Does the UK economy require a fundamental structural shift?
Written by Charles Wookey
Last month, the IPPR Commission on Economic Justice released its ‘Prosperity and Justice: A Plan for a New Economy’ report, outlining a 10-part proposal that would “hard-wire” justice into the economic system, rather than treating it as “an afterthought”. Such a fundamental structural shift would be on the scale of the post-war Labour government, and the Thatcherite marketisation of the 1980s. The Commission admits as much and argues that the scale of the economy’s problems makes such a shift necessary.
The Commission’s diagnosis of the state of the economy is compelling: the fact that wages are no longer mapped against economic growth, and the lack of investment both from investors and within business, particularly in skills and training, is evidence of the prevailing short-termist approach. It offers a well-researched and comprehensive set of prescriptions. I just had a slight unease about the framing of the argument in terms of “the economy” as an isolated system.
For me, the difficulty with an approach which looks at the economy as a self-contained is that it pushes the debate into a mechanical frame of mind, where we think about the levers, valves and influences on an inanimate system. This lends itself to focusing on regulatory solutions and government intervention and self-interest. Critically this approach treats the economy as if it were a separate thing from society.
An alternative would be viewing the economy as just one aspect of how we think about human relationships and society, where the prize is not so much a good economy, but a good society. It is worth asking how the report would read differently if the word ‘society’ replaced the word ‘economy’. Would we think even more about human agency and the importance of mind-sets, alongside policy and regulatory changes, and the societal impacts these could have?
I would argue that thinking about the economy, and especially the market, in isolation from the rest of society, is part of what got us to this position. One where we then think about business as a subset of the economy, merely in relation to profit and other economic outputs constrained by market forces. This results in thinking about profit and growth that feeds the dominant mind-set that a company should aim solely to maximise profit and growth in the service of an economy that grows.
On the other hand, if you were to think in the context of society, you might ask how to organise things in such a way that the various institutions within a society serve the common good. If you ask the question in such a way, then the answer you get is more likely to be focused on the quality of relationships and businesses’ contribution to justice issues. In fairness, parts of the IPPR report bring this connection out clearly and powerfully, and this is not to detract from the quality of their analysis and argument. I feel it could be more powerful still by anchoring what is proposed in a search for the common good of society.
Such a need is clear in relation to the business community. The report rightly points out that business is fundamentally interdependent with the other institutions in society and needs to see itself as contributing to that wider common good. This is contrasted with a widely-held view that says ‘we’re here to make money – within the law – and it is not our job to contribute anything else. But if we shift the frame of reference – as is happening across the business world as conversations about purpose become more widespread – then a different set of expectations about what business should be doing emerge. Hence fairness becomes a business goal.
The report is brave in articulating aspects of what a good society might look like. The conclusions the report draws are important and necessary, but thinking about it as an economic problem perhaps restricts how as a society we respond to the depth of challenge in the way that is needed. The foundations of a human society are in fact measured by the quality of human relationships and the commitment we each make to contribute to the common good. At the heart of such a change is a release of human potential. The capacity to create the proposals this report suggests is there, but, fundamentally its implementation will depend on demand. We believe that as a major voice in society, this is an area where business can play its part to advocate for change.
How can business engage with the IPPR’s suggestions?
Business engaging with the following recommendations from the Commission on Economic Justice could help to reduce economic inequality:
- First, the Commission identifies the important role of pay and pay gaps as a method of reducing inequalities in earnings. The report proposes that all firms with more than 250 employees should be required to publish their pay scales. Also, reporting on ethnic pay gaps should be made mandatory, and all pay gap reporting should be accompanied by mandatory action plans. The IMF has pointed out how unequal societies are less productive: there are strong macro-economic arguments for more equality, skills investment and higher wages- including in business- because they actually contribute to higher productivity. These arguments chime directly with our work on fair pay and employers.
- There are real dysfunctionalities in the investment industry and the capital markets which the Commission rightly points out. There is a need for investors who are going to invest in companies over time, and long-term investment is more likely to bring the innovation and other factors that will raise productivity.
- In order to address the widely recognised problem of short-termist corporate governance, the report places emphasis on changing company law, specifically Section 172, so that the duty of directors is to promote the long-term success of the company. The present law as it stands is, in fact, permissive – the law now does not require directors to maximise shareholder value, and it is welcome that, for instance, the new Corporate governance code requires listed companies to establish their purpose. There may be an argument for clarifying the law to buttress this approach – but it is critical to recognise that legal changes by themselves will not deliver the mind-set changes that are crucially needed.
- On the challenge of automation, there is a choice business has in how they think about how they approach it. The issue is one of incentives: to make more money or to try to create more meaningful work. In order to manage automation, business ought to think more carefully about reskilling and retention.
- The report also calls for reform to enable flexible working hours to shift the reliance away from women as carers. This would be reached with ‘use it or lose it’ paternity leave to encourage shared parental leave, with a period to encourage men to take a greater role in care responsibilities. Furthermore, the Commission aims for all jobs to be required to be available and advertised on a flexible and potential job-share basis. Calls for “an increase in the number of bank holidays” will “enable everyone to benefit from productivity increases through reductions in working time”.
- To make progress with environmental sustainability, a call is made for a “green industrial strategy” to “integrate demand-side policies on decarbonisation”, to achieve a “zero-waste ‘circular’ economy” and sustaining natural capital with “supply-side support for UK businesses and innovation to meet these goals”. Such a shift is founded on the belief that we cannot “sustain either prosperity or justice if climate change continues on its present course”. Such a recognition of the symbiotic role of business and societal needs is encouraging.
We recently met Tom Kibasi at the IPPR and look forward to continuing a dialogue with them as they take forward their work.