Cooking the Books 2 – Prisoners of the market

‘Mounting costs are damaging business investment and undermine the government’s attempts to raise living standards, the CBI has warned’, wrote the Times (9 September), reporting on a document prepared by the employers’ association for the Budget. The CBI’s chief executive, Rain Newton-Smith, argued that:

‘When firms are forced to absorb higher taxes, energy bills, and regulatory costs, the consequences are weaker investment, job losses and less scope to raise wages’.

Employers are always complaining of increased costs due to taxes and stricter regulation, but there is more than a grain of truth in their argument.

‘Absorb’ is a delicate way of saying that, as they can’t pass on the extra costs by raising their prices, their profits have to take a hit. So what Newton-Smith is really saying is: ‘when firms make lower profits due to higher taxes …’ Reduced profits could indeed lead to ‘weaker investment’ (but they could also mean lower dividends for shareholders). Insofar as they do, that does weaken investment. So there is less economic growth. Which, as Newton-Smith pointed out, would undermine the government’s strategy of relying on growth to bring it a bigger tax revenue and so allow it to improve people’s living standard by spending more on education, health, housing and the like.

Irrespective of whether on this occasion the employers are bluffing in order to extract concessions from the government, there is the question of the wider relationship between government and private employers.  The American political scientist, Charles Lindblom, wrote an article in 1982 called ‘The Market as Prison’ in which he argued that, in an economy in which production was in the hands of profit-seeking private enterprises, government decisions were tied to the success of these enterprises. Not only that. If the government didn’t respect this — if it didn’t allow enterprises to make the profits they expected — it would be automatically ‘punished’ by the operation of the market.

His argument went like this: If a government raises taxes too much or imposes too many regulations, companies cut back on investment. This leads to job losses and financial crises. Voters blame the government for this, not the business owners. The government loses the next election. The politicians responsible are punished.

As Lindblom remarked in an earlier book:

‘To understand the peculiar character of politics in market-oriented systems requires, however, no conspiracy theory of politics, no theory of common social origins uniting government and business officials, no crude allegation of a power elite established by clandestine forces. Business simply needs inducements, hence a privileged position in government and politics, if it is to do its job’ (Politics and Markets, p.175).

The market works, he suggested, like an invisible prison in that it limits how far governments can go with social reforms that threaten profits that are business’s ‘inducement’. Anything radical is ruled out. It makes politicians afraid to challenge the ‘privileged position’ of the private sector. They tone down their proposals so as not to scare the market.

A recent example is Burnham’s choice not to appoint Miliband as Chancellor because business perceived him as somehow anti-business. Other examples are Starmer and Reeves’s pre-election statements about Labour being ‘the party of business’ and Burnham’s that his ‘socialism’ is of the ‘business-friendly’ variety.

Politicians in office must help business in its pursuit of profits and certainly not do anything to hamper it. They must serve the interest of business owners.

Next article: Proper Gander – Keeping grounded about Boeing ➤