Civitas meeting: Transforming the market: Towards a new political economy 13 November 2013
Speaker: Dr Patrick Diamond
Diamond’s talk was based on his recently published Civitas tract http://civitas.org.uk/press/EAdiamond.html
Diamond is firmly in the NuLabour camp, having been involved in various positions servicing the last Labour government, including that of head of Policy Planning in 10 Downing Street. He now holds several academic positions at London and Oxford universities. He is also a Labour councillor for the London Borough of Southwark.
What is his recipe for “transforming the market”? This extract from his Civitas tract give the bare bones of it:
“The government is an enabler, directing strategic investment to growing sectors and firms, providing fertile conditions for entrepreneurship.
The government is a regulator, managing the inherent volatility and instability of markets, while promoting competition in product and capital markets.
The government is an equaliser, ensuring the supply of public goods and human capital helps the least advantaged, while ensuring the basic distribution of household income accords with basic principles of fairness and social justice.
And the government is an innovator , promoting experimentation, technological adaptation, alongside the discovery of new markets, services and the advancement of knowledge.” pp49/50
This has the ring of someone reciting a catechism whose end is in its saying not in its doing.
Diamond’s buzzwords for curing the ills of the British economy are decentralisation and localism. This dovetails with the Labour version of the Tories’ risible “Big Society” which I heard John Cruddas outline not so long ago (http://livinginamadhouse.wordpress.com/2013/10/20/one-nation-labour-work-family-and-place-a-taste-of-labours-next-election-propaganda/). Read this in conjunction with this report and you will have Labour’s economic and social programme for the next general election.
There is a good deal of “back to the future” in his programme. He wants to create a ‘super ministry” combining the Department of Business, Innovation and skills (BIS), the Department of Communities and Homes and some Treasury functions to “ decentralise and devolve economic power away from London.” Older readers will be irresistibly reminded of the first Wilson government in the 1960s when work, and especially public sector work, was to be sent to the less prosperous parts of Britain. Thankfully Diamond at least spared us any ancient embarrassing rhetoric such as “the white heat of technology” or “picking winners”, but that is what he thinking.
Diamond’s wish to see Britain’s economy “rebalanced” away from services and towards manufacturing also resonates with Wilson’s desire to shift more people into manufacturing. This he attempted to do with arguably the most absurd tax ever introduced in Britain, the Selective Employment Tax (SET). This was placed on service companies only, the idea being that this would make more people seek manufacturing jobs because service employers would find it more expensive to employ people and the number of service jobs would fall. In turn the hope was that manufacturing wages would be lowered because of increased competition for such jobs. This last was an heroically optimistic scenario because of the power of the unions at the time.
SET failed for the wondrously obvious reason that it increased the costs of service employers without improving the circumstances of manufacturers, whose wages remained much the same, while demand for their goods was at best not increased and at worst might have even fallen if unemployment in the service sector rose due to the increased cost imposed by SET and reduced overall demand. This meant manufacturers could not employ more people. All SET could do in the circumstances of the 1960s, if it had any effect at all, was reduce employment and/or raise retail prices.
So many things are to Diamond’s mind “too centralised” or overly concentrated in particular areas . Apart from general economic power and government, he pointed to banks, infrastructure such as airports and even the Arts. Leaving aside whether localising affairs is desirable, there is an inherent problem with making things more local and decentralised. There needs to be not merely the bricks and mortar of regional banks and companies, councils with much more responsibility and so on, there needs to be a class of people who can handle such responsibilities at the local and regional level. None exists at present. Nor can such a class be created by conscious policy. It is something that happens, if it happens at all, naturally.
At one time Britain did have a healthy political and managerial class who were willing and able to assume the burden of exercising local power. But that class grew naturally from the fact that the whole of society was of necessity conducted at the local level because of poor communications. But from the advent of the railways onwards localism became less and less the natural state of affairs. We have now reached a point where the exercise of political power and initiative at the local level is feeble because those with real political ambition do not see serving at the local level as important. It is all very well to lament this and say power and influence should be shifted back to the local level but how able and ambitious people can be persuaded to confine themselves to local government is another matter. Frankly, I doubt whether the clock can be turned back.
As part of his worship of the local Diamond is much taken with Germany with its regional banks, workers directives and technical schools. He wants Britain to copy them. In this he is making the profound but common error of believing that what works in one society will work in any other society. This was doubly odd because he recognised in one part of his talk (and does so in his written tract) that the transfer of methods from one society to another was problematical, but still went on as though the problem did not exist when he got to the detail, such as it was, as to what should be done in Britain.
Germany is decentralised because that is the way it has always been. A latecomer to the nation state (1870), the German state has always been in practice a federation with some of the larger components such as Saxony and Bavaria having histories as substantial kingdoms in their own right. The consequence is that regionalism comes naturally to Germany in a way that it never would do in Britain and especially England, because England has been centralised in the sense that it has been a kingdom encompassing those with a broad common ethnicity for many centuries. In modern Germany the sixteen Lander form political entities which each have both size and a separate history to create and maintain regional loyalty. In England there are no such hard core regional loyalties. Regional sub-divisions of England are no more than geographical expressions, the South West, the North West, the South East, Midlands and so on. Even the North East – the region of England often put forward as having the strongest regional identity – is far from being an area with a separate identity around which all the inhabitants can coalesce.
Diamond’s scheme for remedying the ills of the British economy has many other weaknesses. He is sold on predistribution. This is, almost inevitably these days, an ideological import from the USA. It is the political equivalent of selling snake oil to the ill. The idea is that silly old traditional methods of redressing inequality such as progressive tax regimes and benefit support (which actually work) are forsaken for ethereal aspirations that encourage long-term investment, providing good quality public services, particularly healthcare and investing in the skills of the young , workers on company boards, a minimum wage pegged to inflation and so on. The problem is these will not work while mass immigration and relatively free trade exists both in terms of imports and the export of jobs through outsourcing.
The broad sweep of Diamond’s ends I would have sympathy with, the re-industrialisation of Britain, greater material equality, an end to the worship of markets, long term planning by companies and so on. The problem is his means. They will not work because he is always trying to work within the context of both a market economy and globalisation. Take his strategy for manufacturing. To increase this, especially in terms of making it much broader as well as larger in GDP terms, some form of protection would have to be used, be that traditional controls such as quotas and tariffs or state control of vital industries together with fiscal measures to ensure the price of essential goods and services are within the reach of the poor. We can be sure of that both because economic history has no example of a country industrialising except by protecting its domestic market and because simple logic tells you that it is impossible to compete across the economic board with countries whose labour forces are earning a fraction of British wages, who have scant regard for health and safety and whose governments ensure that it is very difficult to enter their markets by economic regimes which are anything but laissez faire.
Diamond’s attempt to get round this problem is for Britain to concentrate on high-tech industries. There are two problems with this. The first is strategic whereby it is dangerous for any country to leave itself at the mercy of world events by being unable to produce a wide range of products either at all or in sufficient quantity to tide the country over in an emergency.
The second difficulty is the sheer impossibility of creating sufficient jobs to employ enough of a large population like that of the UK to compensate for the export of lower tech, lower skilled work. Even if it was in theory possible, it would be impossible to find enough people capable of high tech work because the way IQ is distributed means that even in a country with a strong average IQ such as Britain will have huge numbers of people who have mediocre to poor IQs –for example, there are around 6 million people with IQS of 80 or less in the UK. Thus two reasons for a broad-based economy come together: the impossibility of providing enough high tech, high skill jobs and the need to cater for the less able in society.
The audience questions and remarks
What was heartening was the anger which quite a few of the audience (it was a deliberately small gathering of around 25) expressed about the way British governments had failed to protect British companies and British economic interests generally. “Britain is becoming a servant economy” was probably the best of the comments summing up where Britain is headed if the current laissez faire policies continue to be followed.
These points were made by other members of the audience:
- The takeover of British companies by foreigners was made much easier with the abolition of the Mergers and Monopolies Commission (which had a public interest test) and its replacement with the Competition Commission (which has no public interest test but simply a test for the proportion of the market a takeover would involve).
- Manufacturers comprise only 11% of GDP but 50% of British exports.
- Manufacturing jobs are generally better paid than service sector jobs so their loss is more keenly felt both by the individual and in terms of GDP.
- Foreign direct investment is often concerned with the acquiring of British assets rather than new investment.
- Energy costs are killing manufacturing in the UK.
The owner of JLS Ltd, John Mills (who is currently the largest Labour Party donor and a one-time Camden Councillor), advocated a deliberate 20% devaluation of the pound . I have discussed this with him on another occasion and the problem with it is this: starting the devaluation is easy enough, but stopping it at the level you want it is not. The danger is that the currency will deflate way beyond the desired point because the brakes fail to halt the decline in its value. It is also worth remembering that the value of the Pound against major currencies has dropped 20% or so since Lehman Bros failed in 2008.
I managed to make a few points. These were:
1. That it is impossible to rebuild manufacturing except behind protectionist barriers, official or unofficial, the proof of this statement being the fact that it has never been done.
2. Most immigrants are not engaged in highly skilled work but low-skilled or unskilled jobs, which in itself gives the lie to the idea that immigrants are doing jobs which Britons could not or would not do. I further pointed out that many of these jobs involve dealing with the British public – in shops, cafes, call centres and so on – and that many of those so employed have completely inadequate English. To claim that a foreign worker who cannot speak fluent English is a better employee in such posts than a native English speaker is a self-evident nonsense.
3. That British unemployment, especially youth unemployment, cannot be cured while our borders are effectively open both because of the EU and the unwillingness of all the major parties to halt immigration from outside the European Economic Area. (Diamond flatly refused to discuss the question of immigration, contenting himself with “We shall have to differ on immigration”).
4. Diamond stated in his talk that healthy economies relied on “efficient, effective and non-corrupt public sectors”. I broke the dreadful truth to him that Britain no longer has such a public sector. Privatisation (especially PFI) has greatly increased the opportunities for corruption in public service. Increase the opportunities and corruption increases. It is a very simple equation.
Diamond accepted that corruption had worsened in central government public service but bizarrely claimed it had reduced in local government circles. The reality is that corruption has increased not decreased in local government because so much of local government work has been contracted out. Diamond attempted no justification for his claim merely asserted it. (It is a very strange thing but I have never been to a meeting dealing with the same general subject area as this one where anyone other than me has raised the issue of corruption, this despite the fact that there are regular examples of it in the mainstream media).
Privatisation has also reduced the efficiency of public services, because where used it destroys the chain of command within the public service. This occurs because where there is a private contractor involved the public service provider cannot instruct those employed by the private contractor but must work through the contractor’s management. This can lead to very complex arrangements. I gave the example of major London hospitals where there are routinely PFI contracts for the food, the laundry, the ward cleaning and the maintenance and cleaning of the multi-media installations (TV, phone, internet).
5. That giving more power, including greatly increased borrowing powers, to local councils is a recipe for disaster because of the lamentable quality of the large majority of councillors. I urged anyone around the table who doubted this to go and view their local council in action, especially in the committees and subcommittees.
6. The laws which allow directors who do not meet their statutory responsibilities to be punished are rarely enforced. I gave as examples the provisions within the Company’s Act to remove the personal; limited liability of directors and to ban people from being directors. I pointed out that these provisions had not been used against any of the directors of RBS, HBOS, Lloyds or Northern Rock, despite their extremely reckless behaviour. Had the limited liability of directors such as Fred Goodwin been removed the directors could have been sued for every penny they had. As for banning directors, I told the meeting that from my own experience with the Inland Revenue of trying to get even the directors of tinpot concerns banned was well nigh impossible and that to get a mainboard director of a Footsie 100 company banned was in practice impossible unless the director was convicted of a criminal offence against the company such as embezzlement.
What needs to be done
If Britain’s economy can be reshaped it can only be done with a judicious use of protectionist measures, the renationalisation of vital services such as the utilities and an end to mass immigration. Diamond will not even consider doing any of this.
There was one issue which I did not get a chance to raise because of the constraints of the meeting. Nor was the issue touched on by Diamond or any of the audience. It concerned technological changed. Robotics and 3-D printing bid fair to turn our economic world upside down. I include below links to a couple of articles which deal with problems they will create. Just in case you are tempted to say Oh that’s just sci-fi, especially in the case of robotics, go online look at the latest robotic developments, for example, a humanoid robot which can walk over rough ground (http://www.telegraph.co.uk/technology/10360951/Meet-Atlas-Boston-Dynamics-unveils-robot-that-can-walk-on-rocks.html)
and a humanoid robot that has human eye movements very well imitated. (http://www.telegraph.co.uk/science/10413987/Meet-ZENO-R25-the-first-affordable-human-robot.html)
The implications of Robotics are explored in these essays:
Making plans on the basis that our economy and society will remain in broad terms similar to what it is now is a mug’s game.
Robert Henderson 29 11 2013