Yesterday, I spent a lovely day with old friends and we talked for hours over lunch and then a country walk and then over a pint in the local pub and then some more as we sat in the early evening in a lounge overlooking some of the most beautiful countryside that Monmouthshire -- or, indeed, the whole of the British Isles -- has to offer. I was reminded that the last time we had met together as a group had been 30 years ago in a lawyer's office in our industrial home town -- from which we'd all radiated (with some relief) in later years. The fact that our first meeting was in a lawyer's office was of no significance whatsoever, except that one of us was a lawyer and it was a convenient venue at the time.

In those days a group such as ours was considered to be more than a little eccentric, if not completely off our trolleys, because our main concern was environmentalism. We were worried by rampaging economic growth, of growing pollution, of the destruction of the countryside and natural habitats all round the world, of declining oil resources -- the whole basis of our economic system -- and so on. We were deeply pessimistic. But we were not entirely helpless because all of us became active in the environmental movement in different ways soon afterwards. I started (or had already started) an environmental journal, Towards Survival, which, together with The Ecologist was (as far as I'm aware) the first of such in the world, and my friends started a political party which rapidly mutated into the Green Party, also the first of its kind in Europe and probably in the world.

We reminisced about these things but it was not until very late in proceedings that it was revealed -- in our typical modest English way -- that two of our party of six were writing books. Because my friends did not actually want to spend money buying my book -- if it ever gets published -- or perhaps they would not live long enough to be able to read it -- or perhaps I would not live long enough to be able to finish it -- they prevailed upon me to give a brief synopsis of same. Which threw me into a dilemma.

Aristotle didn't have such a dilemma. When he left his home town of Stagira as a young man and joined Plato's Academy in Athens in about 360BC he became what we would now call a Professor of Rhetoric. While Plato specialised in the technique of teaching by means of Socratic style questioning which he'd learned from his former master, Aritstole concentrated on the lecturing method -- the gradual building up of his argument step by logical step and then ending with his strongest point. In fact, when Aristotle had broken away from Plato and set up on his own Lyceum, he wrote a whole book about the art of persuasion with the obvious title of "Rhetoric".

Aristotle must have been very good at this style of argumentation because it largely prevailed from then onwards, particularly when he was taken up in a big way by the Christian Church in the Middle Ages when the works of Aristotle were given almost equal importance to the sacred scriptures. The Platonic type of discussion (not to say, fisticuffs) that was then carried on by the sharp-minded medieval scholastics gradually gave way to the authoritatve sermon and, unfortunately, we have been inflicted with this mode of address ever since, if not by popes, cardinals and bishops, but by our politicians.

However, Aristotle was dead wrong, at least in modern times. What may have been acceptable in Aristotle's day -- what with young aristocratic students lounging about, fed with grapes by pretty slave girls, and with all the time in the world to spare -- certainly doesn't apply now. What modern behavioural research tells us, and what the advertising profession has absorbed wholeheartedly, is that the best technique is to find the most important part of your argument -- the unique selling point, if you like -- and 'sock it to them'. And hard.

But I had a dilemma because, faced with the faces of my sexagenarian and septuagenerian friends eager to receive morsels of wisdom falling from my lips, I didn't know where to start. I couldn't explain in Aristotlian fashion because it was not intended that I should be speaking until midnight at least. On the other hand, my hypothesis about economics rests upon two main points. Both of them, at first sight, seem rather trivial. But, in any case, which one should I present first? Although I could gesticulate with both my left hand and my right hand -- as I did, helplessly -- I couldn't present my case with two mouths simultaneously. I had to plump for one or the other to start off with.

So far, in my postings, which long ago you might well have given up reading, I have concentrated on one of my main arguments. This is that the instinctive drive for status on the part of the male and the female (though carried out in somewhat different ways), is a close cousin to sex -- and the opportunities and consequences thereof -- and thus immensely powerful. It is so powerful, in fact, that the seeking of anything that enhances status also happens to drive the whole economic system like nothing else. It is not about shortages of resources -- which is what the economics text books tell us -- because early man had more than a sufficiency of these. It is about opportunities for status.

Yes, goodness knows we have shortages of resources because there are now so many of us and we are greedy besides in using up our resources. But what actually started long-distance trade, and thus our whole sophisticated economic systems, was the drive for status within our community. Explaining economics in terms of shortages of resources rather than in terms of status is rather like the drunk who searches for his front-door key under a lamp-post far down the street instead of under his porch.

But what I haven't yet spent much time on in my postings so far is exactly why we sometimes choose the most absurd items with which to embellish our status or to make play for a higher status. How is it that early man, quite unlike all the other primate species should choose to be so ridiculous as to decorate his face and body with pigments (as indeed every single hunter-gatherer tribe ever discovered still does) in order to show what a clever fellow he is, and why he should therefore be regarded as a good catch by the best females?

The reason is that man, unlike his predecessors and fellow primates has a vivid imagination. Beside desiring status he also loves novelty -- and, what's more, he can create novelties -- and, what's even more, he can convince others that the possession of such novelties shows that he has high status and that if they were clever enough to do what he does or to possess the same things that he has, then they, too, can have high status and enjoy all the best sex (if a male) or the highest economic security (if a female) that they could possibly desire. As another Aristotle of later times once said (this time Aristotle Onassis) "The only point in being rich is to have as much sex as you want with as many beautiful women as you want."

But where does man get his imagination from? What is it about him that enables him to create and also exploit novelties? It is the frontal lobes of our cerebral cortex, the wrinkled outer surface of our brain which does all the heavy processing work. Unlike the other primates, which have but a modicum of frontal lobe tissue in their brains, we have a massive amount -- well, a few cubic inches anyway. Whatever the gene it was that produced our frontal lobes, it was very active indeed for millions of years during the lives of our predecessor species. Brain size expanded several times in those previous eras, not only because our bodies were becoming somewhat larger (and you need a slightly bigger brain for that), but mainly because our cortex was growing hugely, particularly in the front of the brain -- the stuff immediately behind our bulging forehead.

We have a tremendous penchant for novelty, and an equivalent ability to produce it. Not all are economically successful but some are so powerful that they drive our whole system and it is these that I am calling Status Goods.

So that's how I presented my case -- genetics and frontal lobes first, and then the instinctive drive for status, even though the latter existed first in our evolutionary history. I then rambled on for a minute or two on the lamentable fact that the male lust for status and the power that goes with it invades and saturates almost every other aspect of our lives and institutions besides economics and haqve caused the vast majority of man's problems.

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I'm putting the following article from the FT of this week-end into the database of my book because it has one or two interesting observations to make about innovation and I might want to predate upon it later. As I read it, however, I couldn't help feeling that that there is more than a little anxiety seeping through it. This is something I'm noticing incrasingly in writers on economics. Perhaps innovation is drying up? Or perhaps we (at least the important Initiatory middle class) might not have enough time or energy to enjoy more consumer goods than those we have already. I think this is so. I don't think there'll be much that is greatly new by way of hardware consumer goods in the future. But not because the wells of our imagination are drying up.

One argument that might be put up in oppositin to my case is that we are moving into a ervice economy. In advanced countries more than 60% of workers are now in the service sector and maybe only 20% in the manufacturing sector whereas, a hundred years ago, it was the other way round. So we don't need so many Status Goods to drive the economy forward. But this is a false argument. Even though the numbers of service jobs is increasing all the time they are all connected directly or indirectly with hardware consumer goods or with existing activities. In other words, even the the greatest growth in service occupations will not add anything to our normal daily use of time, energy or space. They are just different ways of producing the balance of things that we have or experience now.

However, there is one very important 'service' field which is not in any way connected with existing ways of filling our time and which will perfectly fit the bill as a future Status Good. These will be genetic products that improve or replace parts of the bodies that we automatically carry around with us. These will be expensive andf will undoubtedly kickstart the economy at some future time when they will become available, we will not need to spend any additional time or energy on them. Examples include a non-rejectable heart or kidney or liver, or injections of stems cells into our brains if we suffer from Parkinson's. And we might also start spending money on ensuring that we are increasingly able to banish deleterious genes from our DNA instead of encouraging them and saving them to procreate again in the next generation which, unfortunately, is what the medical profession is doing today -- and increasingly, too -- without thinking of future consequences for our survival.

KH

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Innovation is old hat in the new New Economy

Christopher Caldwell

The National Bureau of Economic Research announced on Thursday that we should stop feeling sorry for ourselves. In the US at least, the recession that began in early 2001 lasted only eight months and has been over for almost two years now. For the NBER, an apolitical research organisation, saying that the economy is out of recession does not mean that it is operating at full capacity. But it does imply that we are again inhabiting at least a slow-motion continuation of the New Economy that

existed before the dotcom collapse, the Enron accountancy scandals and the attacks of September 11 2001.

The NBER's findings will cheer European investors convinced that US demand can pull other western economies out of the mire. Those Europeans who were not impressed with the New Economy in the first place will fear a new round of privatisations, benefit cuts, redundancies and other collateral damage even before the economic dawn breaks.

If the New Economy is back, what kind of business policies should European governments pursue? Will they "learn their lesson", having being outperformed in the first innings of the boom, and adopt US business methods more thoroughly? Or have they figured out a way to beat the New Economy system? The right course may depend less on what kind of economy the New Economy is than on what stage of it we have reached.

The clearest contrast between European and American capitalism was drawn by Michel Albert, the French economist, in his 1991 book Capitalism versus Capitalism. Mr Albert distinguished between a "Rhineland" model, as practised in Germany and Japan, and an "Anglo-Saxon" capitalism prevalent Since the 1980s in the US and Britain. The former favours "stakeholders" -- the universe of clients, wholesalers, employees and neighbours who interact with a given company. The latter favours shareholders, full stop, and the wider society be damned. The social advantage seemed to go to the Rhinelanders, and so did the economic one continental capitalism provided higher average salaries, more equitably distributed. Besides, the workers who got them built better mopeds and liquidisers.

What they could not do, however, was adapt to a technological revolution. When, in the 1990s, software-writing replaced steel-rolling as the engine of western economic growth, the Rhineland model turned into a disaster. The German manufacturing sector had been rock-steady at a third of gross domestic product in the three decades before 1990. When it plummeted to 24 per cent of GDP by 1997, rigid hiring rules and banking customs prevented that capital and those jobs from being shifted elsewhere, as happened in the less "socially responsible" Anglo-Saxon economies. Continental workers and managers were so intricately entangled in their delicate social environments that they could not break free to innovate.Europe's political energies for the past 10 years have been devoted, with mixed results, to freeing entrepreneurs toexploit the New Economy.

But is it any longer worth pursuing this course to its end? Inevitably there will come a moment when the "innovation" phase of tne New Economy passes -- and a period of consolidation begins. If that moment is now, Europe could be folding a winning hand for lack of nerve. After all, none of the countries that enjoyed world-beating economic expansion from the 1960s through to the 1980s did much in the way of innovation. The Japanese did not invent the small car, any more than the Germans did the coffee-maker or the Italians the typewriter. Instead, showered with benefits and spurred to teamwork, their workers patiently elaborated minor improvements in technologies and products for which there was a proven worldwide demand.

If that moment of transition is not here, it is coming. Fifteen years ago there were more word-processing programs than there are languages in New Guinea; today virtually everyone in the world uses Microsoft Word. In 1985 few people knew a Walkman from a Welshman; today we have a fairly clear inventory of the gadgetry on which the high-technology economy will be built for the next couple of decades e-mail, mobile phones, personal digital assistants and their various spin-offs.

In any technology cycle, innovation-based high-risk economies give way to security-based low-risk economies, once the returns from risk no longer tempt the governing authorities. In the 1880s, the US allowed railway barons to build 75,000 miles of track. Little more than a decade later, Congress was angrily smashing the concentrated power of the "railroad trusts". Once the lines and the rolling stock were built, what further need did politicians have to give entrepreneurs a free hand? That capital was suddenly worth less concentrated in the hands of a few bigwigs than it was doled out to proletarian voters. There is no reason over the long haul to expect that Microsoft and Compaq will escape the same treatment. Unfortunately, many grassroots demands for wealth-sharing are today directed at precisely those sectors in which innovation has most clearly not run its course medicine and biotechnology, for example.

It should be possible to disaggregate the elements of the free-market tool kit of recent years. This does not mean that European politicians who want to keep some kind of social market economy do not face painful choices. It remains essential that workers stuck in unproductive sectors be moved to productive ones. The evidence is that labour-market flexibility is a more effective means to this end than doling out tax breaks. Gerhard Schröder cut corporate tax rates from 40 to 25 per cent as soon as he entered office but said No to the hire-and-fire Gesellschaft; this compromise did nothing to budge the German economy from its downhill path. The Netherlands, by contrast, after passing landmark labour legislation almost a decade ago, has maintained a lavish welfare state while mostly enjoying lower unemployment rates than low-tax Britain or the super-low-tax US. Each country must set its own priorities. But a formulaic approach to encouraging "innovation" may be a means of running to meet opportunities that disappeared with the past decade.

The writer is a senior editor at The Weekly Standard