THE PUBLIC PRICE OF PRIVATE CORPORATISM
In my previous article, I explained why we should stop thinking about politics in terms of “Left” versus “Right”, and focus instead on the gradient between “Libertarianism” (or individuality) and “Corporatism” (the institutional and the collective). I argued that Britain had become increasingly Corporatist in recent decades, and that this has done immense harm.
My original intention had been to explore the harm caused by Corporatism in this second and concluding article, but the interest expressed in this series has helped me decide to stretch it from two parts to four. Here I will focus on private corporations. In part 3, I’ll turn to Corporatism in the public sector and government. In the final instalment, I’ll look at what might be done about it.
I must reiterate that, by “Corporate”, I do not just mean large private organisations. Corporatism in the public sector and in the political process has been just as damaging as the activities of large private enterprises, indeed arguably much worse.
The general point being made in this series is that Britain has fallen ever further into the grip of Corporatism, which serves itself, not the broader community. It has weakened the economy, impaired living standards, undermined public services and debauched the political process. Unless it is challenged, the harm inflicted by Corporatism will become existential.
In brief, the indictment against Corporatism is as follows:
– Corporatism has damaged British society, undermining the political process and corroding public trust in institutions.
– It has weakened our public services, impairing service quality and responsiveness whilst adding hugely and unnecessarily to taxpayer costs.
– It has prompted poor economic and political decision-making, weakened and distorted the economy, shackled the country with unsustainable debts, undermined real wages and contributed to an unhealthy widening in inequalities both of income and of wealth.
– It is hugely costly and, less tangibly but just as importantly, it has undermined individual liberties.
With private corporations, there is one factor that must be borne in mind from the start. This is called “the divorce of ownership from control”. Historically, businesses tended to be managed by their owners, but increases in complexity and scale long ago led to the employment of directors to manage businesses on behalf of huge numbers of often small shareholders.
Theoretically, the interests of directors (and senior officers) are the same as the interests of shareholders, but in practice, of course, they are not. The banks are a classic instance of this, where huge rewards for senior employees have contrasted with dreadful returns for investors.
The ability of shareholders to remove senior officers, or to control board level pay, is absolute in theory but almost non-existent in practice. In effect, the directors and senior employees of corporations exercise almost unfettered control over assets which – and we should never forget this – actually belong to others. They are supported by many of the institutions which manage vast amounts of shares on behalf of small investors. All too often, these institutions are managed by people whose interests are markedly similar to those of corporate directors.
The State and the law connive at all this. When a corporation does something wrong, punishment is inflicted on the company (meaning the innocent shareholders) rather than on the executives with whom real responsibility so often lies.
If an individual obtains money by deception, this is known as fraud, and is punished accordingly. When committed by a large company, however, it is known not as “fraud” but as “miss-selling” and, if punishments are meted out at all, they are inflicted on the hapless shareholders, not the decision-makers responsible for sharp practice.
When banks fail, the government bails out not just the banks (which arguably is necessary) but the bankers as well, which clearly is not. At the very least, the bailing out of senior bankers flouts public opinion.
All of this amounts to near-immunity from the consequences of wrong-doing. As well as being harmful in itself – because it encourages irresponsibility – this contributes to a feeling of “us and them” which has been undermining British society.
Remarkably, too, government hands out huge subsidies under a process which has been described as “corporate welfare”. A forthcoming report will quantify annual cash hand-outs to Corporates from the British state at £14bn, rising to a colossal £85bn when wider “corporate welfare” is included in the calculation.
Even this huge figure excludes broader costs attributable to the low wages paid by many Corporates, which forces the State to make up the difference. Last year, £28bn was spent by the government on in-work benefits such as tax credits, housing benefits and council tax benefits, all of it made necessary by low wages.
The view taken here is that something is clearly very wrong indeed when wages are so low that working people cannot subsist without taxpayer help. In short, society is paying too much to subsidise Corporate profits.
There is not necessarily anything wrong with providing incentives. But giving the vast majority of the £14bn to giant (and usually multinational) corporations does raise the question of why such subsidies could not be diverted to smaller, British-owned businesses instead.
Not surprisingly, both government and the Corporates themselves are coy about the scale of support received from the State, and there are no readily-accessible figures for these activities. If we were to add to the above sums the social costs created by problem lending (estimated at £8bn annually), problem gambling and problem drinking, the total cost to government and society would become even more enormous than the £85bn cited earlier.
And all this, of course, is before we even consider banking support, or the notoriously low tax-take from Corporates.
The Corporates themselves, of course, insist that they are politically neutral, and that their only objective is to grow value for shareholders. The political neutrality of Corporates, seemingly contradicted anyway by their substantial expenditures on lobbying, was not much in evidence during the Scottish referendum debate.
Corporates’ interventions over Scotland are likely to be dwarfed by the efforts that big business will no doubt make to persuade the British public to vote in favour of continued membership of the EU. Membership of the EU suits Corporates – so who cares what the voters think?
So, whilst the claim of political neutrality may be true of party politics – no Corporate would want to antagonise one of the major parties by supporting the other – there are Corporate fingerprints all over the wider political debate and process.
The claim that the sole focus of Corporates is on shareholder value is true in many instances, where directors have a genuine commitment to shareholder interests, even if performance-related perks (such as stock options) can make motives somewhat opaque.
But we need to be aware that the interests of businesses are by no means the same as the broader objectives of society.
Nowhere is this more evident than where wages are concerned. For an individual business, it seems obvious that keeping wages low improves profits. If every company drives wages down, however, the result is a low-income society in which demand is weak – and companies themselves, of course, are big losers if customers cannot afford to buy what they produce. Henry Ford knew this, but the many less enlightened Corporates of today seem not to understand it.
A notably irony here concerns senior executive pay. According to the Corporates, typical wages need to be low if workers in Britain are to compete effectively with cheaper labour elsewhere in the world, most notably in the emerging economies of Asia.
The logical corollary of this, however, surely should be that board level wages should be lowered too, because the emerging economies certainly produce cadres of excellent, highly qualified people who could do a better (as well as a cheaper) job than many of the West’s often mediocre business leaders. Somehow, however, the globalised pressure on shop floor wages is never allowed to drive down board room pay as well, and FTSE100 director pay has increased by 278% since 2000, compared with a 48% nominal increase for shop-floor workers.
Whilst Corporates want a low-wage economy (everywhere outside the board room), they also need high levels of consumption, and few, if any, seem troubled by (or even aware of) this contradiction. The contemporary model for all too many Corporates is to produce goods and services as cheaply as possible and then persuade poorly-paid workers to buy them.
Various policy strands follow from this. First, Corporates favour free movement of labour (including support for British membership of the EU), and often oppose legislation to guarantee minimum wages (let alone the Living Wage). Second, they also have a pretty mixed track record on legislation to protect working conditions, and are opposed to worker co-operation and representation along German lines, despite the marked success of the German economic model.
The Corporates’ stance on regulation is more ambivalent. Despite favouring de-regulation in principle, they often seem to support regulations which, by imposing proportionately greater burdens on small and medium-sized enterprises (SMEs), entrench the competitive position of the Corporates.
Alongside their preference for cheap labour, big Corporates are the most vocal supporters of consumerism, and dominate the near-US$470bn global advertising industry. The problem with this is that the promotion of consumption alongside efforts to depress wages is inherently contradictory, and has been a major contributory factor in the escalation of household debt.
An equally serious shortcoming of a Corporate-dominated economy is that it tends to impair competition. Adam Smith is well known as an advocate of free markets, but much of his Wealth of Nations (1776) is a warning and a diatribe against monopoly and oligopoly. Corporates’ advocacy of unfettered commerce stops well short of encouraging greater competition, and many of Britain’s industries are over-concentrated. A recent illustration of the importance of competition has been provided by the discounters, who, by breaking up the previous domination of the food retail sector by a handful of giant supermarkets, have delivered great benefits to consumers.
The reality, of course, is that a thriving economy requires intense competition, not just to deliver best value for customers but also to offer the widest opportunity for the talents of workers. Historically, innovation has come overwhelmingly from small businesses, even if successful innovation then transforms these small companies into big ones. Likewise, abundant statistics show that small and medium enterprises are the main drivers of job growth, whilst giant businesses often engage in downsizing and “rationalisation” instead of organic expansion.
I would not want to convey the impression that big Corporates are necessarily a bad thing because, clearly, they have an important role to play. But the excessive influence of large Corporates can be bad news for the economy, not least because they stifle, crowd out, or use their clout to weaken new, smaller and more innovative businesses. Corporates all too often promote the dangerously contradictory logic of high consumption in a low wage economy, and their influence can push economic policy in the ultimately futile direction of “flexible” (meaning poorly-paid and poorly-protected) labour policies.
Corporates’ political influence is something to which I will turn later in this series. In part 3, we’ll look at the impact of Corporatism in the public services – a development which has been even worse than Corporatism in the private sector.