Changing the economic frame/ Making a
political difference
“There is nothing more
difficult to take in hand, more perilous to conduct, or more uncertain in its
success, than to take the lead in the introduction of a new order of things.
For the reformer has enemies in all those who profit by the old order, and only
lukewarm defenders in all those who would profit by the new order, this
lukewarmness arising partly from fear of their adversaries … and partly from
the incredulity of mankind, who do not truly believe in anything new until they
have had actual experience of it.” ( Machiavelli, The Prince, 1532, Chapter 6)
“For the overriding
economic problem discussed in this book, the first necessity is not technical
devices but the public acceptance necessary to make them work” (Hirsch, Social
Limits to Growth, 1977, conclusion)
It has long been understood that it is politically difficult
to introduce a new and untried order of things which upsets the economic status
quo. With the slow motion economic failure of the 30 year experiment, it is
nevertheless important to ask: how can
we make a difference politically and begin to organise a better world. The
answer is not obvious. We have accumulated so many critiques of neo liberalism
that, if they were all piled up one on top of another, they would surely by now
reach to the moon. And yet, after several decades, we are no closer to
defeating neo liberalism.
This disconnect between critical thought and effective
action isn’t a problem for everybody. As we have argued in our blog about
Thomas Piketty’s Capital, the sales success of that book can be attributed to
the way in which it combines fact driven critique of growing wealth and income
inequalities with an utopian solution of higher income and wealth taxes. This
solution will never be enacted when we live in post democracy where the mass
party is no more and the organised working class have been disempowered
But it is a big problem for the team that wrote The End of
the Experiment because we wanted to write a book that moved from critique of
the thirty year experiment to new political proposals for action and
intervention. Of course we are academic
scribblers not political practitioners. But we can break with the dismal TINAF
(There is no Alternative Framework) assumption that frames current centre left
and centre right politics; and hope that
our arguments can have some performative impact in the next phase of
ongoing crisis
In our book, the distinctive form of our critique shapes our
concept of the alternative. Because the one centralised, Westminster led
dogmatic experiment has failed, we recommend much more diversity of regional
and local experiments which provide the basis for discovering answers. Because
our critique shows that the generic fix of competition and markets has led to
sectoral mismanagement, we recommend a different approach which recognises the
heterogeneity of the economy and engages with activity specifics in what we
call the foundational economy.
The argument on these points in The End of the
Experiment is dense but it can be
simplified and systematised. The book’s
policy argument starts from a contrarian insight about how there is more than
one economy. It then focuses on part of the economy by proposing the
foundational economy as an alternative
object before proposing chain value and social license as policy principles do
which could be developed and articulated through local experiments
1) The contrarian
insight
After thirty years, it is not difficult to see the problems
inherent in the current framing of our politico- economic problems in a country
like the UK. It is increasingly realised that our economic problems do not have
technical solutions with existing management tools. It is widely accepted that
the current UK recovery is consumption based, debt fuelled and unsustainably
driven by house price rises: if that observation is set in the context of boom
and bust over the past thirty years, the implication is that there is no
setting of the macro policy levers (fiscal and monetary) which will deliver
sustainable UK growth.
The main stream response is denial. The Thatcherite
revolution fails because it is incomplete, the answer is more of the same (and
please don’t talk about debt based growth). The generic fix of competition and
markets is now applied with more force to energy, banking and every other
sector; this structural reform is backed by bolt-ons like industrial policy to
deal with market failure in the commercialisation of early stage innovation.
This kind of obsessive compulsive behaviour may be
increasingly incredible; but it is at the same time difficult to reframe issues
and propose an alternative that works. The difficulty relates to habits of
thought and organisational peculiarities which are embedded in main stream
British politics.
In terms of overall vision, the centre left’s question has
always been why can’t we be more like Germany and their difficulty is that they
have no policies which would move the British economy away from financialization
and onto a more virtuous productive path. Manufacturing output shows no
sustained output growth because the aspirations of foreign owned branch firms
are limited as are the capabilities of British firms who prefer to compete in
sheltered sectors; adding more finance for production or up-skilling the
workforce will achieve little without radical changes elsewhere because UK
supply chains are constructed around low skill and investment.
As a way of breaking out of this impasse, we turn to the
insights of the French historian, Fernand Braudel. First, “there is more than
one economy” because the economy is heterogeneous and includes zones that are
not competitive. Furthermore, capitalism is as much about monopoly as
competition because local monopolies are what many firms want and the state can
franchise. These contrarian insights are the basis for our break with main
stream thinking.
In the 30 year experiment, the economy was represented as
the unitary sphere of competition where all should submit to the imperatives of
globalisation; this conceptualisation was reinforced by the aggregation of
everything into national income measures with growth and jobs then promoted as
the objectives of policy. Against this we argue that a large part of the
economy (more than one third) is sheltered from competition; while growth and
jobs are socially meaningless objectives when the income gains from growth are
captured by the top 10% of households by earnings and because low wage jobs
spread welfare dependence
2) Our object is the
foundational economy
After recognising the heterogeneity of economic activity,
the question is about how to think about the different zones and their
interaction. Our focus is on the zone or sphere which we call “the foundational
economy”. The foundational has never been an explicit object of policy and (we
would argue) has been mismanaged insofar as it has been subjected to the
competition and markets fix.
What’s inside the foundational economy? On our calculations,
we include the pipe, cable and wireless utilities that deliver water, energy
and broadband, transport utilities like rail and bus, food processing and
distribution through supermarkets and most of the lower levels of health,
education and welfare. Their outputs are mundane goods and services, from
processed food to primary education, which lack the glamour or attractiveness
found in high tech or knowledge based “key sectors” like aerospace or the
creative industries.
The activities inside the zone are diverse in terms of
outputs or ownership because the foundational economy produces a bewildering
variety of goods and services under private and public ownership. Yet these
activities also have a series of shared characteristics which are the basis for
our classification. These goods and
services are all foundational because they are necessary to everyday life,
consumed by every citizen regardless of income and distributed according to
population through branches and networks. They are also typically sheltered and
often politically franchised so that the state (through regulation and planning
laws) gives the cable tv operator or the big box retailer an effective local monopoly.
When these activities are bracketed together, the
foundational economy appears as a large and strategic zone for several reasons.
Large because the foundational economy employs one third or more of the UK
workforce; strategic because the cost, quality and security of foundational
goods and services (such as energy supply and health care) are key determinants
of citizen welfare. Indeed foundational activities are funded by a kind of lien
on tax revenue and household expenditure; foundational expenditure accounts for
30% on average of weekly consumption in households who have little choice about
paying utility bills or buying supermarket groceries.
After a period when low cost provision of many of these
goods was taken for granted, the price and security of foundational supply is
increasingly an issue. The crisis of foundational supply is related partly to
the limits of our small planet and partly to the failed thirty year experiment;
thus, our privatized utility operators like BT are investment averse and
British infrastructure is increasingly being half-heartedly renewed by billing
the customer or taxpayer for investment.
3) Our economic
principle is chain value
Our argument on the foundational economy starts from a
distinction between two concepts of value (point value and chain value) which
is then developed into an argument about how the foundational economy is being
mismanaged on point value principles and would be better managed on chain value
principles.
Point value means that the measure of success is least cost
or highest profit in an individual transaction (or basket of transactions) at a
node in an economic chain. Point value is an active and now ubiquitous
principle in the calculations of private and public sectors.
It is represented in the public company imperative of
shareholder value through quarterly earnings and higher stock price; or in
private equity through cashing out by selling a portfolio company to meet the
equity investors’ demand for high returns which are levered up with cheap debt.
But it is also represented in the public sector response to budget cuts and
value for money when, for example, in adult home care the local authority cuts
the hourly rate paid to the agency supplying care workers.
Point value has considerable intellectual prestige; because
it is in one form materialised in all the post 1930s business school
calculations of return which take account of the time value of money; as with
discounting to calculate net present value. At ordinary rates of interest, such
calculations are socially questionable because they devalue the future by
attaching a very low value to returns more than 5 or 7 years away. Practically also, they are place bound
because point value represents a trader mentality which ignores broader social
consequences.
Point value is embedded in private business models which
then pass problems down the chain as with supermarkets which use their power to
capture supplier margins. In the public sector, the problem is that the state
gains on one account only to lose on another account. Thus, wage cuts will
reduce the cost of providing council services but increase the demands for
housing benefit and other kinds of welfare support. Pervasive point value therefore spreads
unsustainability as private and public actors trumpet their point success when
supply chains are undermined and the welfare bill spirals out of control.
So our alternative is back to the future with the
alternative principle of chain value. We
should recover the idea of value as a stream of benefits for (internal and
external) stakeholders over time. Benefits are not only financial and
measurable through one master calculation because there are several orders of
worth and long term uncertainty requires defensive prudence. This requires a different
kind of economic calculus which balances the interests of different
stakeholders (rather than privileging the investor); and introduces political
objectives around the ideal of connected economies which deliver both the
benefits of re-localisation and of national standards and inclusive national
networks
One of the central problems is that much of this calculus
about interconnection is not actionable within the current British system and
is equally unlikely to be realised through
the forms of decentralisation which are currently on offer. The British
way after the 30 year experiment is to dispense with intermediary institutions
and combine self-governing operating units with centralised political power
which micro manages in an interfering way; hence the decision makers are the
PLC board or the Academy School governors subject to interference by Vince
Cable or Michael Gove. As for devolution and decentralisation, in the bi
partisan view, articulated in the Heseltine and Adonis reports, this is a matter
of handing decision making and central money to dominant regional elites with
very few questions asked.
4) Our political
principle is social license
The operationalization of chain value thus requires not so
much more government as a different concept of what nested levels of government
are and can do. As well as very much less reliance on governance at operating
unit level which always promises much more than it delivers.
We are against the post 1979 concept of business friendly
government which has dominated in the period of the thirty year experiment. In
this frame, government’s role is facilitative as it creates the space in which
the incentives of markets and competition do their work; hence the structural
reform agenda of lower taxes, market liberalisation, deregulation and
privatisation. The only acceptable forms of local and regional policy are
infrastructure and training which make the market work better (and now help
create competitive agglomerations); industrial policy is about rectifying
market failure in commercialising innovation.
Against this, we make another back to the future argument
which revives the 1930s ideas of US thinkers like Berle about how business and
community are in a relation of mutual dependence because all business exists
under a social contract whereby the corporation should offers responsible
behaviour in return for the privileges which allow market access and secure
profit taking. This is especially so in the foundational economy where the
privileged business gains a local monopoly on the household spend of an
immobile population in communities and user groups
Hence our arguments for social license in the foundational
economy with the aim of enforcing the obligations of business to the community
(which are much broader than those of customer care). The explicit analogy is
with the mining industry where a social license about benefits for the local
community is the quid pro quo for the right to exploit immobile natural
resources. Social licensing in the foundational economy would impose relevant
conditions on specific activities. Thus, councils would be obliged to pay
living wages while supermarkets should attend to local sourcing; this would
need to be backed by social innovation to change business models.
All this has fierce political pre- conditions in that change
through experiments with scope and scale requires decentralisation with
intermediate institutions under electoral and civil society pressure for
change. But, if we do not have the answer and favour diverse experiments, then
regional and local government can begin right away with experiments in areas,
like adult care, where resistance to change is weakest. The question is whether
regional and local governments, under pressure from civil society, can rise to
this challenge and through experiments and “ actual experience” demonstrate the
potential of this approach in ways which increase not just “public acceptance”
but public demands for change.
Manchester Capitalism
