NICK Clegg wants to give tax breaks to John Lewis style, employee-owned companies. This is just the latest salvo in the “responsible capitalism” debate. But when a government dictates which forms of capitalism are responsible, and which ones aren’t, it overrides the individual morality of its citizens – and not for the better.
After all, while capitalism does not follow one single moral compass, because capitalism is not centrally planned, entrepreneurs’ moralities must largely be dictated by what their customers expect. It is in the entrepreneur’s interest to do so: if the corner shop owner cheats you, you will withhold your custom.
As in all walks of life, some entrepreneurs will act immorally. There are adequate methods to deal with those – the most important probably being the damage to their reputation and therefore their ability to earn money again in the future when they are caught. When private stock exchanges were first set up, they were not regulated by government – the system was entirely based on reputation. Indeed, Clegg might be interested to note that London’s stock exchange arose as a member-owned mutual society without any government incentive to do so at all.
Government meddling, by contrast, favours one-size-fits-all solutions with little if any room to adapt to feedback, so it usually brings unwanted side-effects and unforeseen consequences.
And so it will be when the government tries to interfere with the market’s view of responsibility. According to the latest state morality, employee-owned companies are the best thing since sliced bread. But has Clegg ever wondered why there are so few large ones in the UK, beyond John Lewis and the Co-operative Group, compared to shareholder-owned firms? Or why the Big Bang’s demutualisation of the LSE was such an extraordinary success?
For one, employees rarely set up a business. Setting up a company is risky. It will typically be done by people who are less risk averse than your average man in the street.
Secondly, to set up a business one needs capital. This will usually come from the entrepreneur himself, or from investors. This is why allowing individuals to accumulate capital (rather than to tax it away) is so important. Today, employees rarely have the amounts of capital in their bank account to do so. The most well-known employee-owned business, John Lewis, was of course bequeathed by its owner Spedan Lewis to his employees – not founded by them.
Thirdly, it is extremely difficult to run a commercial company jointly on a day-to-day basis. If you are a member of any group, you will realise how difficult it is to take decisions. A large company can afford professional executives – a small one can’t. Part owners would be unlikely to accept joint or democratic command at all times. Decision-taking would be an endless trial.
To be fair to Clegg, he did not actually plead for wholly employee-owned companies. He merely aspires for more employees to own shares. This in itself is laudable – a repackaging of Thatcher’s shareholder democracy. But why limit employees to buying shares in their own company? They can already buy shares on the stock exchange – which gives them a far greater choice.
Clegg now proposes both tax breaks, and a “right to request shares” to promote at least partly employee-owned companies.
Clegg is right when he believes that tax cuts will incentivise businesses. When they compare risk against potential profit, entrepreneurs will of course consider their potential tax liability. The higher the tax, the fewer new companies will be set up.
But Clegg is more specific: he only wants to give tax breaks to employee-owned companies. He wants to grant a privilege in accordance with his own political preferences. I thought liberals were opposed to privilege? I guess times change: the Whigs of yesteryear are emphatically not the LibDems of today. Instead of giving privileges, we should strive for equality under the law and give a generalised tax cut to all companies.
A second proposal which Clegg is floating is a “right to request”. Employees would be entitled to ask their employer for shares. To an entrepreneur or investor, this right would mean an additional cost and potential expropriation which they will take into account when they take the decision to invest, or not. It would be the equivalent of a hike in capital gains tax. In other words: a further deterrent to enterprise. Does Clegg want fewer companies to be set up? A bit odd, wouldn’t you say, in this climate?
Many companies do give their employees shares, as an incentive. It is their own choice and their own decision. It incentivises their employees, and increases productivity and decreases absenteeism. Companies are best placed to take this decision, as they know their circumstances best. It is a free and informed decision – as opposed to an uniform government diktat.
JP Floru is the author of What the Immigrant Saw, published by Bretwalda Books £9.99.
John Lewis was bequeathed by its owner Spedan Lewis, not founded by employees