Economics of Independence Scotland's Energy Resources Westminster Mismanagement

Why Scotland needs a productive economy that spreads wealth

Written by David Erdal

David-Erdal-Beyond-the-CorporationDavid Erdal wrote the following piece as part of the Vision for Scotland document. David is a member of Business for Scotland and a world leading expert in cooperatives.

The British economy is dominated by the City of London, one of the two greatest financial centres (and tax havens) in the world. Given its shadowy constitution, the City is not even properly subject to the Westminster parliament. No matter what government is in power in Westminster, the City will still be able to pull more strings than anyone else in attempting to alter the balance of economic power.

A consequence of this is that the UK’s economy is subject to strong pressures to extract wealth from existing businesses, rather than to invest, like Germany, in building businesses. The kind of growth that matters to an economy over the long term is organic growth; the kind of growth that matters to the City is deal-making – ‘growth’ by acquisitions, the majority of which have been shown to destroy real economic value, but which make fortunes for advisers and funders. The advice these people give is often tinged with self-interest to an immoral degree: witness the recent flotation of Royal Mail, where the advisers stood to gain enormously if the price was set low.

Creativity is lauded and vital, but London financial creativity tends towards the kind that traded in opaque instruments of diced and sliced mortgages that had been sold to people who could not afford them. This kind of creativity brought the world economy to the edge of collapse; in the process senior City people made fortunes, and the Westminster government allocated unthinkable vast quantities of our taxes to prop up the failing institutions that provided, and continue to provide, these City folk with their huge incomes.

Armed with a good degree in maths and chemistry the son of an Edinburgh friend of mine recently went to work as a derivatives salesman in London. His employer, seeing his ability, told him he would be earning £150,000 a year within two years – that is, before the age of 23. Disillusioned by the patent uselessness of what he was selling and the empty-headed competitive displays of wealth among his older colleagues, he switched to working for a small entrepreneurial company in Scotland.

For them he was managing chemical experiments vital to the further development of already-successful clean technology – and was paid the minimum wage. That is a bad way to run an economy. It is it is yet another demonstration of Nobel prizewinning economist Joe Stiglitz’s finding that the reason why Adam Smith’s invisible hand is invisible is that it isn’t there.

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Building economies

Whatever the numbers show – for example, that for one month recently average earnings rose faster than inflation – the underlying reality is that our economy is dominated by people who extract rather than people who build. The month of apparently higher earnings turned out to be the month that the bankers got their bonuses.

There is no guarantee that Scotland will do it better; but we could. There is at least an opportunity with independence to take a different economic path. By contrast if we stay in the UK we are guaranteed that this sorry state of financial dominance coupled with impoverishment of the wider population will continue.

Co-operative ownership

One government initiative of recent years has been the establishment of Co-operative Development Scotland, which has helped many companies convert to being owned by all their employees. This is a healthy way to go. Twelve years ago, running the advisory firm that is now Baxendale, I helped a retiring owner convert his small (25 person) manufacturing company, Woollard and Henry, to all-employee ownership. (He had announced to his customers that he was closing it, and would have closed it if I had not convinced him that he would get more by selling it to the employees.) Since then the company’s productivity, growth and profitability have taken off; they have developed radically different products and entered new markets; and they have won the Queen’s Award for International Trade. They have more than doubled the number of jobs– good skilled manufacturing jobs. While their jobs have doubled their sales have more than quintupled; recently declared profits were £750,000.

That is stunning productivity growth. Wider academic evidence shows that such companies not only create more jobs, they sustain them better in downturns. Perhaps most important of all, the wider studies show that employee-owned companies characteristically increase productivity faster than companies owned by outside shareholders – and it is productivity that makes an economy successful for all of us. Such companies are democratic in their structure: they share information and influence as well as sharing very widely the wealth they create, and those who work in the business have the final say on who gets to lead it. In the case of Woollard and Henry the majority of directors are from the shop floor.

It is because they share the information and the influence and the wealth created that people commit themselves more energetically to making these businesses successful. This makes such companies the ideal working environment for Jock Tamson’s bairns – and actually for humans everywhere.

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A model for Scotland

In a word, they suit Scotland. If by promoting this inclusive approach we can shape our economy to be less dominated by financial power then we can trigger hugely productive economic development at the same time as spreading the wealth created. A good illustration of how this works is provided by the John Lewis Partnership (JLP), owned since 1929 by a trust for its employees, and with a highly open, democratic constitution. This year once again it has been rated near the very top by its customers.

It is instructive to compare its effect on the economy with that of its rival, Marks and Spencer (M&S). They are very similar in terms of scale: JLP £9.5 billion turnover, M&S £10.3 billion. They distribute broadly similar amounts from their profits: JLP £210m, M&S a bit more: £270m. The £210m from John Lewis goes as the same percentage of pay to every single person working in the business, all 82,000 of them – over £2,000 each on average. This is a low-paid industry; that kind of money going to relatively poor people will have had a significant impact on reducing inequality and improving child poverty. Most of the money will then have been spent in the real economy, on normal things, giving a lift to local economic activity.

Moreover, these sums were paid out without any real transaction cost – through the normal wages system – and tax will have been paid on them. By contrast, the M&S dividend went overwhelmingly to City financial institutions. The transaction costs will have been significant in terms of fees charged as the money was passed around and ‘invested’, probably much of it in ‘creative’ financial instruments. And we can be sure that many of the institutions will have managed to avoid paying much tax. The effect on the distribution of wealth will have been to make a small number of rich people richer and therefore to put up demand for luxury goods and London property – not to spread the wealth, or invigorate the real economy. And as far as customers go, the performance of M&S is nowhere near that of the employee-owned John Lewis Partnership.

Conclusion

An independent Scotland will ultimately depend crucially on the productivity of our economy. Before we can spend anything on health, education or social programmes we have to earn it. Oil is a bonus, but we have to treat it as a bonus: the long term reality is that we need to build an effective, efficient real economy. Oil-dominated economies have a bad record of succumbing to wealth inequalities and corruption. It will take real political will to ensure that Scotland’s oil money is not just spent on putting sticking plasters over the aftermath of the City dominated economy, but gives the impetus to develop a truly productive economy which involves people very widely; gives them at work the citizen’s rights of information, influence and a share of the wealth they create; and as a result stimulates them to be productive and truly innovative in growing an entrepreneurial economy.

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About the author

David Erdal

A co-operative approach is championed by
best selling author and globally recognised
expert on the role of co-operatives in society
Dr David Erdal, who transferred his family
business (Tullis Russell) into a worker owned
co-operative and is also Honorary Senior
Research Fellow at St Andrew’s University.
He argues that Scotland needs to move away
from the sterility of admiring deal-making to
an engaged production of useful output and
sharing more equally in the benefits of that.
He advocates building “an effective, efficient
real economy” where citizens are stimulated
to be productive and innovative through
sharing in the wealth created by their labour.

2 Comments

  • […] Scottish local councils body COSLA and their counterparts in the rest of the UK are calling on Westminster to devolve more powers not just to Scotland and Holyrood,but to council bodies right across the UK.  They argue that the Scottish Independence referendum debate has shattered trust in the old centralised way of running the country and that it is beyond repair. Business for Scotland has previously written about localisation and always believed that independence is just a step in the localisation process (Why Scotland needs a productive economy that spreads wealth). […]

  • What we also need to encourage is for those people who do have spare cash and current investments in shares, etc., to transfer these funds into investing in new and existing companies within Scotland using mechanisms such as crowd-funding, peer-to-peer, and other similar community projects. In this way we could collectively make a huge investment into the future of Scotland. We don;t need to wait for the big banks to do the lending, if we could follow a different approach and mechanisms. All we’d need are the leaders and people with the necessary expertise to show people – like me – what and how to do it!

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