies interact with their customers. Economic policy has had to respond to these changes, as has the discipline of economics itself.
NOT OUT OF THE WOODS YET
But more than a decade after the financial crisis, stagnating real incomes, increasing inequality and pressure on public services have led to a shift in mood, reflected in a range of political movements across Europe and the US. In some places support is growing for more interventionism, more active government industrial policy, and even protectionism. Governments have become less certain about the objectives of economic policy – unsurprisingly, since achieving progress on conventional measures of economic success has seemed to get steadily harder. Policy-makers are struggling with the paradoxical combination of extraordinarily rapid technological innovation and barely moving productivity, exacerbating the difficulty of increasing real wages.
Ageing populations have increased the dependency burden on people in work, forcing up retirement ages, and driving up health costs. All these changes have put further pressure on the allocation of resources in public policy-making. In financial services and utilities markets, regulators had tested to destruction the belief that supplying customers with ever more information would make markets work better. They began to look for other methods. Behavioural economics is now mainstream, supplying new mechanisms to bridge the gap between direct intervention and market reliance, between liberalisation and paternalism. A big elephant pushing a little one illustrated Professors Thaler and Sunstein’s game-changing work Nudge, published in 2008, and since then more and more pachydermic governments have lumbered up to this new waterhole. Governments in the US and the UK established “nudge” units, economic regulators set up behavioural teams, and consumer industries have been quicker still to apply the insights from a combination of psychology and data analysis to their retail strategies.
Our 20th Anniversary content hub touches on all of our areas of expertise and explores how all of these changes affected the many different markets in which Frontier has worked, over the past 20 years.
A LITTLE ABOUT HOW WE GOT TO WHERE WE ARE TODAY...
Our goal was to build a new kind of consulting firm with economics at its heart, and with stability and sustainability as its benchmarks of success. Over the years we have nurtured a culture of openness and engagement. Everybody at Frontier is an owner. Our board is called to account by the shareholders, who are our employees. Our (unredacted) board minutes and management accounts are available to all in the company (economists do like to analyse things).
Looking back, if there was one key element in our success it was that we remained focused on the essence of the business. That is, on the nature of the people we wanted to recruit, the professional development we wanted to give them – above all how we were going to make Frontier a great place to work, creating a self-unifying system of governance, reward, experience and continuity. Those people were – and are – good economists, with the talent to work for major institutions (and so to be respected by those institutions who were our clients), but who could see that we might offer them something else – economics with imagination….
The willingness of our clients to come with us at the start of this adventure was both emboldening and enabling. It confirmed our view of the importance of trusted relationships. But, looking back again, it also brought home to us the importance of building a strong, professionally disciplined, well-governed organisation. As more than one of those loyal clients said to us later: We came because we liked and trusted you, but worried that you wouldn’t put a robust organisation in place to back you up. We thought – well, we’ll give you six months, then, if it doesn’t work, maybe we’ll have to look elsewhere. Six months have become 20 years in the blink of an eye, and many of them are still our major clients.
So this is the moment to say – simply – thank you. If we’ve tapped the strengths of our economics profession, we are aware of its weaknesses too: it was our task to teach clever people how to communicate their perceptions to others. Our international reach has given us a diversity of experience which is part of our culture as well as our capability. In our emphasis on “fun” and personal fulfilment we may have looked quirky at the time, but today’s focus on the link between well-being and performance at work now perhaps makes us seem, in this at least, ahead of our time. Long may it stay that way.