• Andrew O'Brien

Conservatives, institutions and the power of business

The Conservative Party has traditionally been the party of institutions. Monarchy, Parliament, the Armed Forces, Family. Core to the philosophy of conservatism is the idea that human beings are flawed. Although we try our best, we are not always motivated by the better angels of our nature. This is why we submit ourselves to be governed by institutions. As one of the pillars of conservative philosophy Hobbes identified in Leviathan:

“in the introduction of that restraint upon themselves, in which we see them live in Commonwealths, is the foresight of their own preservation, and of a more contented life thereby;”

Crafting effective institutions is one of the ways that human society has been able to evolve. Conservatives have historically found themselves doggedly defending institutions because they recognise their importance. However, it is also important to be able to adapt to changing circumstances. “A state without the means of some change is without the means of its conservation” as Burke noted.

But you don’t have to go back to the dusty tomes of conservatism to look for the importance of institutions. The most electorally successful Conservative Prime Minister of recent times, Margaret Thatcher followed in the “supply-side” traditions of Burke and Hobbes. Her focus was on reforming British institutions to make them fit for the global capitalism that she saw as the future. Both the state and business were shaken up significantly through new strategies, new objectives and changes to the law. Her insight was the need to reforge both business and the state, if she wanted to be successful.

Institutions are the heart of conservative ideology, but partly for those on the “One Nation” side of the debate who understand their importance. No institution is natural or has a god-given right to survive. One Nation Conservatives understand the need to preserve and reform institutions to ensure a strong society and economy.

Yet in recent years Conservatives have taken the eye away from institutional reform into other directions. Conservative policy has become myopic in its focus on taxes. Tax policy is one way of shaping institutions but it is not the only tool in the toolbox. There is also a risk that without reform, tax cuts will not prove effective. The Conservatives most recent experience of tax reform for business has amply demonstrated this.

Corporation tax cuts are costing the government around £16bn per year at present. Over a five-year Parliament, we are talking about the equivalent of one and a half HS2s. But there are has been little talk about the return on this investment by the state.

Unemployment has been kept low and that is important. But this seems more likely due to other factors than business tax cuts. The UK has a historic problem when it comes business investment which is lower than our counterparts around the world. Yet, Gross Fixed Capital Formation, the UK’s stock of assets, is still lower than it was before the financial crash. Business investment has grown only 1% per year over the past decade with tax cuts for business seemingly having no impact on this trend. Investment in intellectual property is only up 6% over a decade, a horrendously low rate. On top of this, UK business is sitting on a cash pile worth around 40% of UK GDP – a staggering amount of money. At a time when the UK has experienced close to a decade of continuous growth, this is a worry.

Sadly, the debate about business has disappeared. The most common view within the Conservative Party is that UK PLC is performing well but is being held back by unnecessary regulation and a lack of support form the state. But given UK business data, this looks complacent.

Take the issue of regulation, which businesses always claim are too high and which Conservative politicians like to highlight. A recent report by the Red Tape Initiative, which was led by Sir Oliver Letwin, highlighted only 37 regulatory changes which the government should take, a number of which affected listed buildings – hardly likely to turbocharge growth.

Is the problem with the UK the structure of business rather than regulatory red tape?

There is also unlikely to be much fat to cut for regulation in the years ahead without compromising standards, under the Coalition Government the Conservatives helped to cut £10bn worth of unnecessary regulation with a further £10bn identified to be cut by 2020. This is a significant amount, but some of the examples of regulation are not exactly game changing. For example, UK businesses were given the opportunity to buy smaller no smoking signs. Jam regulation was changed.

According to the Better Business Regulation 2018 Report to Parliament, the number of businesses that reported regulation as obstacle to the success of their business has fallen from 62% in 2007 to 40% in 2018.

The real challenges facing the UK economy are the lack of productivity growth caused by a lack of investment in both human and physical capital. Government can create incentives for businesses to invest and reduce regulation, but it depends on businesses actually wanting to make the most of them.

UK businesses are consistently profitable – around 12% rate of return for the capital that they invest.

Shareholders have also accrued high levels of return, with Gross Value Added from profits distributed to shareholders rising from 14% to 18%. Quarter by quarter reporting for larger companies has shortened time horizons as noted by the Kay Review. This has held back investment into UK businesses. But the problem in the UK is even longer.

Institutional economists such as William Lazonick and Bernard Elbaum showed that the UK has suffered from “excessive competitiveness” (providing a disincentive to invest because returns are low) and narrow focus on profitability as the main framework for decision making has left the UK unable to keep up with the bigger, managed corporate capitalism which emerged in the late 19th and early 20th Century.

The profit motive may have been enough to powered the First Industrial Revolutions at an individual level, but the structure of UK business has been paying diminishing returns since then. In a complex world where more long-term investments are needed, is the structure of business getting in the way of UK corporate success? Do we need to encourage other measures of success such as social impact and environmental efficiency in order to drive UK businesses to make the right decisions? This is the kind of institutional challenge that the One Nation Conservatives instinctively understand.

A “One Nation” approach would immediately recognise the need to revive the effectiveness of UK business. Perhaps creating a Kay Review 2.0 – to look at the non-financial business sector. Initiatives such as Charlie Mayfield’s “Be The Business” also need to cast the net wider. Is the structure and governance of our businesses right to ensure that we have effective decisions being made? Are we building institutions which work for the long term, or just take advantage of particular tax incentives.

This is the substance of a new foundation for conservative philosophy on the economy, one which focuses on the institutional framework that drives the UK economy. In a way, it could be seen as a return to some of the ideals of Margaret Thatcher. A recognition that what makes the UK great are our institutions.

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