The End Of The Experiment? Part 4

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

The End Of The Experiment? Part 3

The Foundational Economy: A different starting point

If the exhibits in Part II show that the market experiment had many unpredictable and unanticipated outcomes, how does that register in the UK’s core sectors? ‘The End of the Experiment?’ develops three case examples of ‘foundational economy’ activities that demonstrate what’s gone wrong over the past 30 years and how we could do things differently for better economic and social outcomes.

Our starting point is that is that all markets are embedded in politics and that we currently have a problem with political planning. The cases of i) telecoms and broadband, ii) supermarkets and dairy, and iii) retail banking are services most of us use every day. The cases show the increasing prevalence of ‘point value’ calculations and trader mentalities within large, quasi-monopolies, where cashing out often comes at the expense of national outcomes and social objectives. All reveal different fault-lines in their business models that work against societal interests as well as the limits of a generic ‘competition and markets’ framework.

Let’s follow the money and find the faultlines

‘The End of the Experiment?’ cases show how, in different ways, we have ended up with socially and economically dysfunctional outcomes. This is unsurprising when much of the foundational economy is dominated by shareholder value driven business models. There are some generic overlaps such as confusion marketing but all in all three cases the key drivers are financial because giant PLCs compete on two dimensions: (1) the product market to win customers; (2) the capital market to generate the narratives and numbers expected by stock market investors.

The former publicly owned BT in its modern guise shows a marked reluctance to invest in a national network of fast broadband. This unsurprising result is the legacy of privatisation where BT demonstrates a preference for distributing dividends - £20 billion distributed since 1984 – and buying back its shares. The outcome is that its super-fast fibre optic broadband terminates at the cabinet adjacent to, rather than on, the premises. The government’s aim of rolling out super-fast broadband nationally meets BT’s corporate requirements, but does it necessarily meet social needs, particularly when the company expect the state to subvent an extension of the network to rural areas?

Supermarkets present themselves as supporters of British farmers, but a point value mindset often harms stakeholders as suppliers are squeezed upstream. In dairy farming the farmers are visible and vocal complainants, but the invisible and silent victims are often the milk processors in the middle of the chain. In the decade since 2001, processors’ share from a litre of milk has declined from 35% to 19% while supermarkets have maintained margins through a form of predatory contractualism.

Retail banks’ rely on the pressure selling of products to customers where the proceeds are applied to cover branch costs. This is a necessity under a shareholder value driven model in the context of free banking. This often results in numerous mis-selling scandals – the fines for which are treated as a basic cost of doing business. The policy response is nearly always to encourage new entrants, without any understanding of either the destructive competition in the product market or the unreasonable capital market demands for high returns on equity which underlie the dysfunctional business model.

Is this the outcome of market competition?

All three cases play out in different ways but all have socially and economically dysfunctional outcomes. All manage to deliver acceptable stock market returns (although some supermarkets are under pressure). But all crucially depend on their supply chain positioning at key pinch points which gives them power over suppliers or customers. The pursuit of ‘point value’ strategies means that position is exploited to extract value immediately at the expense of a stream of benefits over time. Value is maximised at the point of transaction to benefit the shareholder; profits are levered on suppliers and customers without regard to the social/national interest.

The 30-year experiment has above all enshrined generic competition as its mantra. And to varying degrees, with governments of different hues, this is the principle that has underpinned policy. So within this context, how, in such a large portion of the economy, have these PLCs maintained return on equity and profit margins?  Equally, how have PLCs limited the effects of competition when firms are competing amongst themselves inside each sector?

The key features that have prevented the erosion of margins and returns are (a) the companies avoid direct price competition through confusion marketing which is actively used in all three sectors (e.g. bundling to make comparisons difficult); (b) PLCs inside sectors operate using similar business models –often narrated to emphasise differences –that create an opera of stereotyped competition with emphasis on a part e.g. service, plus (c) PLCs using ‘point value’ as a means of exploiting local power relations to take margins off other stakeholders.

There are alternatives but they require vision and framing

The normal treatment of corporate excess and scandal is to claim that it is the result of ‘market failure’ which requires ‘more competition’. These framing devices dominate the rhetoric of Select Committees, policy reports and other outputs. The recommendations are always generic: encourage new entrants, educate consumers, limit monopoly excess. In doing so, the frame narrows our field of the visible and limits our imagination about what alternatives are possible.

The success of this framing has been overwhelming. But there are many other experiments beyond the free market that perhaps meet social and economic need more successfully. These experiments focus on co-operation and co-ordination to rebuild fragile or fragmented supply chains that resulted from the 30 year experiment. They include modest innovations by local authorities in the UK trying to re-glue the supply chain fragments by co-ordinating private sector partners; building agglomerations of expertise and overlapping functions in their area. These experiments also emerge spontaneously in the private sector: for example, Morrison’s vertically integrated meat supply chain secures supply and investment-driven efficiencies. Similarly Tesco’s intervene in the milk supply chain by guaranteeing, via the processors, a minimum price per litre that effectively puts a floor under competition. Alternative forms of ownership may also change the characteristics of competition: municipally owned utilities in the US compete successfully against PLCs, despite operating with quite different priorities. These different examples do not necessarily require central state planning or co-ordination since they involve the rebuilding supply chains from the bottom up.

These are all experiments related to building the foundational economy.

Looking at the three cases in the book it might be easy to conclude that these are just examples of ‘bad company behaviour’. But that would be an alibi and deny the need for something more than just the restatement of more competition and more markets with the usual bolt-ons like industrial policy. But doing something different requires a fundamental reframing of our problems that should include interventions through licensing for social objectives. However, that will require political will not generic fixes for the generic rhetoric of market failure.

Manchester Capitalism

The End Of The Experiment? Part 1

Our new book, The End Of The Experiment? From Competition To The Foundational Economy  is now available  as an ebook on Kindle. Over the coming weeks we will be outlining its argument and we begin here with a sketch of the historical and intellectual context of the work.

The British economy has been in relative decline since the last quarter of the 19th century, and there has been debate about the sources of that decline since at least the great ‘national efficiency’ debate prompted by the failings revealed by the Boer War.  Britain, it seems, is the subject of eternal experiments. In the post-war years there have been two. The first was the post-war settlement, which delivered historically unparalleled prosperity and generous public goods in the form of the welfare state. That settlement floated on the ‘long boom’ (the thirty glorious years) and it sank alongside that long boom in the 1970s. For over thirty years now we have lived through a new experiment, symbolically inaugurated by the victory of Thatcherite Conservatism in 1979, but an era of experimentation which also encompassed the heady years of New Labour domination. That experiment had several well known features.  It created ‘flexible’ labour markets;  it dismantled the command economy represented by publicly owned industries;  it placed a bet on the creation of a ‘branch’ economy in manufacturing in a global division of labour, and on a financial services revolution in London; it prompted an outsourcing revolution which saw numerous public services franchised to private corporations; it created an audit state; and it ushered in a new era of micromanagement by the Whitehall elite.

The starting point of our book is the failure of this latter experiment.  The public occasion of failure was the great financial crisis, but the roots lie much deeper.  Our book explores four great deficits left by the thirty year experiment:

• A competitiveness deficit: productivity stubbornly lags behind our competitors; the financial services sector  has failed to generate employment; and ‘branch’ manufacturing  has failed to solve the problem of the trade deficit.
• A sustainability deficit: the post-war settlement delivered generous public goods; we show (for instance  in our broadband chapter and in the separate studies of the rail industry carried out in CRESC) that the privatised system isn’t delivering a sustainable infrastructure.
• An accountability deficit: the thirty year experiment was legitimised in the language of accountability, but it has created new worlds of unaccountability – out of control corporate elites, franchises in privatisation and outsourcing shrouded in opaque accounting, constant uncertainty about accountability lines between politicians and service deliverers.
• A competence deficit: the age of experiment has also been  a new age of fiasco -  outsourcing, PPI, rail privatisation, financial regulation; a hollowed out civil service unable to police the new franchises.

The metaphor of an experiment has an appealing ring: experimentation is, after all, the standard method by which the sciences learn, by  testing, refuting or confirming theories. But the British history of experimentation is very different: we show in the book that we live in a state that finds learning from experience very hard. There seem to be three political reasons for this:

‘Hyperpoliticisation’: in a world of extreme micro-management everything is turned into adversarial politics and what in the book we call the ‘antidote fallacy’

The closing of the metropolitan political mind: a drastic narrowing in the social and institutional range of elite recruitment (symbolised by the disappearance of the mass political party and domination of  politics by a narrow class of  professionals) is part of the problem; an equal problem is the rise, since Thatcherism, of a ‘TINAF’ mentality: There Is No Alternative Framework, and this drastically  narrows  the range of possible dissent from the official ‘line to take’.

The shrivelling of professional expertise.  Thirty years of centralisation and increasingly tight control of professional elites have left  (beyond devolved government) shrivelled alternative institutions in civil society  - and alternative sources of ideas.

We will develop these themes further over the next three blogs.

Manchester Capitalism

Introducing The Foundational Economy

The Guardian has just begun a series of articles following the ‘Enfield Experiment’.  That experiment attempts to use local authority initiatives to reverse a long history of economic decline in one of the most depressed parts of the supposedly booming London economy.  At its heart is a new conception of the obligations of business: one that stresses the obligation of enterprises as various as utilities and supermarkets to organise themselves to put  some of the profits they make from the community back into that community, in the form of business for local suppliers and jobs for local residents.

The Enfield Experiment is based in part on a developing argument being unfolded by researchers at CRESC. The notion that business has social obligations is hardly new, but the CRESC argument gives it added point by observations on the changing character of  the economy in the last three decades.  There are many ways of classifying economic sectors, plainly, but one key set of sectors has been created by the recent rise of two phenomena.  The first is the contract state: the vast extension, in the age of privatisation and outsourcing, of business activity which operates as a franchise sheltered by a contract with public authority.  That of course describes the way most utilities now operate in Britain. The second is the rise of the regulatory state: the rise of a web of regulations governing the terms under which business can operate, and often conferring on enterprises regulated protection from competitors: the classic example is the way planning regulations in effect confer local monopolies or duopolies on  supermarkets established in particular local communities.

The CRESC researchers dub all these activities part of  the Foundational Economy, and for an obvious reason: they involve the production and delivery of goods and services that are the very foundation of what we consider to be civilised life in Britain.  And they are not only foundational to everyday civilised life: if we think of utilities like energy, water and rail transport they are also foundational to the operation of the wider economic system.

One of the many paradoxes of the Thatcher Revolution is that it not only helped create and expand the Foundational Economy, through its development of the contract state and regulatory state; it also created the Foundational Economy as a series of sub-sectors sheltered from competition.  The Thatcher Revolution, in the name of privatisation and competition, vastly expanded the areas of business life carried on under the protective shelter of  public franchises: whether those franchises are openly acknowledged, as in the rail industry, or are implicit, as in the local monopolies conferred on supermarkets by planning law.  And it vastly expanded these sheltered areas of economic life in the name of individualism (‘no such thing as society’ in Mrs Thatcher’s words) and free enterprise, denying that enterprise had any wider obligation beyond the PR exercises of corporate social responsibility.  Yet a moment’s reflection shows that the licensed enterprises operating in the Foundational Economy enjoy huge social privileges; their operations have huge social consequences; and as a consequence they should be made to recognise their huge social obligations.
The Enfield Experiment is a first small step along the way to clarifying those obligations, and as the Guardian’s report shows it is paralleled by initiatives in other local authorities.  But this is not just a matter of localism.  The Foundational Economy is a national phenomenon, and it needs to be addressed by a debate about how we manage that national economy, and by policy measures that use state power to reconfigure the social obligations of business.

Note: to follow the CRESC argument further see  Andrew Bowman, Julie Froud, Sukhdev Johal and Karel Williams, The Foundational Economy: Rethinking industrial policy .  Manchester: CRESC, 2013, downloadable at: http://www.scribd.com/doc/122563517/The-foundational-economy-rethinking-industrial-policy-Andrew-Bowman-Julie-Froud-Sukhdev-Johal-and-Karel-Williams.

Pooter.