Monday, 19 September 2016

The John Lewis economy - a belated comment

In my last book review I summarized a very interesting book called The Spirit Level by Richard Wilkinson and Kate Pickett. In it the authors propose a solution that would not only lower inequality and thus correct many of the negative social outcomes related to it (but not caused by it, mind you; they don't prove causality), but also change the entire system of values in society, so that people would be less profit-oriented and would increase their levels of interpersonal trust (among other things). 

Their big idea is to introduce democratic employee ownership. Hence the title: The John Lewis economy (the John Lewis Partnership is the famous UK example of an employee-owned firm; it allows all of its employees to share the firm's profits and have oversight over management decisions through several democratic mechanisms of corporate governance). It's a belated comment since I wanted to write a piece about this ever since 2012, when UK deputy PM Nick Clegg of the Liberal Democrats introduced the actual term "John Lewis economy". It was part of his policy proposal to introduce tax breaks to companies if they offered shares to their employees. 

Although the idea of employee-ownership is certainly admirable (it is easy to get 'hooked' on it), there are several problems with this model being forced upon the entire system and applied in every company. First of all, how would one enforce it? Clegg had the idea of offering incentives in the form of tax breaks. Fair enough, but as Wilkinson and Pickett (as well as many proponents of employee ownership) clearly state this is not enough. Employees have to have a more democratic say in managing the company, not just a share that doesn't mean much to them if everything still stays the same. They need to have oversight over management decisions (like voters do in democracies). That is at least how the John Lewis Partnership works. The problem is that the John Lewis Partnership developed and perfected this model through 80 years of its existence. It had the time to adapt and adjust its employee ownership model throughout this turbulent time. 

Another problem with such a proposal is the statement that "participation, commitment and control would be maximized if companies were 100 per cent employee-owned". And furthermore that "companies could raise capital through loans or mortgages retaining control for themselves", since only a small amount of money on stock markets makes any contribution to companies. This is very problematic on a number of levels. Removing access to various sources of finance for companies means condemning them on the mercy of commercial banks, to name only one consequence. The second is that this would severely undermine the dynamism of the economy as it would reduce their expansion capability, not to mention the ability to employ more people. Firms raise money in various ways primarily in order to expand, to service more customers, and - most importantly - hire more people! Without an ability to expand, or with this ability being seriously constrained, the economy would drastically reduce its dynamism, and especially its innovative capacity. The proposal to virtually abolish the stock exchanges is literary a reduction of modern society to pre-industrial revolution times, where the lack of economic growth implied less belief in the future and forced the economies to remain in a Malthusian trap for millennia. I understand there do exist a lot of successful co-ops out there, and this is perfectly fine. I encourage them to set up shop, expand and include more people in their networks. But one cannot enforce this upon the entire economic system as it would go against the evolutionary foundations of modern capitalism (within which we fought hard to attain the human rights we today take for granted). Having a fairer system is absolutely necessary. But you do not achieve fairness by shattering the spirit of growth and progress. 

Furthermore, one of the biggest arguments to impose employee-ownership is to change the for-profit mentality. This term is very often being confused with a battle for talent on a global level. You cannot compare the wages of local workers of a multinational company with its management. First and foremost because the demand and the supply for the two groups are different. Local workers are supplied and hired on the local market, whereas management is assembled from a national or even global pool of talents. Attracting the very best costs money. 

The same argument is with wages for athletes. There is a huge earnings differential between athletes in a single sport, and an even bigger one for athletes across all sports. Football players (both American and European - which I refuse to call 'soccer') are much better paid than volleyball or handball players. Even an average or below average football player in a good club may have a higher salary than some of the best players in other less popular sports. And this is perfectly normal given the greater demand for watching high quality athletes compete in the most interesting sports for the majority of people (football, basketball, baseball in the US, etc.), which necessitates that they be paid the heftiest sums. This is even more obvious for individual sports and their superstars - think of the top 10 tennis players, formula 1 drivers, or legends like Usain Bolt - who is to say he is not a great performer in addition to being one of the greatest athletes of all time? People pay extreme sums of money to buy tickets for Olympic game finals only to see Usain Bolt run for 10 seconds! And none of them consider this a waste of money. 

The bottom-up approach to solving the inequality problem

By far the biggest problem problem I have with many such proposals aimed at lowering inequality is the focus they tend to have on high incomes and the profit-motive mentality. The main proposals are usually aimed at increasing the top tax rates or curbing the profit motive of companies so as to make them more socially responsible. And although I agree that having more socially responsible companies would be a good thing, I don't think anyone should force companies to make choices they don't want to make. Nudging them in the right direction with smart regulation is much better. Having customers aware of the products made by socially responsible companies is another good example. There have been numerous examples where civil action against polluters or socially irresponsible companies made them change their business practice. The last thing any company wants is a bad reputation. Now they must compete in their social responsiveness in addition to their prices and product quality.

To return to my initial point, why isn't any anti-inequality advocate focused on a bottom-up approach? Why aren't many policy proposal focused on the poverty side of inequality. After all, the variety of health and social outcomes linked with inequality can easily be attributed to poverty, like crime and violence, poor education performance, teenage pregnancies, imprisonment, selected health and mental issues, etc. In other words, if we can make the poor richer and better off by turning more of them into the middle class, we would surely be reducing inequality and simultaneously improving a variety of health and social issues, without imposing potential damage of wealth creation at the top. In fact, having high incomes can only serve as a motivation for people to invest in their education and abilities to achieve the same high living standards. A whole different problem is if the people are being prevented from upwards social mobility if they don't belong to a particular class, gender, or race. This is an issue any anti-inequality advocate should look into since low social mobility (caused primarily by cronyism and elite entrenchment) is arguably the biggest obstacle for lowering inequality - it prevents access on the low levels of society and thus immediately discriminates those on the low end of the earnings distribution.

Fighting poverty, in my opinion, is the most effective way of fighting inequality. Primarily since there are many more poor people out there than rich people. Helping all of them get higher earnings will necessarily solve many of their social issues as well. I understand the psychological factor of anxiety by seeing someone being so much more well off, however this mentality is perhaps a greater concern that the profit-motive one. Why should one care so much about the wealth of others? Because we only value our own success compared to other people's success. Ever more so in today's dynamic era of fast information. I still feel however that the resentment towards the well-off would be contained (but not eliminated) if we eradicate poverty. This remains to be scientifically tested. 

Finally, if you want to build a more egalitarian society than the first thing where to look is among existing egalitarian societies - like Scandinavia, Canada, or Japan. What makes them so successful? Mass employee ownership of private sector companies? The US and the UK have 10 times more employee-owned firms than all other countries in the world put together (don't believe me? See for yourself). So having employee ownership is not that crucial to achieve a more egalitarian society, is it? What is? Economic freedom is one thing. Look it up.

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