Bringing mutualism back into business
Mutualism offers an ideological and practical path that Labour can proudly tread. In the hands of the Coalition it is simply a tool for reforming public services, but social democrats must not ignore private sector reform. By forging a strong discourse on new models of both public and private sector governance, Ed Miliband can challenge the Coalition’s Big Society on its own terms.
David Harvey may not be an obvious intellectual ally of social democrats. But the prolific Marxist geographer has an analysis of current political events in Britain and in Europe that nobody can honestly ignore, and which the left must respond to.
Harvey defines neo-liberalism as a system for converting financial sector credit crises into government debt crises. Dating back to the New York City debt crisis of the late 1970s, via the US savings and loans crisis of 1987-8, through the Long Term Capital Management meltdown of 1997, Harvey traces a succession of critical moments in which states found themselves either under-writing the risky investments of their financial sector, or (in the case of developing economies) being bullied into aggressive austerity programmes in order to avoid defaulting. In no case do lenders themselves carry the risk that they have supposedly priced into the cost of debt.
By this account, the crisis that began in 2007 is simply a magnified version of this trend (and in case this sounds like hindsight, Harvey’s analysis is contained in his 2005 A Brief History of Neo-liberalism). The British and Irish governments are doubly trapped in this bind, first feeling compelled to rescue their own banks at vast public cost, then feeling equally compelled to make unprecedented cuts to the size of government in order to satisfy their own lenders.
Historians will look back on the period of 2007-10 with amazement at how quickly the excesses and failures of banks became reframed in terms of the excesses and failures of governments. 2010 has been the key year in this regard, the moment at which public attention has turned from securing the viability of finance to reforming and slashing the public sector. It’s interesting that David Cameron fractionally over-estimated how quickly this process would take: his 2009 party conference speech (described as ‘barmy’ by Prospect magazine) confused most audiences by arguing that a swollen public sector was to blame for Britain’s economic ills. Within a year, that obvious falsehood had become virtually an orthodoxy, with evidence-free declarations that the public sector impedes growth by ‘crowding out’ business activity.
What has any of this got to do with mutualism? What’s interesting about the swift reframing of the crisis, from a problem of bad private investment to one of bad public spending, is that it has been perfectly mirrored in policy debates about ownership and governance. References to ‘John Lewis public services’ give some hint of how warped the Coalition’s stance on mutualism has become: they want more ‘John Lewises’ in the public sector, but make no discussion of ‘John Lewises’ (or for that matter, building societies, employee-owned firms, consumer co-operatives and so on) in the private sector. Only two years ago, the state was rescuing society from the greatest failure of financial markets in 80 years, whereas now it is taking advice from business leaders about how to reform itself. Two years.
And yet it is healthy that mutualism has reappeared as terrain on which to debate political priorities and differences. Mutuals are evidence that social, political and economic goals are not only pursued, combined and balanced at the level of society via government, but also at the level of the organisation via governance. Any model of ownership and governance makes more or less explicit assumptions about whose particular interests are being upheld, be they private, public or something between the two such as a local community.
Mutuals and the public interest
A basic proposition that both Left and Right can agree on is that mutuals offer a means of blurring the distinction between public and private sector. There is no binary split between national ownership and private property, but varieties of governance and property rights in which goods are held in common, for particular designated uses and groups.
In the case of public services, mutualism allows them to become more private but not fully privatised, in the sense that they become accountable to a limited community, be they employees or users. This potentially makes public services more sensitive to their users and better able to process the local knowledge of employees and the local community. Labour could point out that they have already enacted a radical mutualisation programme in the public sector, in the form of Foundation Trust hospitals.
The extent to which such public sector mutuals act in the public interest is, as tedious as it might sound, all in the detail. Governance models are critical here, in terms of who gets represented, what powers they have, what borrowing arrangements are in place and, crucially, what kind of asset lock they have in place. The asset lock – the legal mechanism which prevents members of the mutual selling their shared asset to the market – needs highlighting under any leftwing mutualism.
Politically, it would not be unreasonable for Labour to depict the Coalition’s public sector mutualism as two-step privatisation, unless the government can give extremely strong assurances about the asset lock. The public may just remember that Tories have a record in this area, giving building societies the right to de-mutualise in the 1986 Building Society Act. Bradford & Bingley and Northern Rock both seized on this opportunity, and the rest is history.
It would be wrong for Labour to let the Conservatives dominate this agenda for public services, not least because of the important precedent of the Foundation Trusts. But equally, the Left cannot be dragged into a debate that is limited to public service reform. If mutualism blurs the distinction between public and private sector, there must be progress made in both directions.
A critical question for Ed Miliband is how far he is willing to propose and celebrate transformations in Britain’s private sector. This is tricky political territory, at a time of minimal growth, a shrinking public sector and high unemployment. The last time the social democratic left seriously considered the need to reform Britain’s model of capitalism (and not merely its models of public service delivery, as preoccupied Tony Blair) was around the time of Will Hutton’s State We’re In in 1995. This was swiftly dropped.
But Hutton’s argument has not become any less pertinent in the year’s hence: quite the opposite. The dominance of the financial sector in the UK economy and the dominance of finance over UK firms is a pressing problem. Cases such as the Cadbury takeover capture the public imagination, while asset-stripping by private equity companies hollows out hundreds of lesser known British firms. If Miliband were aggressive enough, and were willing to repeat the message enough, the electorate might be successfully reminded that our economic woes originated with a series of one-way bets made by a few thousand millionaires living in London.
Mutual governance models
From here, the argument can be made that there are alternative ownership and governance models. The target is speculation, not business (Miliband could use a Phillip Green or two on his side to ram this point home). Firms such as John Lewis are highly profitable. Not only that, but these alternative models produce lower levels of inequality and greater spillover benefits (what economists term ‘positive externalities’) for society. What, Labour might well ask, does the Big Society demand of the private sector? This is an issue that the Coalition has entirely ducked to date, despite Vince Cable’s rhetorical attack on the ‘spivs and gamblers’ in the City.
The spillover benefits of alternative models are likely to be seen in the wellbeing of employees. Evidence from the Chartered Institute of Personnel Development indicates that the chief determinants of stress in the workplace are poor levels of communication from management, lack of internal transparency, lack of any sense of control over one’s working life and erratic decision-making. Their evidence shows that employees are happiest in the voluntary sector, and currently least happy in the private sector. Underpinning this is the finding that wellbeing is closely associated with a sense of common purpose in one’s working life.
Carole Black’s report on the health of the working age population found that the cost to the UK economy of health-related absence was £100bn – not far off the total budget for the NHS. A great deal of this is stress-related. There are some clear economic gains to be made from nurturing a different business and workplace culture in Britain. Far-sighted policy thinkers (including some around David Cameron) have begun to wonder whether regulators and competition authorities could account for some of these social externalities, rather than leave it to the state to sort them out and pick up the bill. If a sink is leaking all over the kitchen floor, a sensible response is to hire a plumber to fix the sink, not a cleaner to continuously mop the floor.
Recognising this may require policymakers to adopt a different view of what good ‘evidence’ looks like. Orthodox economic analysis has no critique of shareholder value maximisation, of the majority of mergers and acquisitions activity, of short-term private equity buy-outs, because these are all classed as ‘efficient’ within the narrow, short-term, neo-classical definition of efficiency through which they are perceived. A more historically nuanced and far-sighted vision would recognise the ambivalent socio-economic character of successful business, and the ways that the state has to pay for the spillovers of dysfunctional capitalism.
The mutuals sector is still woefully under researched, but the first step towards a proper understanding of it would involve measuring their impact on employee health, wellbeing and the neighbouring environment. These do not trump output and consumer satisfaction, but nor are they irrelevant. Only through mutual governance models can organisations enshrine a diverse range of goals and interests in their constitutions.
A shift in business models and practices occurs slowly and haphazardly. What holds it back is an orthodox view that alternative forms of ownership and governance are wacky, unrealistic and unproven. What can enable it is a culture which learns from successes and mistakes. The risk with mutual models is that their governance models fail, either through too much member participation and obstruction to management, or through too little. I get regularly asked what the 'evidence' is on how a mutual should best be established, to which the unfortunate answer is that there are no statistics, only more successful and less successful examples. The challenge is to enable lessons to be drawn and publicly learnt from. Foundation Trusts had no evidence base or template when they were established, but were an innovation that has now become established and made to work.
The Labour party needs to do three things. Firstly, it needs to set out a series of policy measures aimed at enabling the creation of more mutuals and employee-owned firms in the private sector. These measures should include the re-introduction of tax advantages for employee benefit trusts, which can be funded through reducing or removing tax advantages in other share ownership schemes. The other area where there is still scope for private sector regulation and innovation is in facilitating finance for mutuals. One major obstacle to the sector’s growth today is that mutuals cannot access the equity markets, and are therefore dependent on debt finance at a time when there isn’t much around. But we currently have a number of fully and part-nationalised banks (plus the Post Office) that could be used to assist in this regard.
Secondly, it needs to define public sector mutualism as clearly as possible, and then come down hard wherever the Coalition’s policies depart from this. The truth is that the Coalition is uninterested in whether their new public sector mutuals are still mutualised in ten years time, but Labour should be aggressive here. Anything less than a water-tight trust-based model, closed to carpet-baggers, may as well be a privatisation, especially when it is forced on staff against their will.
Thirdly, Labour can learn from and partner with organisations with expertise in this area. In addition to the Cooperative Party, Mutuo (the mutuals trade body) and the Employee Ownership Association have the most insight into the benefits of mutualism and the current obstacles to its growth. But equally important is that the left identifies innovative and plausible new models that are emerging on the horizon, and seeks to understand how new forms of private sector cooperatives can be enabled.
Politicians love to celebrate innovation, as David Cameron’s recent pledge to turn East London into a new Silicon Valley demonstrated. Why not then declare Britain to be an innovation lab for the creation of new organisations and new organisational forms? Britain gave the world limited liability companies and worker co-operatives – what else can we come up with? Experimenting with governance and ownership models is considerably less fluffy than The Big Society, which is everything and nothing.
Discussing private sector reform is difficult for politicians, which partly explains why public service reform has preoccupied policymaking for the past fifteen years. To do so successfully, they need allies in business and civil society, who are able to speak out when governments cannot. Sitting at the overlap between the public and the private spheres of our economy, mutualism offers an ideological and practical path that Labour can proudly tread. But in doing so, Labour must oppose excessive centralisation, high-stress work practices, poor governance and inadequate transparency wherever they are present, in any sector, not only the public sector. Mutualism is not, as the Coalition presents it, just another way of beating up on government.
William Davies is a research fellow at the Institute for Science Innovation and Society, University of Oxford. He is also an associate of Demos, and author of Reinventing the Firm (Demos, 2009). His blog is at www.potlatch.org.uk
This essay is a contribution to Policy Network's series on "Mutualism and social democratic policy in an age of austerity"