What do Conservatives really think about the UK’s productivity puzzle?
For a website which claims to be interested in the economic policy debate within the Conservative Party, it may seem odd that this is the first time that we’ve covered the Conservative Party leadership contest. However, the economic debate has been almost exclusively focused on tax cuts and I’ve written has written several (detailed) articles and papers on the subject. If you want the TL;DR – we need tax reform, yes, but arguing about broad based tax cuts for businesses and individuals is a waste of time.
The reports today about a leaked recording from Tory leadership front runner, Liz Truss in The Guardian have provoked an interesting debate, however. Truss’ comments back from 2019 hinted that the problem with the UK’s productivity was a cultural problem, an unwillingness to “graft”. She also referenced the infamous Britannia Unchained book she co-wrote which said that “[o]nce they enter the workplace, the British are among the worst idlers in the world.”
Truss herself has countered her own previous argument in the latest Conservative leadership hustings by saying that the problem was more capital investment being low.
Truss’ comments beg an interesting question: What do Conservatives think about the cause of the UK’s low productivity?
Are the British people idlers?
Where has this argument come from? It is hardly grounded in history. The bedrock of the Industrial Revolution in Britain was the pool of skilled and semi-skilled workers who were able to take the latest ideas and develop working machines to implement them. This is why Britain was able to industrialise first and has a global reputation for craftsmanship.
In fact, many liberals argued, British workers were too invested in their work and had too much control over how they operated instead of merely taking the orders of their bosses and owners. Much of Britain’s industrial strife has been on issues of pay and conditions, rather than wanting more time off.
The source of concerns about idleness, like much Conservative thinking, seems to be from the 1980s. Enoch Powell and Conservatives in the 1950s had already begun to worry that the emergence of the welfare state would change British cultural attitudes around work. This Marxist idea, as I described it in The Spectator, that the economic structure could warp the values of people leading them to ‘lose’ their work ethic through a supportive welfare system or guaranteed pay/conditions emerged over many years. But the 1980s, with mass unemployment, made developing a new narrative on employment imperative. Cynically, it was easier to claim that the reason why there were so few people in work was not the government’s economic policy but because people were unwilling to work, particularly in lower skilled, and lower paid, jobs.
The attractiveness of this narrative is obvious. Cameron and Osborne adopted a similar narrative in the early 2010s, during another period of economic difficulty. In 2012, Osborne famously asked in his ‘shirkers versus strivers’ speech “where is the fairness, we ask for the shift-worker, leaving home in the dark hours of the early morning, who looks up at the closed blinds of their next door neighbour sleeping off a line on benefits?”
It's interesting to note that Britannia Unchained was published just weeks before this speech.
However, despite the focus on work ethic, the cultural arguments seem to fall down following any meaningful investigation.
An easy way to sense-check this narrative is to compare the UK with other countries around the world. Take France, often lazily culturally stereotyped as a country with an ‘anti-work’ culture in the British press. French output per worker (one way to measure labour productivity) has actually increased faster than Germany, a country which is traditionally seen as having a strong work ethic. GDP per hour worked is higher in France than Germany, whilst the French work more hours than the Germans per year, according to the OECD.
In fact, the Office for National Statistics has found that output per worker in the UK has grown faster than any G7 country bar the United States since 1997 and was keeping pace with the US until the financial crisis.
This argument around idleness also falls down when considering the high level of self-employment and low levels of unemployment in the UK. The Conservatives often like to proclaim how we’ve seen a ‘jobs miracle’ this decade, that hardly smacks of a cultural problem with work. Surely it can’t just all be down to tough love under the Coalition Government. How does this align with Conservative philosophy on the importance of individual choice and responsibility?
The truth is that culture is important, but it is not the work ethic of the British people that is the source of the problem.
A question of structure and management
The same ONS analysis cited above has identified a lack of capital deepening (increasing the relative amount of capital deployed compared to labour) as a key source of the lack of productivity growth. Simply put, firms are investing less in their workers than their competitors. This now also appears to be Truss’ position.
Numerous reports and studies* have highlighted this culture of low investment within Britain. This is not a new problem. It is a culture which dates right back to the 19th Century where British investors found it easier to make big returns overseas than get sucked in intensive competition with German and American firms.
So how do we change this culture?
Essentially, it is a question of governance and management. What is the strategy of the firm and how is that strategy implemented?
The UK has a “particularly extreme form of capitalism” according to Professor Colin Mayers who recently ran a programme to look at the future of business. Short-term shareholder returns are privileged above everything else. Managers are incentivised through share schemes and bonuses linked to share price or profitability to focus on those interests. Unsurprisingly, when UK firms have a choice between investment or dividends, they choose dividends. Only one in four firms prioritise investment (IPPR Economic Justice Commission, p.128) with internal funds despite a third of firms saying that they invested too little. Dividends and share buy backs have risen considerably whilst investment has remained low, with shareholder buybacks and dividends reached 103% of profits in 2018, before COVID.
Reforming UK business and corporate governance appears very far off the Conservative agenda, yet institutional reform is one of the central features of conservative philosophy. Conservatives should be interested in fixing structures that do not work. As business reform is an example of a supply-side reform that does not cost considerable sums of money, it seems especially odd that Conservatives are not considering it.
UK management skills are also ranked lower than competitors such as the US and Germany. Many economists argue that it is UK management which is holding our economy back. An analysis of the UK’s productivity gap with the US found that half of the productivity gap could be improved through better management. You’d think that something which could boost UK’s economy by 10% would be worth focusing on, but apart from the Help to Grow Scheme there is little work on this agenda.
An electoral opportunity for reform
An opportunity may present itself to the Conservative Party to finally tackle these issues because of the changing nature of its electoral coalition which frees up a more critical approach to business ownership and management. In short, the Conservative Party has moved away being the party of the managers towards being a party of working people. In 1992, the last big Conservative victory, nearly 60% of the AB social class (upper and middle middle class managers and professionals) voted Conservative. In 2019, it was around 45%. In fact, the AB managerial class was the only part of the electorate where the Conservatives saw their vote share go down in 2019 compared to 2017.
A party which is electorally dependent amongst owners and managers (and many MPs come from senior leadership roles in business) is unlikely to criticise them. Already a tension has emerged between the so-called “Red Wall” and Conservative MPs from traditional Tory seats about economic policy. Could this lead to a change in thinking?
The emergence of what Thomas Piketty has called the “Brahmin Left” – where richer, more highly educated people tend to vote for left wing parties compared to the past – also means that Conservative’s courting of management may be harder than in the past.
The Labour Party’s policy on business has shifted since the early 1990s away from being critical of management and ownership towards blaming the problems on the state and the lack of a supportive environment for business. In this, the Conservatives and Labour appear to be as one. Ed Miliband’s “predators versus producers” conference speech is glaring because it is unusual for Labour leaders to criticise business structure and management.
The incentive for the Conservatives to take on management and governance of UK plc is rising as their electoral coalition changes. The good news for Conservatives is that three-quarters of the electorate are outside of the AB class. The bad news is that that much of the Conservative Party’s fundraising machine is based on courting rich donors, who do not take kindly to problems of productivity being laid at the door of owners and managers.
Developing a new narrative on productivity
Blaming workers for the productivity slowdown is not right when you consider the evidence.
It is also electorally naïve when considering the Conservative Party’s new electoral coalition.
If the Party is going to succeed it is going to need to develop a new narrative on the economy and productivity, which moves on from Thatcher and takes account of decades of reforms that have been introduced since she took office.
Reforming business, improving management, incentivising investment are the policies that are needed for the next decade. Let’s see whether the next PM has the courage to take these ideas forward.
*A good recent example is Business Time by the Resolution Foundation