Ed Milliband's little big idea

While it is easy to lampoon Ed Milliband and the speech he gave to his party conference, he had one big idea that is worth looking at: that of bringing moral values into government's dealings with business, to reward the good and punish the bad.

On the face of it, what could possibly be wrong with that? It is better to have more training, more R&D, better cared for workers, a social conscience, environmental sustainability. Let's reward the companies that go the extra mile to deliver these things, and punish those that merely follow the rules. Companies that merely tick all the boxes and play the rules to their advantage are not giving back to society in the way they should.

Ed was subsequently challenged to give some examples of what he is talking about and failed abysmally. Southern Cross was mentioned as a company that wasn't giving back, but of course that was in the process of it failing as a business. Let's punish failure with higher taxes? The problem is that it isn't obvious who the good guys and the bad guys are. If you can't even say which companies you think ought to be punished for existing, how are you ever going to write laws to fairly judge the predators from the producers?

The challenge here is to turn good intentions into good policy. Ed's project has been tried before with almost no success under the banner of stakeholderism. Stakeholderism held that workers, suppliers, consumers, the wider community and the environment all had a stake in a business, not just the shareholders, so businesses should be run with all these stakes in mind. But put workers, suppliers and consumers on the board and you get big conflicts of interest. So little policy was ever developed to implement this vision beyond saying "you really ought to think about this stuff". I have written about stakeholderism before, and it all still applies to Milliband's new compact.

While it is possible and necessary to regulate for such things as environmental standards and workers rights, it is logically impossible for a regulation to meaningfully say that you must go the extra mile, beyond ticking all the boxes, because every regulation is precisely one of the boxes to tick. So you can't legislate for virtue.

And while tax breaks for R&D, support for apprenticeships and so forth are reasonable attempts to improve incentives, they don't reward virtue, they are attempts to steer self interest towards more public spirited goals. If Ed's vision means another avalanche of schemes and tax loopholes aimed at rewarding virtue, it will be met head on by an avalanche of tax accountants for whom virtue is not the pressing concern. This is no new vision, this is very much Gordon Brown's signature move of trying to micromanage behaviour through the tax system, giving us one of the most complex tax codes in the world and record levels of tax avoidance.

And let's not forget that creating jobs and providing goods and services are a positive contribution to society. We might like more training and R&D, but there are few businesses that could exist without ever doing any of either. Is Labour just too uncomfortable with the fact that business generally makes a big positive contribution to society even without being tinkered with by government?

So Ed, I hope you enjoyed telling your conference that you will stand up for what is right and oppose what is wrong. It is a fine and noble ambition, albeit somewhat unoriginal. But if you can give it any substance at all, that will be an achievement. Failing that, a mountain of regulation motivated by good intentions is the best and worst we can expect.

Turner, the stakeholder model, and the environment

In the conclusion of Just Capital, Adair Turner argues against "stakeholderism".

"... as a guide to practical policy it is best a cul-de-sac, at worst dangerous. It sounds attractive to ask corporations to think through the wider social 'balance of gains and losses' but in practise it is an almost totally inoperable principle. Corporations can just about imperfectly identify the complex set of actions which will maximise their own profit within given constraints, but they are ill-equipped to calibrate the second, third and nth order social consequence of their actions and lack the legitimacy to make the trade-offs involved. Is it better socially to downsize rapidly to preserve the remaining business and to free up resources for work elsewhere, or to keep workers in existing jobs at the expense of the firm's long term prospects and the productivity growth of the whole economy?"

rather

"Adam Smith's great insight, indeed, was to identify that the complexity of economic interfaces is so great and their number so numerous and each of us so dependent on the behaviour of others, with only a few of whom we could ever hope to have bonds of friendship rather than contract, that we have to construct a system which makes self-interest compatible with civilized behaviour, rather than relying on a generalized disposition to benevolence."

The stakeholder model is further condemned for the weakness of the policy prescriptions that actually arise from it. How then has it gained so much currency? Turner again:

"For while socialism has lost the great ideological battle of the twentieth century, and most former socialists ... accept the power of the market, that acceptance has not come easily, at least at a philosophical rather than a practical level. For socialism was a creed which sought to praise and promote the intrinsic noble purposes ... its roots were both Marxist, and in Britain Methodist, its natural tone messianic. Socialists therefore respond uncomfortably to the prosaic rationality and empiricism of liberalism. More fundamentally still, they respond uncomfortably to the idea that we should accept the significant role of individual self-interest, even if we can demonstrate ... wider social goals."

Now Turner has written a chapter on the environment, arguing well that regulation, eco-taxes and spending on environmental goals are proper social choices, and do not have to be sacrificed on the altar of competitiveness. However, he does not revisit the issue here. But what is the implication for the environment of this rejection of stakeholderism?

The conclusion is that vague admonitions to corporate responsibility do not work, and that we should focus on structuring the system to civilise self-interest. This seems rather a painful pill for the environmental movement to swallow, trading as it does, almost entirely in admonition - that is in promoting "personal responsibility" for the environment. It is hard to blame Turner for ducking at this point.

Now I will admit that individuals are not quite the same as corporations. Individual behaviour is driven rather more by values and preferences, and less by a fiducary responsibility to oneself. So exhortation and example-setting may not be pointless, but nonetheless the difficulty of judging environmental consequences remains, and a system which integrates self-interest and the environment may simplify that judgment.

It is also politically difficult. People are happy to vote for admonition because they can ignore it. Stakeholder environmentalists believe it will work. Environmental contrarians will settle for a policy of admonition because it won't work. So there is an alliance between bascially left-wing environmentalists who believe in the stakeholder approach, contrarian right-wingers who don't, and those indifferent to environmental issues who will go along with the easy option. The liberal environmentalist risks condemnation from all sides, for the crime of supporting measures that will actually do something for the environment.

And it should be said that sometimes the contrarians will be right, and in many cases there is just received wisdom on both sides, and no compelling evidence. Many will dismiss arguments like this out of hand as industry lobbying, but the case should be answered before considering a plastic bag tax. If indeed the opposition is largely justified, then we have an example of a liberal measure, using a market mechanism - price - to use self-interest in the common good, failing because the good has been incorrectly identified. If this sort of thing is likely to happen much, this will be another reason for concern over environmental measures that do more than plead.


There is a mountain to climb here. I have explained the obstacles, but I do not suggest we give up. Firstly we need to focus policy on the most urgent and cast-iron scientifically supported cases, and leave the marginal and arguable ones for later. The mantra that environmental thinking must pervade all corporations and all government departements, as I said here can be dropped in favour of being more specific, and less reliant on other people believing what we think they ought to believe.

Second we need to point out to enviromentalists that 20 years of admonition has done very little. A handful of people have internalised the values coherently, and the rest of us make token efforts, or freeload entirely. By all means they may continue to admonish, but that should not be seen as a political process. Governments should set the rules, expecting self-interested behaviour, not spend my taxes campaigning at me. If environmentalism becomes the new socialism, it will go the same way as the old.

Tags: Adair Turner, Environment, Stakeholder