Review: The Unbalanced Economy

Barely six months from the general election the Labour party’s relationship with business is, at best, clouded. The ‘no’ campaign’s deployment of business leaders in the last frenetic days of the Scottish referendum is a keen reminder of how dangerous a weak relationship can be. Without active and enthusiastic business support, Labour politicians on the campaign trail know that the heavy artillery directed at Alex Salmond in September will be trained on Ed Miliband next May.

Does Chuka Ummuna’s argument that his party is “pro-business, pro-worker” offer a route along which Labour can rebuild this relationship? Delivered from the platform of the TUC’s annual conference, the sound-bite has the defect of being rather too obviously a statement of how Labour would like to be seen: pro- both sides; better together; one nation.

But the question is whether there is any substance to the slogan. Is it seriously possible to argue that the interests of workers and the interests of business can indeed be aligned? A book by two economists, Ciaran Driver and Paul Temple, first published in 2012 and now re-issued in paperback, shows that it is. Changes to company law will be necessary, the authors think, to make it a reality.

The Unbalanced Economy: a policy review is a book in three parts. The first, taking a 30 year view of the UK economy and the policies that were pursued over that time, contrasts the economic cycle of 1979 to 1990 (the “Thatcher cycle”) with its successor from 1990 to 2007 (the “long cycle”). What the authors mean by an unbalanced economy is that demand within the UK (“domestic demand”) has repeatedly exceeded the domestic economy’s capacity to supply. Higher imports and a growing imbalance of payments with the rest of the world has been one consequence. Inflation, allowing the value of supply measured in GBP to approach the value of demand, has been another.

In the last few years of the second cycle, as incomes stopped growing at the pace they had become accustomed to, households became net borrowers alongside the government. Companies (through the corporate sector surplus) and the rest of the world (through its balance of payments surplus with the UK) stood on the other side. This double imbalance meant that as the financial crisis struck in 2007, the UK economy was already in poor shape to withstand it.

To reduce a subtle analysis to a few broad brush strokes, Driver and Temple identify the policy problem over 30 years as a narrow orthodoxy that preached macroeconomic stability plus microeconomic reform, focused on an increasingly flexible labour market and an ever more qualified workforce.

The damage this doctrine has done to investment makes up the second part of the book. Whether as physical capital or human skills, investment creates the capacity that allows domestic supply to match domestic demand. A chronic shortfall in investment is what has created the unbalanced economy. An unbalanced policy prescription – wave after wave of “reform” for workers and their supporting institutions; benign neglect for shareholders; the financial institutions that call the shots; and the CEOs who do their bidding – is what has created that chronic shortfall.

Breaking into this governing nexus of CEOs, shareholders and financial institutions is the final part of the book. The endemic short-termism of the doctrine of shareholder value (discussed from a wide variety of perspectives in a recent TUC-published book is the fundamental flaw. Its consequences include an unwillingness by senior management to invest in the workforce skills necessary to support innovation, preferring instead to make money from well behind the technological frontier, using long production runs that require only semi-skilled labour.

But Driver and Temple go further than this. For the innovative firm, labour isn’t just another dumb “factor of production” to be used up mechanically like steel or printer cartridges. Rather, it is a living input, the level and quality of whose commitment to the firm is both vital – and uncertain. This combination – vital yet uncertain – is why Driver and Temple conclude that workforce participation and representation is necessary if Britain is to become a more innovative, balanced economy. “Employee control rights” are needed, they argue, because:

“…work commitment in some workplaces is an issue of equal if not greater significance than access to finance. The balance of the two objectives may vary between sectors, but at least in creative and science-based industries, the willingness of workers to identify with the company will be crucial for success. Stakeholding is a form of guarantee to those who are required to sink their knowledge and expertise in the firm and thus put these assets at risk.” (p139).

“Employee control rights” could be translated as “workers on the board” but this I think underplays what the authors have in mind here. Rather, it is about boosting the influence and standing of that layer of senior employees who, even in large organisations, are the ones who know how the place really works – boosting their influence and standing so as to bring the very top layer back under a degree of internal control, thereby checking the now dominant influence of shareholder and financier.

Any book with an academic pedigree requires careful reading. The Unbalanced Economy rewards our attention because it speaks to our time. Driver and Temple make an economic case for “pro-business, pro-worker”. They also advance solutions regarding how that can be done. It is not a future free from all conflict, but it may be a future that avoids the pitfalls of the past.

Dr Peter Kenway is director of New Policy Institute