Winner of 2014 Webb Memorial Trust essay competition announced: Adam Ludlow

Posted on 22 Dec 2014   Categories: Publications Related Tags:  

 Congratulations to the winner of the 2014 Webb Memorial Trust essay competition, Adam Ludlow.

This year the Webb Memorial Trust received the highest number of entries than any previous year of the competition.

Adam’s essay appears in the January 2015 issue of the New Statesman.

How can business reduce poverty?

A comparison between modern and pre-industrial civilisation is enough to suggest that business has been instrumental in reducing poverty in the past and has the potential to do so in the future. Through growing economies, creating jobs and producing the tax receipts necessary for redistributive government policy, the exchange of one person’s labour for another is the most sustainable way that poverty can be reduced.

Economic liberals tend to think there is little else to this though, and if you leave business to behave as it will, poverty inevitably falls away, left standing on the pavement as humanity speeds away down the road of history in its ever-accelerating two-seater Cadillac.

Beatrice Webb, however, had severe reservations about this theory. As she wrote in 1896:

“No competent authority would now deny that unfettered bargaining between capitalist and workman inevitably tends to result, not in the highest wage that the industry can afford, but the lowest on which the workman and his family can subsist.”1

As a nineteenth-century socialist, it is debatable the extent to which Webb believed that business itself had the capacity to act intentionally and comprehensively to reduce poverty, hence her belief in trade unionism and the state. But the essence of her words survives in the progressive tradition to this day. Poverty needs to be actively reduced by deliberate initiatives rather than simply to be the coincidental by-product of the free market and something so capricious as economic growth.

There are many ways business itself can take such action, from technological innovation to ethical supply chains. But there is one aspect of business’s record that progressives overwhelmingly think is underwhelming and therefore focus on more than any other: realigning spending priorities – usually away from shareholder payouts or owner profits.

Four alternative uses for capital have particular capacity to do this. First, businesses can transfer profits to charitable causes, second reduce their prices and third employ more staff. Finally, businesses can prioritise the human capital of their own staff: paying them more or providing them with training or support. None of these actions is done purely out of altruism (even charitable donations can be self-serving when part of PR-driven “CSR”), but they all can reduce poverty.

The key point however, is that business resources are finite and to do any one these requires resources to be diverted or withheld from another. If a business cuts its prices and margins, there is a smaller slice of the pie for wages. The question is therefore, if there are a number of competing ways for business to reduce poverty in theory, which is best in practice? 

*** 

Currently in Britain, the most desirable answer is to prioritise staff development. Donating profits to charity is certainly noble, and can be effective when done comprehensively, as in the case of the Bill and Melinda Gates Foundation. However, few businesses are the size of Microsoft and on smaller scales the approach does little to combat the structural causes of poverty, such as low-quality jobs or unequal career opportunities.

Reducing prices for consumers can make a difference, but, significantly, the part of the economy where costs are most problematic is also the sector which is least professionalised: housing. According to Alex Hilton of campaign group Generation Rent: “People aren’t queuing up at food banks because of the cost of food, they’re queuing up at food banks because of the cost of housing”. However, of the 232,000 homes left unoccupied for longer than six months in 2013,[2] one suspects most were held by individual property owners rather than limited companies operating as businesses.

Construction companies say they are desperate to build more houses but are prevented from doing so by prohibitive planning laws. While there is scope for developers to engage more proactively with planning authorities, restrictive laws are to a large extent the product of the real issue in relation to housing: the public. ComRes polling shows half of Britons say they would not support new affordable housing if it affected the view from their window.[3] While business should add its voice to the debate, the issue ultimately requires the changing of minds to accept that more housing is desirable. This is a political task that is perhaps not best suited to malevolently-perceived business.

Finally, while job creation is vital to reducing poverty, in contemporary Britain it is not necessarily the top priority. This is primarily because the multiple deprivations symptomatic of poverty are not experienced anywhere near exclusively by the unemployed.

Deficient diet, inadequate clothing, the torpid crawl of damp across the walls of unheated homes – according to the Poverty and Social Exclusion in the UK project, children most likely to experience the conditions ‘live in small families with one or two siblings, live with both parents, have at least one parent who is employed, are white and live in England.’[4] Poverty in modern Britain is as much caused by low quality, low paid employment as unemployment. If business is to reduce poverty, it is this that it should focus on.  

***

The methods for business to relieve in-work poverty are relatively well known. Prevalent proposals in recent years have been the Living Wage, affordable childcare and more apprenticeships. All are based on a wealth of research and well-argued justifications: improving the income of society’s worst paid, helping women return to the workforce to add a vital second (or only) income to households and providing career opportunities for the 50% of non-university educated young people.

The problem comes with the business case made for each. Despite supposedly reducing staff turnover, and keeping experienced workers in turn bringing productivity benefits, these arguments rarely come from business leaders themselves.

Furthermore, uptake of the Living Wage among private companies has been painfully slow. Improving access to childcare has been supported by Hilary Devel and the CBI, but remains eye-wateringly expensive for most private sector employees. Official figures show the number of people in apprenticeships improving, but start from a low base and stalled last year.[5]

The ways business can reduce poverty are therefore well established in theory but are struggling to be implemented in practice. The key is therefore to understand the hurdles preventing business from doing more to reduce poverty and to develop ways which these can be overcome. 

***

 Markets supposedly hate nothing more than uncertainty. The labour market is no exception. Uncertainty is to some degree behind everything from zero-hours contracts (“We don’t know how busy we’ll be, so we don’t know how many hours we’ll need you”) to the gender pay gap (“What if she gets pregnant?”). While in these cases risk should reside with the employer not the employee, uncertainty can be reduced in ways that are beneficial for both parties.

Take invoicing for example. While large companies with eleven-figure turnovers may shrug off occasionally being paid late, regular tardy payments can play havoc to small businesses. If they do not know when they are going to get paid, how are they meant to know whether they can increase pay? Or invest in childcare coupons? Or take on an apprentice?

This is not an academic issue. Research by Bacs suggests that small businesses are owed an astonishing £40 billion in overdue payments, with three in five small businesses due late payments.[6]

Large companies, however, face only £6 billion of late payments suggesting creditors can pay on time if need be but know they can get away with paying smaller companies weeks or even months late. A small company taking legal action risks alienating its much-cherished customers.

Given this, it should be the responsibility of large companies to ensure they pay on time. One simple and business-friendly way to reduce poverty would be for large firms to sign-up to the Government’s Prompt Payment Code or develop a more stringent industry-standard one that requires average payment times to be placed on company websites. With predictable payment procedures in place, small companies, who make up most of the economy, may be in a better position to invest in their own staff.

There are other major causes of uncertainty too. A key barrier stopping businesses investing in their staff is a concern that the employee will leave soon after the investment is made. Apprenticeships improve the value of a business’s human capital, but businesses appear wary of supplying significant training for young workers when, shortly after it has been completed, many are headhunted by rival firms.

It might be desirable that employees see out their obligations to the employer who provided them with training. However, Britain’s “flexible labour market”, while damaging for many, receives much tacit support from young people: few crave to be tied to one job for decades and many desire the different experiences of changing employer.

To reduce poverty in an achievable way, business therefore needs to find a way of, if not eliminating the uncertainty of investing in staff, at least reducing the risk of doing so.

One option might be to offer staff an annual training allowance of around 5% of their salary, which can be used (strictly voluntarily) on relevant courses. If the employee leaves the company they pay off the training received out of their final pay cheque. If the employee stays, the total amount would reduce by 25% per year, so the entire amount would be “paid off” within four years of receiving the training. Alternatively, it could be set up so individuals themselves do not pay off the allowance, but their new employer does. This would create a system similar to that in football – one of the few socially mobile occupations left where rags to riches stories can genuinely occur. A new employer would compensate the old one for the time and effort put into developing the skills of their new employee.

This would benefit small companies in particular who outsource much of their training, so have a precise cost associated with it. But a model based on de-risking in-house training could also be developed. In his contrarian Finance and the Good Society, Robert Schiller, Yale economics professor and Cassandra of the 2008 financial crash, suggests whatever the recent damage inflicted by financial services, innovation in the sector should still be encouraged. With the exception of people’s homes, life expectancy and cars, there are few ways of hedging against bad outcomes happening in the future. Homeowners can insure against their home burning down but not against its value crashing.[7]

Accordingly, business could reduce the risk of investing in people by creating a mechanism for insuring against the risk of newly-trained employees leaving. If a company took out “employee insurance” they could be free to train an apprentice or pay for an employee’s childcare, knowing if the employee left they would receive a pay-out to cover at least some of the cost already sunk in. The ensuing search for cheaper premiums and no claims bonuses would have the knock-on effect of incentivising businesses to reduce staff turnover, in turn encouraging them to improve their employees’ job satisfaction.

Over the long term and with inevitable improvements in technology used to monitor staff time ever more closely anyway, extending this to hours worked could even be explored. Rather than putting staff on zero-hours contracts, firms could employ them full-time and take out insurance on their time – if the staff are surplus to requirement, the firm is reimbursed by the insurer. If the staff are needed, the insurer keeps the premium, but the company gains from being able to service the increased demand. Again this would mitigate a company’s risk involved in the staff investment necessary to reduce in-work poverty, while also benefiting the business itself.

***

However, some solutions to poverty may not align with business interests so directly. Increasing trade union membership is just one of these. “Collective bargaining”, as first termed by Beatrice Webb, is known to secure better pay and conditions for workers, and businesses could in theory reduce poverty by inviting unions into their workplaces. Presently however, this remains far-fetched.

But it should not be so. There is a common belief that businesses are innately right wing and subscribe to a neoliberal ideology. That this has been accepted by many on the left has unfortunately been one of the movement’s major mistakes in recent decades.

Antonio Gramsci used the term the ‘philosophy of praxis’ to describe the process of delivering socio-economic change and ultimately socialism. The philosophy of praxis in Britain over the past half century has often boiled down to little more than securing a left-leaning Government.

Of course having your hands on the levers of education and the welfare state can do a vast amount to reduce poverty. But if the left assumes the best or only way to drive change is through the state (which controls 40% of GDP), it vacates the other 60% of the economy, which dominates the lived experiences of most people’s everyday lives. This leaves progressives to fight on their own back lawn whilst allowing their opponents to sunbathe untroubled on theirs.

Most ambitious young capitalists aspire to run multinational corporations and some desire to be statesmen. However, many young people of leftish persuasion often seem to have only the ambition of making it into the House of Commons. Some excel in large charities, others make fantastic journalists. However, seeking to get ahead in the world of business is still seen by many as “selling out”. Whereas some of the best progressive talent spends years waiting for their opportunity on the Commons’ benches, rabid capitalists are left to ascend the corporate ladder unchallenged. They are left to declare there is nothing wrong with tax avoidance, that it is merely capitalism operating as it should.

If this is to be overcome, free market capitalism and business need to be unchained from each other in the progressive mind. Rather than being considered something bad or in need or regulation, business needs to be considered as a vehicle of change in itself. Rather than being the person who says “business should hire more people from disadvantaged backgrounds”, why not be the person hiring people from disadvantaged backgrounds?

There is no historical reason why successful businesses cannot be led by progressives: Robert Owen was a highly successful industrialist and a founding father of socialism; Joseph Rowntree a successful manufacturer as well as early pioneer of the living wage. Even today, Warren Buffet has blasted the absurdity of a US tax regime that sees him pay lower marginal tax rates than his secretary.

Business has reduced poverty in many multiple ways and has the potential to do much more. But if it is to realise this, those who believe it can and should do so need to take the responsibility upon themselves and be prepared to make the changes they want to see. To do otherwise, is to surrender control of the Cadillac’s wheel just as the car careers away down the road, the next junction no doubt fast approaching.

Posted on 22 Dec 2014   Categories: Publications Related Tags: