Err, yes Mr. Naughton, this is entirely the point

John Naughton, over in The Observer, is very worried about, err, capitalists being capitalists. Something of a pity really for someone, let alone a journalist, of his richness in maturity should by now have realised that this is the damn point of it all:

The real lesson of the Uber exposé, though, is that it’s time to discard the rose-tinted spectacles with which we have hitherto viewed these Silicon Valley outfits. For too long, they have been allowed to trade fraudulently on the afterglow of the hippie libertarianism that supposedly infected the early days of the personal computer industry. The billionaire geeks who currently run the giant internet companies may look and talk like a new species of entrepreneur but it would be more prudent to view them as John D Rockefellers in hoodies.

And the economic philosophy that’s embedded in this new digital capitalism is neoliberalism red in tooth and claw, which is why they minimise the number of “ordinary” (ie non-geek) workers on their payrolls, outsource everything they can, despise trade unions, view regulators as barriers to “innovation” and are outraged by the temerity of European institutions that seek to curb their freedoms of action.

Yes, exactly. Companies operate to the benefit of their shareholders. They’re also pretty red in tooth and claw when they do so. And if that were all the economy were about then agreed, we consumers might not enjoy the experience all that much. Which is why we do our darndest to make sure that that’s not all there is in the economy. The other magic ingredient we look for is competition. This means that we’ve any number of red in tooth and claw capitalist institutions trying to do the best for their owners and for their owners only. But they can only do this by offering us something that we think is worth it. Their proposition must offer us value: both in the simple sense that no one buys anything at all that they don’t think is worth more than they are paying for it and also in the more detailed sense that competition means that the offering must be better than that of those others.

It’s competition in the market that tempers that profit lust. Just as it’s competition that tempers the inherent inefficiencies and producer capture of formerly monopolistic and non-profit making state services.

On that capitalist side of it this is the very point of the entire system. We want them to be sharp elbowed, nothing but profit seeking, neoliberals. Because only by producing something that we both desire and are willing to pay for can they become those billionaires (geeks or not).

Releasing data could help Britain’s entrepreneurs scale-up

The celebrated entrepreneur, investor and adviser Sherry Coutu CBE has just released a detailed report on scale-up businesses. Scale-ups are defined as enterprises with average annualised growth in employees or turnover greater than 20 per cent per annum over a three-year period, and with more than 10 employees at the beginning of the observation period.

The Scale-Up Report explains how “a boost of just one per cent to our scale-up population should drive an additional 238,000 jobs and £38 billion to GVA within three years”…“[I]n the medium-term, assuming we address the skills-gap, we stand to benefit by £96 billion per annum and in the long-run, if we close the scale-up gap, then we stand to gain 150,000 net jobs and £225 billion additional GVA by 2034.”

The report identifies key issues for helping these companies grow:

  • Finding employees to hire who have the skills they need
  • Building their leadership capability
  • Accessing customers in other markets / home market
  • Accessing the right combination of finance
  • Navigating infrastructure

Twelve recommendations are put forward, but the first (arguably) offers the biggest bang for its buck:

Recommendation 1. National data sets should be made available so that local public and private sector organisations can identify, target and evaluate their support to scale-up companies, and evaluate their impact on UK economic growth.

The specific data required includes:

  • Company registration number
  • Revenue (UK and export)
  • Location of headquarters and plant
  • R&D tax credit (recipients and amount)
  • Employment data (number of pay slips issued in a given month)

It is suggested that data “should be made available on a real-time basis openly or to a cross-departmental scale-up support unit within government. This would allow both public and private sector organisations to target scale-ups accurately to make sure support is offered at right time to the right leaders.”

Releasing this data wouldn’t add to the bureaucracy faced by entrepreneurs. As the report explains, companies are already required to submit turnover data annually to Companies House, report on PAYE in real-time, file quarterly VAT returns, and report on the amount the spend on R&D (if claim R&D Tax Credits). However, as the report acknowledges, releasing this data raises questions around data privacy. To counter this criticism, the report uses the example of the Cambridge Cluster Map, where this sort of data is already collated, and 59 companies have asked to be included in it since its initial launch.

Also, following a YouGov survey, the report reveals: “83% of scale-ups were in favour of the government sharing information on their company growth with other government departments or agencies, and 72% were in favour of government sharing this externally.”

But this leaves a minority of companies unwilling to open up their data willy nilly. The report doesn’t offer any guidance on how to deal with these concerns but there should be a way for companies to opt out. If, as the report reasonably suggests, these companies are then better targeted for support, those that have opted out will surely be all too ready to release their data too.

Philip Salter is director of The Entrepreneurs Network.

Hey, sometimes the lefty lot are actually correct

Galling though it may be to have to admit it there are times when those over on the left side of the political aisle are correct.

Take, for example, the case of supermarkets. They’ve been telling us for the past couple of decades that they’re wrong,. That they rip the heart out of the High Street and that something must be done to stop them. And it even looks like they might have been right:

Supermarkets in Britain could start to close as the grocery industry struggles to cope with an unprecedented slide in sales and profits, the head of Waitrose has warned.

Mark Price, the managing director of the upmarket grocer, said it was “incredibly hard to call” whether all of Britain’s food retailers would survive tumultuous shifts in shopping habits.

The “Big Four” supermarket groups have been forced to dramatically rein in plans to open new stores in UK in order to save cash to shore up their balance sheet. In recent weeks Tesco has scrapped two supermarket openings despite actually building the stores.

However, Mr Price warned that food retailers could be forced to go a step further and close existing stores, just as non-food retailers have done in Britain since the onset of recession.

He was speaking in the week that rival J Sainsbury slumped to a £290m pre-tax loss, scrapped plans to open new stores, and warned that sales in supermarkets will be falling “for the next few years”.

However, let’s not go overboard in our appreciation of their perspicacity here. For all those years they were complaining they were in fact wrong. For we, the consumers, by the very fact that we went shopping at the supermarkets, showed that we liked shopping at supermarkets. Further, said supermarkets aren’t about to be replaced by the High Street of old. Instead they’re being outcompeted by online shopping and the budget retailers. Meaning that we value convenience and low prices even more than we all thought we did.

And the other point that we really must make about this is that, of course, nothing at all “needed to be done”. Whether we think this is as a result of changing consumer tastes, or merely as a revelation of extant tastes now that we can sample these alternatives, no one at all has had to intervene in the shopping market in order to overturn those supermarkets. The market itself has done all of that for us: the aggregate effect of us spending our own pounds in our own manner has led to the results that obviously we all, in aggregate, prefer.

So those lefties, those campaigners, might well have been right, correct, in their insistence that there was something better than supermarkets. But they were obviously entirely wrong in whether anyone needed to do anything about it for one thing that markets really are very good indeed at is reflecting consumer preferences.

Mazzucato versus Worstall and Westlake

Marianna Mazzucato’s 2013 The Entrepreneurial State is the most influential book on innovation. Although Mazzucato’s arguments in the book and beyond are many and varied – for example, I’m particularly sympathetic to her scepticism of the uncritical financial support for small businesses – the arguments gaining the most traction are the least convincing and potentially most damaging.

In short, Mazzucato’s thesis is that the state has been the key driver of “innovation” and should therefore take a more active role than they currently do. Central to this, is the policy suggestion that government agencies that fund this innovation should take a cut of the profits from the inventions. Two writers have convincingly unpicked this – the Adam Smith Institute’s Tim Worstall and Nesta’s Stian Westlake.

First, on the point about states driving innovation, Worstall cites William Baumol, who makes the crucial distinction between innovation and inventions. In reference to Mazzucato’s observation that the key technologies that went into making the iPhone were state funded Worstall explains: “Baumol’s point is that the private sector could have come up with these technologies, even though it was the state that did. But only the private, or market, sector could have come up with the iPhone.”

To put it another way, the iPhone is more than the sum of its parts. In an excellent article (worth reading in full), Westlake cites the work of Jonathan Haskel, which “suggests that for every £1 that British businesses spend on R&D, they spend £8 on other intangible investments of the sort that Apple used to make the iPod a success: design, new business models, marketing and software development.”

But perhaps Mazzucato’s biggest mistake is one of policy. As Westlake explains elsewhere, in The Entrepreneurial State Mazzucato suggests that “the state should find ways to share directly in the profits of companies that benefit from government innovation spending. A repayment system needs to ‘reward [the government for] the wins when they happen so that the returns can cover the losses from the inevitable failures.’”

Westlake outline three convincing reasons why this wouldn’t work: “it would be nightmarish to administer; it imposes costs on exactly the wrong businesses, creating both a presentational and a practical problem; and it’s worse than an already existing option – funding innovation from general taxation.” Westlake’s last point cuts to heart of the problem. As Worstall has pointed out in a response to Mazzucato’s response to his criticism of her work:

That governments sometimes produce public goods should not be a surprise. That’s what governments are for in fact. To provide collectively those things that cannot be provided through voluntary cooperation. To then complain that government doesn’t get extra rewards for doing the very thing we institute it for seems most odd. That’s why we pay our taxes in the first place: in order to get those public goods. Why should there then be some extra appropriation when all government is doing is what we asked it to and paid for it to do in the first place?

Philip Salter is director of The Entrepreneurs Network.

National roaming is one of the reasons we want that arbitration clause in trade deals

One of the thi9ngs that gets a certain type of lefty up in arms is the arbitration clauses in the various proposed trade pacts on offer at present. It’s portrayed as a violation of democracy that if politicians are allegedly in breach of the contracts under which people invest in the country then everyone can go off to a neutral (ie, not controlled by the politicians) legal system to sort matters out. We here regard it more as the upholding of the rule of law but there we go, be a dull world if we all thought the same way.

However, we’ve got an interesting little example of what we mean in this latest silly idea:

There are bad ideas that might appear at first blush to have some merit, and then there are just bad ideas. A consultation announced this week by the Government into whether to enforce national “roaming” so as to improve mobile phone coverage very much falls into the latter category.

Were the normally sound Sajid Javid, the responsible minister, to go this route – and the fact that the consultation has been limited to just three weeks powerfully suggests he has already made up his mind – it would potentially amount to a breach of the terms under which mobile phone operators bought their licences.

Quite, it is very much a change in the terms of those licences. Licences which the phone companies paid tens of billions of pounds for. And none of us really think that the changes are going to increase the profits of the mobile phone companies, do we? So, they paid up in the belief that the rules would be one way and now they’ve paid up the rules are (perhaps) to be changed. This is exactly the sort of thing that that arbitration clause in trade deals is all about. Holding government, the politicians, to the terms that they agreed at the point of investment. And if those rules are changed to work out whether it’s a reasonable change and if it isn’t then who should pay whom to sort of the economic effects of the changes.

Our best guess here is that national roaming isn’t going to go anywhere, whether it’s a good idea or not. For we can’t imagine that George Osborne fancies the idea of having to pay back chunks of those licence fees that he’s already banked and spent.