Dan Lewis: Why Britain now needs another industrial revolution to survive

BRITAIN's financial services industry has peaked and unemployment is rising fast. Come the recovery in 2010, the grim reality is that many middle- class professionals will be without jobs.

The trouble is that with the sorry state of our education system, there just won't be enough entrepreneurs to keep the middle-classes out of unemployment. Welcome to the first truly bourgeois recession.

Permanence is the illusion of every age. Blue chip middle-class jobs for life is one such example. But for the UK in particular, the greatest fantasy was that financial services would continue to be the powerhouse of the economy. No more.

Slowly, but surely, the UK's financial services industry is being crippled by regulation either from the European Union, its very own quango – the Financial Services Authority – and quite possibly in the near future, imported regulations from the United States if the London Stock Exchange is taken over by the NASDAQ.

The global shift of financial power from West to East is well under way and on present trends, the City does not look like winning. It would be foolish to bet on London's competitiveness in the long-run against the combined challenges of Shanghai, Dubai and Mumbai.

Meanwhile, we forget that banks are businesses, too and the tumult in the markets reminds us that they are far from invulnerable.

But the political response – more regulation – to the credit crunch shows great ignorance among policymakers. Anyone who thinks legislation is the answer to the City's woes must be ill-versed in daily life there.

Forget for a moment the public image of the high-earning wide-boy traders and the hedge fund managers. Today's financial sector is easily the most over-regulated, conservative industry in the whole country. Too much of the entrepreneurship has gone out of the sector.

It's high time to start asking; does our economy really need growing numbers of people in fields such as law and accounting – a much under-appreciated trend that has developed during New Labour's decade plus in power – or should they be doing something else?

According to figures from the Professional Oversight Board of the Financial Reporting Council, in 1996 in the UK and the Republic of Ireland, there were 196,000 registered members of the various accountancy bodies. By 2007 that figure had risen to 278,000. It can be argued that this is evidence of an economy on the march. However, it also says a lot about the growing complexity of the tax system and the high cost of complying with it.

Equally, according to figures from the Law Society, the rise in solicitors in England and Wales over the same period has been even more staggering; a 54 per cent increase to 134,000. These are all highly skilled people dealing in complex work. But yet again, it speaks volumes about the decline of trust in society, that so many people need to resort to the law.

One of the most entrepreneurial, socially mobile periods in Britain's history was under the Victorians. Although often mocked, it was manifestly an age of great invention, self-improvement and declining crime.

We have got to recapture that spirit. As the popular TV show Dragons' Den shows, can-doism in Britain is alive and well when given a chance. And we cannot deny the stubborn genius of inventors like James Dyson and Trevor Baylis.

Sadly, the Government response to the UK's entrepreneurial and skill shortages has been predictably inane; 25 skills quangos with names like GoSkills, ProSkills and Energy and Utility Skills. Add to these the other 65 quangos or so who orchestrate bureaucracy in Britain's education system and you begin to understand why unflattering international data continues to accumulate on the worsening performance of the UK's schoolchildren relative to the rest of the world.

And after they have finished education and entered into the world of work, the feedback from employers points to declining skills from the next generation. In its 2008 Education Briefing Book, the Institute of Directors found that 71 per cent of its members believe the writing abilities of new employees had worsened, 60 per cent believed numeracy had declined and 52 per cent reported a worsening of the basic ability to communicate.

This is not how a nation equips itself to deal with globalisation. A root and branch reform of the UK's education system is required. This country still has millions who can barely – or not – read, write and count. In times past, the middle-class were the backbone of the economy. Well now it looks like it might just break. Writing in these pages in February, I noted that the economic situation is bad but not yet dire. Well, it really is dire now and it will take more than one term of a new government to sort it out.

Dan Lewis is research director of the Economic Research Council, www.ercouncil.org