Creating new business opportunities?

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Entrepreneurialism is something which just about everybody is in favour of, but which is actually quite hard to define. In terms of new enterprises, some of the key elements include identifying a product or service which people want and finding a new way of fulfilling that want such that the product or service can be readily sourced and sold at a profit. And often, looking at the history of some of the most ‘successful’ entrepreneurs, it involves sailing close to the wind in legal terms or even slightly crossing the line. The more successful the business, the more likely it is that a blind eye will be turned, especially if exposing any transgressions might embarrass the relevant authorities.

If that’s a reasonable working definition, how do we respond to the news that the Home Office has been issuing thousands of care work visas to companies who provide no care and have no facilities to provide care anyway? Criminal conspiracy or daring (might one even use that term so beloved of the current government, ‘buccaneering’) entrepreneurialism? The companies appear to be properly incorporated, and the visas they obtain, once issued by the Home Office, entirely valid. And they have an obvious financial value when sold on to others. One thing that is entirely predictable is that, when any rules or regulations change, there will be those who will seek out any business opportunities which might be presented as a result. In this case, the government’s changes to visa rules have opened up an entire new industry – trade in legitimate, Home Office issued, visas.

It is by government decision that there are virtually no checks performed by Companies House on the incorporation of new companies. It might be a decision taken to avoid having to employ civil servants to perform checks, or it might be deliberate – the UK Government seems to be rather proud of how easy it is to set up a company in the UK. And it’s another government decision (again, probably taken to avoid employing civil servants to do the work) that the Home Office performs few checks on the legitimacy of applications for visas. And given the government’s announcement that the total number of civil servants will be arbitrarily reduced to the number who were employed prior to the pandemic, we can be certain that there will be plenty of other circumstances in which basic checks will not be performed.

Every such failure creates a loophole which someone, somewhere, will find and exploit in order to turn a profit. Whether we call that someone a dastardly criminal or a buccaneering entrepreneur is, ultimately, an open question: the difference between the two isn’t always as obvious as one might think or wish. Arbitrary reductions to the civil service will even make it easier for those working in the new market to avoid or evade tax. The failure to operate proper checks on the issue of visas might initially look like mere government incompetence. But when similar failures are repeated across a range of functions, it ends up looking more like deliberate policy. As we ‘know’, civil servants are a ‘burden’ who add no real value to anything, they just apply ‘red tape’ and ‘bureaucracy’ which stand in the way of enterprising individuals. Blaming those individuals might be easy, but they shouldn't be the only target.

What about the flip side?

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There is a very old joke where three people are arguing about what is the oldest profession.  The engineer invites the other two to look at the wonder and scale of the universe, saying that it is a magnificent piece of engineering, so God must be an engineer.  The architect replies by pointing out that the bible says that the universe was created out of chaos, so would have taken a lot of planning before construction started.  God, he argued, must be an architect.  The politician responded by simply asking “But who do you think created the chaos in the first place?”

Events generally have precursors; they don’t occur in isolation.  This was brought to mind last week with Jeremy Hunt’s promise to write off student debt for ‘entrepreneurs’, which he helpfully defined as those employing at least 10 people for at least 5 years.  His argument is that the creation of jobs is of central importance to the economy.  That’s sort of true-ish, but things aren’t as simple as that in reality.  ‘Entrepreneurs’ don’t suddenly pop into existence; they start out as new-borns like the rest of us.  Getting them to the point at which they start their businesses involves doctors, nurses, teachers and lecturers.  And to perform their roles those people in turn need surgeries, hospitals, schools and universities.  And those facilities get designed and constructed by architects and engineers.  The businesses started by the ‘entrepreneurs’ need transport and communications infrastructure and a supply of trained employees.  They need finance from banks and governments.  They are not something magical or special, merely one part in a long and complicated chain.

What Hunt is proposing is that one part of that chain should be identified as being so special that it deserves exceptional treatment, even if – by the time they’ve employed 10 people for 5 years – they’re so financially successful that they don’t actually need to have their debt written off and even if struggling healthcare and education workers are more in need of financial help.  And in the process, it effectively demeans and devalues the work done by all those other people to make not just that entrepreneur or business successful, but society as a whole – the doctors, the teachers and all the rest.  There’s something very lacking in self-awareness in someone who believes that his or her particular role in society (has he mentioned recently that he was an entrepreneur before becoming a politician?) is so special and unique that it justifies such treatment. 

I’m tempted to wonder whether the reverse should also apply.  Perhaps a successful entrepreneur who subsequently gives it all up to cause chaos by becoming a politician should be hit with a penalty charge of some sort.  In Hunt’s case that certainly has its attractions, although the lawyers would no doubt argue that individual cases make bad law.

Only dabbling

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Entrepreneurship is one of those things which are generally felt to be axiomatically ‘good’, and young people in universities and even in schools are encouraged to think about establishing their own businesses.  Whilst it’s true that successful businesses are an asset to the community and provide jobs, I’ve often wondered whether it’s really such a good idea to encourage everyone to think that they can be entrepreneurs.  Part of the problem is that we tend to read and hear only about the successes, but many, many entrepreneurs fail; and even some of the most successful have been through multiple failures before hitting the jackpot.

There is also a tendency to understate the element of luck involved in the process; conventional thinking praises the acumen of the successful and assumes that failure is down to the lack thereof in others, but in reality, that ‘acumen’ thing is far from being the only factor – and may not even be the most important.  We find it hard to cope with that though in a paradigm which is based on an assumption that individuals have a great deal more control than is actually the case.

Another aspect which concerns me is that the line between ‘entrepreneurship’ and crime is sometimes a fine one.  Some entrepreneurs sail very close to the wind when it comes to obeying regulations and laws; and some even seem to think that they have no moral obligation other than to obey the letter of the law.  If the law doesn’t specifically forbid something, that makes it acceptable. 

There are plenty of examples of ‘successful’ entrepreneurs whose business practices have later been revealed to be, shall we say, ‘dodgy’?  One obvious name which springs to mind is Sir Philip Green - wasn’t he praised for years as a successful entrepreneur?

But a report in the Business section of yesterday’s Sunday Times took the biscuit in this regard (sadly it’s behind a paywall).  It referred to a plan by Arron Banks, who bankrolled Nigel Farage’s Brexit campaign, to float his business on the stock market for £250million. One paragraph read as follows:

“Banks has claimed that his first dabblings with entrepreneurship came during his school days; he was expelled after being caught selling lead stolen from the roofs of school buildings.”

Perhaps I’m just a bit old-fashioned, but the term I use for selling stolen goods isn’t ‘entrepreneurship’, it’s ‘crime’.  Still, as a “close ally of Farage” and a man who “has forged ties with Donald Trump” (a man whose own business dealings have come under a degree of 'scrutiny', to say the least), and was pictured with the president-elect the day after his election victory, his “early dabblings” don’t seem to have done him any harm.  Such is the power of the word ‘entrepreneur’.

How much risk should we take?

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I can’t help feeling that the coverage of the decision by former minister Edwina Hart to provide support for Kancoat has focussed largely on the wrong issue.  It is, I suppose, typical of the current state of political debate that it concentrates on the personal rather than on the substance, but the complaints about a potential ‘conflict of interest’ seem to me to be petty at best.  There are many constituencies close together in the valleys of the south; if the fact that a factory in one is within the travel to work distance of residents in another is considered sufficient to generate a conflict of interest for the AM, then it will become difficult for ministers ever to take such decisions.

I thought that the real issue here was, or should have been, about the ability of ministers to pick winners when it comes to supporting businesses – or even whether that is what we really want them to do.  It seems that the minister was advised that the business plan was ‘weak’; well, yes, but is that a reason for not providing support?  In the first place, if the business plan had been strong, the company could probably have obtained the necessary finance commercially without government support; and in the second, the nature of new businesses is that some – actually, a large proportion – will inevitably fail.  And many business plans are closer to being works of fiction than most people might suppose; although maybe a poor ability to produce fiction might suggest that a particular scheme is doomed for other reasons.

If the people starting the businesses, and seeking the finance, don’t know in advance which will succeed and which will fail, then on what basis do we ever expect civil servants, let alone ministers, to be able to make a better judgement?  It’s completely outside the bounds of their experience or knowledge.  Even some of the ‘entrepreneurs’ who are generally praised so highly get it wrong much of the time; some of the most apparently successful entrepreneurs are actually serial failures if one looks at their overall history rather than picking out the occasional outstanding success.

Empirical evidence suggests that a lot of frogs need to be kissed before one of them turns into a prince, and the fact that the money comes from government (and thus from the taxpayer) doesn’t change that.  If we want governments to be involved in the business of supporting businesses, then we have to accept that some of their decisions will, with the benefit of hindsight, turn out to be mistakes; what matters is the overall value for money of the whole portfolio.  The real question should have been about how decisions are taken, and how many failures we should accept as part of the price of taking a risk. 

Politicians seeking to ‘hold the government to account’ should be looking more closely at that aspect than criticising ministers (or ex-ministers) for individual failures.  The problem is that it doesn’t generate the same easy headlines.

Taxes and entrepreneurs

Tweet One of the themes running through Tory economic policy is that, as the party’s leader in the Assembly put it a few weeks ago, “Low tax economies are more competitive, more attractive to job creators and are where small businesses are most likely to prosper.”

But where is the evidence for this being a causal relationship?  Note that their approach to taxation is to reduce personal taxes on income, a policy which disproportionately reduces the tax bill of those with higher incomes.  It also shifts the emphasis of taxation from progressive income based taxation to more regressive forms of taxation such as VAT.  But where is the evidence that lower income tax either attracts people to set up businesses, or makes those businesses more likely to succeed?

There are some things to note about these people called entrepreneurs: 

·         Some of them are extremely successful, and earn huge amounts of money as a result.  They’re a small minority of the total, but they’re a minority for whom the small differences in taxes being proposed are little more than small change.

·         There are other entrepreneurs who are running small to medium businesses very successfully.  I’m sure that they’d like to have more money in their pockets (who wouldn’t?), but a tax cut isn’t really going to make that much difference to their entrepreneurial activity.

·         And then there are a large number of them who barely make a living from their economic activity, and for whom the sort of salary at which higher rate tax cuts would start to make a significant difference is but a distant dream.

·         Entrepreneurs tend to be hugely (and often overly) confident.  Their business idea is invariably brilliant – to them at least – and a certain route to earn them a fortune. 

From none of these perspectives does it seem likely to me that a cut in higher rate taxation is going to make any significant difference to the level of entrepreneurism in Wales, which is the stated objective of the policy.  That’s not the same as saying, though, that it’s a policy from which no-one will benefit.

When we look at the higher paid people in Wales – those who would benefit from this sort of reduction in personal taxation – very many, perhaps most, of them are high paid public sector workers.  (Now, it might be argued that that is a problem in itself, but that’s an argument for another day.  Let’s just accept that things are as they are for a moment.) 

How likely is it that any of those people will wake up one morning and say “Oh look, I’m going to pay less income tax.  So I’ll throw in the day job and go and start a company”.  It doesn’t immediately strike me as an obvious reaction.  Far more likely is “Let’s have another holiday this year”.

Now of course, enabling people to have another holiday adds to GDP if they spend their money in the local travel agent (although it doesn’t have quite the same effect if they book online; and a lot of that GDP leaks out of the country to the foreign hoteliers and airlines), but if the result of those tax cuts is cuts to public services, it isn’t so much ‘extra’ GDP as ‘redirected’ GDP.  And, above all, it’s a switch in effective spending power from those at the bottom to those at the top.

So if it doesn’t seem likely to achieve the stated objective, and on the not wholly unreasonable assumption that the Tories know that as well as I do, what is the real aim?  It couldn’t possibly be to try and buy the voting loyalty of the better off could it?

Using stealth to avoid tax

Tweet “Highly paid people oppose extra tax for highly paid people” isn’t exactly what I’d call news, but given the dominance of highly paid people amongst those who make news and define it, the prominence given to Labour’s pledge to reinstate the 50p tax rate is hardly unpredictable.

There are two elements to the criticism however which strike me as valid - up to a point anyway.

The first is that the amount raised by the extra 5p would be small, partly because the number of people affected is small, and partly because they will find ways of avoiding it, using the convoluted rules of the UK tax code.  All that is true, but surely the best approach to tax avoidance is to prevent it, not to allow it to constrain taxation policy, which seems to be the Tory position. 

And anyway, since when did the fact that a given tax raises only a small amount become a bar to it as a source of taxation?  As we’ve seen in the debate over devolving tax powers to the assembly, there are a range of taxes which raise miniscule amounts when compared to total government expenditure – but that is not in itself adequate reason to abolish them.

The second apparently valid criticism is that the proposal has more to do with politics than economics.  Well, yes – but so what?  The proposal has come from a political party seeking votes.  Given that their economic policies are virtually identical to those of the government, it’s inevitable that they will be looking for a bit of gimmickry to try and present themselves as being in some way different.

But if those two criticisms have some validity, what about the more central claim that taxing the 1% of the population a little more heavily will result in some sort of mass exodus of entrepreneurial talent from these shores? The evidence in support of that proposition is scant.  A few vague threats and a couple of anecdotal examples – but there will always be some who choose to go elsewhere, whatever the tax rates.  Three points in particular strike me as pertinent here:

·         Even at current tax rates, there are other countries and economies with lower tax rates.  If tax rates, or small differences between them, were the main determinant, wouldn’t we be seeing more of a flow in the direction of those countries?

·         Most entrepreneurs, even fairly successful ones, earn less than the £150,000 at which the proposed tax rate would apply.  Some might well aspire to cross that boundary, but by number, most new and developing companies are small to middling.

·         Many, probably most, of those earning over £150,000 aren’t “entrepreneurs” at all.  That target group will include bankers of the speculative kind, and chief executives and senior managers, as well as a not insignificant number of people in the public sector.  Whilst the worst of the bankers, certainly, could take their questionable activities elsewhere, the mobility of many of the rest is limited by factors which have nothing to do with taxation.

It is not through ignorance of the facts that the opponents of Labour’s proposal deliberately conflate two different things here.  “Entrepreneur” is a nice cuddly concept; it’s easy to persuade people that we want to keep "entrepreneurs".  But glossing over the fact that most of the people affected are not entrepreneurs at all is an attempt to protect wealth, privilege, and rent-seeking by stealth.

It is part of the ideology which capitalism builds around itself that those at the top are somehow special and unique rather than merely lucky; they are to be revered and rewarded for their talents, even as they suck our wealth into their hands.  The biggest problem that I have with Labour’s proposal is that it doesn’t really challenge that ideology at all.

Kissing frogs

Tweet There is an increasing emphasis on this magic quality called entrepreneurialism in recent years, and sometimes it seems to me that politicians and business leaders think that if only we had more of it, all our problems would be solved.  I wonder if that’s true – or even if we really understand what this stuff actually is.

It’s certainly true that having more companies employing more people would help the economy.  And it’s also true that having more companies starting would be a step along the way.  There is a downside though.  It’s generally accepted that around four out of every five new start-ups fail.  From a macroeconomic perspective, such a high failure rate isn’t necessarily a bad thing; it’s part of the cost of sorting the wheat from the chaff and identifying which business ideas are good and which are less so.

From a microeconomic perspective, however, I’m not convinced that encouraging ever greater numbers of our school and university leavers to do something at which we can reasonably predict, from experience, that 80% of them will fail is an entirely brilliant idea.  And I rather suspect that if we doubled the number of start-ups, the number of failures would more than double – we might still get a higher number of successful companies in total, but the ratio of that successful number to the total would be less.

Partly that’s because more business start-ups probably means that we’re moving into the more marginally viable ideas; and partly it’s because encouraging more and more people to start businesses means that we’re going beyond the pool of people who have the enthusiasm and the commitment without having to be persuaded to give it a try.

But it also partly comes down to us not really having much clue as to what does or does not make a successful entrepreneur.  Values such as commitment, hard work, and perseverance are all part of it, but there’s also an immeasurable something called flair – and I personally suspect that another little attribute called ‘luck’ plays a much larger role than is generally acknowledged.

It’s easy to ignore the question of luck.  Successful entrepreneurs always think that their success is down to their own exceptional personal qualities; and the unsuccessful ones usually have plenty of other things to blame – taxes, red tape, unreasonable expectations that employees should be paid a living wage, the banks, the markets; the list is probably endless.

We know that banks and financiers aren’t particularly good at identifying which businesses will succeed, although there’s an element of self-fulfilling prophecy in that those to which they lend are more likely to succeed than those to which they refuse to lend.  We also know that all the government agencies and services promoting entrepreneurialism aren’t terribly good at predicting success either – although the fact than many of those employed in such areas seem to have little experience of actually running businesses themselves and are experts, mostly, in filling in forms to draw down grants and loans, may be a contributory factor.  And we know that the entrepreneurs themselves are not very good at knowing what will succeed – if they were, we wouldn’t have an 80% failure rate.

People like Michael Moritz who invested in Google at the right time are feted as though they were financial and entrepreneurial geniuses, but is that true, or were they, in reality, just lucky to be in the right place at the right time?  Is entrepreneurial success more like kissing frogs than shrewd investment?  I suspect that it is.

Again, from a macroeconomic viewpoint, kissing a whole lot of frogs before one turns into a prince may well be a sensible strategy to pursue.  But shouldn’t we make the fact that that is what we are doing just a tiny bit clearer to those young people who are being encouraged and persuaded to go frog-kissing?

Rabbits and lettuce

Tweet Yesterday, a group of AMs discussed the question of unwanted callers, particularly in the context of the old and vulnerable. Their concern was primarily around the element of scam and fraud of which many of the callers - whether in person or by telephone are guilty.

I’ve posted previously on the pernicious nuisance calls which I receive regularly when I’m working at home.  It goes wider than the Windows support scams, though. I also suffer regularly from the ones which leave recorded messages on my answerphone, but which never name the company nor leave any contact details.  Leaving me a recorded message telling me that I must press 9 to stop the calls is singularly unhelpful – even if I were to believe that it would actually have any effect anyway.

These calls are a real nuisance, and particularly so for the elderly and vulnerable who are at serious risk of being taken for a ride.  I find them a nuisance, and I don’t think I’m in either category - yet. It’s not easy to determine which calls are honest and which are not, although I start from the simple supposition that any organisation which chooses to ignore or attempt to circumvent TPS rules is unlikely to fall into the ‘totally honest’ category. 

I recently came across this report on the whole issue commissioned from GFK–NOP by Ofcom.  In principle I welcome any attention being given to this problem; we need to shine a bit of light on a murky part of our entrepreneurial sales based economy.

The report lists different types of calls indicating the proportion that fall into different categories.  One of those categories is “other” and this is the one into which “surveys” fall.  “Surveys” is a neat way of circumventing the TPS rules, because they’re not actually selling anything - according to them.  Some of them do, however, pass the details they collect on to other companies who will then try and sell you something.  And those companies can semi-legitimately claim that the TPS rules do not apply because by completing a survey you’ve agreed to be contacted.  A neat circumvention – the best response is never to answer any surveys; which is my standard response.

It’s a pity however that the report from GFK-NOP doesn’t really get to grips with the international callers, one of the big loop holes in the whole TPS system.  Nor does it name, let alone shame, the miscreants.  I wondered whether that might not be because a number of the "survey" calls that I get – despite having told them a number of times that I never answer surveys – are from a company called GFK-NOP; a company which itself uses an Indian call centre to make some of the calls.

At least nobody can say that Ofcom didn’t commission an expert in the field.  Some of us might think, though, that this particular expert has something of a vested interest in the subject.  I had a boss once who used to talk about never “putting rabbits in charge of lettuce production”.  Using a company which makes nuisance calls to produce a report on the subject sounds not dissimilar.

Entrepreneurs, con-men, and thieves

Tweet Three different categories of activity, one good and two bad; and most of us think that we know the difference between them.  But the lines can sometimes be a little “fuzzy” to say the least.

It was a point which came to mind when I saw the television footage last week of the raid by the Information Commissioner’s office on a house from which individuals had been sending those annoying text messages telling us that we may be owed a certain amount of money for having been mis-sold PPI.  It was an interesting counterpoint to a story, carried I think by the Sunday Times, a couple of weeks ago about the firms which actually claim the PPI on behalf of people.

That story talked about the 'entrepreneurs' who have established companies to process claims.  They’ve seen a gap in the market, moved in, and made substantial fortunes as a result.

But by doing what, precisely?  Filling in forms which people could just as easily fill in themselves – and taking 10% of the proceeds for so doing?  I’m sure that they’d describe it as providing a service for people who, for whatever reason, are unable or unwilling to do the job themselves. 

There’s nothing wrong with that per se.  Making a profit by providing a service is a perfectly normal business activity.  It might, though, sit more comfortably with a lot of us if they actually told their customers how easy the job really is.  Whatever, it seems that in total these companies have managed to clean up around £1 billion from the victims of the sold PPI insurance. It may sound a little dodgy to take that much money for doing so little, but if it starts and ends there, it is perfectly legal and it’s up to individuals to say no rather than fall for the marketing ploy.  But it’s the marketing of these services which starts to raise some questions about boundaries.

Apparently the companies who send us those annoying text messages are only middlemen.  However, it does appear that the legitimate companies gain access to potential ‘customers’ by purchasing names and addresses from those middlemen, so the ‘entrepreneurs’ are only contacting those who’ve already been hooked.  Whether that still leaves them as entirely legitimate entrepreneurs is a matter of opinion – do they really have no responsibility for any illegality committed before they become involved, such as the way in which their contact lists are obtained?

According to the news reports these text messages say that you ‘may’ be owed a certain amount of money – I’m sure I’m not the only one to have received a message which was far more definitive than that.  Only a week ago I had one telling me that I am owed £3350 from a mis-sold PPI policy.  Since I’ve never been sold, let alone mis-sold, PPI, the precision with which they can tell me how much I’m owed is remarkable.  From press reports I know that the figure quoted is actually based on an average of the sums recovered for a vast number of people – but that isn’t what the message said.  It very explicitly told me that I am owed £3350.  It's a con. 

About a month ago I also had a message telling me that the sender had been trying to contact me about ‘my accident’ to help me claim compensation – and it’s not the first one of those I’ve had either.  (Let me hasten to reassure both my readers that I have had no accident and remain in apparently good health.) A little bit of research on the telephone numbers used for these two messages suggests – although it does not conclusively prove – that it’s the same people behind both.

Then we have those nice Asian people from the “Windows support department” telephoning me to offer me assistance to resolve the ‘problems’ which my computer has, they claim, reported to them (although their lack of ability to explain how my computer has reported these ‘problems’ rapidly becomes apparent when they are challenged).

Perhaps in India these people work in what looks like a respectable and successful call centre, established by local entrepreneurs.  To me they just look like crooks.

I don’t wish to denigrate successful entrepreneurialism; it’s key to our economic success.  We should be careful though about according the accolade to any and every company which makes large profits.  Successful and acceptable entrepreneurialism depends on more than that.  Companies based on activities which are dubious or in some cases downright illegal, even if not performed directly by the companies themselves, have no place in a successful entrepreneurial market.

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.