James Dyson is a quintessentially British hero. I use “hero" loosely, here, in the way that the Red Tops call people who defeat the Australians at cricket “heroes", rather than the plunging-into-a-burning-building-to-save-a-baby meaning of “hero". Nonetheless, we love him. There is something of the Wallis (be it of the Barnes or Gromit variety) about a man who beavers away in his shed making vacuum cleaners that don’t need bags but do glide on a beach ball. He has made the hand-dryers in toilets tolerable, and has now invented the fan without blades. I am convinced he has patches on the elbows of his tweed jacket, and I love him for it.
Opposition political parties like to recruit high profile non-politicians to assist them. Sir James has been leading a “technology task force" for the Conservatives (having previously been close to, and later alienated from, Labour). His recommendations, according to the Financial Times, are likely to include “tax breaks for high-tech investment and preferential residency rules for scientists and engineers."
Sir James told the Financial Times that the City needed better incentives to invest in technology start-ups. “Developing technology is a slow process and the risks are high. We need to encourage people to understand that, if you invest long-term, you can make enormous gains." The entrepreneur, whose wealth is estimated at more than £500m by rich list compilers, said: “I invested £2,000 in Dyson [the appliances business] and it is now worth a lot more than that."
Specifically, he is mooting reduced Capital Gains Tax for companies that invest over 20 per cent in high-tech ventures and extended leave to remain for foreign graduates from numerate disciplines. Which all sounds well-and-good, but to my mind it raises two issues.
The first is that it seeks to tinker with a machine that is fundamentally flawed. Of course Sir James is correct that it is madness to herd high-calibre graduates back onto aeroplanes as soon as their degrees are finished. But the solution is not to grant an extra few thousand places to the chosen ones. We should not be deporting (or denying access to) anybody who wishes to work in the United Kingdom. Similarly, Capital Gains Tax that discourages investment should be relaxed, not just for those investing in high-tech, long-term projects, but for industry as a whole. Car manufacturers and steel works are as susceptible to the effects of Capital Gains Tax as inventors.
The second is that Sir James is falling into the trap of thinking that he knows specifically what the economy requires. However, Sir James is no more able to predict the specific needs of an economy than the Government or a guest blogger at a think tank. Sir James may be right that UK needs to invest more in innovation and welcome more numerate graduates, but he may equally be wrong. Recent events have demonstrated the danger of assuming that current trends will continue into the long term. The UK may in fact need infrastructure rather than innovation; or it may require linguists more than mathematicians. Rather than creating distortions in the market, the government would be better letting the market perform its discovery process.
As for incentivising (forgive me!) long-term investment, there is a very simple and non-distortionary means of doing this: raise interest rates. Interest rates represent the return on investment: if they are low, long-term investment carries little reward; if they are high, long term investment is very rewarding. Austrian economists would argue that these, too, should be set by the market, so that they correctly reflect the time-preference of society (do we want to consume what we have today or a larger amount in the future?).
It is understandable that Sir James would like to promote an innovative Britain. A man who invested £2,000 and created a company worth £500m could be forgiven for thinking that projects like his are the future. But the future is not yet written, and a 25,000,000 per cent return should be incentive enough for anyone.