Success versus excess

We need to talk about profit, believes Mary Wimbury

Profit: good or bad? Sometimes it seems that as a party we do not know. Too often I hear people say disparagingly ‘oh, they are only in it for the profit’ or dismissively ‘they are in the for-profit sector’. It is as though profit has become a dirty word. And yet, no business can survive – let alone thrive, employ people and grow – without making a profit. We sometimes talk about ‘not-for-profit’ organisations – but even these need to make a surplus (basically a profit) if they are to build up reserves and invest in service development. So, what is it that people really object to? And does it matter that we are not always clear about it?

Usually when people say they object to profit, they mean excessive and unearned profit, often for a poor service. Fair enough. But how do we decide what that is? The 1997 Labour government introduced a windfall tax on the privatised utilities based on their undervaluation and underregulation at the time of privatisation. It was calculated from the difference in value then, compared to looking at profits for four years after privatisation. It worked because it was specific, one-off, well thought through and justifiable. It raised money to invest in creating employment opportunities without deterring future investment, because people did not fear that other industries they were investing in would be hit by arbitrary taxes. Recently Stella Creasy has proposed a similar tax for private finance initiative companies who have benefitted from a significant reduction in corporation tax since their deals were signed. Again, there is a clear rationale and the necessary respect for ownership, incentives and institutions which is required for a functioning democracy. Labour needs to be clear we are not cracking down on profit per se, just unjustifiable, excessive profit.

People also suggest that some sectors are too important to involve the profit motive at all, but selection of these tends to be relatively arbitrary and culturally driven. Renationalisation of rail was in our last manifesto, but next to nothing is said about petrol stations. Yet fuel blockades have shown, the latter are also vital to our national infrastructure. Healthcare is probably – and justifiably – most often cited as a sector where profit should not be involved, but is not food production equally important to our survival? Perhaps the example of Stalin collectivising farms and killing anybody suspected of hiding food resonates too much. The lack of incentives combined with human nature meant less food was produced and more people starved. In the end our mantra must be what matters is what works. It is right that we focus on areas of market failure and prioritise interventions accordingly. It is not surprising that there is enormous concern – that I share – about creeping privatisation in the National Health Service in England. But does that mean that there is no role for the private sector in anything associated with health provision? Surely the fundamental principle of the NHS is that people needing treatment receive that treatment regardless of their ability to pay for it. But what is the best model for encouraging innovation? Is it right for inventors and researchers who come up with good ideas to be rewarded for them? Experience suggests that this is far more effective than the alternative. The cost of developing new drugs is phenomenal – and if the NHS was paying for all research there would quickly be very little money left for anything else. What matters is that we get the regulation right.

It is one thing for party members’ thinking to be unclear but we must ensure our manifesto and the rhetoric of shadow spokespeople is crystal clear. Presumably profit is acceptable for a private sector business developing and selling technology as part of the fourth industrial revolution John McDonnell urges us to embrace? Surely that cannot change just because that technology might at some point be of use to the NHS? Ultimately people should be rewarded fairly for their investment and skills. The market can determine some of that and the state should intervene in terms of both regulation and taxation to meet wider objectives.

Profit is a vital tool in incentivising and rewarding ingenuity, inventiveness and investment of time or money and to enable more of the same. Sometimes it is simply about balancing the good times and the bad. Any business where there is risk needs a profit to cushion it for times when there is a deficit. We should recognise the value of profit and the way it can enable future developments and job creation. Cooperatives and social enterprises are important models to inject into the eco-system of the economy, but at the end of the day they have to grapple with the same dilemmas of making the books add up. Is a not-for-profit which pays its chief executive a large salary better than a community-focussed private business where the boss takes a smaller one but will be able to take more profit if it is successful?

We also need to be far more aware of how we can sound to those whose livelihood depends on profit-making organisations. When I was a general election candidate in 2015 one of the more depressing conversations I had was with a man who lived in one of the few social housing tower blocks in the constituency. He was planning to vote Tory because he drove a private ambulance. He had heard we were against the private sector in the NHS and therefore if we were elected assumed he would lose his job. It is not the only conversation of that sort I have had with private sector workers and in 2005 I remember being struck by the number of parents who were resentful that their child was not eligible for keyworker housing because they worked in the private, not public, sector. We rightly laud public servants for some of the amazing work they do, but must not ignore the achievements of private sector workers. Given how public sector-dominated our membership currently is, we almost certainly need our affiliated unions who represent private sector workers to remind us of this.

Of course, these are questions that have exercised the Labour party since its founding in one form or another. The party’s original Clause IV promised ‘common ownership of the means of production, distribution and exchange’. But the debates about where to draw the line and what should be nationalised are as old as the party itself. There was an element of people bidding each other up to the extent that it was joked that in the end a Labour party conference delegate would stand up to demand the nationalisation of the solar system and the Milky Way. Hugh Gaitskell failed in his attempts to change Clause IV, but Tony Blair was successful, altering it to call for democratic socialism and ‘a community in which power, wealth and opportunity are in the hands of the many not the few’. Of course by then times had changed and state socialism internationally had been tried and failed. As well as collective farms leading to starvation, the stifling of entrepreneurialism and innovation meant medical developments in the Soviet Union could not keep up with those in the west. And the idea of the United Kingdom government owning a nationalised travel agent, as Thomas Cook once was, seems faintly absurd in an era of internet booking.

If we truly want to share power, wealth and opportunity we need to look at and learn from both the successes and failures of socialist experimentation. Renationalising rail will not in and of itself solve problems of investment in infrastructure and management. We need to ensure that any nationalisation programme creates the right incentives going forward to ensure that that railways are effectively and efficiently managed, investment is prioritised and the service is truly responsive to the public. Sadly, too many public sector organisations confront people with bureaucracy and intransigence. That is one of the reasons I am disappointed more attention is not being paid to developing a mutual option for rail rather than straightforward nationalisation. If we are prepared to think more about what it is we object to about the current rail system rather than simply shouting ‘profit’, we will be better able to identify what we need to address in the new arrangements to make sure they deliver the best solutions for the people of this country. Overall, we need clear policies on economic intervention which are coherent and evidence-based that we can justify to people when asking for their votes. And Labour members need to stop having kneejerk reactions about profit and think about what it is that we really object to and really want society to be like. 

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Mary Wimbury is a member of the Progress strategy board. She tweets at @MaryWimbury

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Comments: 1...

  1. On November 6, 2017 at 7:24 pm Verity responded with... #

    This author is so very, very confused about the meaning of the most basic economic terms and concepts. As such I am so surprised that Progress magazine considered it sufficiently well formed for publication without a very basic lesson in the meaning of economic concepts.

    The root of the problem for the author is that she has not grasped the distinction between ‘surplus’ and ‘profit’. Very few organisations can survive in the medium or long term if they do not produce a surplus over their immediate needs, i.e. wages and salaries, immediate future equipment, necessary replacement investment in plant and training, purchases of supplies to address the projected demand. None of this requires profit it requires a surplus. For socialists work, effort and enterprise comes in the form of enhanced wages and salaries as a proportionate return for earned contribution. None of this requires profit.

    Profit is the term used to offer an (unearned) return, not for earned effort, but as the necessary return to those, who by way of their ownership of (unearned) wealth are in position to demand interest payment by way of their investment of that wealth.

    “And yet, no business can survive – let alone thrive, employ people and grow – without making a profit”.

    So this statement a false simplification arising from not having grasped what profit is.Additinally it chooses not to distinguished what is earned from what is not earned but arises from privileged (and usually elite) ownership of wealth.

    “Profit is a vital tool in incentivising and rewarding ingenuity, inventiveness and investment of time or money and to enable more of the same”.

    No, not true, wages and salaries do this incentivising. Profit is a return to wealth owners who may have no stake or interest in the enterprise . It is extracted out of the enterprise and placed in the hands of Directors who choose to do with it what they wish. They may, e.g provide others (non earners) with a disproportionate return. Of course, even in public sector/not for profit sectors, of necessity, we may have to pay out to non – earners. But what distinguishes socialists is that this is a ‘necessity’ not a desirable economic motivator.

    I do want to be offensive since I think I understand what the author would like to have said, but as written the article is a statement of the standard Conservative Party position. The standard Conservative position does not support excess profits. The standard Conservative position does not exclude public ownership. The standard Conservative position supports payment for all contributions (including non – earning investors). What distinguishes the Labour Party is that we support earned effort and not reward for wealth ownership. ‘Profit’ for socialists is an economic necessity in society as organised to pay for use of (unearned) wealth, but unlike the Conservatives this is not a desirable motivator. Surely we wish to return effort not welt ownership.

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