Philosophical foundations for 'good capitalism'? Labour's business agenda, John Rawls, and property-owning democracy.
Author | O'Neill, Martin |
Position | Labour Party - Essay |
Beyond the dead dogmas of deregulation
The approach to regulation and business policy that Ed Miliband and his Shadow Business Secretary Chuka Umunna have begun to sketch has attracted its share of criticism from the business sector's less thoughtful partisans. Digby Jones, with predictably unimpressive recourse to cliche, described Miliband's 2011 conference speech as 'a kick in the teeth for the only sector that generates wealth that pays the tax and creates the jobs this country needs', ending with the cringe-worthy would-be flourish that Miliband's position is 'Pro-business? Not!' (Rigby, Shafer and Bounds, 2011).
But Miliband's nascent vision of 'building a new economy', while standing in need of much further development, embodies a potentially fruitful approach to constructing a better capitalism. To see how and why, it is useful to take a step back, and to consider both the foundations of the relationship between business and the state, as well as some of the recent pathologies of how that relationship has been allowed to develop.
The crash in the world economy, ushered in by the 2007 credit crunch, has claimed many victims. Among those victims is a now-discredited picture of how the state should approach the regulation of business. This picture, which saw government's central task as simply getting out of the way of wealth creation, allowing deregulated private enterprise to get on with generating prosperity, had its roots in libertarian and neo-liberal thinking. Nevertheless, it came to be enthusiastically embraced by parties of the centre and left, and especially by New Labour.
Labour's variant on this approach combined quiescent government deregulation with a belief in the sort of under-the-radar redistribution that can only be achieved during times of economic plenty. A slick and rampant financial sector, supercharged by the liberating effects of 'light touch' regulation, would create tax receipts that could be diverted through the bountiful effects of increasing spending on health and education, and increasing the size of the public sector workforce, to those floundering, deindustrialised sections of the country that had not benefitted from the boom. As long as public spending could be kept high, the inequity and instability of a lopsided economy could be safely ignored.
Well, it was fine while it lasted, but we have all seen that the good times, such as they were, ended in tears and recriminations. We are left with a spluttering, unhealthy economy, marred by structural infirmities and rampant inequality, wheezing at the prospect of facing the future. We have learned that the embrace of neo-liberalism and deregulation, rather than giving parties of the left a new way of approaching prosperity and social justice, delivered a toxic mix of unfairness and economic uncertainty. On this, it is impossible to disagree with the judgement offered recently by Stewart Wood:
There cannot be anyone left who really believes that minimal regulation and tax reductions for the rich will create wealth which, guided by an invisible hand, will trickle down to those in the middle and below. It doesn't work. It has created an unbalanced economy, excessively reliant on financial services and far too vulnerable to external shocks. And it has produced a country scarred by increasing inequality--soaring prosperity for a tiny minority at the top and a persisting decline in real wages for the vast majority. (Wood, 2012) It will be a matter of utmost importance for the Labour Party to come to a clear and credible new view about what a better approach to creating a stable, prosperous and equitable economy might look like. Clearly, the deregulatory approach has been tested to destruction, and a return to that discredited picture would be as intellectually discreditable as it would be electorally disastrous. So, what's the alternative?
It seems that the elements of a better approach are beginning to emerge. Ed Miliband has started to talk about ways in which values of fairness and social justice could be better embedded in the mechanisms by which the government sets the rules within which business and finance operate. Stewart Wood talks of 'a supply-side revolution from the left', now that the failed 'supply-side revolution from the right has run its course' (Wood, 2012). A change in corporate governance could see worker representation on remuneration committees, in keeping with the recent recommendations of the High Pay Commission, thereby creating internal pressures to drive down ultra-high executive pay (High Pay Commission, 2011; see also O'Neill, 2010a, 2010b). Changes in government procurement rules could see lucrative government contracts restricted to firms that take on and train significant numbers of apprentices, thereby contributing towards the country's long-term skills-base and helping to arrest the hollowing-out of high-skill, high-quality industrial job opportunities. Rather than the government simply getting out of the way of business, this rival model sees government's role as being to take a much more active role in setting the terms in which business activity takes place, with the aim of ensuring that the broad social goal of achieving prosperity with social justice can be achieved (see also Denham, 2011).
This approach to 'good capitalism' recognises the residual power of government to set the rules under which the market and its participants operate. Governments have three significant levers, all of which need to be used in unison:
* control over the structure of the tax system, which can be used to incentivise particular forms of corporate behaviour while penalising others;
* changes in direct regulation, which can forbid certain activities, mandate others, or raise or lower the costs of particular business strategies;
* the purchasing power of government procurement, which can be deployed with an eye not just on narrow issues of immediate price, but with a broader eye on economic, environmental and social sustainability. (For an enlightening, sympathetic and comprehensive examination of the strategy of linking procurement to social policy, see McCrudden, 2007).
Honing the details of this approach will be one of the most challenging tasks of opposition. It will also be important to fend off some of the odd and implausible criticisms which this approach attracts. As we've mentioned, Digby Jones, an enthusiastic advocate of the old, discredited picture of quiescent deregulation, described Miliband's nascent proposals to use the levers of government to reshape the economy as 'a kick in the teeth' for business. This sort of kneejerk reaction is unsurprising, but outmoded and misguided.
It is myopic to think that the interests of value-creating businesses and entrepreneurs are served by the creation of an unbalanced, unstable deregulated economy; on the contrary, smart regulation rewards good business practices, and creates opportunities for real value-creators. Food hygiene rules are a form of regulation, but they create enormous social benefit, and allow reliable, serious and high-quality food-producers to avoid being out-competed by cavalier corner-cutting and health-endangering producers. Rules on car safety are forms of regulation but, again, they are both massively beneficial for the population in general, and specifically to the benefit of high-quality producers. The right kinds of regulation create incentives that push markets in directions that chime with our collective social values and goals; this is not to claim that identifying the right policies is an easy matter, but it is to say that pursuing the challenge of doing so should be one of the central aims of politics.
Other critics of the pursuit of 'good capitalism' complain that these sorts of interferences in 'the free market' both infringe important commercial freedoms and lead to economic ruin. Putting workers on remuneration committees, for example, can be seen as an illegitimate state intrusion into the working of free market institutions.
But what such critics conveniently forget is that even the most familiar 'free market' institutions are not facts of nature or necessary features of our environment. The limited liability joint-stock corporation as an organisational form did not spring fully formed from the ground like a mushroom, but is a creature of legislative design, dating back to the Companies Act of 1862 (see for example Micklethwait and Wooldridge, 2003). The irony of demanding that governments not interfere in the 'natural' order of corporate activity is thus a decidedly rich one. Markets are created by the rules of property, and structured by a formation of regulatory instruments and legal rules. Appealing to the entitlements thought to be associated with the corporate form is doing no more than appealing to a convention, bereft of independent authority (Murphy and Nagel, 2002). The questions that face us regard how governments should structure markets, not whether they should do so, for doing so is unavoidable. Even the decision to 'deregulate' is just one political choice among others (and, as we've seen, often a rather disastrous choice); seeing it as a reversion to a natural equilibrium fails to see that our economic life never takes place in the absence of state-made rules.
Still other objectors decry Miliband's talk of rewarding socially valuable economic activity and punishing socially useless business as a return to a sort of moralised version of 1970s industrial policy, but this time with the government picking ethical rather than purely economic winners. But this misunderstands...
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