Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 8 June 2016

Bad business

This post mainly uses examples from the UK, but I suspect much the same story could be told in many countries. The reaction to Obama's criticism of Wall Street was extraordinary, until perhaps you realise that in the US political support is sometimes a commodity that corporations and the wealthy can buy. I return to the US at the end of this post.

I am sure the employment regime that existed at 'Sports Direct' would horrify anyone. A system of discipline that penalised taking time off sick such that ambulances responding to emergency calls were regular visitors to the factory. Many of the staff were not paid the minimum wage. This is what can happen when the majority of workers are not represented by a union, and local jobs are scarce, or other employers are not much better. We know about it because of the work of investigative journalists, but there are few of them left so how many other cases do we not know about?

A long time ago the Conservative party represented business, and the Labour party represented employees through their links to trade unions. In the 1980s the power of the trade unions was significantly reduced, and Labour leaders even thought they could gain votes by attacking some union actions. Since then, Labour have avoided ever siding with workers in industrial disputes. This continues under the current leadership: Labour did not even endorse the junior doctors strike. As a result, we can ask who represents employees against exploitation by employers within the workplace, and who represents society against rent seeking by employers at the national level?

The Conservative party was and still is the party of business. As Aeron Davis notes, even in 1997 only 7% of the business community voted Labour and 69% voted Conservative, despite all of Blair's efforts to show Labour was business friendly. In the last election business leaders did all they could to support the Conservatives, both financially and with explicit support. When this tight link between a political party and business is combined with an ideological belief among many in the party that regulations such as those that support employees are 'red tape' that needs to be cast aside, we get a mix which is potentially dangerous for employees and society.

We have seen many examples of bad business behaviour since the 2015 election, such as the emission test scandals. In some cases governments, being ‘business friendly’, actively helped with that deceit. Other examples are here, or here, or here, or here, or here(FT)/here/here/here/here, and that is not even counting the financial sector. It is estimated that over 200,000 employees are paid less than the minimum wage they are entitled to (HT Jo Maugham).

The links between the party and business, and an instinctive dislike of regulations on business, does not of course necessarily mean a Conservative government will automatically create an environment where abuses of employees and customers can flourish. As George Osborne showed when he increased the minimum wage, politicians can act against type. But it would clearly help in avoiding business exploitation if the Conservatives faced an opposition that felt free to be critical of business.

That is what Ed Miliband tried to do when he was Labour leader. He put the issue of producers versus predators, or as an economist might put it wealth creating versus rent seeking, at centre stage. Labour also proposed some relatively mild measures to reduce inequality (e.g. the mansion tax). The latter in particular were unpopular with CEOs. Partly as a result, we saw near universal endorsement of the Conservatives from business leaders.

An interesting question is why this should be seen as a problem for Labour. The answer has to be that approval by business is seen by many voters as a mark of economic competence. Of course economists know that running a business is very different from running the economy. In addition, as I think Justin Wolfers said, when a businessman claims economic expertise, remember: business is about enriching yourself, economics is about making us all better off. But the media environment encourages a rather different view. Economic issues, unless they are of major importance, are typically discussed in business sections or segments.

I have personally never understood the prominence that business news has in all parts of the media. For example, are there really that many people who want to know the daily movement in stock markets around the world every hour on BBC 24 hour news? More worrying is how often business leaders and business representatives get media coverage compared to representatives of employees, particularly at the BBC. (Business leaders also seem to beat economists at the BBC, as Justin Lewis noted about the 2015 election. This has been repeated during the referendum campaign. This is despite the public trusting us more than business leaders. [1])

The result of all this may be that Labour wants to avoid appearing anti-business. The Blair/Brown regime went out of their way to cultivate business, and were famously relaxed about the large increase in inequality at the top that occurred before their time. It is not totally ludicrous to claim that the UK financial crisis, the biggest example of business mistakes adversely effecting society for many decades, might have been partly a result of this.

The current Labour leadership is unlikely to repeat that mistake. But the problem remains that the Conservatives will throw the anti-business charge the moment Labour adopts any measures that restrict business freedom or threatens the incomes of business executives, and business leaders – for reasons already explained – will back them up. If this leads to a significant number of voters concluding that Labour are not competent to run the economy, we are in danger of hard wiring bad business. As Luigi Zingales observes in this perceptive article, although there is a deep distrust of crony capitalism among many Republican supporters, they still elected a crony capitalist.

[1] In Justin Lewis's article, he notes that newspaper partisanship directly influenced the broadcast news agenda”. Perhaps this is the most plausible explanation for many of the BBC's biases, together with – ironically – a fear of being too left wing, as Jack Seale reports with a great quote from Robert Peston.


  1. “I left school with no qualifications, learned about business by working with my mother in her business at weekends. I enjoyed it. Business was in the family. That was much more important to me than school.”

    Adviser on education to Blairite and Conservative governments Sir Philip Green (of his 'Retail Academy').

  2. The number of business scandals since 2015 is no higher than in any other time period. You, of all people, should know the importance of using a relevant counterfactual / comparator, yet you deliberately fail to do so when it suits you in this instance.

  3. I remember, vaguely, a transition point in the 80s, where the BBC flipped from asking professors about the economy on the news (and pieces like The Money Programme) to more and more asking City analysts. Feels like that was an important turning point in how we think about all of this.

  4. Personally I think minimum wage legislation is wrong. Employers' attempts to extract additional work out of employees is partially due to the minimum wage. I think tax credits are a much superior way to achieve a similar results and they would likely improve working conditions (while reducing wages I accept).

    I think minimum wage is similar to drug prohibition. Low productivity people exists. Low value activity exists. If you ban low productivity people doing low value jobs in clear view, it will happen in the shadows. I think it's better to offer tax credits (or drug addiction treatments) than simply ban the practice and put people in jail.

    I also think that people like Mike Ashley would be poorer in a world with no minimum wage. In the current world Mike Ashley is able to achieve abnormal profits given his willingness to push the limits of the law. When it's risky, few people will do it. If it wasn't risky, more people would be willing to compete with him and his profits would disappear. There are always some people willing to be drug dealers.

    I accept I am not in the majority on this view, but I think it's still true.

  5. Businesses employ the great majority of people in this country, so it is perfectly natural for people to listen to the views of business leaders on what is good for business, and hence (they might assume) employment. You can wish this weren't the case but it's like complaining about the weather. Any sensible Labour politician will realise this.

  6. Labour needs to prove it will be FAIR to business, and not just to small businesses. That means encouraging best practice, regulating against bad, and accepting that many ordinary people, and small businesses rely on the success of some globally owned companies, not all of which operate exploitatively. There is a spectrum of practice, with companies like John Lewis at one end, and some of those you refer to above at the other. I have been to a couple of Labour meetings recently, at which I heard speeches by Jeremy Corbyn and others and I came away with that feeling being on the side of workers and small business, as of course they should be, seemed to lead them to the generalisation that all 'big business; is on the other side. This is a false dichotomy for all but the most staunchly ideological. They certainly had absolutely nothing to say about encouraging best practice and investment into the UK, about making this investment attractive through fair regulation and conditions.

    When asked about this omission, they still just spoke about trade unions and workers rights. This is what gives the media the opportunity to portray Labour as 'anti-business', whether it is true or not.

  7. we also see the BBC leading with quotes from think tanks, some of which, like the Tax Payers' Alliance, are owned by people who do not disclose their name or how much money they contribute. In my opinion, they should not be quoted unless their ownership is public.

  8. "It may be 5.30am and pitch-black on the outskirts of Shirebrook, Derbyshire - but the roads are busy. A stream of cars, typically packed with eastern Europeans, wind their way along country lanes and deliver about 1,500 people to a massive facility surrounded by farmland."

    Economists also have their share to blame and have done very nicely out of it. They advocated liberalising labour markets with the expansion of the EU, first saying that no one would move, then when they did, play down the effects, especially on inequality and the low wage end of the labour market. It simply contributed to labour losing its bargaining power (one of the contributions, I agree, but still vitally important). Similar horrendous problems arose with rapid liberalisation of goods and capital flows (deinudstrialisation and financial crises and financialisation). Historians have warned about these things, not economists, not mainstream macro-economists, anyway. I know there are frictions and second welfare theorems and what else, but it is economists that come with dubious concepts like efficiency equity trade offs and have played up the role of incentives and Ricardian comparative advantage - very useful for self-serving financial and business elites. (These things may have been important at very specific historical times, but in most times having a whole theory founded on them is a massive distraction.) They have done it for decades. You would probably have to go back to the 1960s and outside the US to find the time when economists in the mainstream did not emphasise these things and warned about them.

  9. Like always, I enjoy your posts and continue to learn from them, but I would suggest you missed a wee trick; that the BBC website has "economy" as a subset of it's "business" category, provides a clear insight as to that institution's priorities, how debates are framed and what lense we are expected to use to view all matters economic.

    As for Sports Direct; an extreme example of what current labour laws allow employers to do to our fellow citizens with or a chance to recast the consequences of legislation in simplistic, personality-fixated terms ... I wonder how it'll be reported .....

  10. «I have personally never understood the prominence that business news has in all parts of the media. »

    Having wondered too why the vast majority of news are targeted at proprietors/investors my tentative explanations are:

    * It "normalizes" the point of view of proprietors/investors as the "public" point of view. After all news publishers are usually in varying degrees of subtlety the tools of (big) proprietors/investors.

    * There are quite a few more proprietors/investors around nowadays than in the past, because of the diffusion of rentier speculation in land and shares, in the top half of the income distribution, instead of merely the very top.

    * Usually even small proprietors/investors are affluent and have significant disposable income, that is they are very valuable targets for advertisers even if they are not that many.

    The three factors above are much exemplified in the colossal surge in circulation, especially in the USA, of "The Economist" periodical, that used to be strictly targeted at insiders.

    As to the third point, an interesting discussion of "The Guardian" marketing approach, in the long term:
    «"On 10 August 1979, the Guardian published a statement in Campaign, the weekly magazine of the advertising industry, which declared that the paper is read by “The Thinking Rich…85 per cent of them are ABC1 (social class) which is a better percentage than the Financial Times or Daily telegraph can offer.’ The statement also stressed that its readers ‘were not down-at-heel extremists without a penny to bless themselves with…They have bank accounts full of lovely money.’"»

  11. «The result of all this may be that Labour wants to avoid appearing anti-business»

    BTW my impression is that the majority of the "conservatory-building classes" don't worry very much about "pro-business" or "anti-business", they assume that businesses can take care of themselves, and indeed surely they can.

    I think that "anti-business" is a dog-whistle, a "shibboleth" that conservatory-building classes take as having a translated meaning: that it means "anti-speculation" and "pro-working class".

    Most conservatory-building class voters are very much in favour of speculation (especially highly leveraged government guaranteed property speculation that returns 100% per year profits on cash to themselves), and are very much anti-working class, as they regard themselves as upper-middle class as trusties and fellow travellers of the upper class, and cheaper help is always hard to find.

  12. «The result of all this may be that Labour wants to avoid appearing anti-business. The Blair/Brown regime went out of their way to cultivate business»

    Toa dd to my previous comment about that being a signal, another one of my usual T Blair quotes:
    «I was canvassing in the Midlands on an ordinary suburban estate. I met a man polishing his Ford Sierra, self-employed electrician, Dad always voted Labour. He used to vote Labour, he said, but he bought his own home, he had set up his own business, he was doing quite nicely, so he said I’ve become a Tory. He was not rich but he was doing better than he did, and as far as he was concerned, being better off meant being Tory too.»
    «In that moment the basis of our failure - the reason why a whole generation has grown up under the Tories - became plain to me.

    You see, people judge us on their instincts about what they believe our instincts to be.

    And that man polishing his car was clear: his instincts were to get on in life, and he thought our instincts were to stop him.»

  13. This will not end until we have competition in the labour market. The Job Guarantee (JG) is counter-cyclical auto-stabilising social security:

    (i) people can choose to go onto social security via the JG. This disciplines the standard economy. All of a sudden 'no deal' is an option in the normal business jobs market and that makes the job market behave, well, like a market. The JG operates much more completely than a 'minimum wage' ever can, but doesn't disrupt the wage structure entirely as an income guarantee would. Minimum wage can't provide an income if there aren't the jobs, and needs enforcing by a police force, whereas an income guarantee (at the very least) cripples the spending half of your auto-stabilisers - requiring taxes to be hiked massively on the other side to make the numbers add up.

    (ii) Because they are working, the number of people on a JG becomes less of a social issue - no more 'bring down unemployment', no more 'shirkers'. Therefore normal businesses can be allowed to go bust, not pay redundancy, etc because the JG will catch people who lose their jobs during a retrenchment. That disciplines the spending and wage channels since there need be no bailouts or the 'special industries' that pump-priming requires. Overpaid workers get an imposed wage cut when they are forced to move to the JG as do greedy bosses. 'Corporate confidence' is no longer of overriding concern.

    (iii) People on the JG are working and producing output - so they are more socially productive than on unemployment benefit or income guarantees. And because they are seen to be working they become cheaper to hire from a normal business's point of view (there is always less hiring risk if you know people are working). That eliminates a current risk cost completely from the economy (the 'long term unemployed' issue).

    (iv) Forcing businesses to compete for staff should accelerate the capital development of the economy, and replacing jobs with better machines is what we want the private sector to do. People need to be expensive to use, and jobs in the normal business jobs market must not be sacrosanct. Business models that fail, must be allowed to fail without any sentimentality.

    It's a simple buffer stock system that ensures people have enough money to buy food and shelter, and that minimum standards are kept.
    In other words its like the minimum wage, but requires no enforcement, reaches everybody and works automatically to stabilise aggregate demand in remote areas.

    A living wage at £10 per hour is £375 per week. Even at the current minimum wage it would be £270 per week. Or nearly twice the insufficient ‘basic income’ of the state pension.

    A Job Guarantee gives the poor over twice as much income as even the best income guarantee the UK has been able to offer, and of course competes all other wages into line by definition.

  14. "As a result, we can ask who represents employees against exploitation by employers within the workplace, and who represents society against rent seeking by employers at the national level?"

    Certainly not New Keynesian economists.

    Nobody enforces 'rights' when there are fewer jobs than there are people. Capitalists laugh in your face and move onto the next person in the queue who is more desperate.

    As long as we have visaless unskilled immigration from the EU and policies that result in deliberate involuntary unemployment ("NAIRU") workers are absolutely stuffed.

  15. I think this post is closely related to Chris Dillow's point about the difference between being "pro-business" and "pro-market". It would seem that the electorate (and public in general) seem to think these concepts are one and the same, which plays right into the hands of the Tories. People can no longer criticise big business without being accused of being a "Trot" or "commie", even though many people do so in defence of free markets. For example, it is fair to say that stronger bargaining power for workers and a universal basic income are market solutions, even though I bet the majority of the public associate them with "socialism" and "left wing ideals".

    If Labour wanted to rebrand itself, it could do worse than taking on Chris Dillow's slogan, i.e. Becoming the party which is pro-market and not pro-business.

  16. As far as I can see, this trend exists more or less in Europe, see the French movement against workers laws presented by "socialists" that is the trend seen done by the so called "social democrats" all over Europe.. real socialists where are you?

  17. "...combined with an ideological belief among many in the party that regulations such as those that support employees are 'red tape' that needs to be cast aside, we get a mix which is potentially dangerous for employees and society." persist in calling for more of what has one on for decades: the pernicious erosion of protections for privately-held property - which includes businesses.

    Plain facts...there is a massive surplus of labour and a scarcity of bona fide investment opportunities (read: "reasons to start a small business").

    The worst thing you could do in today's no-growth, money-printing economy would be to call for limits on profitability!

  18. (Part 1 reply to SWL's post)

    In particular what this post misses is the State needs to take a more pro-active approach towards attacking rent-seeking. The level of competition considered ‘acceptable’ by regulators is too low. And that’s because of the ‘business confidence’ meme that scares them into inaction.

    You can get to that by increasing the heat of competition. Breaking up firms, requiring them to be smaller and there to be many more of them in any particular marketplace.

    The natural capitalist approach is to eliminate competition using a variety of techniques – from market niche to oligopoly. The state should spend a lot of its time ‘stirring the pot’ to prevent this happening. And the indication that the pot needs stirring is price rises of any magnitude in any market. That means encouraging and even funding competitors, forcing IP to be shared, etc to break the market power.

    In a market with effective competition a business that increases output will out compete businesses that put up prices.
    Companies like Whitbread and Wetherspoons use the brand identification trick to create a ‘monopoly of one’ arena. That is what brand management is all about – eliminating competition in the eye of the customer.

    If you get firms that abuse the monopoly that brand gives, then they should be *subject to a competition investigation and broken up*. The threat of a break up should be sufficient to get the management of the company to consider investment and productivity improvements.

  19. (Part 2 reply to SWL's post)

    Labour need to reframe the issue of government spending.

    Instead of

    'what are you going to cut to fund programme X/tax cut Y'

    you can have:

    'fund programme X/tax cut Y' - which will either pay for itself by expansion in the real economy (in which case inflation will stay steady and there will be no compensatory tax/interest rate[1] rises), or it won’t (in which case this tax/interest rate[1] will change.)

    In other words the policy options switch from ‘pre-fund’ to ‘post-fund as required to maintain stable prices’. Taxation is no longer linked rigidly to the amount of government spending, but to the combination of government spending, net private sector nominal saving and the real expansion of the economy.

    It is powerful for John McDonnell to be able to say “We intend to introduce a Job guarantee scheme funded by the state and we expect that the economy will be able to expand its output to absorb this extra spending. However we reserve the right to increase Corporation Tax by up to 4% to compensate should it feed through to demand inflation. Obviously we want to avoid that so over to you Mr Entrepreneurs to create the necessary economic expansion.”.

    Once you have a JG and the ‘business confidence’ bogeyman that Kalecki mentions is laid to rest then you can be far more aggressive pushing up the living wage. At the top end you give the Ministry of Competition real jack boots to stop oligopolies forming.

    Wages are then controlled also since excessive wage rises mean that some of the firms go bust and everybody loses their job – falling back to the Job Guarantee.

    Or in a newspaper get it to read: "McDonnell offers strict warning to commerce that I'd expect that to be paid for by increased production and investment, and that any price rises would trigger competition commission investigations and/or additional taxes on profits."

    Carrot and stick.

    If they attack it say the people responsible for putting the prices up are the businesses. Individuals don't do that - they just paid the higher prices and got nothing extra for it.

    So all you're doing here is discouraging the behaviour. If you put prices up, it will be taxed away. If you expand production you get to keep the loot if you want.

    1. "Labour need to reframe the issue of government spending.

      Instead of

      'what are you going to cut to fund programme X/tax cut Y'

      you can have:

      'fund programme X/tax cut Y' - which will either pay for itself by expansion in the real economy (in which case inflation will stay steady and there will be no compensatory tax/interest rate[1] rises), or it won’t (in which case this tax/interest rate[1] will change.)"

      It is somewhat naive to believe this will work. What will happen is this:

      Reporter: So, Mr McDonnell, how will Labour fund these planned spending increases?

      McDonnell: Well, hopefully the economy will grow sufficiently that they will pay for themselves, but if not and inflation goes up too much, they'll have to be be interest rate rises or tax rises'

      Headline: 'Labour admit spending plans may lead to increases in inflation, interest rates and taxes.'

    2. Corporate taxes. Which if increased will encourage investment.

  20. So well written! Congratulations!

    The multiplicity of actors is impressive. Most of the business is employment disguised. Take for example B2B companies and calculate where for example 50% of the turnover comes from. Amazing high the few business clients they. So they could be departments of larger businesses, so employees of larger businesses. However, they would NEVER realize so. They think they independent entities.

    Could you in the next articles have reflections on governance for complex, large, digital and knowledge/competencies asymmetric communities, please?

  21. It is probably too simplistic to say that money is the root of all evil, but I personally have no doubts whatsoever that the diversion of Labour from its theoretical charter is due to the influence of money on modern election strategy.
    What starts as "balancing the scales" to offset inherent capitalization advantages of Conservative leaders quickly morphs into "business friendly". Or in American terms, Clintonism.


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