How can we kick-start better growth? Responsible capitalism pt. 1

The UK’s latest growth figures, released this morning, made for grim reading. Some analysts have warned that the 0.2% contraction in the economy in the final three months of 2011 pushes Britain ever closer to a double-dip recession. Questions about the Government’s austerity-based approach to resolving the country’s economic woes are also resurfacing, particularly given that it has cooled its expectations about how successful its own ‘deficit reduction’ strategy is going to be in the immediate term, with public debt recently pushing over the trillion mark, and the Government continuing to borrow significant sums of money.

What does the current climate mean for future growth, and perhaps more importantly, employment and the quality of life of citizens? These were some of the questions explored at the recent Jobs Summit hosted by the RSA, which included contributions from David Miliband MP. One of the themes raised in the morning session that was particularly interesting to me concerned the relationship between growth and employment. John Kay, an economist that writes for the Financial Times, spoke of Okun’s law in economics, which states that a 3% decrease in output is associated with a 1% increase in unemployment. Kay argued that evidence suggests this is not a universal law; in some countries decreases in output translate to significantly less or significantly more unemployment. The ratio for Spain, for example, has been closer to 1:1, while for Germany and Japan output decreases have much less of an impact on employment levels. While not as precarious as the situation in Spain and Greece, unemployment levels in the UK and the US, Kay argued, are influenced by output notably more than in Germany and Japan.

Kay suggested one possible reason for this is that the social contract firms traditionally had (several decades ago) with their employees has increasingly become strained or has broken down in the UK and the US. A business model which once promoted long-term employment and profitability has been replaced by companies being far too fixated with (short-term) earnings targets, and therefore more willing to make cuts (e.g. to jobs) to make up for lower demand. On the other hand, Germany and Japan, as Ha-Joon Chang writes, have practised different forms of capitalism based on more robust long-term relationships between companies and employees, greater worker involvement in management processes, and a co-determination system (Germany) that ensures worker representation in the making of key corporate decisions. Interestingly, the policy debate about ‘responsible capitalism’ in the UK seems to be heading in this direction (perhaps not yet at the level of substance), captured in Cameron’s rhetoric about a ‘popular capitalism’ powered by co-operative business models where the social contract between employers and employees is fair and co-determined.

Diverging from Kay's argument, another participant in the Jobs Summit, Professor Paul Gregg, argued that Britain’s labour market is actually quite strong and flexible (with few significant structural barriers), and less susceptible to unemployment following decreases in output. However, he argued that there is a huge imbalance in where unemployment is concentrated, and it disproportionately affects certain sections of society and individuals, who then become ‘trapped’ at the margins and suffer long-term unemployment. This lasting, damaging effect was also noted by others in the panel, including David Miliband.

The solutions to these problems, as directly and implicitly evidenced by some of the arguments made by the panel, require us to move beyond traditional narratives about growth. It is clear that current responses are far too grounded in trying to re-kick-start consumption-based growth centred on continued increases in productivity (and a fixation with GDP/material throughput) – which is both socially and environmentally unsustainable. We need an economic system that de-couples ‘growth’ from harmful social and environmental impacts (including unemployment/inequality and natural capital depletion) – where a new social contract between business and society is based on creating long-term profitability and employment (or ‘shared value’ as Michael Porter puts it), rather than short-term targets and cost-cutting measures. As Paul Gregg also noted, flexibility in the labour market needs to be based around the needs of workers and citizens, rather than output targets – and this can be achieved through, for example, flexible working patterns, and trying harder to reach marginlised, long-term unemployed groups.

One way to achieve these required shifts and introduce a better model of growth, as nef, Business in the Community and others have suggested, is to move towards a ‘service and flow’ economy where quantitative growth is replaced by qualitative growth – growth in socially valuable goods and services, backed by high levels of employment and the sharing of ‘social value and sustainability gains’.[1] This model of growth, as well as the new social contracts and sets of relationships that would sustain it, could provide a job-rich and socially productive – and environmentally sustainable – economic model where GDP figures hold less relevance to the state of the economy. As Tim Jackson has written, prosperity (social, environmental, and economic) can be achieved without continuously expanding levels of unsustainable GDP growth – so long as it is based on wellbeing or ‘flourishing’, rather than the permanent expansion of man-made capital. In this respect, any growth model must also consider the natural economy (of ecosystem goods and services), and the non-market ‘core economy’ (or the ‘economy of regard’ as David Halpern calls it) – which GDP doesn’t. Debates about ‘responsible capitalism’ must take account of these issues, as a forthcoming report by the 2020 Public Services Hub at the RSA will show.

If our economy was structured around such models of growth, today’s figures would have made far less alarming headlines.

[1] Also see Jean Gadrey, ‘A job-rich ‘post-growth’ economy’ in Watts, A. and Botsch, A. (eds.), After the crisis: towards a sustainable growth model. 2010 (available online).