Topping Up Welfare
By Anthony de Jasay
This new shrewdness was amusingly illustrated in the recent grand debates about the modernisation of the derelict French Socialist party. Touchingly candid, its mainstream reformers declared that the party is not anti-capitalist, because it is for wealth-creation; if no wealth were created, how could they redistribute it?
The question is well taken indeed. How could you slaughter a fat pig if it was not fattened first? One wonders whether capitalists are encouraged to create wealth if it is destined to be redistributed?
Economists of socialist inspiration have always brushed such questions aside. They persisted in treating national income as something that is produced first and distributed afterwards. Production can be left to the soiled but capable hands of capitalist entrepreneurs, with the resulting product being divided by the state along lines dictated by “social justice”. The stage of distribution reacted back but little or not at all upon the stage of production. Statistical proof that taxation undermined incentives was difficult to find.
Lately, however, it has dawned even on left-leaning politicians and union leaders that there is a trade-off between redistribution and economic growth. One cannot have both an extensive system of welfare provision in kind, complex protective regulation, high taxes and endemic budget deficits as well as low unemployment, technical progress and vigorous growth. Scared a little by the perspective of stagnation or breakdown, since before the turn of the century Britain, Holland, Sweden and Germany have tried to put a brake on the luxuriant spread of the welfare state. The share of GDP taken by government and the social welfare agencies seems to be levelling off. The European average is now hovering at just over 40 per cent, with Germany at 44, Britain at 45, though France is still defiantly leading the pack with 54 per cent.
Most governments now recognise that it is no longer clever politics to go on topping up the welfare state by throwing ever more money at the gaps that keep showing up in it. Clever politics now demands that the task be delegated to others. Business and Europe have started to be solicited.
The “Third Way” that Tony Blair learnt about from his sociologist guru Anthony (now Lord) Giddens (and that Vaclav Klaus branded the fastest way to the Third World) included the idea that business enterprises did not belong to their owners alone. Along with its shareholders, a corporation had other “stakeholders” to whom it owed some responsibility and who ought to have a say in its conduct. Employees, suppliers and customers were the obvious ones, but the townspeople, cultural and educational institutions, the environment and for that matter the whole nation had a “stake” in each business and it was management’s clear duty to respect these stakes.
The spread of this doctrine is paralleled by the rise of “business ethics” as an academic subject. Believing that such a subject really exists is tantamount to treating business as an individual, a person who can have ethical codes and duties to follow them. But business is not a person. Its conduct is directly chosen by managers, who are persons and have ethical duties. The overriding one is their fiduciary duty to the owners who employ them. Whatever the managers do in their private life, in running a business their duty is to maximise the present value of all future net profits, all of which belong to their employers, the shareholders. It is clear that if they are worth their salt, they will always deal squarely, for in business “honesty is the best policy”, i.e. it is the profit-maximising one. There is only one maximising policy; the distinction between short and long run is spurious and must be replaced by “present value” in which both short and long run profits are discounted to their present worth.
Maintaining employment when there is not enough work in prospect for all earns kudos for the “socially responsible” management. In fact, the managers are not only spoiling the chances of more efficient resource allocation that can only come about if labour is mobile. They are also stealing money that belongs to their owners and was entrusted to them. The same goes for all expenditure, or forgone revenue, favouring the interest of a “stakeholder” that will not yield sufficient future profit through the effect it may have on goodwill for the corporation rather than for the social standing of its managers.
For well-known reasons, managers can get away with vast generosity to “stakeholders” without owners curbing them. “Business ethics” courses teach them that on the whole this is how they ought to behave, albeit “with due consideration” for the “legitimate interests” of shareholders. The media and the economically illiterate political class go one further. They brand it as scandalous that a corporation makes a net income running into billions; why can’t it be content with hundreds or tens of millions, which would still be a thousand times an ordinary workman’s annual wage? And why can’t such profitable corporations contribute more to protecting the environment, financing community projects, help provide housing and social services?
Thus, public opinion and the media are hectoring managements to be “ethical” and spend for the benefit of the “stakeholders” the money entrusted to them by the shareholders. Corporations are sternly asked to be “good citizens”, though only individuals can do that. Managements do yield to this moral pressure; doing so passes for “best practice” in most business ethics courses. The net effect is that state provision for welfare and good works, running at a level that stretches government finances to critical limits, is topped up by the private sector without taxation and budget deficits being further increased.
A Truly “Social” Europe
Governments, cheered on by public opinion, now delegate downwards, to the corporate sector, some of the “topping up” that the welfare state always requires. They also try to delegate some of it upwards, to the European Union that they, egged on by their electorates, stridently demand to become really, truly “social”.
It is a fair guess that the proposed European constitution was rejected in 2005 by the Dutch and particularly the French referendum because it was not “social” enough. This may have been a misjudgment on the part of the French, for the most innovative part of the draft constitution, the Charter of Fundamental Rights, bore within it the seeds of a vast and irresistible expansion of “workers’ rights” and social protection, with member states forced to comply by the European Court of Justice.
This abortive effort was repeated in 2007 by the “simplified” Lisbon Treaty in which the Charter of Fundamental Rights has reappeared in all its cack-handed absurdity. All 27 member states should have ratified it; but the Irish in a referendum have rejected it. They will be asked to vote again, the right way this time, and perhaps go on voting until finally they vote as Europe’s federalists tell them. However, if this eminently democratic procedure does not work itself out as now expected, the most “European” member governments are determined to push for the nearest approximation to a socialist ideal that they can possibly get.
Europe, the programme of the current six-month French presidency of the Union declares, must above all be a protective entity, sheltering its citizens from the risks of globalisation, unregulated capitalism, imported food that endangers health and undermines the capacity of European agriculture to feed the people, it must harmonise upwards corporation taxes, and do many other things that member states would rather delegate to Brussels lest they should be accused of being irresponsibly populist.
Trying to get Brussels to do the topping up may or may not produce much of a result. But it is yet another testimony to the wishful thinking that blithely supposes that if someone else can be made to carry out our task, we do not to end up paying for it one way or another.
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For more articles by Anthony de Jasay, see the Archive.