As part of his promise to introduce a manifesto “more radical than the last”, John McDonnell has unveiled a series of sweeping economic policies, all in step with his socialist philosophy.
One of these pushes to “democratize” the economy includes the introduction of “inclusive ownership funds” for firms with more than 250 employees. The fund would pay workers up to £500 per year in additional income, with the remainder sent to the Treasury for public spending. These funds would be managed and held collectively – akin to the co-operative model championed by John Lewis.
While at first glance this move may seem like a novel way to raise public funds and involve workers in business, it is, in fact, a two-pronged assault against enterprise. The policy effectively translates to the state taking ownership of a slice of all businesses with more than 250 employees, and it aligns corporate governance with state economic policy.
McDonnell justifies this initiative by claiming that the UK ought to be more like our continental counterparts such as Germany, where worker representation on company boards is widespread. However, to replicate this model in Britain would be a grave mistake.
Whereas Germany has a coordinated market economy, with employee associations and collective bargaining agreements, the UK relies more on market mechanisms. These include relatively liberal rules regarding hostile takeovers of firms and intellectual property. Taking this kind of practice from a coordinated market economy and merging it with a liberal market like the UK may lead to very different effects.
Besides this, having fund representatives sit on boards is a clear example of preventing businesses from making independent decisions. No longer would companies simply have to ensure that their shareholders were satisfied, they would have to bear the interests of the government into account. This move is tantamount to ensuring that the government of the day’s industrial strategy is as wide-reaching and pervasive as possible.
Furthermore, partially nationalising industry to pay into these “funds” won’t end up boosting people’s paychecks. Instead, it acts as an effective cash grab by the Treasury. The dividend promised to workers will most likely fluctuate based on the company’s performance on the stock market – and it would be hard to properly calculate what these dividends would be in private companies.
In practice, the lion’s share of the slice of wealth taken by the government would be held by the government. The funds accrued may be spent responsibly on public services – however, it is much more likely that they would be squandered on useless projects and wasteful departments. Meanwhile, businesses would have fewer assets to sell to prospective investors – meaning less growth.
Bearing all this in mind, is this really the kind of economic policy we want for post-Brexit Britain? Leaving the single market means that it is now in our interest to offer tax and regulatory incentives to businesses so that we can maintain our competitive advantage. We need to demonstrate that we are open for business – and stringent constraints on the ability of businesses to thrive does not send that message.
McDonnell’s technocratic socialism isn’t the answer to our economic woes. Rather than trying to nationalise business and dictate corporate governance, the government should strive to create an accommodating atmosphere for free enterprise – an atmosphere which will satisfy shareholders and employees alike.