Over the years, the future of the welfare state has been one of the themes of these pages. In this article, Ben Rudder analyses how Pension Funds are invested and suggests ways of cutting the rising costs of competition — between funds themselves and between the companies they invest in. He offers ideas for debate about how societies could be made socially more responsible, living standards higher and the working week shorter.

Who owns private industry, and what could we do with it?

Socially Responsible Investment, Real Incomes, and the Costs of Competition

By Ben Rudder


It is a curiously little-known fact that the world's largest companies are actually "owned" by the collective funds of millions of small savers, the vast majority of whom save about £3000 per annum.

The recent Myners Report in the UK states that 52 per cent of the Stock Market is held by UK-based Pension Funds and Life Assurance firms.

If one adds overseas savers' investments, the institutional shareholding in UK quoted companies rises to more than 60 per cent. A decisive and controlling share.

But if small savers "own" global capitalism, they are barely aware of the potential for change this fact implies.

The perceived difficulty for trustees and savers who wish to be responsible and profitable at the same time, is that the existing economic structure is stacked against them. High profits often come from companies that cut regulatory corners, pay low wages, or have captive high-spending markets such as defence or the financial sector.

The playing field has begun to be levelled though, by the emergence of coordinated trustee action to find standards of corporate governance for the companies they invest in, preventing, say, low pay or environmental pollution.

But there is a much bigger opportunity, namely of cutting the rising costs of competition — between funds themselves and between the companies they invest in.

Global trustees, with savers' approval, could coordinate their investment strategy to reduce the costs of competition, and so raise living standards at a much greater rate. It means finding agreements to reduce the wastage caused by over-capitalisation in certain sectors, and curbing the marketing and litigation arms race.

I suggest that the trend is partly due to the current method of issuing money.

The discussion is of particular relevance to Scandinavia, where, like the UK and Switzerland, large Pension Funds have accumulated.


How savings are invested

Myners was highly critical of fund management practices in the UK, describing stock selection as little more than "herding" — following the pack.

In fact, there is little room for manoeuvre. All large funds are invested like a hedged bet. Stock is not only held in every major industrial sector, but with many competitors within each sector.

Every major fund is likely to hold shares in, say, Vodafone, BT, Orange and One2One, for instance.

But consider this: every cost to these companies means a reduced dividend to the saver. And the greatest cost increasingly springs from competition — raising the requirement for marketing, litigation, tendering, internal administration, consultancy and financial asset management.

Investors' dividends are eroded by this costly competitive punch-up, which also limits product quality and wage levels.

These costs are carried over into the price we pay in the shops. In 1950, the cost of a packet of cornflakes was mostly for farmers, processing, packaging and transportation to the point of use. Now the dominant costs arise from the fight to retain market share.

This trend is again mirrored in the types of work we do in modern economies. In a recent unpublished study, Colin Meech and I estimated that the labour deployed in largely administrative and conflict resolution activity had risen in the UK since 1950 from about 35 per cent to about 54 per cent.

Manufacturing labour for public and personal consumption fell from 44 per cent to 16 per cent. Some slight expansion has come in non-administrative services, such as health and education, rising from 20 per cent to 30 per cent of paid labour.


All OECD countries are pursuing a similar route, with the US way out ahead.

But a Martian biologist would be puzzled. Why do humans use their technological advances mostly to support more paper-pushers? Why instead don't they give themselves a higher standard of living and/or a shorter working week — by retaining a greater proportion of workers in manufacturing or end-user services?

If society could find a way of reversing recent trends, and, say, double the number of manufacturing workers, then the value of manufactured goods available to the average person could double. I address the question of ensuring adequate monetary demand a little later.

More people would be doing hands-on production or service delivery for the health, education and entertainment of the population, but the increased output of these goods and services would permit real incomes to be raised and the working week to be shortened.


The costs of competition

If we return to the current investment mechanisms of the large funds, i.e. the combined monies of the real "owners" of the private economy, we find that each fund is pitted against the next, and each company is encouraged to pit itself against the others. To the costs of competition between companies, outlined above, can be added the cost of competition between funds. The fund management industry, at £4bn per annum, is just one of such costs.

Is there a good reason why the funds shouldn't cooperate to reduce their mutual costs of competition? The irony is that while their investment policies are utterly competitive in approach, they end up acting in unison, effectively as a gigantic pooled fund. And despite being commercially at loggerheads, the funds become joint owners of the firms they invest in — owners who are in a formal partnership in company after company, but who never discuss policies to yield mutual benefits for the beneficiaries.

Many may argue that this competitive outlook is necessary for innovation. But innovation could also be stimulated by a stronger sense of trust and participation between a company and its customers. Funds could ensure that employees are well remunerated for innovation, and that customers are consulted about possible future buying habits and aspirations.

Others may argue that the modern economy somehow requires more paper-pushing. But this is counter to all attempts at efficiency elsewhere in the economy: There are about 2.5†times the number of goods being circulated than in 1950. But the numbers employed in the financial sector have grown more than six times. If we assume that money should mostly serve as a means for exchanging real benefits, then we are now nearly three times less efficient at it than in 1950 — and this despite the use of bar codes, computers and networked data management.

For an individual investor, financial services seem to add value. But for all investors taken together, it becomes clear that the financial services sector, with its clever new "products" and sales gimmicks, is like a huge parasitic growth on their savings, legislatively out of control.


Coordinated approach

So, where to start? On the macroeconomic scale, a coordinated approach by funds could:

Both approaches would also free corporate funds to meet corporate governance policies on pay and the environment.

If dividends rise, pensioners will have more disposable income to spend on enjoying their retirement. If wages rise, families would have more disposable income. Labour would shift to meet these real consumer-oriented demands.


A voice for the small saver

It is another curious irony that the trade unions — who often have trustee representatives as well as employee representation — did not long ago wake up to the opportunity. There are more than $11 trillion globally in funds with trades unionists as trustee representatives.

A joint global trustee network that is prepared to consider macroeconomic management issues could give trades unionists and other ethical investors a direct voice at global trade and monetary meetings. The WTO, World Bank and IMF can do little without consulting global corporations, and trustees are representatives of the real owners.

Trade unions have experience and democratic traditions that could be vital in balancing pay against profits, and the training and retraining of labour — issues which would flow from a coordinated reduction in costs of competition.

In conjunction with the existing ethical investors, such as the churches, the trade unions could reinvent themselves, not as the class warriors of old, but as the democratic institutions of global capital management of the future. There is no reason why the commercial funds should not follow this lead. It would be in the interests of their beneficiaries, and in any case, the pressure for democratic engagement within the commercial assurance market is growing.


Money supply

A coordinating body for funds would need assistance from government beyond legislative changes affecting competition — namely in money supply.

There is evidence that the underlying trend towards administration is driven not only by the commercial culture of competition, but also by a systemic problem in the supply of money.

The volume of money in circulation, effectively in current accounts, is expanded every year by the issue of loans by commercial banks, beyond what they hold in savers' assets. This additional amount is created out of thin air, as it were, and entered as new numbers in a deposit in the name of the borrower, and as a liability to the bank. When the loan is called in, the asset and the liability cancel each other out, and the bank benefits from a "super-profit" of interest.

There are two key problems here. In the first place, the super-profit of the banks draws money out of normal circulation and puts it back into capital investment. Secondly, and more importantly, banks tend to lend largely for capital investment, either in commerce, or as mortgages for homes.

These two investment trends, commercial and mortgage, act simultaneously to drive the economy towards administrative investment:

In this way, capital is either wasted, or poured into new administrative processes which seek to capture part of the flow of new money in the business-to-business market. Marginally higher wages are then offered by the newly-formed or expanded companies to those who migrate from, for example, nursing to clerical work. In such a fashion the labour structure of the economy slowly changes, accumulating all the familiar paradoxes of continuing poverty amid affluence, low pay for those who do the most vital work, environmental damage — and the trend to litigation when a cup of coffee is spilt.

A key to undoing this trend may lie in the reform of money supply. Particularly impressive is the work of Joseph Huber and James Robertson, who argue that the super-profits of banks should be ended, and the right to issue money of account (rather than just paper and coin) should revert to the state. They call their proposal seigniorage reform, and argue that the state could simply spend the money into the economy, either as grants to consumers, public spending, or capital support. In fact, some balance between these types of expenditure would assist circulation between consumers and capital, and thus help reduce business-to-business investment.


Social implication

There is also an interesting social dimension. Real growth could be stimulated faster (i.e. labour could be more rapidly moved to non-administrative functions), if there was a progressive approach to improving the lot of the lowest paid.

This is because, as Keynes pointed out, raising incomes only of the already well-off merely leads to higher levels of saving, and thus puts more investment back into the capital markets and hence into administrative businesses.

For demand to go into manufacturing and improved health, the lowest paid need more disposable income, and the state more spending power. This progressive approach might simultaneously reduce levels of crime, permit a turn to preventive medicine, and result in less demand for the conflict-resolution costs of social services, policing and criminal law. The well-off might not see incomes rise as fast as the low-paid, but they would have the advantage of improved surroundings, less fear of crime and a young population perhaps more disposed to look after them in their old age.



If funds cooperated to reduce the costs of competition, and government reclaimed the right to issue money, we could use technology to improve our way of life, instead of supporting growth in administrative labour.

Government should be attracted by such an approach. In exchange for sponsoring legislative changes and public debate, they could improve the lot of the lower paid without hitting the middle classes — and that's a recipe for re-election. Meanwhile, the funds could agree to an extension of asset holdings to the lowest paid — a genuine "stakeholder" opportunity.

That monetary policy and institutional cooperation can work in the alleviation of poverty is at least demonstrated in principle by the debt forgiveness policies to the developing world.

As owners of the economy, we need to understand that an economy delivers what our families want by the interaction of three things:

As an idea of what might be possible, Meech and I calculated that if, over the next 10 years, manufacturing jobs were rise again to the level of 1950, then the OECD countries could more than double average income in real terms, and simultaneously†reduce the working week to three and a half days.

In fact, a more sensible political decision would be to use part of that effort for capital development in poorer parts of the world, addressing poverty and migration.

Equally, effort could be given to rationalising transport, improving the environment, doing away with built-in obsolescence, and working towards a high quality and sustainable way of life.

The time for debating such an approach seems overdue. Everyone is frustrated by the strange dissonance of brilliant modern technology and continuing poverty, tedious work and long hours. In the meantime, we need better research and more debate -- any takers?


The author would be very grateful for feedback: brudder@thehub.co.uk

Ben Rudder, PhD, BSc, is a consultant in business automation. His training was in Anthropology and Evolution and he worked for a long time as a foreign and industrial correspondent, also doing freelance work for the New Scientist. He is working on a book based on the ideas introduced in this article.


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