How Labour Makes Policy

 A Constitutional View

It is often said that the Annual Conference is the Labour Party’s supreme policy making body. This is true for the party in the country. Conference is the party’s “parliament” where issues are debated by delegates appointed by CLPs, trade unions and socialist societies. It binds the NEC and party officials but not, of course, individual members who can continue to dissent.

However, MPs are accountable to a wider electorate as well as to the party membership. The party cannot mandate MPs or the PLP in the performance of their duties. On selection Labour candidates sign an agreement to take the Labour whip and to support the manifesto. This means that the PLP has some freedom of manoeuvre in policymaking. In practice, the Shadow Cabinet play a major role which is formalised in the rule book through the Clause V committee.

Clause V sets out how the manifesto is decided. The Cabinet (or shadow cabinet) meets with the NEC and representatives of the PLP, trade unions and other stakeholders to select from the party programme the items for inclusion in the manifesto and may decide policy on issues not in the programme.

The policy programme includes all the resolutions from conference which passed with a two thirds majority and so also includes the NPF report agreed by conference. The NPF consists of some 200 members including the shadow cabinet, NEC and representatives of trade unions, CLPs, MPs and councillors. It reports to conference each year and works under the supervision of a joint policy committee of the NEC.

A Policy Analysis View

The constitutional view does not tell us where power really lies, who is influential, which ideas get a hearing or how conflicts are resolved. For example, the leader’s office plays a role mostly ignored in the rule book. The first draft of the manifesto is usually written by the leader’s team and so key decisions are made even before the Clause V meeting happens.

Nor does it take account of the ecosystem of think tanks (IPPR, CLASS, Fabians), academics, lobbyists (SMMT, War on Want), campaign groups and other interests. These seek to influence policy through direct contact with MPs and often with fringe meetings and stands at conference. CLPs frequently pick up ideas from campaigning groups, for example, the green new deal or MMT. Corporate lobbyists are more likely to target the shadow cabinet.

As I see it the party has two strands of policymaking. One is through CLPs and unions submitting resolutions, responding to NPF consultations, and ultimately voting at conference. The second strand runs through the shadow cabinet. Each member is engaged in policy development in their area, drawing on advisors, consulting specialists and commissioning research.

Where shadow ministers have time to consult and deliberate, most CLP discussions are limited by the time available. So, we tend to stick to broad principles or seek to demonstrate a strength of feeling by passing similar resolutions across the grass roots. This leaves the shadow cabinet with the space to develop the details.

The potential strength of the NPF is that it involves CLP representatives in a more deliberative type of policy-making and it gives CLPs the chance to react to drafts of more detailed policy positions. It can bring together these two strands through the policy commissions where CLP and trade union reps can debate directly with shadow ministers. In addition, through holding hearings CLP reps have an opportunity to hear industry lobbyists, academics, think tankers and campaigners directly and put their claims to the test.

A Production Economy

This a further sketch towards a longer piece I'm writing. It's taking time as I'm still developing the ideas. Comments welcome, but I'm having technical difficulty responding.

Before goods and services can be exchanged in an economy they must first be produced. It is the act of production which adds to our wealth and well-being. The narrative of a market economy distracts attention from production and wealth creation to focus on buying and selling. In changing the story, we need to put back the idea of production. Britain was once described as a nation of shopkeepers. The market narrative portrays Britons as a nation of shoppers; we need to recognise ourselves as a nation of makers.

I use the term production to include all activities which add value in the economy. It is not limited to manufacturing or industrial production. Services too are produced and it is not uncommon to hear service companies refer to “products” when they mean the services they offer. For example, a bank might describe its variety of current accounts, savings accounts and credit cards as its product range.

It was perhaps easier to understand the production economy when more output was classified as industrial. The image that came to mind in the past would have been men going to factories, shipyards, building sites. Now when services dominate the economy, the image of women and men going to offices, retail parks and call centres doesn’t connect so easily to the idea of production.

A major difference between industrial production and services is that the output of a service is often consumed at the time of production. For example, a visit to the dentist, a car repair, a flight, a hotel stay, a restaurant meal, a business consultancy, a training course are all are largely produced in the delivery. Nevertheless, all involve the combination of labour and capital to provide a desirable output.

Since the time of Adam Smith, economists have identified three “factors of production” – labour, land and capital, although today we tend to see land as a form of capital. Production begins with labour acting on natural resources; shaping, moulding, transforming raw materials into useful and necessary stuff. Tools can enhance the output of each worker and so with more and better tools labour becomes more productive.  The modern firm needs workspace like a factory or office, stocks of raw materials, equipment including computers and software and the means to fund production until the goods or services are sold. This makes up its capital. This gives us the basic model of production: labour and capital combining to create desirable outputs. Neo-classical economists talk of a production function (f) where output of a firm (O) is a function of capital (K) and labour(L):

O = f (K, L)

This model assumes a given level of technology. The firm can increase its output through the introduction of new techniques and better technology. In addition, raising the skill level of labour raises output which is sometimes referred to as human capital. In summary, a firm’s output is a function of the amount of labour employed, the quantity of capital invested in the firm, the level of technology and the skills of the workforce.

Without tools a worker’s output is limited. With more capital invested in production the output rises. The story of labour productivity is not, as sometimes suggested, a matter of working harder but of increasing output through capital investment and exploitation of better techniques.

Shifting the narrative from markets to production helps to humanise our understanding of the economy. In place of the hidden hand of the market we have human agency in the form of people at work to create wealth using the equipment and machinery in which people have invested. We are transformed for passive consumers to active producers. Most people spend more time working than shopping. The production story connects to people’s experience of the economy in the workplace. Women and men lend their time, their effort and their skills to create the stuff that a society needs. For many of us a job is more than a way to earn money; it provides a sense of who we are and dignifies the contribution we make to the community.

The production story can also help to illuminate policy choices. Take the problem of plastic pollution. The market story encourages us to think of reducing consumer demand for plastic. Experience tells us that the market will respond to consumer pressure, as it did to the demand for less damaging agriculture, by providing alternatives and charging a premium to environmentally conscious customers. The production story suggests a different approach, that of acting directly to limit plastic production.

A shift to a production narrative will help to combat the myth that only the market sector counts in the economy. Production of publicly funded services are often discussed as if they are a cost to rather than a part of the economy. Yet the production of healthcare, education, environmental and many other services are contributions to the national income, not subtractions from it. According to the available statistics, the mostly government funded sectors - public administration, defence, education, human health and social work activities - add around 17% to GDP.[i]

So in the production story, teachers, doctors, first responders and other public employees are all workers contributing to the production of necessary and desirable services as part of the economy.

Updated 10/1/21: to expand the concluding section.

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[i] National accounts aggregates by industry (up to NACE A*64) [NAMA_10_A64], Eurostat.

Hard Choices

 Some Labour party comrades are very exercised at present over how the party should vote in a division that might never happen. What should the parliamentary party do in a vote which has not been called on a deal which does not yet exist?

I confess I find it hard to care about an issue which will change absolutely nothing. Indeed if there was a possibility that a deal was to exist and be voted down in the House of Commons then I think no-one would be in any doubt about what the PLP should do. Voting against is not an option because the party is united in wanting a deal. 

The choice between voting Aye or abstaining is purely symbolic. I find it hard to explain rationally the energy being expended on this hypothetical, gestural, procedural choice. I suspect no one outside of the bubble of political obsessives will even notice. The famous red wall voters have better things to think about.

The decision will have no impact on the real world. Not one person will be made better off; not one patient will receive treatment any sooner; not one homeless family will be housed; crime rates will not fall; the dole queue will not shrink.

I put quite a bit of effort into politics. I do so because I want to see change, real change, not to feel better about myself or to signal that I'm a right thinking member of the right tribe. There are enough real issues to keep us busy - climate change, poverty in the midst of plenty, corruption at home and oppression overseas.

Our representatives are worrying about the wrong thing and need to regain a sense of perspective. Forgive me if I don't care how you vote. Frankly, my dears, I don't give a damn. 

 

A Narrative of Abundance

This is also a first draft for the same piece I am developing. Constructive criticism is welcome.

Britain is a wealthy country. The UK has been a member of the club of rich nations, the OECD, since it was founded in 1961 and it grows steadily richer. We were not a poor country in 1980, but by 2019 we were twice as rich when measured by GDP per head. Part of the story we need to tell is about how the economy has led to such abundance.

In a production economy the output of economic activity is greater than the inputs. The value of the goods or services produced must be sufficient to provide for the wages of labour, a return on capital and to pay other direct costs. In fact, most production creates a surplus above the minimum needed for these purposes. Surplus is the difference between a subsistence economy and an economy which is capable of developing.

While it might seem like an obvious idea, economists have used different terms for “surplus” and encumbered it with theoretical and critical appendages. Adam Smith called it “extraordinary profit”. Neo-classical economists talk about “economic rent”. Marx drew on Ricardo’s labour theory of value to explain “surplus value”. (See box) For the purposes of a new narrative the term surplus will serve well enough although I may occasionally say rent where that is more natural.

In the market story profit is not a dirty word, but rent is. Profit is understood as the appropriate return to capital, the payment for patiently tying up capital in production. Rent however is a sign that a market is not functioning well so that the supplier or suppliers have power in the market enabling them to extract additional rewards. This view obscures an important reality of a production economy. Surplus is ubiquitous. It arises in many forms and is, in fact, the aim of any business with ambitions towards growth.

In what follows I will first outline the main types of market power which leads to surplus. I will show some evidence that business understands the pursuit of rent and finally explore what this means for our new narrative.

Market Power

Saudi Arabia can produce oil at a cost of around $3 a barrel. Adding capital, administrative and transport costs this rises to $9. If it sells at $50 a barrel then it has a surplus of $41 for every one of the 12 million barrels a day it sells. Oil is an extreme example of a resource rent. All the other oil producers share in resource rents. Even the UK where the total costs are $44 a barrel can provide large surpluses to Shell and BP.

Oil is not unique; all commodities are subject to the same dynamic. Some producers have lower costs of production than others and so win greater surpluses when they sell at the world price. Metals like copper, nickel and zinc; cereals like wheat, maize and rice; raw materials like timber, rubber and cotton; foodstuffs like beef, sugar and coffee; all are capable of delivering resource rents to particular producers.

Monopoly is another source of surplus. In most markets there are buyers prepared to pay a high price and many more ready to buy if the price is low. This gives the monopoly supplier an opportunity.  She can choose to keep production low and earn a large surplus on each sale or increase production and earn a lower surplus but by selling more increase the total take. A monopolist will try to set the price which maximises the total surplus.

Although the market story has a distaste for rents, governments are a major source of monopoly power. Governments grant patents to entrepreneurs who then have a monopoly on the production of their invention. In effect, patents offer the promise of monopoly profits as an incentive to innovation. They offer a bargain where the patent holder has excusive rights to the invention but must disclose it in the patent filing. Thus, when the patent expires, usually after 20 years, the innovation can spread more widely.

Pharmaceutical companies  are a good example of businesses which run on surpluses created by government. Technology firms too rely on patents, although software is protected by copyright which has longer time limits and fewer disclosure requirements.

Some monopolies occur naturally. If there are strong economies of scale then it may be cheaper to have a single producer or supplier. Natural monopolies include utilities where each household or business needs only one connection to the network. Amazon has built its business on economies of scale becoming a utility for online shopping and gains a monopoly surplus as a result

Digital technology has brought us a new kind natural monopoly, one where the economies of scale are on the demand side. We use Skype, for example, because other people we want to talk to use it. In fact, the larger the number of other users the more useful it is to us. This same logic applies Microsoft operating systems and office software. We want to be compatible with the systems everyone else is using.

There are many techniques businesses use to attract a surplus from branding to enable them to charge premium prices, to differential pricing – charging more to less price-sensitive customers. Monopoly profit may not need a single supplier but an industry with a small number of big players who don’t compete on price can create enough surplus to go around.

Business Strategy

Many businesses generate very little surplus. In small businesses like local shops, restaurants, workshops and professional bureaus the surplus is adsorbed into the income of the owners. Any business with ambitions to grow will want to create a surplus to pay for investment in expansion. However, it is in large corporations where making a surplus is approached as a scientific effort. As a student of business studies I learned that most corporations do not seek a level playing field. In fact, the aim is to tilt the field in their favour. Few firms will express it that way; the term of art is “competitive advantage”. A company with an advantage over its competitors is one which can reap extraordinary profits.

Competitive advantage is a central idea in business strategy. Various techniques are used to identify and to sources of advantage. One well known tool, Michael Porter’s five forces model, provides a framework for analysing an industry to assess its scope for generating surplus. The five forces are:

•          rivalry among competing firms,
•          bargaining power of suppliers,
•          bargaining power of buyers,
•          barriers to entry,
•          substitute products.

Recall that surplus is the difference between the price a firm can charge and the total costs of production. Where a firm sits in the supply chain can affect its surplus. If its suppliers or buyers have strong bargaining power then they can set their prices so that the surplus come to them. Rivalry between firms can erode the surplus, but in many industries firms prefer to compete on quality or by differentiating their products rather than on price. The availability of substitutes can put a limit on surplus if customers might switch if they judge that the price advantage outweighs the inconvenience.

Barriers to entry offer a range of possibilities. Intellectual property, such as patent, can be a barrier. So too can government regulation, where licencing or safety rules are onerous. Large economies of scale or the need for high capital investment can discourage new entrants who would face risking high investment cost in order to challenge the incumbents.

Take the pharmaceutical industry as an example. Supplier power is low but buyer power can be significant if the NHS chooses to use it. Rivalry is limited as each company sells differentiated products. Substitute products are limited except for those who believe in homeopathy. Incumbent companies are protected by many barriers to entry. The high costs of R&D have to be borne for a long period before there is any income. Regulatory approval is also time consuming and technically complex and finally patents provide a temporary monopoly for each successful product. It is not surprising that a small number of incumbents dominate this industry.

Firms and their investors can use this model to identify how competitive pressure might impact on the opportunity for completive advantage and consequent surplus.