Supply chain blues

In The Fifth Discipline, his book about systems thinking, Peter Senge describes a business simulation called the ‘beer game’. Developed in the 1960s at MIT, it consists of a simple supply chain for producing and distributing beer played out between a retailer, a wholesaler and a brewery. As the game starts, the retailer is selling and re-ordering four cases of beer a week, keeping a stock of 12 cases in store at any one time. Similarly at the wholesaler, except that his weekly orders are in truckloads. End-to-end time from retail order to delivery to the shop is four weeks. The game covers 25 weeks.

The fun starts in week two, when the retailer unexpectedly sells eight cases of beer instead of four. So he doubles the week’s order to eight, wanting to replenish his stock. But the next week, he sells another eight, while he only receives four (the order he made a month ago). That leaves only four cases in store, so he ups his order to 12 cases. The same thing happens in week five, and now, with panic in the air, the order goes up to 16.

Meanwhile, the same thing is happening up the supply chain, but amplified by the ‘bullwhip effect’ – the farther in distance and time from the customer, the greater the flex, like the tip of a whip when you crack it. After a few weeks of soaring orders from the wholesaler, the brewery is rubbing its hands and wondering if it should increase capacity. But a few weeks later, as the retailer starts to receive ever larger deliveries, he stops ordering. His stockroom is full and he has several weeks in hand. The cycle goes into reverse.

Senge reports that over thousands of replications, the game always ended the same way. A spike in demand leads to a build-up of orders and depleted inventories through the system – until volume deliveries feed through and orders promptly dry up. By the end of the game all the participants are awash with unsellable beer, each blaming the others for not keeping up with wildly shifting demand… They can scarcely believe the truth: after doubling in week two, retail demand remains perfectly stable at eight cases a week for the rest of the game.

Of course, since the 1970s management of supply-chains has tightened out of all recognition, with lead times slashed and smaller deliveries made just-in-time. On the other hand they have become longer and much more complex. Modern retail logistics systems perform extraordinary feats of coordination embracing thousands of suppliers to keep shelves filled even at the best of times. But tight links and many nodes also make for greater vulnerability to disruption, amplified by interaction between different supply chains – shortages of microchips, for instance, causing knock-on bottlenecks in logistics chains across many other industries.

Even with today’s technology, product or service supply chains need specialised workers to operate them. Specialised workers are the product of their own human supply chains, all operating to different lead times. Assuming you can get them – a big if nowadays – carers, bartenders and fruit-picker will take days to train, waiters/waitresses and food processing workers weeks, brickies and HGV drivers months, butchers and carpenters a year to get to basic level, nurses and mâitre d’s three years, vets five, GPs 10 and consultants 12 and up.

The hidden intricate infrastructure of the economy, modern supply chains cope with temporary shortages or small changes in demand every day. But now imagine them as a single enormous interrelated global beer game. And then the consequences of tossing a giant Covid-shaped spanner into the works. Manufacturing disrupted everywhere, as plants shut down or cut shifts; shipping schedules in chaos with vessels and containers non-existent where they are needed and jamming hubs and ports where they aren’t; travel and mobility restrictions inserting frictionpreventing the usual short-term fixes; and on top of all that, structural shortages breaking everywhere as the Covid shock jolts aggregate demand and supply and demand out of sync for everything from vegetables, bricks and microchips to labour. Especially the latter: if anything, the Great Resignation in the US may be accelerating, and in the UK the Office for National Statistics reported that in the three months to September a record 1.1m vacancies were posted – a rise of one-third over pre-pandemic numbers.

Then there are the debilitating symptoms of ‘long Brexit’ emerging as Covid peels away the patches on our fragile supply lines. More than one-third of the UK’s 5m resident EU workers who were expected to remain and ensure needed labour-market flexibility have had enough and gone home. The effects on the UK trades and professions listed above, all of which are in desperately short supply, have been dire. In comparison to the structural need, the government’s offer of short-term visas for a few hundred butchers and a few thousand lorry drivers and poultry workers is like using sticking plasters to cover holes in an already tattered bandage.

For once it really is, to change the metaphor, a perfect storm. Yet while this storm seems to have particularly complex causes and chaotic effects, we can see already how it is turning out: exactly as in the beer game, amplified to a massive and ramifying scale. Here’s veteran FT columnist John Dizard: as supply chains begin to sort themselves out, ‘an inventory recession looms,’ he predicted in a recent piece. 

‘Why will consumers order new stuff if it turns out they over ordered in 2020 and 2021?… When all the goods are delivered by all those truck drivers coming out of retirement, there will be a huge global pile of stuff that will not be reordered soon.’ Industry associations across the economy are saying that the consequences will be playing out until 2023 or beyond – the sheer number of bottlenecks feeding into each other makes what comes next hard to predict after that. Dizard reckons the effects will be echoing around for decades.

A couple of rounds of beer game 2.0, anyone?

Johnson’s conjuring tricks are wearing thin

Never waste a good crisis, is a worthy if tired motto. But never has the notion been put to more brazenly opportunistic use than by Boris Johnson’s government. Like a fairground magician performing dodgy conjuring tricks, Johnson this week produced the most preposterous rabbit yet from his Brexit hat: the promise that by barring migrants and raising wages, leaving the EU would transform low-wage, low-productivity, service-based Britain into high-wage, high-productivity Germany.

Like all his previous rabbits – the famous £350m a week for the NHS, ‘prodigious extra quantities of fish’ for UK fishermen, frictionless access to the EU single market (‘the easiest agreement in the world’) assured by the insistence of Italian prosecco and German car manufacturers, the assurance that the Irish circle can be squared just by saying so, in short his whole cakeist agenda – this one will turn out to be illusory. 

Of course, everyone would like to see a high-wage, high-productivity, levelled-up economy. But the notion seized on by a panicky government that 40 years of sedate jogging down the low road to a low-skills service economy fed by an endless supply of cheap European labour can be reversed in months by market forces is both fantastical and insulting. Yet this is par for the course from a government whose lack of planning and preparation for Brexit and messianic belief in the free market leaves other Europeans slack-jawed with astonishment. 

While Brexit isn’t the cause of every one of the current emergencies, it is making all of them worse – and will continue to do so. Naturally, this could and should have been foreseen. 

Take the gas crisis, the result of a uniquely British collision of Brexit, short-sighted regulation and government inattention. Brexit was the trigger, leading predictably to the UK’s exit from Europe’s internal energy market in January this year. Warning bells should have sounded in 2017 with the closure of the UK’s largest storage facility, holding 70 per cent of the total, when the government withdrew financial support. The final straw dropped this autumn with the collapse of a number of fragile energy firms when their business model of buying energy short to supply under longer-term fixed-price contracts turned sour – exactly the same formula that, apparently unremarked by Ofgem, brought down the banks in 2008.

The same pattern of long-term neglect punctuated, as now, by periods of hasty policy retrofitting on the hoof, is repeated in many other sectors, notably logistics, as well as in the shape of the economy as a whole. As ministers are now discovering, the UK’s hands-off attitude to globalisation has bequeathed an unresilient economy that imports far more than it exports, most of it from Europe and much in essentials. Most economies carry six to nine months of stocks in their supply chains, and these are now running low at a moment when the global economy is picking up. Predictably. Given its unbalanced economy, this is particularly serious for the UK, and it can only get worse when the full regime of customs checks and declarations on imports, which has been repeatedly pushed back, is finally imposed next summer. Once again, thank you, Brexit.

For everyone bar Johnson himself, a few hedge-fund cronies, and a booming bureaucracy industry, the Brexit vanity project has been a disaster. Think fishermen, reeling from a smack in the face with a wet mackerel instead of the revived industry they signed up for; farmers leaving crops rotting in fields or having to incinerate thousands of pigs for lack of pickers and abattoir workers and butchersto process them; exporters to Europe labouring under the costs and delays of extra paperwork and customs checks; the City of London, hardly a low-pay sector, which nevertheless wants temporary visas for brainy foreigners to help drive start-ups in fintech, law and ‘advisory services’; firms and even individuals in retail, hospitality, care and logistics, worn to a frazzle by worsening conditions even as pay edges up; and, finally, consumers, unable to fill up their cars, who face supermarket shelves emptied of necessities and generously hiked prices on those they can actually buy. 

So far, the government has dealt with all this by short-term expedients, chiefly blaming Covid and hurling money around with the abandon of a Euromillions lottery winner, along with toting a few small wins (one of which, believe it or not, being the proud boast that publicans and retailers can now revert to the 1970s and sell stuff in imperial measures – pounds, ounces and pints). But the larger contradictions are coming home to roost as the Treasury reverts to type and flatly contradicts the levelling-up discourse by raising taxes and removing £20 a week from the pitiful amounts available to the most vulnerable Universal Credit claimants. So what happens if the wage increases the government now praises as the welcome price of Brexit feed through into rising prices rather than productivity, which on past form seems supremely likely, and red-wall voters at last begin to see through the artifice of the magician’s tricks? 

Some fear that in that case Johnson would play the last card in his Brexit hand and carry out the long-threatened unilateral withdrawal from the Northern Ireland protocol. This would set off a major diplomatic crisis with the EU and US, and the kind of ‘back me or else’ crunch at home that he has exploited before. If that happens, with Covid infections still running at 60,000 a day, by far the highest in Europe, a shortage of turkeys or sprouts will be the least of the UK’s Christmas worries. It may be a long, cold winter. 

The death of the job

One of the many things that Covid has bust wide open is our ideas of work. More accurately, it enables us for the first time to see as a whole many different things about work that we already dimly knew but had avoided thinking about. And what is revealed is shocking. 

The first revelation was that millions of frontline workers – the essential carers, cleaners, nurses, shelf-stackers, drivers and runners who keep the wheels of the social economy turning – were risking their (and others’) lives doing jobs that paid poverty wages. That was followed by the discovery that many of the more privileged work at least as well in their front room as they do in their official workplace – in other words, their hovering managers and expensive offices were neither essential nore added much value.

The third revelation is that a lot of work – most? – is horrible. It is demeaning, insecure, surveilled, stressful and unpredictable.  Sometimes it makes you ill, or worse: as Jeff Pfeffer catalogued in his angry Dying For A Paycheck, toxic workplaces kill 120,000 Americans a year, making going to work the nation’s fifth largest killer. 

Today, according to Gallup, just 40 per cent of Americans are in ‘good’, ie full-time jobs. The other 60 per cent have jobs qualified as ‘mediocre’ or ‘bad’. Unsurprisingly, those unsatisfactorily employed are more likely to have seen worsening conditions during the pandemic. At the same time, adding insult to injury, the pay of CEOs is touching new heights as boards rush to compensate them for the terrible unfairness of having to cope with the fallout from Covid. The High Pay Centre estimates that this year median pay for top UK CEOs is 120 times that of the typical worker; in the US the ratio is an out-of-sight 300.

All this puts some context around the latest unwelcome discovery: that ruptured supply lines over an ever growing range of products and services – meat, fruit and vegetables, a variety of groceries, hotel laundry, building materials, gas – are mostly caused by a paucity not of raw materials or manufacturing capacity but of people willing to process and deliver them.

In all this, Brexit is an aggravation, not a fundamental cause. Apparently as contagious as Covid, labour shortages are erupting all over the world. In the US an unprecedented 4m fast food, hospitality and retail workers quit their jobs in April in an ongoing movement that has been dubbed the ‘Great Resignation’. Despite the shortages, the US adult participation rate has rarely been lower. But wherever the walk-outs occur, the reason is the obvious one: a wave of revolt at work that is literally not worth doing. 

‘We all quit!! CLOSED!!’, read a sign posted outside a branch of Wendy’s. ‘Closed indefinitely because Dollar General doesn’t pay a living wage or treat its employees with respect,’ read another. In the UK, in a series of articles, the FT’s excellent Sarah O’Connor has shown how jobs that the government now expects British workers to fill, such as fruit picking, meat processing (one of the UK’s largest ‘manufacturing’ sectors) and lorry-driving, are simply incompatible with a normal family life, or even a single human one. In short, people have had enough of being abused and exploited. If companies don’t care about them, why should employees be any different?

It’s hard to argue they are wrong. The real surprise is not that the pot has boiled over now, but that it has been so long coming. Today’s crisis isn’t new. It is the culmination of a 40-year shift in which for most people the employment relationship hasn’t so much changed as been abolished, as companies systematically offlloaded employment risk and responsibility on to individuals. 

When I started work in the 1970s, employers were paternalistic, but at least that implied an obligation. Shell and Unilever had their own sports grounds, many subsidised activities, sometimes even housing. But any remnants of such ‘parental’ ties were severed in the 1980s as the obsession with cost-cutting and outsourcing took hold. 

For those who kept their jobs, from then on the only thing the company committed to provide outside the job and pay was a vague promise of ‘employability’. Career and increasingly pension were now the responsibility of individuals, as employers – given the excuse by daft regulation – lost no time in ditching final-salary in favour of much cheaper defined-contribution pensions. 

After long-term employment, career and pensions had been pared back, since the early 2000s it is the job that has been in the corporate firing line. As software, enabled by the internet and particularly machine learning, eats the world, much work has become commodified to the point of fungibility. Shift, part-time and temporary work have burgeoned, at the extreme in the shape of the abomination that is the zero-hours (or zero obligation) contract, and increasingly, with the growth of the platform economy, as the gig. 

Here, the corporate campaign against employment, hitherto subterranean, has broken into the open in the legal battles by Uber, Deliveroo and others to prevent their drivers and couriers being classified as employees rather than independent contractors. It’s hard not to think of this as, for many people, the death of the job. It’s certainly the end of the conventional notion, embodied in many governments’ economic policies, of work and employment as a reliable route out of poverty, and of companies as the transport that will carry them upward.

The truth is that in recent years companies, egged on by the capital markets, have done everything in their power to avoid employing people full time, and have only done so as a last resort. And now that Covid has disrupted the supply lines of expendable cheap labour that they depended on to flex, they are left in today’s fix.

Given its complex origins, don’t expect the present crisis to solve itself naturally if and when Covid runs its course. It wasn’t after all nature that created it in the first place. Rather, it is the inevitable result of the collision course with their own employees and the rest of society that managers and directors set themselves and their companies on when they adopted the ideologically-driven credo of shareholder value in the 1980s.

It would be hard to imagine clearer battle lines. On the one hand, in 2015 an international Gallup survey found that a steady job with a regular pay packet was the thing that most people wanted more than anything else in the world. On the other, a steady job with a regular pay packet is the thing in the world that most companies least want to give them. Yet as companies may now be beginning to worry, winning the battle isn’t the same as winning the war. Recall the legendary exchange reputed to have taken place between Ford boss Henry Ford II and Walter Reuther, head of the powerful autoworkers union, as they inspected a brand-new automated Ford production line. ‘Well, Walter, how will you get these robots to pay your union dues?’ asked Ford. ‘And how will you get them to buy your cars, Henry?’ Reuther replied.

A new look

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As ever, thank you for your loyalty, most of you over many years. Don’t hesitate to let me know any issues – and suggestions will be welcome.

Universal Basic Capital: an idea whose time has come?

In 1976, Peter Drucker wrote a book ambitiously entitled The Unseen Revolution: How Pension Fund Socialism Came to America. It was one of his least successful books, and he later retitled it more modestly The Pension Fund Revolution. This was sort of plausible in that when he wrote it 25 per cent of US company equity was owned by pension funds (by 1990 it was 40 per cent), but wholly wrong that it betokened a revolution. It should have been called ‘pension fund capitalism’, to reflect the fact that the funds were instantly captured by the fund-management industry – trustees, fund managers, shareholder proxy advisory services and even hedge funds, which incomprehensibly pension funds are permitted to invest in and even worse lend shares to for voting purposes – to become, ironically, an integral part of the short-termist shareholder-value ecosystem that has distorted our economies, impoverished the 99 per cent and fostered the populism that now threatens our entire democracy.

But 50 years on, could something like Drucker’s pension fund revolution be on the cards today? 

A couple of years ago, a second slim volume appeared under another alluring title: Citizen Capitalism: How a Universal Fund Can Provide Influence and Income to All. One of its three authors was the late, much lamented Lynn Stout, Cornell law professor and writer of the definitive and self-explanatory The Shareholder Value Myth (I wrote about it here).

Their proposal was in concept a simple one: ‘to respond to the crisis of declining American civic engagement, unity, and financial security’ by setting up a universal fund, voluntary and open to all citizens, that would assemble a portfolio of stocks, at the beginning chiefly from corporate and individual donations, and distribute the resulting dividends and other proceeds as income to members. The fund wouldn’t sell or trade its shares, and nor would citizen-shareholders, whose holdings would revert to the fund on their death. 

Crucially, however, individuals would have the right to vote the shares held in the portfolio. Part of the point of the fund would be to build stable, long-term holdings for companies, at the same time providing incentives for individuals to vote their shares accordingly. This, they argue, would be a step towards liberating corporations from ‘the tyranny of shareholder value’, the better to serve the broader social interest. By making the voice of ordinary shareholders heard in the boardroom, citizen capitalism, they hoped, would empower ‘a new class of long-term, diverse shareholders who can change the direction of corporate America, making corporations more citizens’ servants – and less citizens’ masters’. 

While modestly well received when it appeared, the book promptly disappeared from view at the end of 2019, blown away in the gale of panic unleashed by Covid. That might have been that. But as we have discovered, one of the most surprising qualities of Covid is its magical ability to turn things that were previously unthinkable into not only thinkable but eminently and urgently doable ones.

One such suddenly doable project is ‘levelling up’, or ‘refloating the middle classes’, as it would be in the US. While last year’s furloughs and grants of various kinds effectively functioned as emergency bungs to bail out some of the most disadvantaged in the system, these don’t remotely touch the longer-term income and other inequalities that the pandemic has brutally outed – and will need fixing in fairly short order if democratic capitalism is to have a future.

Right on cue, enter in the last few months the notion of ‘Universal Basic Capital’ – a national endowment that, picking up on citizen capitalism, would channel equity contributions from philanthropists and companies into a fund, roughly modelled on a sovereign wealth fund or Alaska’s Permanent Fund, for the benefit of individual citizens. 

For proponents, UBC has several advantages over the more current idea of Universal Basic Income, being both more practical and in the long term more far-reaching – an unusually favourable combination. It’s more practical, politically and otherwise, both because the concept is already familiar from mutual and soveign funds, and, more importantly, it doesn’t require extra taxes or compete with other causes for existing funds. Moreover, as proponents as different as hedge-fund meister Ray Dalio and left-wing economist Joe Stiglitz can agree, if the fund were allotted equity stakes in companies bailed out during the pandemic, the public would rightly share in the upside potential of recovery in return for bearing the downside risk during the crisis. On the same grounds, how about it taking a small stake in start ups, too? Didn’t Nobel economist Herbert Simon estimate that 80 per cent ‘of the income we enjoy comes not from the efforts of living individuals or existing corporations, but from this shared inheritance’?

Universal capital could also be much more far-reaching than UBI in its effects, at least over time. This is because it goes with the grain of capitalism rather than fighting it. Thus it is not re-distributive (altering the distribution of wealth already created), as with UBI, but pre-distributive (permanently altering the basis of wealth creation in the first place). As it accumulates over time, the fund becomes a force for individual levelling up, which, at least in the active citizen capital model, would be reinforced as long-termist ownership and share voting begin to correct the dysfunctions of today’s corporate governance.

Finally, in so doing the fund would reorient the corporation away from its misguided and destructive obsession with the present and honour its most extraordinary feature, its ability – when properly managed – to function not only as a wealth creator in the here and now, but also ‘as a vehicle for the present generation to altruistically pass forward resources through time to benefit those who will live in the future’.

The cost would be small, the effects large, though gradual, and they ought to appeal to both right and left. As Dalio notes: ‘[The fund idea is] an odd duck that is neither capitalist nor socialist. And the fact that you can’t so easily label it is one of its more appealing aspects’. It should be on the agenda of any progressive party that has an interest in fairness and working to correct the short-termist bias of today’s corporate governance. Unfortunately, given the UK’s non-existent record of institutional innovation since the founding of the Open University in 1969, and the Labour Party’s crisis of timidity, it is unlikely to happen here. So the best we can hope is that it is taken up by President Biden’s policy wonks, or gains traction in the shape of the voluntary model of Stout et al, thus giving us something we can copy without having to look too brave about it.

How England’s footballers ran rings round its politicians

It’s tough to lose the final of the Euros. It’s even tougher to lose it on penalties – a cruel and unusual punishment made more so by the fact that partly responsible was a tragic error by a coach who knows all about taking penalties.

But enough of the hysteria. Just as there was far too much expectation squatting like a stone on the England squad from the start, so the vastly overdone despair at falling at the final hurdle is in danger of erasing the magnitude of the achievement.

It’ll be no consolation for the team’s last three young penalty takers for the time being – see Marcus Rashford’s agonised letter of apology for his shootout miss. But it is hardly a disgrace to lose out to Italy, along with Spain one of the two best sides in the tournament. Remember that England came through the month unbeaten in open play and held the Azzurri to a draw over 120 minutes in the final.

After the disappointment, let’s take pleasure in what we have: a talented, genuine and eager squad that did us proud by getting to a final for the first time for half a century, led by a decent, honest manager whose ‘Dear England’ letter at the start of the tournament was more eloquent about patriotism and being English than any politician in any party for as long as one can remember.

And whose conduct has a lot to say about good management. Since 2016 Southgate has quietly remodelled the national team in the modern European idiom, something that proved beyond all his predecessors – Sam Allardyce, Roy Hodgson, Steve McLaren, Fabio Capello, Sven-Göran Eriksson, Kevin Keegan, Glenn Hoddle, Terry Venables, even though all of them tried – all the way back to Graham Taylor, the last exponent of blood-and-thunder English football exceptionalism in the 1990s.

In this, of course, he has been much aided by the foreign managers and players who have been attracted to the English game. To put things into perspective, the last time a club managed by an Englishman won the Premier League, the richest and by some measures most competitive league in the world (although the Germans, Italians and Spanish might have something to say about the latter), was 30 years ago. Leeds under Howard Wilkinson in 1991-92, since you asked.

Since then, foreign money and the personnel that followed it have brought the elite English clubs, many of them kicking and screaming at first, into the modern football world. Arsène Wenger was the pioneer with Arsenal’s ‘invincibles’, and from the millennium on only the Scot Alex Ferguson interrupts what is otherwise a continental managerial monopoly on winning in England. It has culminated gloriously over the last four years in the era of Pep Guardiola and Jürgen Klopp who at Manchester City and Liverpool have engineered a near-perfect synthesis of English and continental features, their teams at best allying heads-up technique and football intelligence, long lacking here, with speed and energy.

Southgate has observed and learned from these improvements, not to mention picked young players schooled in the new methods. One implication, of course, is that England’s Euros win over Germany, far from being a blow for Brexit, as one idiotic Tory tweeted, was precisely the reverse: a reflection of Southgate’s eager participation in the fizzing trade in ideas and people between the European footballing nations, each learning from the others, that over the last two decades has raised the bar across the continent and made Europe currently the most progressive footballing region.

As the FT’s astute Simon Kuper observed, Southgate has binned football nativism. ‘To him, football isn’t war, or art. It is a system’, Kuper writes, and the coach has constructed a team to compete with other systemically inclined European teams on an equal basis. His players are young, hard working and resolutely diverse, and Southgate has brought the best out of them as enlightened managers do in any workplace: by treating them as adults and giving them confidence to express themselves both in their work and outside it.

Their football, although still a work in progress, speaks for itself. But unexpectedly, it’s outside football that the players have been handing out the sharpest lessons. And my, haven’t they done it well. The unselfconscious, natural way they have taken the knee; the direct calling out of Priti Patel’s hypocrisy; the straightforward acknowledgement and apology for their mistakes; all these have rattled and wrong-footed Johnson’s government at every turn – the equivalent of a football nutmeg – and made ministers’ belated scramble on to the bandwagon of the team’s success look both risible and desperate, as Marcus Rashford did earlier over school meals. As Marina Hyde asked rhetorically in The Guardian, while footballers barely out of their teens find it necessary to own up publicly for missing a penalty, when has the government ever acknowledged responsibility for its much more serious mistakes over the last two years, let alone said sorry for them?

Yet while Southgate has decisively modernised its football team, and through his endearing and diverse young team given us a glimpse of an England as we would like us to be, the scenes at Wembley both before and after the final are a sobering reminder of an older one that lingers on in half life: the England of the long ball, battlers and in-your-face aggression on the football pitch, magnified into xenophobia and violence off it.

Taming our tribal traits once and for all won’t happen overnight, or even at all, without political and management of a consistently high order, one devoted to calming passions rather than arousing them, unifying round a shared purpose rather than dividing, and cultivating diversity rather than stoking confected culture wars. Although rare, that kind of modest, thoughtful leadership does exist. Just a pity for our wider politics that it’s in the English football camp, rather than in Downing Street or Westminster.

Regulating the regulators

In pursuit of the chimera of cost-free growth, every government seizes on the idea of pruning regulation, aka ‘slashing red tape’. Boris Johnson’s is no exception. First it took an axe to the planning rules, vowing the biggest shakeup for more than a generation. Now the latest Taskforce on Innovation, Growth and Regulatory Reform (TIGRR) has reported, promising, what else, ‘a bold new regulatory framework’ to take advantage of the ‘one-off opportunity’ of Brexit to free up enterprise from red tape (not to mention afford Johnson an unmissable chance to congratulate its authors for ‘putting a TIGRR in the tank’ of British business).

So far so normal. The big irony is that the intuition is right: of course there is too much regulation, and the worst of it is both intrusive and ineffective, while making life miserable for the regulated (think teachers, social workers, GPs) – the worst of all possible worlds. The cost of regulation is unknowable, but it certainly outweighs any social or economic value it creates by a wide margin. But the latest report shows no more understanding why than its predecessors. Like all of them, this one acknowledges that regulation can and should be positive: ‘Good regulation, set up in the right way, can be a vital part of the infrastructure to support growth’. But there is no indication that its authors know what ‘good regulation’ is. There is much talk of ‘digital opportunities’, ‘smart’ and ‘agile’ regulation, and things like ‘sandboxes’ to play with it in, but no hint of the crucial part it plays in a larger system or how it should do it. 

Regulation has become a monstrous industry that feeds on itself. Like targets, bad regulation begets more regulation and more red tape. John Kay wrote in his eponymous 2012 review, ‘We have dysfunctional structures that give rise to behaviour that we don’t want. We respond to these structures by identifying the undesirable behaviour, and telling people to stop. We find the same problem emerges, in a slightly different guise. So we construct new rules. And so on’. True to form, the current report sees no irony in proposing that increased discretion for regulators to change the rules should be offset by ‘a strengthened system of Select Committee scrutiny, supported by more effective, and more effectively used, economic impact assessments and metrics’ – in other words, another layer of regulation – aided by a Better Regulation Committee and a new Brexit opportunities tsar ‘to review and reshape rules and regulations to boost growth and drive forward innovation’ in the Cabinet Office.

Regulation should indeed favour innovation. In fact, it kills it dead in its tracks. To see why, listen to John Seddon’s podcast on ‘Buurtzorg: a brilliant care service that failed to work in the UK’ (and his other one on a recent ‘blueprint for social work’). Buurtzorg, as everyone knows by now, is a brilliant care organisation that from small beginnings has become an outstanding success in the Netherlands, its home territory. Based on small self-organising teams and minimal bureaucracy, Buurtzorg provides high-quality, personalised care at 40 per cent lower cost. In a country that has spent more than a decade dithering what to do about a social care crisis that deepens by the month, you might think this would be a model to replicate. Yet despite initial high hopes, efforts to do so in England have made minimal headway. Both countries started from the same position: a care crisis and a similar approach to public-sector management. So why the difference? 

The short answer is regulation. In the Netherlands, as Seddon notes, Buurtzorg founder Jos de Blok crucially didn’t have to start from here. Everyone knew that the previous system was broken. So when de Blok set up a small care outfit on a very different basis, he was allowed and even encouraged to experiment. To cut a long story short, Buurtzorg is now so successful with both patients and care workers, who still queue up to form new teams with one of the Netherlands’ most favoured employers, that under the tolerant eye of the regulator and politicians it is beginning to reshape the wider Dutch health service from the inside. 

Contrast that with the English response, which is to double down on existing methods, insisting that the only way to improve is to ‘try harder’. So the regulator still makes organisations report on all the unnecessary things – protocols, standards, activity levels – that de Blok knew he had to jettison in order to design a more responsive system. In effect, the Netherlands has moved on from the reductive, industrialised New Public Management paradigm that has strangled public services in the last 40 years, while thanks to the regulator England remains imprisoned inside it.

A quarter of a century ago Michael Porter and Claas van der Linde wrote a piece on regulation in HBR called ‘Green and Competitive: Ending the Stalemate’. It showed that it was wrong to think of environmental regulation as a static zero-sum game entailing higher costs (if the regulator wins) or lower quality (if companies prevail). Both win if properly designed standards trigger innovations that lower the total cost of a product and improve its value. This of course was the first lesson of the quality movement: doing it right first time costs less, not more. Innovation-friendly regulation focuses on outcomes, not processes or technologies — how to get there is up to companies. Above all, the aim is to learn and improve, a process in which regulator and regulated are partners, not adversaries, as they are usually cast in the UK. 

In The Whitehall Effect, Seddon outlines a simple way of transforming regulation and inspection from instruments of control and compliance to a force for innovation and improvement. In a redesigned system, parliament would set the purpose of the service, seen in customer or citizen terms, to which service organisations would be required to work. Neither politicians nor regulator have any business specifying methods or or processes – their job is to hold managers accountable, not to manage themselves. How to deliver the service is the job of management, using the measures and method of its choice – putting responsibility for innovation sqauarely where it belongs, at the point of contact with the customer. Regulation likewise should be close to the customer. Instead of looking for errors, checklist in hand, inspectors, says Seddon, ‘will pose just one question:”What are the measures and methods being used to achieve the purpose of the service?” and then check their validity’. Instead of policing, inspectors become a welcome source of support. It’s too late to remove TIGRR from the tank, alas – but this, he says, ‘is what intelligent regulation looks like’.

The revenge of those who saved the NHS

We knew the sort of things – part score-settling, part confession, part acute insight and part plain bonkers – that Dominic Cummings would come out with for the Parliamentary committee in May. He confirmed much of what we guessed about Boris Johnson’s ramshackle government and how it approached the pandemic. Together with what we have learned for ourselves over the last plague year it allows us to predict with some confidence the verdict of the official enquiry into the handling of the crisis, whenever it finally comes.

Of course, the report won’t say directly that we went into the biggest crisis since WWII with an administration of opportunistic and shifty second-raters, led by the biggest chancer of the lot – although it will surely make the point indirectly with hard words about PPE procurement, the ‘unimaginable’ £37bn spent on track and trace, the hopeless messaging surrounding the lockdowns and social distancing, and the ‘ring of steel’ supposedly thrown around care homes, among other things. It will also acknowledge that what happened last year was unprecedented, at least since the Spanish flu pandemic of 1918, and that if no government has got all its crisis measures right it is no surprise – one of the most sobering lessons of the Covid episode is that evolution in the shape of a tiny blind virus without a brain is a lot cleverer than we are.

Yet any report should also point out that Covid wouldn’t have been able to make itself so comfortably at home in our richest societies without inherited weaknesses that even a more competent and less feckless team would have struggled with.The most glaring is the neglected and run-down organs of state which both individually and jointly have comprehensively failed the challenge thrown at them. For this blame successive governments that having enthusiastically accepted the neo-liberal axiom that the market is the answer to everything if only the government would get out of the way, have over the last two decades casually outsourced capabilities, responsibilities and increasingly decision-making to the private sector and even more worryingly private sector IT.

As Cummings confirmed, what was left to face the crisis was a collection of inturned agency silos that were riven with rivalries, distrust and turf-wars, had no shared goals and were chronically unwilling to share information. Take your pick of hapless UK institutions to supply the aptest symbol of the UK government in 2021 – the risibly renamed Great British Railways, currently the worst run, highest cost, and least passenger friendly in Europe; the once-revered Post Office, which put more faith in its terrible computer system than in its staff and after a decade of defending its scandalous treatment of innocent postmasters is now having to pay reparations worth billions; or, nearer to home, the mother of Parliaments and home of British democracy which has been left untended and unmaintained for so long that billions are having to be spent to prevent it subsiding into the Thames. I could go on.

Then add to the state’s self-mutilation a decade of austerity that Covid has revealed as one of the most monstrous false economies of all time. Not so much thrifty housekeeping, more criminal failure to invest in the state’s decaying institutional infrastructure. The report might list an NHS subject to constant reorganisations that that can barely cope at the best of times; a threadbare unjoined-up care sector that is an insult to civilised society; contemptuously slashed essential local-authority services; unfit-for-purpose regulation (Grenfell Tower stands as another symbol of the UK’s complacent and negligent government); and the consistent blind eye turned to burgeoning economic, health and housing inequalities. 

As we have been learning, over the last year the cost of these policy choices has come flapping home for payment. It has been paid in the horrific tally of lives lost to Covid. The first job of any government is to protect its citizens. Instead, fearing above all the collapse of the perennially tottering health service, and without any other thought-out policy to hand, the government persuaded us to protect the NHS, and it, by, in effect, sacrificing the most deprived of society – the poor, the unhealthy, the inadequately housed and above all the elderly in care homes, all of whom suffer disproportionately from it – to the disease. And as a stopgap solution, grotesque as it seems to say so, it has worked. 

But there’s a kicker. ‘Saving the NHS’ in last year’s terms is not only not a long-term solution; it is a Pyrrhic victory that we can’t affort to repeat. Reparations for the decades of neglect and austerity are urgently due. And there can be no question of non-payment. In an increasingly interconnected world, the occurrence of more non-linear, extreme events in the future is almost guaranteed. If the gaping holes in the social infrastructure and state competencies are left unfilled, society will remain as vulnerable to these future unexpected unknowns as it was to Covid in December 2020. In the meantime, the pockets of deprivation in our midst will remain breeding grounds for new variants of the coronavirus, just as will happen in poorer countries until they are vaccinated too. The report might but probably won’t call it the revenge of those who saved the NHS.

Biden’s bigger challenge

In 100 days, President Joe Biden has not only blotted out the political nightmare of the last four years and restored due process to US government. Remarkably, he has rewritten the economic orthodoxy of the last 40 years from top to bottom.

Deficits? Who cares? Not the IMF, which looks benignly on Biden’s three-legged plan to spend an astonishing $5.5tn, equivalent to some 35% of annual US output, on economic stimulus, including direct payments to families, rebuilding US infrastructure, and on supporting families, especially poorer ones. Biden’s intention to raise taxes on the rich and on corporations to help pay for it likewise fails to raise institutional hackles (although Republicans predictably declare themselves shocked, shocked): tax cuts are now judged to aid trickle-up rather than down, and inequalities – strongly fanned by the covid pandemic – both within and between countries, hold growth back rather than abet it.

n effect, Biden has cancelled the old Washington consensus and replaced it with a de facto new one – an activist state, progressive taxation, green infrastructure spending, support for trade unions, a global minimum corporate tax rate that has been resisted for years, and a winding back of globalisation, particularly in relation to China, to boost supply-chain resilience. Industrial and even employment policy hover in the wings. 

Of course, this is not to say that President Biden will automatically get all his initiatives through a finely-balanced Congress; mid-term elections, just two years away, could set the counter back to zero. Yet it is already clear that a reform-bent president has shrewdly leveraged the circumstances to change the terms of the debate. He has made clear that the current situation renders half measures worthless, and some hitherto unusual remedies both obvious and, dare one say it, oven-ready. 

Covid has played into this. On the one hand, a successful vaccination campaign that had already begun has redounded in Biden’s favour. The pandemic makes much needed health spending a no-brainer. It also encourages experimentation: as Larry Elliott noted in The Guardian, furlough schemes to subsidise the wages of those unable to work ‘are not the same as a basic income, but they are similar enough to get people used to the idea’.

Yet even if, as we fervently hope, Biden’s reforms are adopted and take strong root, there is one glaring hole in the programme through which unless stopped half the potential benefits will leak away. It’s the last economic taboo, so completely internalised and embedded in the national psyche that it’s never up for political discussion. It is of course the need to challenge the status of the corporation and the way it is managed.

Think about it. The corporation is the intermediary through which the lofty abstract economic ambitions – levelling up, building back better, full employment, decarbonisation – are translated into what actually happens to real people in real places on the ground. It’s the engine room of the economy. And management is the operating system that governs what it does and how it does it.

The trouble is that our managerial software hasn’t been upgraded for four decades. It is now so far out of kilter with the wider economic and social interest that the engine is producing as many if not more problems than solutions – including some of those that current reforms seek to address. One issue is that most companies now only create good full-time jobs (what most people want more than anything else in the world, according to Gallup) as a last resort. Another is declining innovation rates as companies plough investment into short-term efficiencies and share buy-backs rather than R&D. 

A third, and perhaps the most spectacular, is inequalities of all kinds, but particularly income and wealth: as Thomas Piketty put it in Capital in the Twenty-First Century, ‘In all the English-speaking countries, the primary reason for for increased income inequality in recent decades is the rise of the supermanager in both the financial and nonfinancial sectors.’ In the US, supermanagerial bonuses have soared by 1000 per cent over the last three decades, compared with a 116 per cent hoick in the minimum wage.

So the corporate OS urgently needs to be rewritten. But for all the well-meaning initiatives on both sides of the Atlantic – the Purposeful Company initiative in the UK, the US Business Roundtable’s declaration in favour of more inclusive business aims, BlackRock’s call for social purpose – it’s hard to imagine it will come about through self-regulation. As Tariq Fancy, formerly BlackRock’s head of sustainable investing, notes, fund managers and finance professionals are trained and incentivised to chase yield and profits, and most companies ‘are still profit-seeking machines, built from the ground up as a collection of legal and financial incentives to make a healthy profit’. Expecting a market to self-correct its distortions in these conditions is fantasy. Governments haven’t hesitated to legislate changed social and economic behaviour by their citizens to deal with the Covid crisis; they alone can alter corporate and management behaviours by changing the incentives and legal provisions that caused them. 

Yes, but… can they? Tackling the management challenge is a bigger and more contentious test than fashioning a spending programme, yet in the long term even more important. Try a thought experiment. Imagine a Biden, or any other, administration attempting to redraw the corporate rulebook, knowing that in question would be the business model, and outsize profits, of giants including Silicon Valley titans with a collective worth of some $8tn, more than the GDP of many countries, with lobbying and legal firepower to match. Is it even possible? Have we left it too late? Just asking.

On re-reading Peter Drucker

I’ve been reading Peter Drucker recently. Or re-reading: you couldn’t not be aware of him in the 1980s and 1990s, when a new tome with his name on it dropped on your desk every year or two (he wrote 40 in all), with names that often seemed to have little to do with management  – eg Post-Capitalist Society, The New Realities, or, somewhat bafflingly, Landmarks of Tomorrow.

At the time, though, I didn’t get him. He seemed to write in sentences that were both obvious and obscure. ‘The purpose of a business is to create and keep a customer’. ‘Management is doing things right; leadership is doing the right things.’ ‘Management and managers are the … constitutive organ of society’. What on earth did some of his famous one-liners even mean?

Had I been listening, one of the things those titles were saying was that Drucker was quite different from nearly all other management writers (apart perhaps from Charles Handy) in that management was not actually his primary concern. Paradoxically the ‘father of management’ was interested in management only because he was more urgently interested in something else. And – another paradox – management is the richer for it.

As you would be as a clever, well-connected young man in Vienna in the 1930s, Drucker was deeply preoccupied with world politics and society, and particularly the subterranean social currents from which totalitarianism had welled up in the shape of communism and fascism. It’s impossible to overestimate the importance of Drucker’s formative Viennese influences, rubbing shoulders as he did with Hayek, Mises, Schumpeter and Polanyi, as well as artists and musicians. ‘Management was neither my first nor has it been my foremost concern. I only became interested in it because of my work on community and society’, he wrote later. Either implicitly or explicitly, that wider interest is the subject of all his work.

For Drucker, the reason management matters is simple and basic. It isn’t an end but a means. The end is a free and functioning society, which can’t exist without thriving independently-run organisations and institutions. They depend in turn on good management. ‘Our society has become…a society of institutions,’ he wrote. When organizations are ineffective and corrupt, a command economy and society is the only alternative. That is what he meant by management being ‘constitutive’: ‘Performing, responsible management is the alternative to tyranny and our only protection against it.’

From this everything else follows. For Drucker, management was a moral profession, with a duty primum non nocere, first to do no harm. Companies, being part of society, had a direct stake in its health; too systemically important to be under the control of any one constituency, they and their managers had a first positive duty to make productive the resources that society put at their disposal. Profit was both a test of their effectiveness and the essential down payment on the cost of the future jobs and useful products it was their task to provide.

On the other hand, what profit wasn’t was a business’s purpose. Indeed, the nearest Drucker comes to a rant is his exasperation with managers for the complacent and circular way they used the profit motive (which he dismissed impatiently as the invention of neo-liberal economists to justify their equations) and profit maximization to explain their behaviour. Widespread public hostility to profit was their own fault, he declared: ‘In the terms management uses when it talks to the public, there is no possible justification for profit, no explanation for its existence, no function it performs. There is only the profit motive, that is, the desire of some anonymous capitalists – and why that desire should be indulged in by society any more than bigamy is never explained. But profitability is a crucial need of economy and society.’

This was written in 1974, when Drucker was already alarmed at the prospect of growing inequality and managers trashing their organisations’ reputation and legitimacy by ignoring their own social impacts and obligations – particularly the duty to create good jobs, which he correctly saw as the glue that kept society stitched together.

You don’t have to agree with everything Drucker said to see many further resonances with today. He would have treated with contempt Boris Johnson’s crass assertion that the warp speed arrival of Covid vaccines was due to ‘greed’ and ‘capitalism’. On the contrary, he would have described the UK experience, at least, as a too-rare case of ‘the society of institutions’ working as it should: decisive action by government to de-risk vaccine manufacture with bold advance orders, meshing with Oxford University’s public-sector research and Astra-Zeneca’s acceptance of the challenge to distribute it initially on a non-profit basis, and procurement followed up by the NHS’s near faultless execution of the vaccination campaign.

As for capitalism, Drucker judged it potentially a better basis for a free society than anything else on offer – but by no means unconditionally. It was constantly in danger of being subverted by the blind pursuit of money and profit. He hated managers benefiting directly from laying people off. Capitalism wasn’t an end goal in itself: ‘Free enterprise cannot be justified as being good for business. It can only be justified as being good for society,’  he wrote in 1954’s The Practice of Management.

Drucker was the moral conscience of management, which he viewed as a ‘liberal art’ – something that required broad human wisdom and judgment to harness the technological tools available and guide the art of practice. These were deeply unfashionable concepts in the era of financialisation when the only social responsibility of business was ‘to increase its profits’. (This is why his books barely figure in business-school curricula, majoring as the latter often still do on finance and shareholder value.)

Characteristically, Drucker’s last book was a collection of essays entitled A Functioning Society. If he were alive today, that would surely still be his central concern. And as we ponder the future of our economic institutions in the light of Covid, in the wake of Brexit and Trump, management itself would be right in the front line.

As Jerry Davis points out in a powerful recent essay on the weakness of purpose in the face of omnipresent pressures of shareholder value, ‘nearly every major societal pathology in the West today – certainly in the USA – is caused or exacerbated by profit-oriented corporations’. Think opioids (thank you, Big Pharma), obesity (Big Sugar), nicotine addiction (Big Tobacco) and climate change (Big Oil), all of whose managers have used relentless lobbying and misleading scientific evidence to confuse opinion and protect their profits, at the expense of the wider community.

But today the even more immediate danger to Drucker’s ‘free and functioning society’ is the potential reengineering of humanity itself through social media, aka Big Tech. The threat is no longer a blunt totalitarian ideology from outside but (Davis again) ‘a dystopian nightmare of increasing corporate dominance, in which a handful of unaccountable corporate hegemons use pervasive information technology to control our daily lives’ for their, their shareholders’ and manipulative politicians’ profit.

Deployed differently, those same technologies could also open up the prospects for democratic renewal, and there are some pressures from below in this direction. Will they be, though? It will need support from governments to weight incentives against doing the wrong things – no honest company should be handicapped against less scrupulous competition – and Biden’s support for trade unions is also welcome. But in the end it won’t happen unless management finally lives up to the responsibilities Drucker ascribed to it. As he almost said, good intentions, like plans, are worthless ‘unless it all immediately degenerates into hard work’.