Chris Dillow: Anti-business

How business and the free market have failed society

Chris Dillow is an economics writer at Investors Chronicle. He blogs at Stumbling and Mumbling, and is the author of New Labour and the End of Politics.

Cross-posted from Chris’s website Stumbling and Mumbling


The Labour Party politician Rachel Reeves claims to be “pro-business.” At risk of mistaking a vacuous cliche for a serious proposition, I’m not sure she should be.

It’s not obvious that business has intrinsic virtues. Yes, some businessmen are genuinely committed to virtues of excellence even if they don’t use that MacIntyrean term, but equally business is a location of hierarchy, unfreedom, bullshit jobs and bullshit language.

What’s more, the single-minded pursuit of short-term profit often displaces such virtues. It can crowd out altruism or professional pride; incentivize managers to chase a quick buck through fraud rather than by promoting a healthy corporate culture (pdf); encourage risk-taking; and reduce creativity (pdf).

Equally, whilst businesses can be part of a healthy market environment, they can also undermine that environment by bribing government, seeking special favours or hiding behind intellectual property laws that restrict competition. It’s not obvious that governments should be pro-businesses such as PPE Medpro, Relx or Capita.

Instead, if we should be pro-business, it is because business is a means to achieving other things, the most obvious of which is prosperity.

Now, all economists agree that the determinants of a nation’s prosperity are capital, labour, technology, institutions and culture. Which poses the question: to what extent do businesses contribute to these?

For years – long before Brexit – the UK has had low capital investment and a lack of vocational skills. Which tells us that businesses’ ability to grow the first two of these has been limited.

But a more interesting case is technology. The best companies have organizational capital; they are more productive than you would imagine from looking only at the capital and labour they employ. Compare, for example, Amazon and Evri. There’s not much difference between their drivers and vans. And yet Amazon is an excellent at delivering goods and Evri less so. It has organizational capital, an ability to do things with capital and labour that other firms cannot. It is more than the sum of its parts.

We have a rough way of measuring investors’ assessment of such organizational capital. It is the ratio of the share price to book value, the value of a company’s capital stock. For years, Amazon’s price-book value has been high, meaning that investors have considered it to be worth much more than the sum of its parts. In this sense, the Amazon business adds value by doing clever things. So too do other big tech companies such as Microsoft or Apple*.

It makes sense to be pro these sorts of business; they create wealth by being good businesses, not simply by buying capital and labour power.

But not all busineses are like this. Many don’t so much create wealth as divert it. Fund managers are mostly quacks and snake oil salesmen whilst banks are mainly property lenders with casino sidelines. They are, as Adair Turner said, socially useless.

This is especially the case for utility companies. Water companies pour shit into seas and rivers; gas and electricity suppliers rip off their customers; and train companies cancel thousands of services, meaning they fail in their basic duty of getting capital and labour in the right place. There’s no reason we should be pro these.

Put it this way. If E.On or EDF were to disappear tomorrow, what would we lose? As long as we have electricity and gas production and distribution – that is, real resources and technologies – not much. Such companies are no more than the logo and letterhead to whom you send your bill.

Even outside of egregious cases such as these, many firms destroy value. Many – including household names such as National Express, Vodafone or Saga – have low price-book values, suggesting that the market thinks they subtract value from the resources they employ (though of course whether the market is right is another matter).

You might think such inefficiency will be corrected by market forces either by product market competition driving out bad businesses, or by them being taken over. But this does not happen in those sectors such as utilities where competition is absent. And it happens only weakly in other markets. As Nick Bloom and John Van Reenen have shown, there is a “long tail of badly managed firms”. Yes, there’s a case for strengthening market forces to ensure that competition is stronger, but this only reminds us that pro-market policies can and should be anti-(some) business ones.

Which brings us to the nub. If Labour is serious about boosting trend growth – and it should be – then it needs policies which are anti-business, or at least anti some businesses. Tougher competition policy would be bad for incumbent businesses but would foster the creative destruction necessary for productivity growth. A shift from taxing profits to taxing land would be anti businesses that own commercial property but would perhaps incentivize productive capital spending. Encouraging alternative means of financing start-ups (such as a state investment bank) would be anti-bank – more competition for them – but pro-entrepreneur. And encouraging worker democracy would be anti-business in the sense that it would undermine the power and self-regard of the worst sort of bosses, but we’ve good evidence that it would (pdf) raise productivity.

Labour should be pro the small shop confronted with a rapacious landlord; pro the pub or restaurant owner being ripped off by the utility company; and pro the start-up struggling to raise finance from a dysfunctional banking system. It should not be generically pro-business – and in fact given conflicts of interests such as these it cannot be.

Of course, there’s isn’t always a conflict between policies that are pro-growth and those that are pro-business. Rejoining the single market, for example, would be both; that Labour is not advocating this suggests its embrace of pro-business principles is mitigated by other considerations.

All this should sound familiar. For one thing it is bog-standard conventional economics: proper economics, remember is not the free market fairy tale of Tufton Street but an analysis of how the real world operates. And for another, it echoes Ed Miliband’s distinction between producers and predators.

And yet his distinction was howled down by his opponents in the Tory party and (what is much the same thing) the media. Perhaps Reeves has to retreat behind mindless cliches because she knows that intelligent political discourse is not possible.

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