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22 January 2015updated 22 Oct 2020 3:55pm

How can business reduce poverty?

The Webb Trust essay prizewinner offers an answer.

By Adam Ludlow

A comparison between modern and pre-industrial civilisation is enough to suggest that business has been instrumental in reducing poverty in the past. Through growing economies, creating jobs and producing the tax receipts necessary for redistributive government policy, the exchange of one person’s labour for another’s is the most sustainable way that poverty can be reduced.

However, this magazine’s founder, Beatrice Webb, had severe reservations about this theory. As she wrote in 1896: “No competent authority would now deny that unfettered bargaining between capitalist and workman inevitably tends to result, not in the highest wage that the industry can afford, but the lowest on which the workman and his family can subsist.”

The essence of her words survives in the progressive tradition to this day: poverty needs to be actively reduced by deliberate initiatives rather than simply to be the by-product of the free market and something so capricious as economic growth.

There are many ways business itself can take such action, from technological innovation to ethical supply chains. But there is one aspect of business’s record that progressives focus on more than any other: realigning spending priorities – usually away from shareholder payouts or owner profits.

Four alternative uses for capital have particular capacity to do this. First, businesses can transfer profits to charitable causes; second, reduce their prices; and third, employ more staff. Finally, businesses can prioritise the human capital of their own staff: paying them more or providing them with training or support. But which is most effective?

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Currently in Britain, the most desirable answer is to prioritise staff development. Donating profits to charity is certainly ­noble, and can be effective when done comprehensively, as in the case of the Bill & Melinda Gates Foundation. However, few ­businesses are the size of Microsoft and, on smaller scales, the approach does little to combat the structural causes of poverty, such as low-quality jobs or unequal career opportunities.

Reducing prices for consumers can make a difference, but, significantly, the part of the economy where costs are most problematic is also the sector that is least professionalised: housing. According to Alex Hilton of the campaign group Generation Rent: “People aren’t queuing up at food banks because of the cost of food, they’re queuing up at food banks because of the cost of housing.” Of the homes left unoccupied in England for longer than six months (currently around 200,000), one suspects most are held by individual property owners rather than limited companies. While business should add its voice to the debate, the issue ultimately requires the changing of minds to accept that more housing is desirable. This is a political task that is perhaps not best suited to business.

Finally, although job creation is vital to reducing poverty, in contemporary Britain it is not necessarily the top priority. This is primarily because the multiple deprivations symptomatic of poverty are not experienced anywhere near exclusively by the unemployed. Deficient diet, inadequate clothing, the torpid crawl of damp across the walls of unheated homes – according to the Poverty and Social Exclusion research project in the UK, children most likely to experience these conditions “live in small families with one or two siblings, live with both parents, have at least one parent who is employed, are white and live in England”. Poverty in modern Britain is caused as much by low-quality, low-paid employment as unemployment. If business is to reduce poverty, it is this that it should focus on.

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The methods for business to relieve in-work poverty are relatively well known. Prevalent proposals in recent years have been the living wage, affordable childcare and more apprenticeships. All are based on a wealth of research and well-argued justifications: but uptake of the living wage has been painfully slow, childcare remains eye-wateringly expensive and official figures show that the number of people in apprenticeships stalled last year. The ways business can reduce poverty are therefore well established in theory but are struggling to be implemented in practice.

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Markets supposedly hate nothing more than uncertainty. The labour market is no exception. Uncertainty is to some degree behind everything from zero-hours contracts (“We don’t know how busy we’ll be, so we don’t know how many hours we’ll need you”) to the gender pay gap (“What if she gets pregnant?”). While, in these cases, risk should reside with the employer not the employee, uncertainty can be reduced in ways that are beneficial for both parties.

Take invoicing. While large companies with 11-figure turnovers may shrug off occasionally being paid late, regular tardy payments can play havoc with small businesses. It should be the responsibility of large companies to ensure they pay on time; they should sign up to the government’s Prompt Payment Code or develop a more stringent industry-standard one.

There are other major causes of uncertainty, too. A key barrier stopping businesses investing in their staff is a concern that the employee will leave soon after the investment is made. Apprenticeships improve the value of a business’s human capital, but businesses appear wary of supplying significant training for young workers when, shortly after it has been completed, many are headhunted by rival firms.

One option might be to offer staff an annual training allowance of around 5 per cent of their salary, which can be used (strictly voluntarily) on relevant courses. If the employee leaves the company, they pay off the training received out of their final pay cheque. If the employee stays, the total amount would reduce by 25 per cent per year, so the entire amount would be “paid off” within four years.

A model based on de-risking in-house training could also be developed. In his contrarian Finance and the Good Society (2012), Robert Shiller, the Yale economics professor and Cassandra of the 2008 financial crash, suggests that, whatever the recent damage inflicted by financial services, innovation in the sector should still be encouraged. With the exception of people’s homes, life expectancy and cars, there are few ways of hedging against bad outcomes happening. Homeowners can insure against their home burning down but not against its value crashing.

Accordingly, business could reduce the risk of investing in people by creating a mechanism for insuring against the risk of newly trained employees leaving. If a company took out “employee insurance” they could be free to train an apprentice or pay for an employee’s childcare knowing that, if the employee left, they would receive a payout to cover at least some of the cost already sunk in. The ensuing search for cheaper premiums and no-claims bonuses would have the knock-on effect of incentivising businesses to reduce staff turnover, in turn encouraging them to improve their employees’ job satisfaction.

Over the long term, rather than putting staff on zero-hours contracts, firms could employ them full-time and take out insurance – if the staff are surplus to requirements, the firm is reimbursed by the insurer. If the staff are needed, the insurer keeps the premium, but the company gains from being able to service increased demand.

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However, some solutions to poverty may not align with business interests so directly. Increasing trade union membership is just one of these. “Collective bargaining”, as first termed by Beatrice Webb, is known to secure better pay and conditions for workers, and businesses could, in theory, reduce poverty by inviting unions into their workplaces. At present, this remains far-fetched.

But it should not be so. There is a common belief that businesses are innately right-wing and subscribe to a neoliberal ideology. That this has been accepted by many on the left has unfortunately been one of the movement’s grave mistakes in recent decades. Antonio Gramsci used the term the “philosophy of praxis” to describe the process of delivering socio-economic change and ultimately socialism. The philosophy of praxis in Britain over the past half-century has often boiled down to little more than securing a left-leaning government.

Of course, having your hands on the levers of education and the welfare state can do a vast amount to reduce poverty. But if the left assumes that the best or only way to drive change is through the state (which controls 40 per cent of GDP), it vacates the other 60 per cent of the economy, which dominates the lived experiences of most people’s everyday lives.

Free-market capitalism and business need to be unchained from each other in the progressive mind. Rather than being considered something bad or in need of regulation, business needs to be considered as a vehicle of change.

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