Are productivity and efficiency always good things?

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Will Hayward drew attention this week to the rather defeatist comment by a Reform Ltd MS that “we are not very good in Wales at being efficient in running things”. There’s a sense in which we should not be overly surprised at the comment; it is, after all, in line with the general view held by the unionist parties that Wales is too small and too poor, and Welsh people too stupid, to ever govern ourselves, and that we should defer to our betters in London. For a Reform Ltd politician to express similar views is on a par with the breaking news that the Pope is a Catholic; all he’s done is to repeat a weary old trope in rather more blunt language than that to which we are accustomed.

Leaving that aside, though, the thing that piqued my interest is the inherent assumption that ‘efficiency’ is always and necessarily a good thing anyway. It may seem blindingly obvious, and be a generally applicable rule, that it’s better to achieve a given goal with fewer resources; but being blindingly obvious doesn’t make something true. I’ve been around long enough to know that what’s obvious isn’t always true and what’s true isn’t always obvious. Whilst they’re not quite the same thing, there is a clear overlap between efficiency and productivity, and coincidentally the new Welsh Government announced this week that it will be setting a national productivity target aimed at closing the gap between Wales and the rest of the UK. The announcement itself makes it clear that many of the details are yet to be determined, so it’s impossible to predict the likelihood of success at this stage. The encouraging thing, though, is that it looks as if the target is to be set and monitored at a macro level, rather than being a micro-economic target for individual businesses or sectors.

That difference between the micro level and the macro level is an important one, and brings us back to the question of whether improved efficiency is always a good thing. For any individual business, the ability to produce the same output with, say, half the input in terms of labour is a huge financial advantage, and unquestionably a benefit for that business. But for the economy as a whole, producing the same output with half the input could simply leave half the workforce unemployed, an outcome which few would welcome – even the businesses which have achieved the savings, who could find that half their potential customers can no longer afford their products. Whether reducing the number employed in existing enterprises is a good thing or a bad thing thus depends on whether – or to what extent – those freed up resources can be employed on other useful activities. That is a lot harder to plan for and achieve, and increased use of AI in the drive for efficiency / productivity gains may make it more so.

It also opens up other questions, particularly about how the benefits of improved productivity / efficiency are distributed (increased wages, reduced working hours or increased profits, for example). Changing that distribution goes beyond the current powers of the Senedd, unfortunately. It would, though, be good to see, amongst the yet-to-be-announced metrics which will be used to measure success, an attempt to at least monitor who is benefitting, rather than simply assume that an overall average increase in productivity is sufficient in itself. Sometimes, a simplistic bottom line can obfuscate rather than clarify meaningful progress.

My dad's bigger than your dad

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I’m not sure quite what impact the pro and anti EU camps think lists of prominent businessmen supporting their respective causes will have.  The fact that one bunch of fat-cats support remaining and another bunch support leaving doesn’t do a lot for me.  Perhaps it will swing some votes, perhaps not.

But arguing over who has the longest, or the most accurate, or the most credible list of fat-cats is a debate even further removed from the core discussion about the merits or otherwise of EU membership.  It’s more reminiscent of a squabble amongst children than a grown-up debate about the future direction of the country, however one defines ‘country’ in this context.

There are two alternative views as to what the impact of leaving the EU would be on business, and of course the reasons for those differing views should be a part of any rational debate about the decision which is to be taken.  But does anyone really believe that the question of who is right on the issue boils down to who has the longest list of supporters? 

Frogs and princes

Tweet As a follow-on from yesterday’s comment about governments and business-friendliness, there’s another aspect about the way in which governments help businesses which means that they don’t always do the right thing.  Government ministers absolutely adore a good photo op, and it it’s associated with ‘creating jobs’ (or at a push merely ‘saving jobs’), so much the better.

As a result, much of the state aid to industry goes to larger companies with lots of employees: the bigger the better is almost the case, since more jobs can be ‘saved’ that way and the photo ops are better too.  But the biggest companies are often also the most ‘successful’ in terms of output and turnover, and therefore the ones which could probably most easily obtain additional funding on commercial terms.

Governments are also afraid of being associated with ‘failure’ – here in Wales, for instance, the opposition parties (the Tories in particular are guilty –“With almost a company a week shedding jobs – after previously obtaining a business grant – Labour ministers have clear questions to answer”, although not exclusively) are quick enough to criticise the government when any company which has received government funding goes belly-up.  This can lead to a degree of caution when providing aid to smaller, less well-established companies – which are often the ones which would struggle to obtain commercial finance.

But here’s the thing – anyone involved in start-ups and innovative products knows only too well that failure is frequently the result.  Governments have to be willing to kiss an awful lot of frogs before they find a handsome prince, and oppositions will seek the headlines every time a frog fails to turn into a prince.  Doing the investing at arm’s length, through an executive agency or a government-sponsored investment bank doesn’t get them off the hook either; the opposition parties will still blame the government of the day for exercising inadequate controls.

Is there a way out, which allows government to take more risks in the hope that the rewards of the few successes will more than make up for the failures?  I suspect that the answer is “not without more mature politics”, where parties stop trying to pretend to be business-friendly and do more to understand the way investment in businesses actually works.  That doesn’t mean not applying proper scrutiny to ensure that the decisions being taken are sensible and aligned with a transparent strategy, but it does mean not assuming that the strategy is failing just because many companies turn out to be frogs.  It means judging governments not on the individual decisions being made, but on the overall success of the programme.  I won’t hold my breath.  Headlines are too easy to come by.

Are businesses really business-friendly?

Tweet Politicians and parties often try to out-do each other as to which can be the most business-friendly.  And each party criticises the others for not being sufficiently business-friendly.  I wonder, though, what they mean, because there is a huge, and not generally understood, difference between being friendly to business in the generic sense and being friendly to existing businesses in the specific.

What I mean by that is that businesses, once established, will always seek to ensure that the environment in which they operate is the one which is most favourable to their interests.  Whether that be in terms of tax breaks, employment legislation, health and safety or environmental protection, they will lobby for the regime which most protects their interests.  And most politicians seem to see being business-friendly as doing what these lobbyists request and gaining their support and endorsement (and potentially, funding for themselves?).

But ‘business’ in the generic goes much wider than that.  It is an essential element of the capitalist system that some businesses will fail.  Creative destruction of some businesses as a result of innovation and change is one of the essential economic drivers.  Preserving ‘what-is’ in aspic, and supporting the continuation of existing businesses in the face of new challenges is potentially inimical to the interests of ‘business’ more generally.  The only reason that this isn’t a great deal more obvious is because economic (and political) power is wielded by existing businesses; those which haven’t even been imagined yet are, by definition, powerless and unable to lobby.

Sometimes, it may well be that those things which existing businesses lobby for would also benefit the businesses of the future; but that’s more by accident than design.  They’re really only pursuing their own narrow interests, even if they try and make it sound otherwise.  In that sense, even existing businesses themselves aren’t always business-friendly in the more generic sense.

Am I saying that business isn’t important?  Of course not; under the current economic system, it’s an essential driver of employment and economic activity.  But what I am arguing is that creating a climate which fosters that is not at all the same thing as assisting current businesses to carry on doing what they’re doing – assistance which may even, at times, prevent or delay innovation and change.  Yet that's often what politicians mean when they talk about supporting business.  In truth, their claims need to be scrutinised a lot more closely to understand whether that simply means that they’re supporting existing vested interests.

Being right for the wrong reasons

Tweet I find it hard to disagree with Ed Miliband’s assertion that banks have become too large and financial power too concentrated in the hands of a few.  That alone is reason enough to want to see some of them broken up into smaller banks.

I’m far less convinced about his apparent belief that the additional competition which he expects to result will bring benefits to businesses, such as more lending.  The faith in “competition” as the answer to just about everything is what gave us the marketization of the health service – perhaps he isn’t so far away from Thatcher and Blair as he’d like us to believe.

Certainly, having more and smaller banks will lead to more competition; it’s the leap beyond that to the conclusions about who would benefit that I would doubt.  Smaller banks are likely to take less risk rather than more; they’ll be competing for the safest, most profitable, customers, not the riskiest ones.  And if banks aren’t lending to businesses at the moment, it isn’t because they can’t – it’s because of their assessment of the likely levels of risk and return.

Paradoxically, Miliband’s advocacy of breaking up the banks may actually have the opposite effect of that he claims.  Insofar as breaking up the banks is one of his better ideas, it’s for completely different reasons than those he gives.

Entrepreneurs and managers

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The Government claim – of course – that their budget was ‘business-friendly’, and therefore likely to boost economic growth.  The aim is not unreasonable; but is their claim really true?

Certainly, there’s a good argument for reducing the level of corporation tax.  Leaving profits in companies to allow for reinvestment and taxing the money more heavily when it is taken out in salaries, dividends and share options should theoretically enable businesses to invest more, and is, in principle, something that I support.

The proposition is not without caveats however.  If the investment simply flows abroad to lower wage economies, then the businesses will still benefit, but the benefit to the rest of the UK economy is rather less clear.  And I’m not at all sure that a relatively small cut of 1p hasn’t been massively over-hyped in terms of its potential effect.

It will certainly benefit the larger businesses paying £millions in CT, but it won’t make that large a difference to the smaller and medium sized companies which are the real engine of growth in employment opportunities.  And many of those larger companies are currently sitting on large cash piles anyway – it’s not lack of cash which is holding back investment so much as lack of worthwhile investment opportunities.

Then there’s the second part of their ‘business-friendly’ agenda – the reduction of the top rate of tax from 50p to 45p.  The argument is that this reduction in tax for those earning over £150,000 will help and encourage entrepreneurs.  I’m unconvinced.

Whilst there certainly are some entrepreneurs on very high salaries, £150,000 is a salary of which most entrepreneurs can only dream; the level of tax which they’d pay on it is tomorrow’s problem, not today’s.  In fact, the majority of people in the UK economy earning that level of salary aren’t entrepreneurs at all, they’re rent-seeking managers.  Increasing their take-home pay doesn’t have any obvious connection with boosting growth.

That perhaps underlines my issue with the way that the UK Government is using the term ‘business-friendly’.  Creating a climate where businesses can grow and thrive, providing jobs as well as goods and services, isn’t at all the same thing as increasing the net rewards of the people running those businesses.  It’s more than a little disingenuous to conflate the two in the way that the government are doing.

Education for what

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There was a report on Wales’ education problems last week (nothing new there) which had a spokesperson from one of the ‘business’ organisations saying that the education system was ‘letting employers down’.  It’s an interesting perspective on what the education system is for.

That the education system in Wales is currently letting our children down is not a proposition which many would argue against.  And since part of any education system should be to prepare our young people for what they will face after leaving full-time education, then it follows that the ‘product’ from the education system may not always be what employers want.

But it’s the presumption in the expression that leaves me uneasy.  Preparing people for the world of work is one thing; turning out people who meet employers’ specifications is quite another.  It’s a perspective which a number of people have expressed recently in relation to what they insist on calling ’soft’ degrees in university; and some have gone further in suggesting that a lot of what is taught is ‘useless’ because it doesn’t make people more employable.

Falling to give people the skills which make them employable is certainly letting them down, but over-concentration on that narrow perspective runs the risk of devaluing learning for the sake of learning.  Having employable school-leavers may help boost society’s material wealth, but material wealth is not the only thing which enriches us.

Certainly, politicians should listen to what the needs of the workplace are, but they shouldn’t allow that to define and constrain the education which we provide for our young people.  There’s more to education than providing employment fodder.

Inconsistency, poll ratings, and boardrooms

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I don’t quite know what to make of David Cameron’s recent evangelising on the subject of women in the boardroom.  He’s certainly right on the point of principle; the low level of female directors in our major companies represents a significant loss of potential talent if one assumes, as I do, that talent and ability are fairly evenly distributed between the sexes.

I’m not convinced, though, about his claim that this failure alone accounts for such a significant degree of economic failure in the UK, nor that putting it right will have the claimed level of economic impact.  The fact that Norwegian business, with its much higher level of female representation in the board room, is doing well is not proof that the one is the result of the other.  There are a lot of other differences between the Norwegian and UK economies.

I wonder whether his alighting on this particular issue might not have more to do with his poll ratings amongst female voters than it has to do with economics.  I also wonder how his hint that the Government will legislate if necessary to impose quotas sits with his repeated claims that businesses are already over-regulated and must be freed from state interference in the way they operate.  It doesn’t look or sound consistent to me.

I’d actually support such legislation if it were to be introduced, but I’m not expecting to see it any time soon.  And I can’t escape the nagging doubt that criticising the lack of women in the board room is a bit of a diversion from the fact that the government’s economic policies can hardly be described as successful.  It almost looks like blaming somebody or something else.

Good performance, bad performance - just give me the money...

Tweet When large companies are doing well, those at the top feel justified in paying themselves ever higher rewards for achieving that success.  And when they do badly, those at the top feel justified in paying themselves ever larger rewards for taking the tough decisions necessary to reverse the decline. 

Or so it would seem, from the news today that boardroom pay for the UK’s top companies has risen almost 50% over the past year, at a time when those collecting those rewards have been slimming down their companies and telling the shop floor workforce that they’ll have to work longer hours for lower pay.

I was going to look at whether, and to what extent, the performance of the companies is actually down to the performance of the directors in any event, but Chris Dillow has already done that job much better than I could.

Whilst there are always some exceptional individuals around, most of those in boardrooms probably got there by a combination of accident and luck – being in the right place at the right time is one of the key factors.  They wouldn’t agree with that assessment of course; they all have sufficient self-belief to be convinced that they’re all so exceptionally talented as to deserve whatever they can get.

The real questions are why so many others seem to believe that as well; and why we let them get away with it.

Weeding out the incompetent

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Most people starting a new job know and understand that there is some sort of ‘probationary’ period, during which their new employer can sack them if they don’t prove themselves.  It’s easy to see why employers want such a condition; judging people on the basis of an application form, cv, and interview is never going to be as effective as judging their actual performance.  And it’s not an unreasonable condition.

But how much more protection than that do competent and effective employers really need?  To listen to some business organisations, the answer is lots.  What they really seem to want is to be able to hire and fire at will, so that they have maximum flexibility with no come-back; the employees are just a resource like any other. 

Sadly, the UK Government has been listening to such views, and has proposed extending the period during which employees are barred from bringing a claim for unfair dismissal from 12 months to 24.

(In passing, it’s interesting to note that the announcement was made by the Chancellor of the Exchequer – since when did he take on the responsibility for employment law?)

In effect, the government are proposing to double the period during which employers can legally sack someone unfairly.  It amounts to condoning unfair action by employers as long as it happens within the first two years of employment.

Why should we tolerate ‘unfair’ dismissal at all?  If the dismissal is fair, then the employer will win any tribunal case.  This proposal bans the reasonable cases as well as the unreasonable ones. 

The argument seems to be that there is a cost to the employer of having to defend any action, and abolishing the right to bring a case will therefore save businesses time and money – but there are surely better ways of weeding out the vexatious cases than simply banning all cases?

I can’t help wondering why anyone would conclude that the way to protect employers from unjustified claims is to abolish the rights of everyone, and simply allow unfair behaviour to go unpunished.  Allowing people to ignore health and safety rules for two years would be a good way of reducing their administration costs as well, but it doesn’t make it a good idea.

It’s another example of the thinking that the way to make business competitive is to give employers more freedom to treat employees as they wish.  Competent managers don’t need that sort of freedom.  We’d be better off ensuring that those running businesses have the competence and skills to do so, and to ensure that they treat employees fairly in the process, rather than simply licensing incompetence.