The social market – a big Lib Dem idea

What people often struggle with when it comes to Lib Dem economics is not the detail of our specific policies – which voters frequently don’t have the time to dig into, in any case – but our economic vision. Labour has a Big Idea, nationalisation, which dominates its economic agenda. The focus on Corbyn’s renationalisation plans was out of proportion to their potential impact, because it fits with how people see Labour’s economics, putting more of the economy under state control in the hope that permanently benevolent governments will somehow manage to run it all for the public good. The Tories likewise have their Big Idea in privatisation, moving more and more of the economy toward shareholder-driven corporations, deregulation, and the profit motive, in the apparent belief that this will placate the magic efficiency fairies. What’s our Big Idea?

The answer, in my view, is the social market, the core of which is that businesses should be owned and run by and for people across society, as independent bodies working to do good things in their own way. Taken to its conclusions it’s a truly radical vision, requiring the transformation of how we hold and invest capital to make cooperative, mutual, and social businesses the new normal. Even taken over the short course of a parliament, it’s a vision that can provide deliverable goals, improving working conditions and pay as we democratise workplaces and help new social businesses enter the market.

The social market is far from the misconception of Lib Dem economics as blandly toeing the middle line between the two other parties. It’s what happens when we logically put our principles into practice, decentralising economic power directly to people in a way that’s sustainable, democratic, and socially just. So how do we get there?

Firstly, we have to make it clear what we’re leaving behind, and secondly, we have to put policies in place that make it clear that what are now considered ‘alternative’ business styles should be standard norms in a liberal future, and ones that we’re prepared to act to help people build and grow. That’s why at Brighton Conference I’m bringing forward Amendment One to F28, the motion on business policy.

Amendment One endorses the belief that businesses that only take into account shareholder profits are fundamentally an outdated model for the twenty-first century and one we need to scrap, and explicitly advocates a social market economy that puts stakeholders, not shareholders, at the heart of how business operates and how profits are allocated. This gives a fundamental backbone of principle that ties together many of the motion’s other good policy points – ending the era of shareholder corporatism and distributing economic power more widely towards a social market is a clear goal that can unify Lib Dem business policy for the future.

The amendment would also commit Liberal Democrats to campaigning for better startup support for cooperative, social, and mutual enterprises. Inevitably given their different ownership structure, such businesses offer fewer possibilities for shareholder investment – a social market future is one where startups are likely to be made primarily on a loan-style basis rather than permanently purchasing parts of a businesses, and we need to start reforming investment systems to allow that to happen. In conjunction with measures already in the motion to help workforces start to buy up parts of their businesses, this measure will help start moving us towards a much more diverse, workforce-driven economic model.

It is sometimes alleged that liberals are in some way agnostic on economics. This far from true: we are a values-driven movement, and our economic ideas, like our social policies, stem from applying those values to the world we live in. The social market is the way we build those ideas into a decentralised 21st century economy – and tomorrow, conference will have the chance to set us firmly on the course towards one.

* James Baillie is a member and activist from Breckland and a former chair of the Lib Dems' Radical Association. He is currently a doctoral student at the University of Vienna, where he works on digital studies of medieval Georgia. He blogs about politics at thoughtsofprogress.wordpress.com.

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14 Comments

  • Tony Greaves 14th Sep '18 - 12:08pm

    I’m not sure this is what David Owen and his friends meant by the social market…

  • “Inevitably given their different ownership structure, such businesses offer fewer possibilities for shareholder investment – a social market future is one where startups are likely to be made primarily on a loan-style basis rather than permanently purchasing parts of a businesses, and we need to start reforming investment systems to allow that to happen. In conjunction with measures already in the motion to help workforces start to buy up parts of their businesses, this measure will help start moving us towards a much more diverse, workforce-driven economic model.”

    Unsustainable. How would capital intensive industries survive? Would the state be directly choosing which companies to invest in? The big benefit of buying and selling shares is that it’s done at the level of the individual. The returns on good investments, and more importantly, the damages of bad investments are all individualised. Shifting this to the state would make the damages of bad investments exposed to everyone.

    Plus, Labour’s McDonnell is far ahead of all of us in shaping the policies for a social market economy. I don’t believe it’d work (I think the furthest you could go is the German model and they haven’t (and probably can’t) eliminate shareholders from the economy) but McDonnell does and he’s years ahead.

    If you want to increase labour’s share of power then actually create a detailed plan on rolling out a Negative Income Tax plan or a UBI.

  • James,

    it is a concept that has its roots in the cooperative movement and friendly societies and was promoted as an alternative to nationalisation in the post-war years. The Mondragon corporation is an oft quoted example and in the UK many point to the John Lewis Partnership. Gordon Brown introduced tax incentives for firms adopting profit-sharing, employee share schemes and employee benefit trusts, but the latter have been more favoured as a basis for tax avoidance schemes rather than a revolution in stakeholder participation.

    One of the issues with employee ownership structures is that where a significant element of wages is based on profit-sharing, when profits fall substantially (as is the case with John Lewis) then wages have to be cut in a time of recession.

    The factors of production to which all income flows are often defined a Land (all naturally occurring resources), labour or human capital, capital (man-made machines, tools and structures) and entrepreneurs.

    Missing from these classical factors is the state, that provides much of the physical infrastructure, institutional architecture and public services without which the modern economy could not function.

    All the income in the economy flow to one of the above factors. Land receives rents, labour receives wages, capital receives interest and entrepreneurship receives profits

    Income needs to flow to the state from the factors of production to enable it to provide pubic services. That income should come in the first instance from naturally occurring resources (Land) and secondly in proportion to the relative share of income derived from wages, interest and profits.

    This is the economic foundation for Land Value Taxation as the basis of economic reform. It provides all citizens with a share in the natural resources of the country (including such resources as the electro-magnetic spectrum) and places the burden of any additional taxation required proportionally against national income derived from the factors of production.

  • “advocates a social market economy that puts stakeholders, not shareholders, at the heart of how business operates and how profits are allocated”

    Sigh. I assume this was written with the small minority of big, nasty corporations in mind, rather than the majority of British companies which are owner-managed SMEs.

    A company belongs to it’s shareholders. They own it. At some point they will have taken a risk by investing in that company, and in exchange for that are entitled to do whatever they like with the profits. Who are these stakeholders they are supposed to share with? What did they risk in exchange for a piece of the action?

    If you sold your house for a profit, would you share that profit with your neighbours?

    There are many problems within British corporate culture, such as short-termism and perverse incentives within the system, but investors earning a return on their investment is not one of them. Without returns there will be no investors, and there will never be enough loans to go around for start-ups and risky ventures to compensate.

  • Neil Sandison 14th Sep '18 - 1:09pm

    Tony Greaves The Owenites had there own version far removed from James proposal or main stream social democracy but the principle of a social market economy based around the common good and that enterprise and innovation regardless of which sector it comes from can add value and improve society and that reward for effort is not a bad thing but should be shared fairly by all those who contribute towards it . Work as we know it will change rapidly in a AI led economy we will need new models of employment and means of valuing the human resource .The social market economy is one of the right stepping stones towards that goal.

  • Lorenzo Cherin 14th Sep '18 - 1:52pm

    Much thanks to James.

    Too many are mixing and rehashing, some attempting at improving.

    Social market is not my description of what James advocates. It is social enterprise and cooperative industry.

    This is something both social Liberals and social democrats advocate. John Stuart Mill was from both classical and social liberal view, an early supporter.

    Jo Grimond developed this as policy advocation for a fairer society and economy.

    It can only ever be appropriate for some industries, it is good for large concerns we need to more or less be certain last, such as production of essential goods or services, or small enterprises where the capital is invested by the collective starting it, or some form of enterprise loan or grant they’ve secured.

    Nick Baird is right and wrong, practically and morally.

    You cannot dictate to shareholder owned companies because of what he says.

    But you can persuade them and change the face of the economic social dynamic.

    It should be the case that labour is seen as the partner of capital, increasingly as labourforce effort is managerial and creative, powerful and innovative. They should and can share in profits. It’s not all about risk, but all about effort.

    Neil Sanderson is correct on the social market economy, David Owen, our party and Liberal International all adhere to this. It means an economy that is responsible, a society likewise, where effort and outcome ,is in tandem, where the market is utilised in spheres it can benefit all. Owen is to the left of that , he not a fan of it in health policy, I think it has never been tried there, instead we have top down salami sliced private monopoly contracts.

  • Lorenzo Cherin 14th Sep '18 - 2:00pm

    Neil Sandison, name I got wrong, would be good to hear from you on this, are you an ex SDP activist, think the radicalism and innovation in a lot of their policy is not realised or understood.

  • James Baillie 14th Sep '18 - 4:53pm

    Some interesting comments here – and some predictable ones and some well known but nonetheless worthy history lessons (most of which I don’t have time to respond to now, but as a historian myself they’re always interesting to read!)

    Tony Greaves is of course right that what I am presenting is a concept of the social market which differs in various ways from some previous usage. I nonetheless think it’s the best term for what I’m talking about, and that’s partly why I’m putting out this article to bring forward and clarify that definition.

    I don’t understand Zak’s comment, which seems to be predicated on assuming a statism entirely lacking from my original post. I’m not suggesting that people shouldn’t be able to invest money and get a fair return for the risk, and I’m certainly not suggesting the state should dictate capital flows: I’m suggesting that people shouldn’t necessarily get a *permanent and unlimited* return on investment, which is the principle on which shareholding is predicated and which often ultimately leads away from investment in the proper sense and towards rentierism. I’m not suggesting, either, that one should dictate terms to current businesses – I’m saying there are different ways of doing things to a shareholder-only model, and that many of those provide more social good than the simplistic ways in which businesses are often constituted today, such that we should write Liberal Democrat policies to support a more diversely constituted business system.

  • “I’m suggesting that people shouldn’t necessarily get a *permanent and unlimited* return on investment, which is the principle on which shareholding is predicated”

    I’m sorry James, but that just doesn’t make sense to me. Are you saying that any money you put into your pension fund in your thirties should not be earning you any return by the time you reach your forties? Or that bank accounts should only earn interest during the first year?

    Many of us are shareholders, even if only indirectly via pension funds or ISAs. Who is going to vote for a smaller pension when they retire?

    We need to get much better at supporting entrepreneurs and start-ups, but the number of ordinary people who are willing to take a risk and gamble their life savings or remortgage their house to start a business is actually very small. Unless you are willing to set up and fund a government-backed bank that is risk-hungry and doesn’t ask for collateral, and are consequently willing to write off the inevitable failures at taxpayers expense, then equity investment must remain a large part of the investment jigsaw. Any policy that hurts the return on that investment will kill that source of funding.

  • Innocent Bystander 14th Sep '18 - 6:52pm

    I’m afraid these are the bizarre convolutions you get into when you start from the point of hating the elite or anyone who has succeeded in life.
    What do the stakeholders do when the genuine shareholders refuse to invest their money?
    There is nothing in the way of a “workforce driven economic” model now and it succeeding. What are they short of?
    Oh! I know, new ideas, money, initiative, enterprise and all that other stuff.

  • If there was one country that could make this work it would have been Russia as it privatised much of its state owned businesses in the 1990s.
    The government of Russia deliberately set a goal to sell its assets to the Russian public. Privatization was carried out with the primary goal being to transform the formerly state-owned enterprises into profit-seeking businesses, which would not be dependent on government subsidies for their survival. To distribute property quickly and to win over popular support, the reformers decided to rely mostly on the mechanism of free voucher privatization, which was earlier implemented in Czechoslovakia. The Russian government believed that the open sale of state-owned assets, as opposed to the voucher program, would have likely resulted in the further concentration of ownership among the Russian mafia and the nomenklatura, which they sought to avoid. Nevertheless, contrary to the government’s expectations, insiders managed to acquire control over most of the assets, which remained largely dependent on government support for years to come. From 1992 to 1994, ownership of 15,000 firms was transferred from state control via the voucher program.By the end of the vouchers program, a great deal of assets did fall into private ownership and worked to provide some basis for market competition with roughly 98 percent of the population participated. The vouchers, each corresponding to a share in the national wealth, were distributed equally among the population, including minors. They could be exchanged for shares in the enterprises to be privatized. Most people were quick to sell their vouchers for money, unprepared or unwilling to invest.
    Most vouchers—and, hence, most shares—wound up being acquired by the management of the enterprises. Although Russia’s initial privatization legislation attracted widespread popular support given its promise to distribute the national wealth among the general public and ordinary employees of the privatized enterprises, eventually the public felt deceived. Another case of the best laid plans of mice and men.

  • Neil Sandison 15th Sep '18 - 10:23am

    I think what James and i recognise is that business has changed since the financial crisis but could easily drift back to bad old habits as memory dims and whilst the social market economy first mooted in the 1980s was not feasible then because of our reliance on traditional banking and financial institutions we have moved on since then with crowd funding and the growth of self employment .There is a greater sense of business responsibility for your product, greater awareness of environmental and community impacts, The customer is no longer a passive bystander so now is the right time to redefine what is work and how it contributes to the social fabric of our society .The tories just replaced public monopolies with private monopolies deregulation failed because it was not underpinned by corporate responsibility and incredible weak regulators .Labour just wants to turn the clock back to when we owned car , van and rail companies and minister wasted multiple millions of pounds by operating the minister knows best governance ,propping up products no one wanted to buy.social enterprise ,mutual ownership ,customers and employees owning their water,power or waste company and receiving a dividend when it returns a profit on its productivity or cuts waste or pollution or can demonstrate it has been socially responsible .We need to be brave enough to look at new models and move with the times .

  • Kinda disagree with loan-style financing for start-ups. Start-ups normally incur losses during the first 5-7 years of their lives, which means they cannot afford to pay interest during those years. Venture capitalists exist for a reason.

    Nick Baird – However, a KfW-style national bank can be created to facilitate financing for SME manufacturing firms. It is the fact that these firms cannot access to equity financing due to extensive information disclosure requirements. Meanwhile, it seems that British banks tend to lend money to consumer and mortgage loans, whereas VC investors seem to prefer fancy tech start-ups over manufacturers.

    Nick Baird – “Who are these stakeholders they are supposed to share with? What did they risk in exchange for a piece of the action?” – the German/Japan stakeholder approach is supposed to encourage greater involvement from other parties of a company such as management, creditors, employees or even the government (the government can be a big player in Japan regarding corporate governance). This idea is to prevent short-termism. You know, parties like employees and creditors tend to have far less interest in short-termist decisions that can harm the company’s long-term survival. For example, creditors would certainly deny extravagant dividend payment if the firm’s profitability has problems. In Germany and Japan, creditors have bigger role because bank loans constitute bigger share of corporate financing.
    But, I have to disagree with James about eliminating shareholder interest since companies are owned by shareholders after all, and they need sufficient required return to invest (and their returns depend on the company’s profitability). They cannot have fixed-term returns since they are permanent owners until they choose to withdraw.

    James seem to miss a core tenet of the social market model. The social market economic model is the one that aims to maintain free competition via state interventions such as social safety net and anti-trust legislations a.k.a balancing laissez-faire and socialism. Another core is to harmonize shareholder-employee-management relations, but not things like “eliminating shareholder interest” like James seems to propose. You cannot have loan-based financed start-ups as new firms cannot afford to pay interest.

  • Peter Hirst 20th Sep '18 - 1:49pm

    This fits in well with our theme of involving people, empowering them and enhancing our democracy.

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