To most of us who are not economists or in government, it is regarded as common sense that we need manufacturing and other producing businesses to pay for public services.
The financial sector, which includes insurance, pensions, accountancy and retail banking is a valuable part of the UK economy.
However, there are serious concerns that the casino banking sector is extracting rather than producing wealth, and that it is harming rather than benefiting the economy.
One of the concerns relates to the huge level of merger and acquisition (M&A) activity, which means that UK companies can easily be taken over by foreign companies. There is a theory that it does not matter who owns UK companies, only how they are run. This is wrong. Inevitably, and this may take decades, manufacturing is moved abroad.
The other, just as serious, the problem with the open market in UK companies is that the continual threat of hostile takeovers deters long-term investment.
The combination of these two factors has meant that almost every sector of manufacturing has declined to almost nothing, or disappeared completely. This includes agricultural equipment, ceramics, electrical engineering, forklift trucks, machine tools, pneumatics, shipbuilding, textiles, toys, white goods and so on – the list is endless.
While it is wrong to suggest that Mrs Thatcher destroyed our industries in the 1980s, her government did establish the system which has continued to devastate our manufacturing sector at a steady rate ever since.
Until about 1980 the City of London operated in a “gentlemanly” fashion, and hostile takeovers were frowned upon. However, the breakdown of that system revealed that it was possible to extract large amounts of wealth, principally by using hostile takeovers to asset-strip public companies which were operating for the long-term and had built up large reserves of capital.
In the USA they recognised this problem and introduced anti-takeover laws, which in particular allow the use of “poison pill” defences.
However, in the UK the continuous threat of hostile takeovers compelled public companies to consider the immediate interests of shareholders above those of the company and its employees. Capital assets were sold, long-term investments including research and development were cut, while at the same time dividends were increased.
UK “growth” has for decades been an illusion. It has sold its companies and assets, and created new money, to finance unsustainable consumption.
It has now become clear that without manufacturing, and other producing companies, we are unable to afford the level of public services to which we have become accustomed.
We are now in the bizarre situation where we need to return to the style of corporate takeovers (and of skills training) that we had 50 years ago. We urgently need a law which makes takeovers more difficult.
* John Hann is a party member in Winchester
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14 Comments
I agree with much of what John says. This is very apt at the moment as Murdoch is again trying to take over Sky (depressingly this time (without Sky News) he might succeed)
Thank you for an interesting and important article.
According to “The Manufacturer” [ https://www.themanufacturer.com/uk-manufacturing-statistics/%5D manufacturing contributed 25% to UK GDP in the 1970s. It now contributes 11% of GVA. The UK is currently the eighth largest manufacturing nation in the World and is likely to break into the top 5 by 2021.
Our increased emphasis on the FIRE [Finance, Insurance, Real Estate] sector of commercial activity is harmful and has coincided with policies harmful to public services. Perhaps this is a causal factor as it may have reduced the power of the many who used to work in manufacturing. Perhaps that was the intention.
The power of the Financial Industry is currently disproportionate and we would be well advised to reduce it by greater emphasis on non FIRE activities and an awareness that markets need state regulation as does motoring, fire regulations etc.
I agree with this. We have to secure the economic basis to support the country or public spending will just continue to rack up as debt.
You can make a country too open to global money. Global money entering London without rent controls on properties has made UK rents and housing costs too expensive for the domestic population at regular wage levels. Other western European countries have prevented much of this by law.
UK companies are too open to take over by foreign firms and are ripe for asset stripping for short termism, which is happening to GKN now, happened to Rover and to Cadburys to a point.
Germany has golden shares in major companies to prevent them being sold off, assets sold off, the jobs going abroad, the brands being trashed etc. It’s top 100 countries have barely changed in 40 years, except that those companies keep growing and now make their manufacturing sector 5 times that of the UK’s with many premium original brands and an 8% German balance of payments surplus.
By contrast, the UK has a balance of payments deficit of typically about 6% and only around 10% of the economy is in manufacturing, presently stagnant and of that much is owned and controlled from overseas. What we have is reliant on long supply chains across borders which cannot usually be replaced domestically. Hence brexit is extremely bad news for manufacturing, as Patrick Minford would agree.
The UK top 100 companies has totally changed in 40 years, but this has not allowed the UK economy or public finances to prosper.
@ Joe Hann,
“To most of us who are not economists or in government, it is regarded as common sense that we need manufacturing and other producing businesses to pay for public services.”
A physicist, I was taught to beware of “common sense”. Most of 20th century physics doesn’t make much (common) sense at all as anyone who has studied Quantum Mechanics will tell you. Yet it gives the right answer. Schrodinger’s cat can’t be both alive and dead at the same time, or can it? Economics isn’t quite as difficult as that but it does need a little lateral thinking at the macroeconomic level. Or (common) senses are more attuned to thinking at the microeconomic level.
At one time 80% of human effort went into growing enough food to keep us all alive. The only public sector would be the system of Government set up by our monarchs which would take nearly all the other 20%. This would allow our KIngs to cross over to France with their armies every now and again and try to reconquer lost territories or keep a better hold on what they’d still hung on to.
The growing of the food was primarily to keep us alive not to finance the public sector. Just as now we build cars because we need cars. We build jet engines because we need them too. And its the same story with running banks, building houses, besides, of course, growing enough food etc which now only takes 2% or so of the workforce. We do all these things because that is what we need to do. Not to finance the public sector. The better we can do all these things and using fewer people to do it the more people we have available to be teachers, doctors, nurses etc.
They are contributing to society too. Our economy depends on having an educated workforce. So teachers, who are doing the educating, are just as productive as anyone else in our society. Anyone who is alive and well now, who would otherwise have been dead but for the NHS, must surely think NHS staff are very productive too!
Two additional facts about the benefits of manufacturing and the cost of Brexit: Only in manufacturing can low-skill workers achieve a good income, because combining their work with capital can make them very productive, but Brexit will end UK manufacturing. AI will eventually eliminate these jobs, but the value added remains. After labor-cost become irrelevant for factory-locations, the UK would be back in the race, but it will be too late. The winning locations will be picked now based on know-how (AI will be phased into worldclass-locations first before greenfield facilities will become widespread), logistics and energy-cost. Again, Brexit-UK is out.
I don’t know about the City being ‘gentlemanly’ before the 1980s. I seem to remember Jim Slater as an asset-stripper in the early 1970s and wasn’t ‘Tiny’ Rowland described as “the unacceptable face of capitalism” by PM Ted Heath around the same time.
It is an important area of policy focus, John.
The share of wages in the UK economy has declined from 65% to 53% in recent decades as we have moved towards a service based economy. A large proportion of that wage income is spent on rent, interest and mortgage payments. An ever increasing element of consumption spending is financed with personal household debt instead of disposable household income.
The acquisition of UK companies and property by overseas investors is a corollary of a large trade deficit in goods. The cost of decades of excess imports over exports is the accumulation of domestic assets by overseas providers of consumer goods, that in turn exacerbates leakages from the domestic economy in the form of dividends, interest and rents that are repatriated overseas.
Our ruined currency makes property and some co’s very attractive to foreigners.
One effect of moving manufacturing to “third world” countries is that the workers in those countries are doing very well – as time goes by, there is a transfer of wealth from our workers to theirs and what were cheap goods will become increasingly expensive here over time. Net earnings in this country, after tax and property rental/mortgage, already have lower purchasing power than in many developing countries and arguably poorer quality in many areas.
Where does this all end up? Exponential technological and genetic based medicine changes hold out some hope but suspect the failure of successive govn’s to recognize the need to reset state spending downwards and the huge debt levels will at some point implode the economy, perhaps set off by a bad Brexit and/or a long overdue Asian correction.
I’m sorry but I don’t agree with much of this article. For a start, what do you mean by “huge” levels of M&A activity? Can you give me a number? And how many of those are hostile?
While there are of course exceptions, foreign investment is usually a good thing, and as a liberal party as a matter of principle we should not automatically be against it.
Take our automotive sector. After decades of mismanagement under UK ownership, where it inefficiently produced crap cars that hardly anyone wanted, it is now thriving under foreign ownership. Look at Jaguar Land Rover under Indian ownership, or Mini under German. They are providing lots of high quality automotive engineering jobs, and their cars are a great export success story.
Bad management is bad management, regardless of what passport the manager carries. It would be nonsense to try to force basic manual jobs to be retained in this country when our unemployment level is under 5%. The result would be to make our industry uncompetitive, and result in those jobs completely disappearing. Or are you going to then propose state subsidies and protectionism?
We are very good at some things in this country (and not so good at others). Sometimes we are so good that foreigners want to buy in to get a piece of the action (like ARM recently). Despite a few high profile exceptions, foreign investors don’t usually want to asset-strip, destroy or move those success stories offshore.
We should welcome and even celebrate that, because the money they spend buying in becomes available to invest in something else.
In the 1990’s we were told that globalisation was “inevitable”, we just had to compete harder – keep up or get left behind; critics of the process characatured as wanting to stop the world turning while they got off. Some globo-sceptics foresaw a dystopian vision where markets were out of control and governments as a result unable to provide basic services; inequality growing and law and order breaking down.
Whilst some of this is starting to happen, there is a big pushback against globalisation from far right and far left. It seems we either accept globalisation warts and all, or scrap the entire project.
There should be another way, the kind of managed capitalism which worked well until the 1970’s when free market fundamentalists wrecked it. A Keynesian-style liberal capitalism is the only way to ensure order and social justice. We need to assert this loudly before the extremists take over.
“There should be another way, the kind of managed capitalism which worked well until the 1970’s when free market fundamentalists wrecked it. ”
Not sure of the nature of managed capitalism pre 1980s? Huge govn handouts to successful companies like GEC/Marconi in the form of turnover plus ten percent profit for govn contracts? Auto and motorcycle industry producing products no-one wanted to buy. Hopeless inefficient state companies which were later privatized and forced into efficiency by having their pricing capped (unlike now). Three day weeks and power cuts. Not saying now is perfect but really do not see anything good about the seventies except the much lower population density in the UK.
“A Keynesian-style liberal capitalism is the only way to ensure order and social justice. We need to assert this loudly before the extremists take over.”
Bit late for that, successive govn have built up so much debt there isn’t room for any more intervention, not that it would do any good – the govn needs a very light touch where productive industries are concerned and the further they are away from the day to day running the better. Turning the NHS into the best in the world, solving the social housing crisis and getting the UK population back to sane levels is where the govn needs to concentrate its efforts within the context of falling govn real spending as Brexit kicks in.
Valid points from Nick Baird. Foreign Direct Investment is not of itself a bad thing. The issue is that trade and investment needs to be reasonably balanced if it is not to have a distorting impact on the domestic economy.
The kind of managed capitalism which worked well until the 1970’s was the Bretton Woods system set-up by Keynes and the Americans after the war, When the UK fell behind trading partners in competitiveness the UK devalued to restore its balance of trade, as it did in 1967. The Bretton Woods system and Keynesian managed capitalism that relies on capital controls fell apart in 1971 when Nixon was forced to take the US off the gold standard.
In the UK, Heath, Wilson and Callaghan all tried going for growth with Keynesian monetary and fiscal stimulus packages that relied in Incomes policy to restrain inflation. When they could not maintain an incomes policy, stagflation (inflation and rising unemployment) took hold. Stagflation was not theoretically possible according to Keynesian economic models and the theories had to be rethought.
Mainstream economics today (as practised in the west) is a synthesis of neo-classical micro-economic theory and Keynesian macroeconomics. Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand.
The synthesis was developed by John Hicks and Maurice Allais and formulated with the IS/LM model (investment saving–liquidity preference money supply). This mathematical modelling approach to economics was popularised by leading economists like Samuelson and is the foundation of economics teaching in Universities.
There are, however a significant variety of different schools of thought. Some critics have argued that potentially promising approaches have been excluded in major mainstream publications by a focus on problems amenable to formal modelling.
Chartalists, who are generally considered part of the Post-Keynesian school of thought, criticise mainstream theory as failing to describe the actual mechanics of modern fiat monetary economies. Chartalism rejects critical mainstream theories such as the loanable funds market, the money multiplier, and the utility of fiscal austerity.
Vince is offering us a new form of capitalism .Would agree with author of this piece hostile takeover that stifles innovation and keeps products from the market may need to be outlawed .But we should continue to promote new forms of capitalism like Employee and community ownership .Can those large vacant ex retail premises be regenerated into start up units for modern businesses making bespoke products ?
Can that old garden centre thats gone bust become a community farm and grow your own business .Dont just tell me what the problem is whats your solution.
An active industrial policy for now would make UK science, R&D and companies develop and own the new technology of robotics and advanced computing, to sell it to the world and to apply it to increase the UK’s low productivity, grow the economy and re-shore work lost to Asia.
These labour saving technologies applied here would even up cost competitiveness with Asia, while cutting shipping costs and delays, reducing batch sizes and making production much more responsive to demand than OEM production in the likes of China, as well as improving quality and communications and lessening the stealing of designs and bespoke technologies. These severely hamper the attractiveness of Asian manufacturing.
Investments would have to be made into whole of life training with firms needs in mind and improving education levels. Wealth would have to be better distributed and a universal citizens income may become essential, so needs to be planned for. Infrastructure also needs to be greatly improved.
If the LibDems (or someone) do not offer this approach in the UK, others, in particular Germany will steal a march and a historic opportunity will be lost to the UK. Fiddling around with 1p on Income tax won’t inspire and won’t deliver much.