Free Lunch (12 page)

One popular way of looking at this is through the ‘stakeholder’ model. In this, the owners of the company, the shareholders, are important but they have to take their place alongside others. Thus, there are internal stakeholders in the business – the shareholders plus the managers and workers – but there are also ‘external’ stakeholders. These include customers and suppliers, but they also include competitors. How so? One company, if it produced shoddy products, would not only risk going out of business but could also drag down the reputation of the whole industry, so it has a responsibility to its rivals. Other stakeholders include the government and the communities in which firms operate.

The stakeholder approach has received a bit of a battering in recent years, not least because it was picked up enthusiastically but then soon dropped by the Labour Party under Tony Blair. At heart, however, it seems uncontroversial. Sensible managers would always want to take into account a range of interests, both inside and outside the company. The ‘good company’ may even attract a better class of investors, concerned about the ethical context in which they make their money. Where the controversy arises is when corporate social responsibility is seen to overwhelm a company’s main objective. Critics such as David Henderson, a former top official at the Organization for Economic Co-operation and Development, argue that the best thing firms can do for society is to make profits, which in turn generate jobs and prosperity, and that anything else is an unnecessary luxury. Managers are good at making profits, or they should be, but they are not so good at charity work. It is all a question of balance.

So far we have learned some of the fundamental economic explanations about how this restaurant, and other businesses, work, and their role in the economy. When I first studied economics I used to regard this as perhaps the least realistic part of the subject, a very long way from the cut and thrust of everyday business life. Gradually, however, I have come to see how relevant much of it is. To take an example: if you were contemplating investing in a firm you would probably want to know something about the strength of its market position, and whether it is able to deter potential competitors, so barriers to entry are important. You would probably also want to know about whether its management is focused on controlling costs and maximizing revenue, all of which comes straight out of the textbook. Economics is not business studies. But economics and business are intertwined.

The balance of this book requires that we now move on. So let us turn to another hugely influential figure, who had a rather different perspective on the role of business.

8

Mulled Marx

Our next speaker is often not thought of as an economist at all but as a political philosopher, a revolutionary and hero of many a revolution, and the subject of tens of thousands of pilgrimages to his tomb in London’s Highgate cemetery. This is a strange omission, when for a time perhaps half the world was run on the principles of Marxist economics. If the late twentieth century was a victory for the economics of Adam Smith (and others), this was only after Marx had run him quite close.

Any smart restaurant might think twice about admitting Karl Marx. His spectacular beard, grey-flecked and bushy, saw him depicted in cartoons as Prometheus. To modern eyes his appearance would have been more that of a gentleman of the road. His pet name within the family was ‘Moor’, because of his wild appearance. In fact, the Marxist ‘look’ may have been based on a statue of Zeus given to him as a present, which he kept in his study. There was, however, little that was godlike about Marx, who suffered like few other mortals from carbuncles, boils (in places you would not want to know about), liver problems, insomnia, bilious attacks, migraines and respiratory complaints. A Prussian spy given the task of reporting back on Marx from Soho in London noted with disgust that ‘he very seldom washes himself, combs his hair or changes his clothes’ and that he enjoyed getting drunk often. Despite this, Marx fathered six children by his wife, Jenny von Westphalen, the daughter of a wealthy Prussian aristocrat, and another by the family maid, Helene ‘Lenchen’ Demuth. Friedrich Engels, his collaborator and benefactor, took the blame for the latter accident, claiming he was the father. Both Jenny and Lenchen are buried alongside Marx in Highgate. When Marx wrote about poverty he did so from first-hand experience. He was poor for most of his life and three of his children died in infancy. His poverty appears, however, to have been self-inflicted. He refused to take a job, even during the long periods when he suffered from writer’s block, preferring to sponge off friends and benefactors, including the long-suffering Engels.

Marx was born in 1818 in Trier, Prussia (now Germany) to parents who, to avoid legal discrimination, had just converted from Judaism to Lutheranism. He studied at the University of Bonn, having already acquired a duelling scar, and came under the influence of Hegelian philosophy. By then, however, Marx was developing his own distinctive approach, which he put into practice as a journalist and then editor of the
Rheinische Zeitung
, a liberal newspaper that was too liberal for the authorities. Marx then set off with his new wife for Paris and Brussels, where he was to co-write the
Communist Manifesto
with Engels, published in 1848. (As an aside, the house in Brussels where Marx and Engels toiled came up for sale in 2002, with the estate agents hoping a wealthy Marxist would be tempted to put in an offer.) In 1849 the revolutionary thinker came to London, where he embarked on his great work,
Das Kapital
. The first volume of
Das Kapital
, or
Capital
, was published in German in 1867 and sold slowly, although an American edition, published in 1890, quickly sold its 5,000 print-run, allegedly because the publisher marketed it as a book that explained how to accumulate capital. The final two volumes of
Capital
, edited by Engels, were not published until after Marx, penniless and heartbroken following the death of his wife, himself died in 1883. Despite this,
Capital
ranks as one of the three most important economics books, along with Smith’s
Wealth of Nations
and Keynes’s
General Theory
.

A different kind of dismal scientist

We have seen how some of the classical economists who followed Smith took a far less optimistic view of the way capitalist economies would develop. Malthus saw population growth out-stripping food supply, with disastrous consequences. Mill favoured utopian socialism to counter what modern economists would define as market failures in the distribution of income. Ricardo, while providing his famous explanation of why free trade was beneficial, also thought that landlords would be the main beneficiaries of economic growth. Workers would be trapped on subsistence wages. Marx, while borrowing the economic tools of the classical economists, including Smith, had little time for their conclusions. Malthus’s grim predictions about population, he said, rested on the assumption that the capitalist system of production would continue. Under a different system there need not be a problem. The only abstract laws of population, he said, existed for ‘plants and animals’, not humans. Mill’s utopian socialism, in the making when Marx was working on
Capital
in the reading room of the British Museum was, to Marx, both wishy-washy and wishful thinking. Marx owed his greatest economic debt to Ricardo. Both believed in the fundamental importance of distribution. If the emphasis in Smith was on the size of the economic cake, and the prospect of it growing considerably over time, Ricardo and Marx were more concerned with how it was divided. Both saw that division as leading to huge tensions. The difference was that Marx took those tensions to what he saw as their logical conclusion.

This logic, Marx’s adaptation of the Hegelian ‘dialectic’, set him apart from other economists. His criticism of them was that they proposed laws of economics as universal and permanent as the laws of physics and chemistry, without realizing that they were describing a temporary phase in economic development. Capitalism, in Marx’s view, was a mere staging post on the economic journey from feudalism to communism, its final destination. Did he have a point? While Smith has survived remarkably well through changing economic circumstances that even he could not have dreamt of, and comparative advantage is still as relevant as in Ricardo’s day, it is the case, perhaps unsurprisingly, that quite a lot of the economics of the nineteenth century and before has not travelled well. Unfortunately for Marx, that is also true of most of his analysis. Before explaining why, let me sketch out some of that analysis.

The value of labour

Marx, like many of the other economists of his day, took as his starting-point the question of value. In his view the number of worker-hours needed to produce a product determined its value. If that sounds slightly odd to a modern economic observer, in an era when we know that the cost of manufacture is only a fraction of what we pay for something in the shops, it still has its echoes today. Take your car to a garage for a repair and the quote you are given will usually consist mainly of the number of hours of labour needed to do the job. Or, on a slightly grander scale, a lawyer’s bill will usually be calculated on the basis of an hourly charge multiplied by the time he took for the work. Of course, nobody believes that the amount you pay to the garage goes straight into the pocket of the mechanic, or that the articled clerk who does the donkey work on your legal case gets anything like the vast sum of money you hand over to the firm. And this, essentially, was Marx’s point. In any price there is value, determined by a strict interpretation of the cost of the labour required, and there is ‘surplus’ value, that which the owner, financier or landlord of the business obtains as a result of the sweat of the workers.

In the previous chapter I described why businesses operate on the basis of the profit motive. Without profit, potential capitalists might as well leave their money in the bank and spend their time fox hunting or on the golf course. The lure of making more money than was available in the absence of risk provided capitalists with their spur. It provided the basis for investment, without which economic development could not occur. It also gave owners of land, the landlords, incentives to allow their green fields to be turned into factory sites. Profit and rent provided the spur for development. Logical though that looks to us today, economists at the time found it hard to challenge Marx, mainly because his analysis was within a value framework that was their own. To argue that the owners of machinery deserved a return was wrong, said Marx, because the value of that machinery – defined by him as the amount of labour needed to build it – was already taken into account. As for rewards to the owners of land, this hardly came into it. In Marx’s view, all property was theft.

While we can quibble with Marx’s scheme, it does give us a neat way of thinking about the way he and others saw the tensions inherent in capitalism. The aim of capitalists, and in this Marx lumped owners, financiers and landlords together, was to increase surplus value. If this meant employing women and children to carry out dirty and dangerous industrial jobs, so be it. If it meant employing men to work long hours in poor conditions, that was a sound strategy. The comment of a Manchester businessman to Engels, when Marx’s friend was pointing out the filth and squalor in which the working classes lived – ‘And yet there is a great deal of money made here. Good morning Sir!’ – seemed to sum up the attitude. Marx, though, was keen not to attach the blame to individual capitalists. They were creatures of their time, and of the system in which they operated, and their time was running out. Marx’s labour theory of value provided the conflict inherent in capitalism, the battle for fair shares and the inevitability of exploitation. Marx also provided a route map to capitalism’s collapse.

Capitalist crisis

On the face of it, Marx’s analysis, even if it provided an accurate description of worker exploitation – all too evident at the time in the slums of Victorian England – and the abuse and ill treatment of child workers, did not necessarily explain why this process should come to an end. The capitalism described by Marx may have been a kind of industrial feudalism but why, as long as bosses could keep workers under the cosh, should it be doomed to failure? The answer, as he saw it, was that there was a dynamic process at work. Capitalists were not content to rest on their laurels, living off their profits, or ‘surplus’ value. Instead, they were driven by a need and by the pressures of competition from others to move things forward, by investing this surplus in yet more machinery. Marx was quite poetic about this. He wrote: ‘Accumulate, accumulate! That is Moses and the prophets. Therefore save, save, i.e. reconvert the greatest possible portion of surplus value or surplus-product into capital! Accumulation for accumulation’s sake, production for production’s sake.’

This drive to accumulate capital, or as we would describe it, invest, had three important consequences. The first was that some workers would be displaced by machinery. In modern terminology, production changed from being labour-intensive to being capital-intensive, throwing workers in those pre-welfare state days on to the streets. This, the creation of a ‘reserve army’ of the unemployed was quite important in terms of worker-exploitation. As long as there were people out there willing to take a job just to eat, wages could be kept very low. The second consequence was that accumulation would result in a ‘survival of the fittest’, as weaker firms fell by the wayside and dominance by a few large ones became the norm. Evolution, it seemed, applied as much to capitalist economies as to the natural world. (Marx sent Charles Darwin a copy of the first volume of
Capital
, although he did not receive a response). The third and most interesting consequence, however, was that the accumulation process itself created problems for the very capitalists instituting it. Marx identified what today would be described as over-investment. Driven by the desire to accumulate and to maximize their profit, capitalists invested more than was necessary. This would drive down prices because other capitalists, with their extra investment and production, would have to compete. The process would be brutal, with small firms being driven out of business by bigger ones. It would also, in Marx’s view, be part of a never-ending cycle. Capitalists, it seemed, would not learn from their mistakes. Capitalism was doomed to a declining rate of profit, which would add to the pressure on capitalists to exploit workers. It would also impose instability on the economy, as waves of accumulation – investment – were followed by retrenchment and reductions in jobs and wages.

In the Marxist scheme there were two contradictions inherent to capitalism. The first was that downtrodden workers, earning only subsistence wages, would not provide the market, the demand, for the ever-increasing amount of goods produced by the factories of the capitalists. Marx constructed an elaborate explanation of how the system could remain in balance by producing larger and larger quantities of luxury goods which the capitalists would sell to each other, but his clear implication was that this was unsustainable. Any economist would agree with him. Mass production requires mass consumption. The more fundamental contradiction lay with the workers themselves. Brought together in factories, often having moved to industrial towns and cities from the country, would they be prepared to accept their exploited plight indefinitely? Marx clearly thought not. He wrote:

Along with the constantly diminishing number of magnates of capital, who usurp and monopolise all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working class, a class always increasing in numbers, and disciplined, united, organised by the very mechanism of the process of capitalist production itself.

The capitalists’ own factories would become hotbeds of discontent, revolt and, ultimately, socialist revolution.

Workers of the world …

Marx’s tomb carries the slogan ‘Workers of all lands unite’. That, or the more usual ‘workers of the world unite’, provided his rallying call. Out of Marx’s
Capital
came a view of the capitalist system as not only inherently unstable and crisis-ridden but also fundamentally unfair. His labour theory of value demonstrated that capitalists were parasites on the body economic, getting fat on the surplus value created by their workers. The answer was for workers to control ‘the means of production, distribution and exchange’, simultaneously eliminating this surplus value (as well as the capitalists to whom it accrued) and enriching the lives of ordinary workers. Socialist parties, as well as communists, took this up. Until Tony Blair successfully abolished it soon after becoming the leader of the Labour Party in 1994, Clause Four of the party’s constitution said: