The Role of Business in Society

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Can’t help, not won’t help
by Diarmid Weir

Key assumptions of the New Labour government seem to be that businesses were just crying out for the chance to do socially useful things. They really wanted to take on more staff if they had a bit more training or work experience. They were apparently crying out for the chance to contribute to Education Action Zones if only the government would show them where the need is. And they were desperate to help the NHS find a more cost-effective way of building hospitals if only the government could draw up the right contracts.

Clever chaps or pretty stupid?
Given the reputation for ruthless rationalism and lateral thinking of top businessmen and the rewards they command for this reputation, it seems extraordinary that – if these were true – the clever chaps did not get together ages ago and realise that it was in their best interests to do these things anyway. If despite the effect of the windfall tax the profitability of British business and economic growth is raised by these interventions this suggests that British businessmen as a group are really pretty stupid and are not, after all, deserving of their extraordinary financial rewards.

There is another more charitable view to be held, however. This is that British business was indeed acting perfectly rationally in not doing these things. And that the New Deal and Education Action Zones will not improve either profitability or growth enough to offset the costs. And that business can only build and operate PFI hospitals at a cost to health provision which has previously thought not to be politically acceptable.

As you were
If they were acting rationally then there is no reason to suppose that they will not continue to act rationally. This means that when the New Deal ends, while they may keep some of their new recruits on, the trend of shedding employees will continue as before. And their continued involvement in Education Action Zones and NHS PFI schemes will depend on profit – not educational or health benefit.

To believe this is not, despite appearances, to be cynical. I suspect that many individual businessmen see the merits of improving the lives and potential of the unemployed, of better public sector schools and of high quality public hospitals. The arguments for these are overwhelming – if businessman are as clever as their salaries suggest they should be clear to them too.

Survival is not enough
No – there are other reasons why rational businessmen will not, through the agency of their businesses, support greater employment and training or better quality health and education for all, despite their evident social benefits. Consider this – a business might produce a valuable product which represents good use of natural materials, may provide worthwhile employment for a number of people and balance its operating income and expenses. In most people’s eyes such a business should survive. After all many multinational firms provide neither an essential product nor particularly worthwhile employment and yet continue to grow. But if our business has a loan, then it must now earn more income than it spends to keep up its repayments of capital and of interest to the bank. And if it is a public company its income must be higher still to keep its institutional shareholders happy. They too are seeking profits. Even if businessmen and the directors of financial institutions wished, as they might, to reduce shareholders’ and policyholders’ financial returns in the interests of increasing their returns in other areas such as health, education or general social benefits, they cannot. They are prevented from using their human judgment by legal rules that cast their responsibilities in rigid financial terms. This stems as much as anything from the failure of the discipline of accountancy to update the ‘money measurement’ concept – and to find ways of accounting for human, social and environmental capital along with money capital.

Powerful Imperatives
The same conditions apply to banks, whose imperatives are passed on to the companies they lend to and to others through competition for return on capital. And these imperatives are powerful ones. The banks have the option of high rates of return in the equity and financial markets which are boosted by the credit-multiplier effect – the process through which fractions of one loan go on to form the reserve base for yet more loans. With these options the banks and financial institutions are in a powerful position to demand high returns on loans and share capital from businesses.

Businessmen continually forced by such pressures to cut expenses and raise incomes by ever-increasing amounts are in no position to fulfil even the most fervent desire to improve employment opportunities, education or health. For business to play its proper part in society will require far-reaching reforms in our financial and accounting systems and the rules that determine how and in whose interests firms and financial institutions are run.

4th July 1998

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