It took a big bang financial crisis to act as a catalyst for our political leaders to revisit some of the basic assumptions that have underpinned British competitiveness for the past 30 years. In the wake of the crisis, questions were raised on all sides about the sustainability of long-standing trends: growing wage inequality and rising living standards funded through increasing debt levels; historically-low levels of investment and short-termism in markets; the growing housing asset bubble; and regional and sectoral imbalance. And a political consensus was quickly arrived at: returning to business as usual was not an option.
Yet five years on, there is still no consensus about what this actually means. All the fragile signs of recovery, as welcome as they are, suggest that old habits are dying hard in the British economy. Although the coalition ambitiously talked of rebalancing the economy back in 2010, this agenda has quietly sunk without a trace as they desperately try every old-school measure, including subsidising home ownership, to get the economy moving again.
The Labour party, in contrast, has started to shape a vision for long-term structural economic reform in opposition. But the party needs to flesh out the agenda for a more responsible capitalism in the run up to 2015 if it is not going to suffer the same fate as the coalition’s vision for the economy.
In many ways, responsible capitalism has misleading connotations of businesses acting in ethical or moral ways. A better label would be inclusive capitalism, because at its heart is an economy that works better for more people: not just for the management of large companies, but also for employees, for consumers, for savers, and for small businesses.
Sacrosanct in British capitalism since the 1980s is principle of shareholder value: companies are run with the aim of maximising profits for their shareholders. Much of the economic ecosystem flows from this principle, including our system of corporate governance; a flexible labour market characterised by relatively low employee rights, a high share of low-skill jobs and low employer investment in skills; and the assumption that while government can regulate and incentivise, what goes on inside what Ewart Keep has called the ‘black box’ of firms is not something the government can or should influence.
Central to the working of the system is the assumption that competitive markets facilitate a fairly even distribution of power. If you have a job where your employer does not invest in you or pay you properly, the assumption is you can go and get another one. If you buy a poor-value product or service, the assumption is you can switch suppliers.
However, there are significant problems with the model. Competitive pressures don’t always work in improving the lot of employees or consumers if there is an over-supply of labour, or markets are dominated by a few big suppliers where switching is difficult – think the ‘big six’ energy companies that control 99 per cent of the energy industry.
Moreover, the theory of shareholder capitalism translates into something more like corporate-management capitalism in practice. Corporate boards are supposedly responsible to shareholders, which include many members of the public via their pension funds. Yet the asset-managers who actually represent long-term pension interests in the boardroom chase
annual results from trading shares, rather than long-term return by growing companies. Fragmentation means it is not in a pension fund’s interests to go it alone using a different approach – returns would be distributed right across the industry. This results in endemic short-termism in equity markets that ripples across the rest of the economy.
An agenda to make growth more inclusive would need to tackle these root issues. But while we can look enviously at economies like Germany and Japan, where business decisions are based on more than maximising quarterly profit, the question is what can Britain learn from these systems given how different they are?
Embracing this agenda means accepting that government could and should shape what goes on inside companies. Skills policy is a good illustration. It has three levers: supply of skills, demand for skills, and how companies themselves utilise and develop the skills of their own workers. In the UK we have stepped back from the last and pursued the first two. It has resulted in a polarised labour market that has more high-skill jobs (although we still have skills underutilisation) but also the large number of low-skill, low-pay jobs they create, largely ignored by skills policy.
There are a number of potential policy mechanisms to address this. Regulation and incentivisation has historically been used in a minimal way, for example regulation to prevent rogue businesses failing to meet minimum standards the majority already meet. Similarly there are employer training subsidies like ‘train to gain’ that ended up subsidising the certification of existing skills and did not engage with the quality of training offered by employers.
But businesses can be regulated and incentivised to enable deeper systemic change to occur. For example, the national minimum wage improved productivity by forcing low-wage employers to improve the skills utilisation of their employees. Committing to all new homes being zero carbon by 2016 created markets for new technology. Regulation establishing rights to train, or licences to practise in low-skill sectors like social care, could drive further improvements in skills, productivity and wages. Employer national insurance contributions could be restructured at the bottom of the income distribution, to remove the tax disincentive for employers to increase pay between the minimum and the living wage.
Another consideration is the important role for government in catalysing markets where failure exists. For example, even at the top of the economic cycle, market failure impedes the ability of fast-growing businesses to be able to access growth capital. This is because the fixed costs of due diligence on a small company quickly erodes the incentives for lenders and investors to take a risk. Our global competitors have long recognised this problem: the US and Germany have had schemes in place since the 1950s that catalyse rather than replace the market by making finance available to businesses affected by credit rationing. They do so by harnessing private sector intelligence so that investment decisions are not made by government officials or banks or investors with nothing to lose, but by those that have leveraged skin in the game. This stands in contrast to schemes in the UK.
The third lever at the government’s disposal is to facilitate collaboration as well as competition. One of the reasons that the dual apprenticeship system in Germany is so successful is because there are institutions that facilitate sector-wide collaboration, for example on skills. Hence businesses are happy to invest in transferable skills via apprenticeships and the quality of apprenticeships is consistent across small and large businesses. In Britain, there is huge variety in the quality of apprenticeships because employers are more reluctant to invest in a collective system that values transferable skills. The last Labour government set up Group Training Associations to try and facilitate more collaboration and economies of scale. Building on their role will be important.
Fourth, the government need to restructure rules of our economy to empower employers, savers, consumers and small businesses and better embed their interests into economic decision making. For example, reforms to corporate governance might put employers on company boards or give extra weight to votes cast by long-term shareholders, and consumers could be empowered through rights to collective class action.
However, there are limits and challenges to this agenda of long-term structural reform. In truth, measure-by-measure the suggestions here do not feel equal to the mammoth task of creating an inclusive capitalism where growth is shared by the many, not the few. What’s required is a deep commitment to structural economic reform; a shift in our economic ecosystem, not a tweak in a particular area of policy like vocational skills or investment allowances.
In order to succeed, this agenda requires institutional reform. In its time in government, Labour made significant reforms to corporate governance, including the 2006 Companies Act, which gave company directors a legal duty to incorporate employee, customer, supplier, community and environmental interests in its decision making. Yet it has made little impact because boards are not formally accountable to these groups in the same way they are to shareholders. Changing the rules of the game is important, but is not enough by itself. Indeed, putting an employee on a company board is merely a tokenistic gesture unless they can genuinely represent the interests of all fellow employees through recognised workplace institutions. Trade unions, pensions funds operating in the public interest and consumer associations are also needed to collectivise and represent employee, saver and consumer power.
A lot of work is needed before we have a manifesto-ready agenda in tune with public opinion. There is still a gap between the vision – an economy that works better for most people – and a clearly-enunciated agenda that will convince people that this is something that can actually be delivered, and which has a direct link to people’s lives.
This agenda is destined to fall at the first hurdle unless it can convince some of the UK’s business community to embrace a more symbiotic relationship between the state and the market. Yet key business lobby groups tend to take a reactionary view, while businesses that are exemplary in embedding employer and consumer interests at the heart of what they do rarely speak up to support broader systemic change that might support more businesses to be like them.
Finally, if this agenda has even a hope of succeeding it requires long-term commitment. This is true of individual policies: small business financing schemes in the US and Germany have existed since the late 1950s and have become part of the ecosystem itself rather than a policy to try and affect the ecosystem. But it is also true about for the broader agenda. It’s easy to forget that Thatcherism enjoyed a 30-year governing consensus. Long-term and structural economic reform only has a chance of success if it can eventually buy in cross-party support. The national minimum wage is an excellent example: it was fiercely opposed on its introduction but its abolition quickly became unthinkable. So perhaps most challengingly of all, if a long-term responsible capitalism agenda is to be successful it would need to secure the support of a broader political coalition spanning left and right.
This article first appeared in the Fabian report All of Our Business, which can be found here. The report will be launched later today at the Fabian Labour conference fringe event ‘Sharing the Responsibility’ at 18.00, the Mercure Hotel, Brighton. More information can be found here.