Labour Party’s Economic Rethink Should Focus On Good Corporations

John Kay

“We will cut spending but not as fast or as nastily as the Conservatives; we believe in a market economy but not very strongly.” These were central elements of the Labour party’s economic policies in last week’s UK general election. They do not constitute a persuasive narrative and they did not persuade.

The European left has been in intellectual disarray since the collapse of socialism. The threadbare content of Labour’s economic thinking echoes similar weaknesses in the French (not very) Socialist party and Germany’s Social Democrats. In Greece and Spain, the extreme parties of the left are gaining electoral ground by promising things they cannot deliver. The third way of Tony Blair, former UK prime minister (and Bill Clinton, former US president), who saw the need for fresh economic thinking back in the 1990s, has collapsed into vacuity.

So here is one idea to start Labour’s rethinking of economic policy. The profit-making corporation is, should be and will remain the central institution of the modern economy. But that does not mean the purpose of a profit-making corporation is to make a profit; we must breathe to live but breathing is not the purpose of life. The purpose of a corporation is to produce goods and services to meet economic and social needs, to create satisfying and rewarding employment, to earn returns for its shareholders and other investors, and to make a positive contribution to the social and physical environment in which it operates.

Mr Blair flirted with the idea that the purpose of the corporation was a central issue when he embraced “stakeholding” before his election in 1997, but the debate died, partly through the opposition of businesspeople who thought stakeholding meant trade unionists on company boards. It may be an idea whose time has come again.

The usual objection, that an organisation cannot have more than one objective, can be swiftly dismissed. The statesman must balance competing pressures and interests, and every household must manage the sometimes incompatible demands and needs of different family members. Likewise, the job of the professional manager is to balance sometimes complementary, and sometimes conflicting, claims.

Similarly, the good school imparts factual information while stimulating critical thinking. The good smartphone compromises between portability and battery life. We recognise good schools and smartphones when we see them, and we know a good company in the same way.

The good corporation — like the good smartphone or the good school — can be identified by what it achieves. It pays workers a living wage; it does not engage in aggressive tax avoidance. It develops the skills and capabilities of its employees and does not bewilder customers with complex tariff structures. It earns profits, reinvests some and pays a dividend to shareholders. Its executives spend more time walking around offices and shop floors than sitting in the meeting rooms of investment banks. The good corporation contributes relevant expertise to the formation of policy but does not engage in lobbying on a scale that corrupts political decision-making.

The political and social legitimacy of the market economy, and of the corporations through which it functions, cannot simply be asserted — as it has been in the market-fundamentalist rhetoric that has dominated economic policy for the past three decades. Its legitimacy has to be earned by the behaviour of the leading economic institutions. That social contract has too often been broken in recent years. And drawing attention to that breach, and the measures needed to regain trust, is an agenda that is not hostile but rather friendly to the long-term interests of the business community.

This column was first published in the Financial Times and on John Kay’s Blog.