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19 February 2007

We love capitalism

Were trade unionists looking in the wrong place when they fought for better pay and shorter hours? T

By Richard Reeves

Karl Marx famously predicted that capitalism would produce its own gravediggers. If so, they have been an awfully long time on the job. (Perhaps they knock off early.) In fact, there is no grave. Capitalism is alive and well, having triumphed on all fronts: economic, social and political. Like democracy, it has proved to be the worst way to run an economy – with the exception of all the others. Yet it seems unlikely that in a hundred years there will be any general need for the word capitalism at all. The only sixth-formers writing essays on “capitalism” or “socialism” in 2107 will be those studying history.

As a result of this total victory, the market economy has been depoliticised. If anything, it is Labour ministers who now make the case for capitalism – for productivity, competitiveness and growth – and new Conservatives who point to the “social irresponsibility” of a selection of companies. When Rover finally went under in 2005, victim of the scouring forces of global capitalism, the national response was a collective shrug. We are all, it seems, capitalists now.

But what species of capitalist do we want to be? Where markets have proved triumphant is in their ability to drive up living standards and personal choice through rising productivity. And yet, as John Maynard Keynes presciently warned in 1930, this solving of “the economic problem” still leaves mankind with his “real [and] permanent problem – how to use his freedom from pressing economic cares . . . which science and compound interest will have won for him, to live wisely and agreeably and well”.

Solving this problem means rethinking the essence of each individual’s relationship to the labour market. Capitalism is triumphant but complacent – to reform it, we have to go into the belly of the beast.

There are mountains of data being produced which show us what the Beatles and Aristotle instinctively knew: that higher levels of wealth and consumption have a limited, and diminishing, impact on our sense of well-being. Politicians are trading terms such as “general well-being” and “quality of life” because there is a grow- ing awareness of the costs as well as the benefits of consumer-driven growth – the malaise that the psychologist Oliver James calls “affluenza”.

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The prescriptions for the disease are to “simplify” our lives, consume less, address our “work-life balance” and meditate. There is even a gentle man giving out free hugs. At a policy level, higher income tax is sometimes proposed (presumably because those days of supertax in the 1970s were so euphoric), along with longer holidays and state-mandated limits on working hours. These are mostly well and good. But they skirt around the central issue (and here Marx was at his most acute): the relationship between the individual and his or her work. Purposeful, rewarding work is at the heart of a well-lived life. This is why Gordon Brown has called for “full and fulfilling” employment and why David Cameron – a decade later – supports a “modern vision of ethical work” as part of a drive towards “general well-being”. There is a strong, consistent link between job satisfaction and overall happiness. Work is where economics becomes human, where the connection between the creation of wealth and cultivation of well-being is strongest.

Work is also the site at which the skills and effort of the individual are transformed into something the number-crunchers at the Office for National Statistics can measure and call GDP. Right now, in the UK at least, we are not doing too well on this score. The most important component of overall productivity today is labour productivity – in other words, what people actually do (or fail to do) at their workplace each day.

The problem that companies face is how to motivate people to “go the extra mile”: to give the firm more creativity, energy or time than is required under the terms of their contract. In the management literature, this is labelled “discretionary effort”. But it is much more than an issue for managers. It goes to the heart of the particular model of a market economy that is and has been in vogue for the past century or so, one that is based on people working for a firm owned by other people, to whom most additional profit flows. As the other Marx (Groucho) put it: “What makes wage slaves? Wages!”

There is a solution to both problems, a remedy that will raise levels of well-being and boost productivity. It is, in that incalculably misused phrase, a “win-win”. The solution is this: for the people who work in an enterprise to have a real financial stake in its long-term performance. Firms in which the employees are also the “co-owners” are more productive, with more engaged employees. They account for no less than £20bn worth of turnover – roughly 2 per cent of the UK economy – and cover such diverse sectors as retail (John Lewis), civil engineering (Arup) and advertising (St Luke’s). In the mid-1990s, Labour flirted briefly with the idea of a “stakeholder” society, then being articulated by Will Hutton, but backed off once the top brass realised that it would entail taming the capital markets. The essential insight of stakeholding was right, but the place to start is in the firm itself, not the market as a whole.

Most policy-makers view the co-ownership sector in the same way as the royal family: a good thing, slightly anachronistic . . . and a bit wet. But firms where workers not only own a real stake but also play a real role in running the firm – where the co-owners are also co-creators – are not for the soft-hearted. These are not reheated co-operatives: pay differentials tend to be lower than in comparable firms, but there is no expectation that everyone will get a same-sized slice of the pie. One of the sources of higher productivity in these “CoCo” companies is tougher peer policing: it is harder to “pull a sickie” when the co-workers who “welcome” you back will be poorer as a result. Information-sharing and innovation levels look to be higher in CoCo firms.

Latter-day pirates

The best study undertaken of relative performance suggests a 19 per cent productivity lift from co-ownership. Applied across the economy, co-ownership would make the UK the most productive nation in the world. In a survey of managers in co-owner firms, 72 per cent reported that staff worked harder than in competitor companies, and 81 per cent that they took on more responsibility. And CoCo firms should not be tarred with the brush of being an example of “corporate social responsibility”. They are only as responsible or irresponsible as their owners, just like with any other firm.

CoCo enterprises should be the next-generation capitalist business model. A new organisation, the Employee Ownership Association, will start a campaign this month to raise political and public awareness. The timing is auspicious: the public limited company, until now the mainstay of capitalism, is in some danger from private equity firms (at this very moment, a ravenous group is circling Sainsbury’s). It might be possible to throw a few legislative or regulatory obstacles in the path of these latter-day pirates. But the whole point of a public limited company is that its stock is publicly traded. If a private equity firm offers my pension fund a great price for its stocks in Sainsbury’s, the fund might well be obliged to accept it. Most CoCo firms, however, are impregnable to outside raiders: the stock has to remain in the hands of employees. It is also easier, in such firms, to take longer-term decisions without too much fear of the impact on short-term share prices.

John Lewis is flying high, but had some years of retrenchment and reinvestment in the 1990s when its headline profit numbers were weak. “If we had been a plc, you could write a script that we would have been under severe scrutiny in those years,” says the firm’s personnel director, Andy Street. “But our structure allows us to operate on slightly different timescales.”

As a business model co-ownership seems hard to beat. Yet if this was the end of the argument, it would be hard to get very excited. After all, productivity per se is scarcely relevant: what counts is how it is arrived at. But CoCo capitalism has other advantages, in its human engagement with work and an increased sense of citizenship that spills over into life outside work. For one thing, it seems that co-owned firms are less likely to award vast salaries to their chief executives, and may act as a brake on runaway wage inequality.

John Stuart Mill, a passionate advocate for co-ownership, argued in the 19th century that the benefits included “the healing of the standing feud between capital and labour; the transformation of human life, from a conflict of classes struggling for opposite interests, to a friendly riv alry in the pursuit of a common good to all; the elevation of the dignity of labour; a new sense of security and independence in the labouring class; and the conversion of each human being’s daily occupation into a school of the social sympathies and the practical intelligence”.

Given that the “feud” between capital and labour is the raison d’être of the trade unions, co-ownership is not necessarily good news for them. Even in the “corporatist”, German-style version of capitalism, the underlying assumption is that labour and capital have differing interests, which have to be balanced peaceably and fairly. Under co-ownership, the distinction implodes. And it was certainly Mill’s view that giving “the whole body of workpeople . . . a direct interest” in the profits of the enterprise would bring about “the true euthanasia of Trades Unionism”.

Yet a move towards a different sort of capitalism poses challenges to political orthodoxy, too. Despite capitalism’s victory, there is a resistance to looking with a clear eye at its flaws; there is still a timidity about questioning the current version of capitalism for fear of being branded a barricade-building red. But surely, it must now be possible to have a conversation about the kind of economy we want: after all, young people born after the fall of the Berlin Wall are reaching voting age.

There are certain policies that might help with the cultivation of co-ownership, from changes in tax treatment to better data collection and the provision of advice. However, the argument has to be won first. For the left, this requires a significant shift in focus. The primary locus of political attention in the past half-century has been on the state and its relationship to the individual. Taxation, regulation, redistribution and public services are the staple diet of Labour types. The fruits of this philosophy, especially the welfare state, are obvious and real, but the party has to start living up to its name again.

The central social and economic issue of our time is the relationship of individuals not to the state, but to the organisation for which they labour. Co-ownership could be seen, using the old labels, as socialism without the state, yet it could equally be seen as capitalism with more capitalists. The point is that it doesn’t matter. What should concern us now is whether existing structures and cultures are enabling us to live “wisely, agreeably and well” and, if not, what we might do about it.

CoCo Companies is published by the Employee Ownership Association (https://www.employeeownership.co.uk)

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