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The economic landscape always changes faster than economic policies can catch up. The third way debate, as it applies to economics, is an attempt to bring the frameork of political economy up to date with events. For there is little doubt that the context and therefore constraints on national economic policies have altered dramatically. This transformation is often described in shorthand as "globalisation", the increased interdependence between individual financial markets and economies.
Unfortunately, the tendency to describe what is different about the world as globalisation has revived two old sets of attitudes. On the left there is an emphasis on the dangerous power of multinationals and financial markets, leading to an uncomfortable turning away from the world that sits uneasily with the other left-wing tradition of internationalism. On the right, the focus is the impotence of governments and inevitability of giving free reign to market forces.
However, globalisation is an inadequate description of what is new in economics. After all, as authors like Paul Hirst and Graham Thompson have pointed out, the world was pretty globalised at the end of the last century too. But there is something different about the modern economy.
This is the increased weightlessness or intangibility of economic value. What does this mean? It means that what we are willing to pay for is, increasingly, the non-material content of goods and services. This is sometimes billed as the "knowledge economy" or "information society", but these are too narrow a description. Value can lie in anything from the caring services of a nurse to the deals done in financial markets, from the design of a new car to the capabilities of computer hardware and software. It does not lie in the plastics and metals that make up goods.
This is not the same as saying we have lost our appetite for goods - clearly this is not true. Rather, as a result of both new technologies and increasing prosperity (supply and demand trends), the share of the value of goods created by the materials is minimal compared to the research and design - and marketing - that have gone into them.
This is not a prediction about future trends in the advanced economies. It has already happened. Not only have most already shifted heavily towards services, but also many big manufacturers do not actually make. Nike makes no shoes and Dell makes no computers, for example. All their fabrication, the low-value end of what they do, has been subcontracted to developing countries.
The implications of understanding the UK economy as an increasingly weightless economy are profound, and the obvious one concerns the international location of production. Although the evidence suggests that as yet few jobs in northern manufacturing have been lost to southern nations, the potential is there. But it will be no bad thing to export low-value jobs, and shift to more skilled, high-value jobs, as long as there are feasible adjustment policies.
A second issue concerns the financial markets. Clearly the potential to shift portfolio and speculative investments quickly means the markets can exercise a kind of extreme veto power over national economic policies. But, again, the existence of this blunt instrument is not necessarily a constraint. It usually takes quite extreme policy errors to generate a financial crisis.
The implications that go beyind these normal "globalisation" concerns are more interesting, and more binding as constraints. If value added is non-tangible, it can obviously be created anywhere. But paradoxically this is likely to mean more concentration of activity rather than more dispersion. The reason is that new communications and information technologies can substitute for physical muscle but complement mental muscle. High-skill "knowledge workers" tend to need to be with similar co-workers, which is why Silicon Valley is in one location, and why universities exist.
Equally, the structure of markets is becoming more polarised between giant corporations and small companies. The existence of network and marketing externalities favours the giants corporations, especially in high technology industries, but physical and financial barriers to entry are low, so the start-up rate can increase. The economics of regulating weightless markets is in its infancy (Hal Varian at Berkeley is in the vanguard here).
More broadly, technology means there will be radical shifts in governments’ ability to monitor and tax certain kinds of transaction. The existing tax base is likely to be eroded. Although people are relatively immobile and most employees can not avoid paying income tax, a growing share of transactions will take place on-line and will be either untrackable or easily disguised. Governments might therefore have to tax far more heavily the tangible parts of the economy, such as pollution, or deliveries.
Finally, in this canter through the implications of the weightless economy, the nature of workforce required is very different. A good deal of evidence points to the fall in demand for unskilled and rise in demand for skilled labour that has already occurred in the OECD economies. For the ‘unskilled’ left behind like flotsam by the tide, often living in a depressed rustbelt area, the new importance of human attributes like intelligence, empathy and imagination in the economy is scant comfort. But it is important not to equate skill with pure academic attainment. Packing pupils’ heads with more facts is not the right approach.
It is not that governments are powerless, but rather that their old levers are irrelevant. As Larry Summers pointed out at a recent seminar on equality hosted by the IMF, governments hold the fate of their citizens in their hands as never before. If change is rapid and unpredictable the task of equipping citizens to cope with it becomes profoundly important.
Diane Coyle is Economics Editor of The Independent and author of The Weightless World (Capstone).