Culliton Submission 1992

(Outline of a personal R&D philosophy)

Dr Roy H W Johnston

(All this material is copyright to the author; comments to rjtechne@iol.ie)

The following essay, which is based on a submission made by the author to the Culliton Committee on industrial development policy in 1992, contains the following sections:

  • (A) Background, in which I attempt to summarise my own experience as a basis for recognising and commenting on the problem;
  • (B) Statement of the problem, in terms of the obstacles to the development of innovative added-value employment-generating enterprise in the Irish environment;
  • (C) Outline theoretical approach to the development of a framework supportive of new enployment-generating added-value enterprise;
  • (D) Suggestion of some immediate next steps which might be implemented without delay.

(A) Background

Since graduating from TCD in mathematics and physics in 1951 I have been engaged in one aspect or another of the process whereby scientific reseach at the frontiers of knowledge is transformed into technology with economic utility, and of the process of entrerprise development with innovative technology. I have worked in universities, research institutes, existing stablished firms and in start-up firms, and at the interface between the university research system and innovative industry; in Ireland, in Britain and in France.

To give all the details of this would in the present context be tedious; it is on the agenda to place some aspects of this experience on record, if an appropriate format can be found.

Such a career would be unremarkable in a developed industrial country. In Ireland however it may be somewhat unusual, because of the transitional state of the country from a colonial to post-colonial situation.

In the course of this career, early on, I became aware of the economic disaster which faced the country in the 1950s, reflected as it was in the total lack of jobs for people with scientific training, who were produced by a relatively well-developed university system (adapted to the needs of the British Empire), but ended up emigrating in droves.

I did some rudimentary economic analysis, aimed particularly at the question of the movement of capital, and discovered that it was not for shortage of capital that the country was in crisis, as we were substantial net exporters of that commodity. The pattern for the industrial commanding heights had been set by Guinness in the 30s, whose road for expansion was to set up in their main export market, with the opening of the Park Royal brewery in London.

This analysis seemed to suggest that the only positive way forward was via the development of the State sector, via enterprises such as the Sugar Co, Aer Lingus etc, with conscious political direction of capital into commercial investment in Ireland, with national and social objectives.

(It also, in my own case, suggested that radical political alternative approaches were necessary, and led to my devoting some energy to the development of some sort of effective 'left' in Ireland, which would be prepared to give priority to the State sector in the national interest. The analysis of the complexities, anomalies and failures, locally and globally, which gave rise to the current general crisis of the 'left' is another matter, to pursue elsewhere.)

To return to the end of the 50s: shortly after the Industrial Development Authority (IDA) was set up, I sought it out, with the concept in mind that if the flight of capital and the flight of knowhow could be brought together, both might be creatively employed in Ireland. Thus I must have had in mind a search for some sort of hedging alternative to the centralist State model which was the left-wing orthodoxy of the time, and which Irish governments had also adopted pragmatically.

I remember finding a small office, with some civil servants in it, to whom I attempted to make the case for reversing the brain drain, and linking it with an alternative route for expansion for those firms which had saturated the Irish market and were poised for expansion. I had, of course, no business training or experience, and I doubt if I presented the case well. In addition however I ran into a complete culture-gap; this was my first experience of attempting to deal with a bureaucracy which had been trained totally from Leaving Cert level in bureaucratic procedures and little else.

Shortly afterwards my short-term contract with the Dublin Institute for Advanced Studies came to an end, and I had to look for a job. The managing director of Guinness in Dublin had made a speech which was reported in the papers, urging the development of knowhow-based industry in Ireland. I wrote to him, he invited me to lunch, and I was offered a job...in Park Royal. It was a development job, rather than a research job, and it was policy to keep the research in Dublin and the development in Park Royal.

This got me some experience of hands-on development in an industrial process environment, development project team-work etc, which has added to the background for this submission.

Returning to Ireland in the 1963, it looked like there was something like an economic take-off beginning to happen, and it appeared to be knowhow-based, although the IDA still seemed to think that knowhow was something you imported by bringing in a major multinational. I was associated with the Aer Lingus real-time computing project, and was able to measure our abilities against those of the IBM people we were dealing with. We were every bit as good, and in some ways better. We shot down their first proposal, analysing its performance before buying it, using the experience of an American airline, and some hard-core theoretical analysis. Their second proposal made use of 3rd generation hardware, and took care of the weaknesses of the first which we had exposed and analysed.

I conclude from this episode that the knowhow available from Irish graduates is as good as that available to any multinational in the world. Even in the 60s however the IDA did not seem to be aware of this. As late as the mid 70s an episode occurred which showed that this view persisted: an honorary TCD degree was being given to the President of Bell Laboratories, one of the leading US applied-scientific research centres. The IDA happened to have their man in on the event. It was a surprise to the IDA to learn that the basis for the event was a long-standing contact between Vincent McBrierty, of the TCD physics lab, and Bell Labs, in the context of research into nuclear magnetic resonance. There was a hint of a realisation on the part of the IDA that the university research system was in fact a key developmental resource.

They came up with some money (by bending the rules) which enabled TCD to start up the Applied Research Consultancy Group, employing some people who had emerged from key research areas to act as a delivery system for industrial take-up of the results of the research. I had the task of managing this small university-fringe enterprise from 1976 until it was wound up in 1980.

The experience of this pioneering enterprise was on balance very positive, and the analysis of the reasons for its failure contributes to the alternative approach suggested below.

Shortly after this came the Telesis Report. The key message of this had been forshadowed by Armand Frank of SPS (1) in the 60s; I had noted it at the time, and it supported my own analysis, and its subsequent development. The lessons of the Telesis Report, even now, do not yet appear to have been taken on board at governmental level.

Thus I can claim to have a background in which I consciously, as early as the 50s and certainly in the 60s, pioneered the socio-technical standpoint which is now beginning to be the orthodoxy of the Irish technological establishment, but has yet to be taken on board effectively by the politicians.

(B) Obstacles to the Indigenous Development of Innovative Industry in Ireland.

This short note does not do justice to the complexities, but it is necessary to begin with the historical roots, which include among them the blocking of access to the 'godless colleges' by the Hierarchy of the rising Catholic middle classes in the mid-19th century. The net result of this was that the Catholic component of the bourgeoisie, when it emerged to national leadership, had been deprived of effective access to the emerging European tradition of science-based industry, and was steeped in the verbal rather than the practical culture. The handful of pioneers (2) who emerged subsequently from the National University showed what might have been done had the foundation been laid earlier.

The other side of this coin was that such scientific Establishment as there was at the foundation of the State was solidly Protestant, and that this seems to have been seen by some as a 'problem' rather than as a resource.

Thus insofar as there was a 'science-based entrepreneurial' tradition in Ireland at the turn of the century, it would have been dominated by the Protestant colonial tradition, people like Purser Griffith being perhaps typical, likewise Ferguson (of tractor fame); it was rooted in the tradition of the Parsons turbine and the Grubb optical works, both spin-offs of the Earl of Rosse's famous telescope at Birr(3). All this is only now being 'taken on board' in some fringe-political areas, but remains a long way from mainstream politics.

People reared in this tradition would have been decidedly uncomfortable in the post-Treaty Catholic-hegemonist situation; they mostly emigrated or withdrew into their shells. Some, such as my father Joe Johnston, in the 1920s attempted to keep the entrepreneurial spark alive via a programme of raising the economic consciousness of the co-operative movement, the legacy of Horace Plunkett, but on the whole without success, as this had been crippled by partition, and lacked deep social roots.

It was necessary to re-invent a national entrepreneurial culture, in the post-colonial situation, and the people who were engaged in trying to do so lacked the insights to enable them to pick up the threads of what had been there before. The 1930s concept of entrepreneurship was to erect a tariff, and supply the home market with a high-cost low-quality product, enabling members of a golden circle to make money at the expense of the Irish people. The concept of 'entrepreneurship', already given a bad name by the 'gombeen men' who had made money out of trade in the abandoned chattels of the Famine victims, was not salvaged by 30s protectionist experience.

It was the 70s before the State 'discovered' scientific knowhow, available from a European-standard university system, as an industrial resource.

Another aspect: it was the late 60s before the Government discovered the need for technical competence at the technician level, and founded the Regional Colleges (4). This was about 30 years overdue; the Algerians did this in the first decade after independence. Prior to this, there was nothing between the graduate and the craftsman, and the Dublin VEC Colleges which tried to fill the vacuum were dependent on London accreditation. This appalling gap must be attributed to the domination of the State machine by civil servants, with academic leaving certificates, reared in the verbalist tradition of what passes for Irish culture, without the least understanding of what was involved in the setting up of knowhow-based industry, and under the illusion that this knowhow was necessarily an imported factor.

People familiar with the historical background are welcome to pick holes in the foregoing, as I know it is a crude approximation. If in so doing, some issues get discussed that would otherwise have been ignored, then no harm is done.

Now to focus in on the problem: starting an innovative business. The tax environment is crippling, and where State subsidies are available, they tend to be directed at equipment rather than people.

Taking the experience of the TCD applied research consultancy group: we were able to start because the IDA bent the rules in our favour, and enabled us to employ some postgraduates with the aid of 'training grants', thus giving a visible 'delivery system' which would suggest to potential customers that we could in fact supply knowhow on contract and outside academic schedules. This worked, we gained experience, and we doubled our turnover in 3 successive years, and increased it further in the 4th.

Thus the initial IDA support, anomalously for the time, subsidised people rather than equipment.

In year 4 we put in for an equipment grant which would have made it feasible for us to bid for a contract abroad. We went to the IDA for support, but were blocked (I understand) by the Department representative on the Board, on the grounds that the IDA was not supposed to be financing 3rd-level institutions.

Granted, we were not a separate business entity; we were an autonomous financial unit in a College accounting system, supposed to cover ourselves without cost to the College. This was a transitional situation; the trend in Europe, with which we were in touch (and indeed counted ourselves among the pioneers), was for fringe-college enterprises to have corporate status, and to have some overhead support from Regional Government. In the event, the College decided that the enterprise was too risky. When the sums were done, it turned out that the overall activity had been about 15% short of viability, on total costing. Comparable services elsewhere (eg the IIRS) had something like a 50% State subsidy.

The point of all this is that the 15% we were short was substantially less than we paid in tax to the Government. Which suggests that it should be feasible to devise a tax system, and in general a State environment, which would favour start-ups.

By way of coda to this episode, the present writer had a few bad years, and was at one stage reduced to drawing unemployment benefit. At one point he leaked the information that he was working hard to try to get Techne Associates off the ground. Whereupon they stopped the dole, although no money was coming in.

A further coda: thanks to the lack of entrepreneurial culture, the aura of perceived 'failure' of an enterprise is seem by most people as negative, rather than (as in the USA) as a creative learning experience.

And the other side of the coin: during this time the commanding heights of the economy, such as CRH, Smurfit and the Banks, were (like Guinness in the 30s) exporting their surplus capital, mostly to the USA. The business lore is that you go abroad and do what you know how to do, rather than venture into the unknown by doing something else in Ireland. The environmental obstacles to start-up reinforce this lore, which is by no means universally accepted (cf the experience of Nokia in Finland, which originated in paper pulp and went on to become a supplier of digital telephone exchanges; if Smurfit had employed some of the graduates whom we export to Philips in the Netherlands they could have perhaps been doing something analogous).

Thus the problem can be summarised: the present grant, taxation and social welfare system

  • (a) subsidises the scarce commodity, capital, encouraging its profligate use;
  • (b) taxes the plentiful commodity, labour, giving an incentive to use capital to get rid of it;
  • (c) penalises enterprise among the unemployed.

A rational economic tax system would:
  • (a) tax the scarce commodity, capital, in order to encourage economy in its use;
  • (b) subsidise the plentiful commodity, labour, in order to encourage its maximal use in servicing capital as intensively as possible;
  • (c) encourage enterprise among the unemployed.

(C) Theoretical basis for a solution?

It is easy to suggest the above principles, but how do you do implement them? In what follows I am proposing some recipes which have the status that they should be perhaps looked into, with some economic modelling, by one or more postgraduate students, with appropriate supervision and sponsorship.

Let us consider a situation in which the revenue of the State is generated by an annual tax on the estimated value of all fixed productive assets: land, buildings, heavy plant and equipment. We are talking of a generalisation of Crotty's Land Tax (5). Crotty I gather would generalise his land tax via a tax on the banks, on the assumption that this would get at the buyers of equipment using bank credit for this purpose. This approach however is I feel somewhat of a blunt instrument, in that it would also penalise the type of overdraft used for working capital.

This tax is used for all the needs of the State, and in addition for providing a basic income, equivalent to the present dole, to everyone; a 'social wage' or retainer, to ensure that they remain in the country and available for work. The social wage is paid direct to the individual, and in due proportion to the carer (of whatever sex) in respect of dependents (eg children).

The owners of the productive assets can then employ people to work them, by paying an additional 'economic wage', over and above the social wage paid by the State. There is no tax or PRSI deductions, these taxes on labour having been abolished. The marginal cost of recruiting additional labour is thus relatively low, and there is an incentive to recruit, in order to get the best out of the productive assets, on which a fixed tax is paid.

Note that what we are saying is, basically, 'legalise the black economy'; this MUST be going on now to a considerable and unrecorded extent, the present level of unemployment being rendered tolerable by people earning on the side, and not wanting to kick up a fuss, lest they be discovered. In the 50s with less than half the numbers of unemployed there were mass demonstrations in the streets.

[I have heard at first hand of a situation where a small firm has been got out of a difficult situation regarding a delivery by a moonlighting incentive scheme involving untaxed week-end work, with workers and management colluding. The success and persistence of the black economy shows the way forward, and supports the argument of this submission.]

In this scenario, the value of the assets would be the book value. If a firm undervalued assets, this would show up when they were sold, and back tax could be claimed.

There would need to be a base-level, corresponding to some square footage of shelter per person, and some amount of land per person, which would be untaxed. Any living space over and above this would be taxed, and its owners would have an incentive to use it productively, whether for starting a cottage industry, or rented accommodation. Any land above the base-level would be taxed at a level such as to encourage its productive use, or else to sell it off to someone who would use it productively.

Putting numbers on this principle is one research project worth doing, and current economic modelling techniques should be easily able to handle it.

It would thus be possible for many long-term unemployed, who lack marketable skills, to live on their social wage supplemented by subsistence horticulture. I understand that there is such a group which has dropped out of Dublin and settled in Co Clare, finding the situation much improved. If however under the present tax dispensation they make a success of market gardening, and cash in on the premium market for organic produce, their dole would be stopped.

There are schemes to subsidise small firms to employ graduates with scientific and engineering qualifications, and this is regarded as being successful, in that the graduates so employed are usually retained at a full wage once they have proved their worth. Thus the concept of reducing the cost of the marginal recruit is admitted. We are simply generalising this concept, and making it less conditional on immediate high value-added generation.

The TCD applied research enterprise, in this environment, would have been ideally placed, as it had no fixed assets, and could have recuited its workers at about half the cost; as most of its outgoings were wages, it would have been quite profitable. When it went to buy fixed assets, it would have not needed to go to the IDA for support, and it would have budgeted for the associated assets tax, which would have encouraged it to choose the equipment carefully, to maximise its productive utility.

[D] How to make the transition: the immediate possibilities:

Making the transition from the current situation could be done, with some careful management. (This transition is also a topic for research attention.)

It could be done without changing current cash flows, simply by re-defining them. Take for example a firm with assets of 2M and employing say 100 people at average net wage 12K and generating added value 1.8M. Say it pays PAYE deductions of 200K and VAT 180K to the State. These are crude ball-park figures for a marginally profitable firm.

Suppose we define the social wage as 2.5K per person, and each worker has 2 adult-equivalent dependents on average. We thus have 7.5K social wage, and a further 4.5k economic wage.

The spouse's part of the social wage would of course go direct to the spouse, together with the associated social support for the minors. The exact way to handle this is a matter for revision of social legislation, and feminist interests would of course need to be taken into account.

Thus we need the State to get 750K + 380K if it is to be no worse off. We are talking, in this hypothetical example, about something like a 56% tax on the productive assets, but in this situation the firm could recruit new workers at only 4.5K per skull, and could really work the productive assets to capacity, generating profitable business, and then if and when capacity was expanded, there would be a lead time before tax on the expanded assets became due. The marginal effects would be spectacular, though at the actual transition-point no-one would be any better or worse off. Setting the best values for these numbers would be a valid and feasible modelling exercise. The values given above are simply to illustrate the painless transition process.

Taking another look at it: consider a self-employed person with a house worth 80K of which 50% of the square footage was surplus to basic living space requirements. This at a 50% tax rate would generate 20K revenue to the State, of which 7.5K would go back to the family as social retainer and the remaining 12.5K would nominally replace the VAT which is probably currently being paid. If the business went down, what would happen the surplus space? It would still be taxable, and the tax ought to be recoverable eg by renting rooms to students. Here we are some way off the right ball-park: rent for say 4 rooms might generate 4K per annum.

Thus for the tax on productive assets to work equally well for self-employed craft-workers doing cottage industry operations, progressive tax-bands for square footage over the basic level would have to be introduced, eg starting at 20% in the above case. The reconciliation of the numbers with something which would work and would not generate anomalies is part of the research project. I must emphasise that he above are very rough first estimates.

To return to the overview: if this transition was made in year 1, and an average tax rate was struck, some firms would be above it and some would be below it, if the rule were 'no change in cash flow'. In successive years, the individual rates could progressively be adjusted until all were at the average rate. It might be necessary to have the average rate defined by sector, depending on the intrinsic capital-intensity of the sector. The value of the assets-tax rate in each sector could be used as an economic planning tool. The land tax rate in agriculture should perhaps be somewhere in the neighbourhood of what people are prepared to pay for conacre, and this should help define the sectoral rate.

The tactics of the transition might be to declare that from Day 1 anyone can recruit off the dole and pay the marginal economic wage, with the new recruit still keeping the dole; anyone on the dole can invent a job and can stop looking over his shoulder, as what is being done is no longer 'black'.

Any firm sacking expensive workers to hire cheap ones would however have to declare its assets for tax, and make the transition according to the book.

***

The foregoing ideas are showing signs of being taken up by some political, religious and socially conscious groups, and it may be useful to have them set out as a basis for discussion.

Notes and References

1. Standard Pressed Steel, one of the US-based companies which had moved into Shannon in the 60s; basically a producer of nuts and bolts.

2. I am thinking of McLaughlin of Shannon Scheme fame, Kettle who pioneered electricity generation in Dublin, Dillon in Galway who realised the importance of seaweed and alginates, Bayly Butler who used applied biology in the Dublin building trade; there are many others who remain unsung.

3. Purser Griffith, Parsons, Ferguson....

4. This I believe can be traced to the SPS input mentioned above via Noel Mulcahy, recently retired from being Dean of Science and Engineering in Limerick University.

5. Raymond Crotty...note needed....

(The above are an initial indication of some topics and names on which notes are needed.)


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Copyright Dr Roy Johnston 1998