As the new year arrives, Baroness Sarah Hogg, former Frontier chair, argues that the lessons of economic history could point the way to a more productive future – if the UK chooses to heed them.

Here’s a thought for the new year, which should be a moment for optimism as well as soul-searching. Geopolitics pose threats to Western economies, but also for some (notably the UK), opportunities - if they can learn the right lessons from economic history.

Innovation is essential to growth

For over a decade, western European governments have kept their economies ticking over by sucking in other countries’ underemployed human resources. But their voters have revolted against this route to growth (which did little for income per head), while boosts to demand resulted in levels of public debt that have made financial markets jumpy. 

Forced to think more about at the supply side - so far to pretty meagre effect - these governments need to raise their game. Behind the classical growth model of the proximate causes (or constituents) of economic growth - the accumulation of capital and labour - there is a wealth of literature on the fundamental reasons why one country has achieved more growth than another.

Climate, geography, ethics and legal systems have played a part, while competition within open trading systems has also long been seen as the oxygen of growth. But amongst all these factors there’s a key phenomenon whose importance has become ever more apparent: the degree of technological innovation, without which no sustainable increase in productivity can ever be achieved. 

But the path from innovation to growth is hard

The trouble is that while governments may talk a good story, they seldom have much idea how to achieve technological growth breakthroughs. They stir in one-off short-lived policies like alchemists desperate to find a recipe for gold, and are easily distracted by other priorities. To be fair, the economics profession hasn’t been all that much help, because they have found the precise transmission mechanism from science and technology to growth frustratingly hard to pin down. As Robert Solow famously put it: “you can see the computer age everywhere but in the productivity statistics”. 

But economists are trying harder, and those who give them awards have noticed. This year’s three winners of the Nobel prize for economics were all focused on understanding the path from science to sustained growth. And they are an excellent prompt to good New Year thinking about how to create the seedbed for innovation and growth. 

The US economic historian Joel Mokyr was singled out for his identification of the need for innovation to be bedded in a culture conducive to science and its commercialisation, to give sustained stimulus to growth. In other words, industrial innovation isn’t something you can simply buy off an international shelf and expect it to yield an economic advantage.

Lessons from the seventeenth century

To deliver the transmission to growth, you need, to begin with, a strong base of scientific understanding. And of course there’s more. At different moments in history there have been, for one reason or another, big cultural shifts that made one economy more successful at innovation than another.

A notable example was the UK in the seventeenth and eighteenth centuries, when traditional attitudes were overwhelmed by the passion not just for pure science, but for its exploitation for the benefit of humankind. That addition is critically important. The Royal Society was never intended to be an ivory tower, and the changes were in society not just the laboratory.

But what does that teach us about how to take advantage of the unprecedented technological explosion of the twenty-first century? Take, for example, the UK again. It has long prided itself on a strong science base in its universities, still world class. The Government now is avowedly attempting to make the UK an “AI superpower”. And AI for Science (November 2025) is only the latest in a series of government strategy papers purporting to explain how this will be achieved. 

There’s some good stuff in all of them, particularly the articulation of the links between AI and scientific discovery. But a growing chorus of voices are warning against complacency. They believe the wrong historical lesson has been learned by anyone who believes the UK can achieve AI superpower status by following the kind of government-led approach that drove Japan’s postwar industrial miracle.

The world is changing too fast: already it seems there are more AI researchers in China than the whole of Europe and the US put together. That means a much broader approach to facilitating innovation, based on making the UK overwhelmingly attractive to the best scientific talent, is needed. 

The importance of talent – and attracting it from abroad

The journey from science to growth starts with talent. Yet Sir Paul Nurse, President of the Royal Society (and another Nobel prizewinner), has not been the only person to complain that the UK is shooting itself in the foot with high visa fees for a wide range of science researchers. Instead, history teaches us we should be treating them as an investment.

Scientific talent is mobile, as Nobel winners demonstrate. Some 30 per cent of science winners of the past 25 years were not working, at the time of their awards, in the country of their birth. The US has been the biggest beneficiary of this; the UK the biggest loser. With an excellent record, for its size, in breeding Nobel winners, it has seen too much of this talent move elsewhere.  

Why current geopolitics offers the UK an opportunity

It’s easy to be fatalistic about this, accepting that the US offers scale and money that can’t be matched east of the Atlantic. But at the research level, the English-speaking UK has an historic opportunity.

The Scientific American recently highlighted the risk to the US of a brain drain, as its universities find their gates closed and grants withdrawn. Meanwhile Putin’s regime is causing an exodus of Russian talent. And Israel, aware of the risk of an exodus among academics uncomfortable with its leadership, is straining every sinew to make its scientists want to stay. 

So the geopolitical climate is offering Europe just a chance to reverse a little of the brain drain of scientific talent to the United States in the second half of the twentieth century, and most particularly in the late 1940s. At a time when both the US and Europe are challenged by China’s rush to dominance in new technologies, no such opportunity should be missed.

As the Scientific American reminded its readers, while the nice story about the 1940s brain drain was that the US gave refuge to Jewish scientists, the truth also involved much more realpolitik. Some 1,500 German scientists and engineers got a free pass to the US after the second world war, with a blind eye turned to a Nazi or even SS past, partly because the US government was fearful of them staying where they were. 

They didn’t just go to save their skins. It may be apocryphal, but there’s a telling story that one of the favoured engineers put it like this: “We despise the French, we are mortally afraid of the Soviets, we do not believe the British can afford us. So that leaves the Americans.” The result was that “Operation Paperclip” tapped into the scientific pre-eminence established in Germany in the nineteenth century, fuelling American growth in the second half of the twentieth.

In the late 1940s those scientists certainly weren’t wrong about the UK: it was indeed spectacularly broke, with public debt equal to 250% of GDP. Today’s debt level (less than half that) may be uncomfortable, but not such that we need to nibble away at incoming scientists’ incomes on the spurious grounds of needing the money to finance the NHS. A truly growth-focused Government should now be playing to its potential. With similar single-mindedness to postwar America, it should be pulling out all the stops to attract scientists finding life uncomfortable elsewhere. 

Changing the UK’s innovation environment

But talent isn’t the whole story. In November 2025, with an unusually tabloid title (Bleeding to death: the science and technology growth emergency), the House of Lords Science and Technology Committee urged the Government to make many more changes to the innovation environment to break the UK out of its “doom loop”. 

The Committee identified several ways in which the UK has been inflicting self-harm. Leaving aside Brexit damage to research co-operation, trade and investment, the financial and regulatory climate has been chilly for innovative businesses. While their Lordships are by no means the first to bemoan the lack of scale-up capital in the UK, they are right to say it is a dismal feature of Britain’s feeble investment performance. Indeed, the danger they most fear is that the UK would spend a lot of money becoming the incubator for other countries’ innovation-led growth.

The role of pension funds

Returning to investment, a prime target of concern is the role of pension funds (which are in control of a bigger chunk of investment in the UK than their equivalents anywhere but in the United States). They devote less and less to UK assets and hardly any at all to the young private companies that are nursing the seedlings of growth.

There is, at last, some change afoot. The  Mansion House Compact, and the more ambitious but also woollier 2025 Compact, offer some hope of structural and regulatory changes that may increase the flow of pension funds to businesses pre-flotation. But the fragmentation of public sector schemes (compared with, say, Australia) means they lack the advantages of scale when it comes to allocating funds to riskier investments.

The Government’s Pensions Schemes Bill will bring an overdue consolidation, which will certainly help; but the legislation shows the all too familiar traits of multiple objectives and over-reliance on regulation. And meanwhile the Government needs to put its own house in order, by combining the small and over-bureaucratic public investment banks created, amongst other things, to fill the gap left by Britain’s exclusion from the European Investment Bank.

The other obvious weakness in the UK is that the scientific research base is much narrower than in the United States, being concentrated in the universities. Even in the life sciences, supposedly another UK priority, industrial research centres are few and far between. The Government needs to be more pro-active, and open-pursed, in attracting these, as well as boosting academic research. 

The UK’s culture of risk aversion

There still remains a more fundamental cultural weakness in the UK which fits tellingly into Mokyr’s picture of economic history. Americans, in particular, discern a negativity in the UK which penalises failure more often than it applauds success and embeds an aversion to risk that is inimical to growth.

This weakness can only be partly addressed by Government, and then by example rather than by the writing of yet more plans. To encourage innovators to feel the UK is the place for them, politicians need to do more than say they would like them to come, or even pay them to do so. By carping attitudes to financial success, by heavy penalties for failure, by ever-increasing regulatory requirements, by feeding the compensation culture, politicians and lobbyists in the UK have been making economic agents more and more risk averse.

Ask any entrepreneur to compare dialogue with funders in the US and the UK, and they will say the same. In the US, funders ask about a business’s ambition and opportunity; in the UK, about its downside risks. Above all this risk aversion is being hammered into the economy by a system of regulators who have themselves been made (by politicians) over-fearful of any perceived failure to prevent anything going wrong. It is a paradox that strong legal institutions, once deemed to be essential to a climate for growth, have come to act as a dampener.

The need for creative destruction

This culture of risk aversion is blunting the dynamic analysed by the other two of this year’s Nobel economists, Philippe Aghion and Peter Howitt. They were awarded their share of the prize for having developed Joseph Schumpeter’s evocative notion of “creative destruction” into a framework within which to explore the process of growth. 

Whatever such detailed analysis yields, the key insight is that innovation is not a peaceful, bloodless or “fair” process, but one in which firms die and jobs are lost as new businesses are born and new people make - a lot of - money. Overdoing employment protection is yet another way to lame the UK in the race for growth. It’s a perspective that sees AI itself as a threat, rather than an opportunity to overcome the competitive disadvantage of high labour costs.

Conclusion: there is a path to growth, if the UK chooses it

So the key lesson from economic history is that to be a winner in today’s growth race you need the full cultural package: world-class well-funded academic institutions; an immigration system that treats scientists as big wins and industrial research bases as ever bigger ones; a deep capital market for scale-up funds; and a tax and regulatory system that encourages risk-taking and economic churn, loss as well as gain, victims as well as victors. And on all these scores, the UK is found wanting.

To put that right won’t be easy, or popular. It will require a much broader agenda than an industrial plan, and a strong sense of priorities. And broader shoulders, too.

For if the government learns the right lessons from history, it will focus on attracting talent, fostering a climate of opportunity and allowing destruction in the name of creation. And it will take the blame for the pain as others take the credit – which is, of course, not what any politician signs up for.

Guest Author: Baroness Sarah Hogg, Former Frontier Economics Chairman