The impact of supply side economic policies is affected by many cultural factors, that make it difficult to take something that works in one country and simply assume that it will work in another. If we just consider for a moment the discipline of the German people, and compare that with the easy going Italians or closer to home ourselves in the UK and compare to the USA we see stark differences that are deeply embedded within our own psyche.
Entrepreneurial activity has much to do with our cultural background, upbringing and education. In the case of the USA risk taking and “laissez-faire” are a tradition dating back as far as the original constitution.
The American Constitution and its Bill of Rights owes much to Thomas Paine.
“It is a perversion of terms to say that a charter gives rights. It operates by a contrary effect — that of taking rights away. Rights are inherently in all the inhabitants; but charters, by annulling those rights, in the majority, leave the right, by exclusion, in the hands of a few.”
The UK on the other hand has always been an autocratic society. (In England, Thomas Paine was indeed tried in absentia for seditious libel against the Crown and sentenced to death). While we granted Parliament primacy over the Sovereign in the late 17th Century, it was not until 1911 that we gave the electorate, through the House of Commons primacy. Our winner takes all electoral system has ensured an autocratic type government designed more to maintain the status quo than truly represent the will of the people.
I am trying to say that the British people culturally prefer to be led, rather than take the initiative themselves. If we just dwell on the USA electoral system for a moment we see that it is quite usual for the President not to hold a majority in both houses, instinctively the American People seem to shy away from giving absolute power to the President. While we believe that without absolute power a government is weak.
The Industrial Revolution, to which much of the British eminence in the World Economy can be ascribed, was a period during which invention and discovery played a major role. Invention and discovery are still strong factors in Britain, our academia is of the highest standard in the world, but we don't bring our discoveries to the market!
During the 1980's the UK education framework began changing, we started converting the former Polytechnics into “Universities” encouraging people to get University degrees instead of undergoing Vocational training. Where once these institutions had been supplemental to apprenticeship programs, they started offering “soft university” degrees.
It slowly became policy to target a higher and higher proportion of people getting degrees. In many cases these did not help to make people more employable, however they had the advantage of improving the employment statistics as they shielded the economy from needing to provide jobs for a few more years.
An economy needs artisans and engineers more than it needs lawyers and accountants, as these are the “artificers” in Keynes terms. The people who create things and invent. This is at the heart of a thriving manufacturing sector … invention, new products excitement! It has always been this which distinguished a market economy from a centrally controlled economy, it is ideas, that are the birth of new industrial activity. In a centrally controlled economy we rob the system of the vibrancy that comes out of the creativity of man.
Any autocratic system (managed from top down, or “what the boss says goes”) will only fire on a few cylinders … it has robbed itself from the power of a multitude of minds and substituted that with a few, who, no matter how brilliant, cannot compete with the many.
The UK has a long record of great discoveries and inventions, but a poor record of bringing those to the market. I contend that this is a cultural as well as educational issue. We want someone else to make the big decision, take the risk, and are happy to simply bask in the glory of the discovery. As a people we are risk adverse, we would rather take a margin trading than expose ourselves to the risks of manufacture.
As Napoleon said, “The English are a nation of shopkeepers!”
Entry and exit from Markets.
The major draw backs of a market economy, where competition is the main regulator, lie in the tendency toward monopolistic practises. These practises are likely to result in the distortion of pricing mechanisms, not least in the labour market, where exploitation of the worker will result, particularly during the downward phase of the trade cycle.
If we want to bring about a more entrepreneurial economy, we need to examine the factors that influence both entry and exit from a market.
The entrepreneur in arriving at a decision to start a venture must not only take into account the costs and regulatory requirements of starting a business, but also the costs of closing the business as these impact on his level of risk. Here we not only need to consider the ease with which we can hire and fire people, but also the general insolvency law.
In the USA, for example, the insolvency law is far less onerous than in the UK allowing for relatively easy exit from the market or restructuring of companies under financial duress. In the UK the tendency is mainly toward liquidation rather than re-structuring. We need to address our insolvency law if we want to bring about a culture of “derring do” or enterprise. Entrepreneurship is seldom calculated to the nth degree and often involves seeing an opportunity (gap in the market) and taking a risk that others will not dare. If the consequences of failure are not too disastrous more people would be prepared to take the risk, and while many will fail some will succeed.
The American slogan “if I can't fire, I won't hire!”. The UK labour legislation is a veritable minefield, suited more to large corporations than new embryonic ventures. We cannot create a culture of enterprise unless we look to large scale exemptions from much of our labour legislation in regard to new (less than 5 year old) ventures.
Access to Capital
The ease of access to capital is possibly the biggest deterrent to entry into a market. Here we see many traditions that mitigate against new businesses.
Foremost is the banking principle of lending to wealth.
We will often hear small businesses say;
“Banks offer an umbrella when the sun is shining, but take it away when it starts to rain”. Obviously this is sound Banking, as the Bank's first responsibility is toward its depositors, but it is the cause of many a failure amongst small businesses.
“Banks will only lend to me, on condition that I provide securities like a second mortgage on my house”. Here we have an issue that is partially cultural, we should accept that if we ask someone to take a risk on us, we must also be prepared to take risk ourselves.
“Yes, I can get a Bank loan, but the interest they want is ridiculous”. Once again the issue is partially cultural, a business should be borrowing money to expand its activities and if that expansion is so marginal that, it is not viable as a result of having to pay interest commensurate with the risk being taken then the expansion is simply not viable.
The 1980's (lets call them the Thatcher/Reagan era) saw the introduction of formal Venture Capital markets which brought equity financing within the reach of the SME. These exchanges should probably be evolved further, possibly right down to community level exchanges.
Regulation and Licensing.
Obviously the less formalities that need to be completed in order to start a business, the greater the likelihood of a new businesses being born.
Regulation should only exist in so far as it is designed to prevent the excesses of Capitalism. These include exploitation of the worker or employee, environmental issues and other activities that might contrary to public interests.
Licensing, while partially a means to raising Government revenue, is also a barrier to market entry as it reserves the right of entry to a particular sector, to the few. (See my quotation on democracy from Thomas Paine above.)
Taxation as a barrier to supply side growth.
We saw above that both Margaret Thatcher and Ronald Reagan relied on reduced taxation to act as a stimulus for demand rather than money creation advocated by the Keynesian school of thought.
In the case of Reagan, he simply allowed the USA fiscal deficit to grow, relying rather on the major trading partners to fund the fiscal shortfall. With the dollar being used as the world's primary reserve currency, this seemed feasible in the short term, in the longer term it has resulted in a transfer of ownership of much of the USA industry to the East, particularly Japan. To a lesser degree China who have preferred using their Dollar holdings to buy up raw material resources in the developing world.
Margaret Thatcher after the bonanzas of privatisation had been exhausted was forced to resort to more and more regressive forms of taxation. This trend has continued through the the subsequent governments and has created a situation where the impact on the poor has put greater pressure on the budget to maintain it's social security net.
Let us look at some of the indirect taxes that impact negatively on new start ups or business generally.
VAT: A new venture will not immediately obtain Vat status, rendering it uncompetitive in supplying to businesses.
Business Rates: These amount to a tax on running a business.
Fuel Duty: This is a silly tax, as it impacts on cost of goods through the transport factor. It generally reduces the competitiveness of British manufacture in the export markets.
Import Duties: These are so skewed as to discourage British manufacture. For example in the electronics industry, if I import components I will pay import duty, while if I import the end product that I have designed ready assembled there are no duties! This is one of the main reasons that we have a weak electronics industry.
I could carry on ad infinitum with distortions in our tax system that ultimately impact against the development of British Industry. We really need to overhaul our tax system from top to bottom. Tax is the cost of running a Government which hopefully provides services and benefits to us all and as such should be paid by the people of a country. Any tax on a business be it income tax or otherwise is ultimately paid by the people … in the price of goods they buy!
The saying that “only the air is free” is no longer true, the energy companies in complying with carbon reduction targets have to include the increased costs in energy prices, which is really a tax.
We can now truly say “even the air we breathe is taxed!”