Home   Editorial   About   
Promising to rebuild what has been proactively destroyed is not a sign of economic competence - a note

Hector McNeill1

The government's "new proposals" are essentially filling in funding gaps that their policies, over the last nine years, have created. This will return to the state of affairs prevailing in the pre-2008 period i.e. a decade ago. It is important to realise that this extraordinarily unimpressive "ambition" is a reflection of the failure in macroeconomic policy in the intervening period.

In a world where the mantra, "There is no alternative" continues, it is self-evident that macroeconomic theory and practice is seriously flawed. Note that if any criticism should be leveled, it should be to economic theory and practice because of the lack of economic theoretical and practical options. It is the economists who need to come up with more practical solutions that have a positive impact on the wellbeing of all constituents. However, because policies do not secure Positive Systemic Consistency, political parties are provided with the opportunity to mould policy to support political party support constituencies and often to prejudice those identified as opponents of the party. This is divisive and destructive. The political parties speak of aspirational policies and opportunity when, in reality, the way in which economic policies are implemented only intensifies division by widening rifts between sections of the community. Aiming for a "classless" society will always be an uphill battle when policies end up creating income and wealth-related class divisions. Economic theory and policy needs to come up with something that is more constitutionally acceptable for a participatory democracy.

Therefore it would be preferable for any "new proposals" to reflect essential changes in approach. However, these remain few and far between.

This issue became more than evident in the slumpflation period of the 1970s-1980s when work on the Real Incomes Approach was initiated. The motivation was that all policies that proposed ways and means to get out of that predicament caused serious prejudice for sections of consituencies. Policies, to this day, continue to create winners, losers and those who seem to remain in a neutral policy-impact state, currency purchase value has continued to decline and an increasing proportion of the constituency has drifted towards lower real income status.

Conservative and Labour economic proposals - a first brush assessment

Largely because of the very limited options conventional KMS economic theory and practice provide in terms of policy targets and instruments, we see the basic approach of both parties becoming very similar. In terms of financing operations both parties are proposing having expenditure not exceeding tax income. However, Labour will be able to spend more because they propose to increase tax on very high income earners while the Conservatives are proposing to lower taxes which in spite of the theories stating otherwise is likely to result in a lower government revenue.

In terms of significant rises in promised borrowing, this relates not to operations but to investment in such things as infrastructure. Although both parties are applying similar fiscal rules they both make the common assumption that these investments result in future growth. The evidence for this theoretical proposition is weak but there are some differences in approach which cause the two party's proposals to be quite different.

John McDonnell over a considerable time has been exploring many different options on what can make business and infrasructural operations more efficient. There are two vectors or approaches. One is the bringing of utilities into public ownership and the other is promoting mutuals or participatory ownership of private companies. The performance of utilities under private ownership has not been impressive and some utilities are run by foreign state owned companies which is a state of public ownership of UK assets by foreign government-owned operations. Many of the current utility operation contracts guarantee the companies running them fixed monthly incomes irrespective of consumption. There have been many instances of ineffective provisions such as in the case of certain train services and ticket pricing has become prohibitive for people with lower incomes. These are just some of the reasons the general public appear to favour passing utilities into public ownership as a move towards secure better services and greater efficiency. Clearly this process will be prolonged since transitions are only likely to occur as contracts come to the end of their agreed terms. There have been questions concerning how shareholders of these companies will be compensated. This is a question of the types of contract and the types of assets the operating companies took possession of under the contracts.

The untapped competitive potential of mutuals

The other more interesting aspect of Labour's plans are the moves towards mutual ownership. McDonnell has mentioned this in terms of the local provisions of utilities but in reality the major potential lies in the encouragement of the formation of mutual companies to help initiate a correction of the unacceptable disparity in wealth and income levels in this country. Mutuals operate on the basis of the staffing owning the company. Thus rather than have the shareholder-employee operational structure which placed employees at a distinct disadvantage because of the profit, fiscal, monetary and productivity paradoxes, mutuals are run and staffed on the basis of "employee" being the shareholders. The notion of mutuals being inevitably sleepy and uncompetitive is a false one. With today's IT systems and decision support systems, the notion of there needing to be constant "committee meetings" and "voting session" to take commercial decisions is completely out of date and is not a practical view of how these can operate. In terms of competition, mutuals, because they are not shareholder-employee structures, operate, on average, with a 15-18% cost advantage. They start off in a more competitive status that larger plcs and other types of companies whose driving motivation is "shareholder value". There is no doubt that Labour have an advantage here if they concentrate a little more on the mechanisms for helping in the creation of such mutual companies. One paradox is that Labour have had "cooperative" MPs for many years but have never mainstreamed this concept although now this might have changed. The former Cooperative Wholesale Society (CWS) was the largest supermarket in the country but following Thatcher's financial de-regulation changed over, like many mutual building societies into a non-mutual. As a result the company lost its dominance and the building societies concerned failed while others were saved by The Nationwide Building Society the largest mutual in the country.

Does this mean a confrontational transition?

The Conservatives under David Cameron toyed with the idea of mutuals but this was very soon scuppered by business interests. They are totally aware that well run mutuals are potentially more competitive than external shareholder owned companies. So here the tactic to be used, in a wave of expansion of companies that promise a reduction in income disparities, is to emphasise startups as well as providing incentives for companies who wish, on a voluntary basis, to transform into mutuals. In this way this can avoid any direct confrontation with other forms of operation.

Investment for real growth

Mutuals are also the corporate structures in the best position to benefit from the Real Incomes Approach under Price performane Policies as explained at the end of the article: Appropriate business rules for competitivity & growth. If Labour wish to accelerate the reduction in income disparity and promote real economic growth, then a Real Incomes Approach policy to accerlate the growth and penetration of mutuals in the economy would be way to achieve this. This would add an additional level of objectivity to Labour's higher investment plans by turning making sure the brief of their Development Bank include a major source of investment to support a wave of growth in mutual operations to promote a more competitive private sector economy, higher incomes, lower unit prices and a genuine national economic growth. This offers a significant potential but it is, as yet, not clear if this is what Labour have in mind.

Apart from the Development Bank proposal, the investment proposals of the Conservatives and Labour are not much different, the devil is in the details. To date these have not been revealed if, indeed, they exist.

The Real Incomes Approach has evolved over the last 40 years and it is evident that to achieve a sustained national growth in real incomes and a reduction in income and wealth disparity, an expansion in the percentage of mutuals in the economy has a central role to making this policy a success.

SMOT.GIF - 2160 Bytes