Output, not profit

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It’s generally recognised that the biggest problem Wales faces – whether as part of the UK or as an independent country in waiting – is its relative economic poverty.  Or perhaps more correctly, its relative lack of economic wealth.  Putting that right ought to be pretty high up the list of priorities for Welsh politicians – nationalists and unionists alike; we should be aiming to support ourselves in either scenario.

For many, the answer is a simple one.  The private sector must be greatly expanded (although there’s less of a consensus as to whether the public sector needs to be shrunk in the process).

Anything which stands in the way of that – taxes, planning controls, regulations should be swept aside.  Oh, and the government should provide a generous scheme of grants and soft loans to enable those private businesses to set up and expand, and an education system which churns out people with the skills which ‘business’ needs.

That all of these things would help expand the private sector is probably beyond dispute (although whether they’re all desirable is another question entirely).  The underlying – and sometimes openly stated – assumption is that the private sector creates wealth, whilst the public sector spends it.  However, that view seems to be in danger of confusing profit and wealth (or perhaps social wealth with private wealth).  They are not at all the same thing.

It’s not that the quest for profit is irrelevant in this context; it’s just that there’s more to increasing social wealth than merely allowing some people to make profit.  Profit may well be the incentive which drives some people to borrow other people’s capital and invest it in businesses which provide goods and services which can be sold – but it isn’t the necessary or only driver.

Adam Smith – not generally known as an avid left-winger – described wealth as "the annual produce of the land and labour of the society".  That’s closer to a definition of GDP than profit.  And, since the measure on which Wales is failing is GDP per head, it’s actually a more relevant consideration than profit.

The CRESC report which I referred to a couple of weeks ago included the following comment in its concluding section:

“At this stage, what the UK economy needs from business (quoted and unquoted) is not profit but output because net output or value added at firm level provides the fund from which labour is paid and therefore sustains employment.”

In other words, an overall increase in economic activity is more immediately important to us than whether that activity does or does not generate profits for individuals.  And whether that activity comes from private business, social enterprise, state enterprise, or any other sort of enterprise is less relevant than that the activity happens.  It’s a different way of thinking about the question – and suggests that different solutions might apply.

One might think that a government which has done so much to identify the sorts of economic activity which it wants to see expanding in Wales might take a pro-active view of its role, but instead it seems to be largely reactive – when there’s any action at all.  It seems to be fixated on the idea that it can do little more than facilitate, encourage, urge, and incentivise private entrepreneurs to come along and solve our problems for us.  It's the same approach which has been tried and found wanting for decades, although it occasionally gets dusted off and presented as something new and different.

My thanks go to a pseudonymous commenter on a previous post who reminded me that it was not Einstein who said that “one definition of human madness is to do the same thing and expect different results”.  But the fact that it wasn’t Einstein doesn’t invalidate the sentiment.