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  • Andrew O'Brien

Can ‘Free Markets’ return Sunak’s faith in them?

Updated: May 15

A few weeks ago the Chancellor of the Exchequer, Rishi Sunak, gave the annual Mais Lecture. Rishi’s lecture was somewhat overlooked because of events in Ukraine, but a few journals covered it. Profits before wages, said the Guardian. ‘Wise words’ said the FSB via City AM.


Reading the lecture it is clear that Sunak wants to be seen as a ‘thinking Chancellor’, similar to Gordon Brown and Nigel Lawson, rather than a ‘political Chancellor’, like George Osborne. In the speech, Sunak lays out his three priorities: Capital, People and Ideas. However, I think it could be summed up with an alternative three. Investment, Investment, Investment.


Why don’t British firms invest anymore?


At times, Sunak’s Mais Lecture reads like a stream of consciousness as the Chancellor tries to grapple with the question: why don’t British firms invest anymore?

Amazon's model: A counter to markets?

Sunak has faith in free markets and a new “enterprise culture” but surely the free market answer to the question is firms are not investing because they do not believe that it is profitable to do so. Yet the word “profit” is not included in the lecture at all (sorry to the editorial team at the Guardian). The data does not appear to indicate that the UK has a “profit problem”, however. The level of profit for non-financial firms in the UK has remained pretty constant between 9-10%. Moreover, looking at the example of firms such as Amazon, a firm which took six years to start making consistent profits and fought market expectations to get the space to grow into a global giant, the problems appears structural.


The short-termism of British capitalism has been documented for years, (see the Kay Review) yet Sunak cannot bring himself to criticise firms. The problems that Sunak identifies are decades old, yet Sunak wants to blame “uncertainty over the British economy” in recent years such as Brexit and COVID. But have we had Brexit for forty years? Was fear of pandemic responsible for the slowdown in investment and R&D we’ve seen since the 1980s? It just does not seem credible that a Chancellor that clearly reads the statistics can come to this conclusion. This leaves the Chancellor appealing to faith.


Government cannot do the jobs of firms for them


The plaintive tone of the lecture does not come as a surprise to this website. As we wrote back in March 2021, Conservative Chancellors are simply running out of options. Tax cuts and huge increases in public investment are attempts by Conservative Chancellors over the last decade to bring the horse to water and make it drink. But the results have been mixed. Employment growth has been strong, but wages and productivity have been poor. Investment overall has been weak (including intangibles).


Despite this, the Chancellor is going back to the same old tools. We’ve increased public investment to the highest levels since the 1970s. We are going to look at the tax treatment of capital expenditure. The latter in particular is a good idea, but research on whether tax treatment actually boosts investment is mixed. Certainly, broad cross-cutting and unconnected business tax cuts do not work, the experiment of significant reductions in Corporation Tax to attract investments has shown that. Investment appears, as in the case of Amazon but going back generations earlier, to be linked to culture and structure of the economy. In the case of Britain where you have an extremely effective City of London, which can take your capital put into some other part of the world and make a big return, why (if profit is your only driver) would you invest in Britain? We have a short-term culture where firms feel under pressure to turn profits very quickly and to artificially maintain those profits, even if it risks future performance.


If you aren’t directing the market, someone else is


Like many politicians of the right, Sunak is in thrall to the abstract concept of ‘free markets’. The most puzzling comment in his lecture is his view that economic life is the “result of human action but not of human design”. This might be true of hunter-gatherer societies, but not of the 21st Century and it was not even true in Adam Smith’s own time (whom the Chancellor quotes). Indeed, Smith spends much of The Wealth of Nations attacking the designing principle of his own time: mercantilism.


The truth is that if the state is not designing the market and the economy, someone else is. In the case of Britain, that “someone else” is the financial sector. We have an economy which is very good at extracting money and financialisation of industries, but lacks the structures and culture to significantly boost productivity or tackle long term social and environmental challenges. There is little patience and certainly an unwillingness to put the national interest ahead of money. There are many people on the right who don’t see a problem with that. It will ‘trickle down’ in the end. Unfortunately for these advocates, the political vision of the Johnson-Sunak Ministry is the opposite – that trickle down doesn’t work and that we need better (more evenly spread) growth than before. The Conservatives know that the status quo does not bring votes.


The Chancellor may feel that by not designing an economic model for Britain that he is creating a ‘neutral’ model, but non-interference is itself a choice and leaves power elsewhere.


Does the government have an “enterprise policy”?


Thatcher had a clear enterprise policy. She believed that too little competition and too much state interference was the cause of low levels of productivity and investment. She was going to force competition on business, even if it didn’t want it (which during the early 80s, it didn’t). It was this enterprise policy that shifted the UK’s economic model than anything else the government did. She changed the culture of British business. What is this Government’s enterprise policy? The Business Secretary was due to release a ‘national enterprise strategy’, yet it has not been published and we are not aware of the contents.


Strategy and policy, however, are not the same thing. It is clear from the Chancellor’s lecture that the real problem is the structure and governance of British business which has failed to invest in people, capital and ideas for decades. A new enterprise policy is essential to addressing those issues. Is this government willing to break with Conservative orthodoxy to create one?


Sunak wants to restore people’s faith in free markets, but the lecture feels like Sunak is searching for reasons to keep his own.

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