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The state, the economy and the politics of fear

De-regulation means more red tape, and simplification means increasing complexity. What is the state up to?

Phil Mullan

Topics Politics

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The dynamic for state-market relations over the past decade has been set primarily by the exhaustion of politics. Governments that revel in being ideology-free and pragmatic have evolved new approaches to state activity. These are the product of three main overlapping influences:

  • The loss of faith in the state as agency for social and economic advance;
  • The rejection of long-term political goals, resulting in politics taking on an increasingly administrative character;
  • The culture of fear across society, with one manifestation in the emergence of the state as risk manager.

The political elite’s loss of faith in the efficacy of government policy coexists with its adoption of the pragmatic managerialism that has replaced the pursuit of specific societal objectives. While few anymore believe in the state’s transformative capabilities, those in government have no choice but to rely on state institutions on a day-to-day level to try to keep things together.

The intellectual distaste for big government lingers but has not prevented the state becoming more pervasive in its interventionism than ever before. Macro-state objectives have been replaced by a permanent stream of micro-state initiatives. And because the state’s powers are now seen as more limited, it operates less directly. The popular delivery mechanism is through ‘partnership’ with the market sector. Hence the language of ‘facilitation’ and of ‘setting frameworks’ rather than of the state taking direct responsibility for objectives.

The politics of fear and anxiety provide the main cohering system overarching all the micro-management and partnering arrangements. The state has become predominantly a risk management state, to use London School of Economics Professor Michael Power’s term (Michael Power, The Risk Management of Everything, Demos, 2004). State-market inter-relationships have become conditioned by the heightened sense of uncertainty and anxiety about today and the future held by those on both sides of the relationship, both by politicians and by business leaders.

The upshot of this is government policy that talks the talk of deregulation, while state regulation becomes more extensive and pervasive. Initiatives brought in to simplify the tangled web of red tape often only have the effect of making things more complicated. The business world, having embraced self-regulation as an alternative to direct state control, exemplified by the more extensive code for corporate governance, finds itself constrained in a regulatory straitjacket nevertheless. How do we account for this situation, and what might it all mean for relations between the market and the state?

Regulatory take-off

Government regulation has historically been justified as ensuring that private sector activities did not adversely affect the public interest through ‘market failures’ resulting, for example, in cartelisation, anti-competitive behaviour or excessive profiteering. This is still the official motivation for bodies like the UK’s Office of Fair Trading (OFT) and the Competition Commission (formerly the Monopolies and Mergers Commission).

But as the political context has changed, the substance and reach of regulation have grown. So, for example, the OFT was given new powers in the 2002 Enterprise Act to launch criminal, in addition to the previous civil, prosecutions against cartels. Extra resources have gone into beefing up the trading standards regime in order to help meet the higher consumer health thresholds. Extending the risk management emphasis, the UK government is now proposing a risk-based system for enforcing consumer regulation under the auspices of the OFT, after initially contemplating a separate consumer and trading standards agency.

Market affairs regulation has been expanding vertically, as well as horizontally. In 2003 the government established the specialist Competition Appeals Tribunal to allow third-party challenges to OFT decisions not to intervene in proposed mergers. This Tribunal both introduces a bent in favour of more intervention, but also illustrates the tendency to set up additional procedures to regulate the regulators.

In keeping with today’s litigious mood, more businesses are prepared to use the regulatory machinery to pursue their business interests against competitors, sometimes with vexatious claims. As Philip Collins, the new chair of the OFT, noted in October 2005: ‘We are spending a lot of resources in what is essentially a business-to-business battle.’ (Bob Sherwood, ‘Challenge for OFT is telling when not to act’, Financial Times, 17 October 2005.)

Way beyond the competition authorities, we can see an across-the-board expansion of the regulatory state. The long-established organisations have become more active in recent years, often with enhanced powers, and there has also been a big jump in the number of new regulatory agencies and quangos. For example, the UK government’s pre-budget report last December announced another new regulatory body, the Local Better Regulation Office. This is designed to coordinate more closely national with local authority regulation.

Most prominent in Britain are the regulatory bodies set up to monitor the performance of the privatised utilities, such as Ofcom, Ofwat, Ofgem, and Offer. This group draws attention to one of the main drivers for regulatory expansion – as the alternative to the more direct form of state intervention through state ownership.

This tendency away from direct control is not just confined to the former nationalised industries. It is also the case in financial services, now the most important single sector of the British economy. Until the 1970s and 80s, financial markets were directly controlled by the government and the (then) nationalised Bank of England. The government imposed direct controls on credit expansion, on equity issues, on currency exchange, on cross-border capital flows, and on long-term as well as short-term interest rates.

Now all these direct controls have been abolished. In their place is a comprehensive battery of financial-sector regulation, more recently brought together under the auspices of the UK’s financial ‘super-regulator’, the Financial Services Authority (FSA).

The government is adopting a broader agenda than its predecessors. At the same time as we have witnessed the transition from state ownership to indirect control, the state’s range of activities has broadened into more non-economic areas. This has required a redefinition of the ‘public interest’ rationale, often through arguments about the benefits of social inclusion, precaution and risk management.

This dynamic for intrusive regulatory extension merges with the government’s assimilation of risk management. With the state operating as Risk Manager Supremo in our more uncertain world, regulation is increasingly justified by the needs of risk control and containment. This affects market operations directly through the application of the precautionary principle via licensing controls, or moratoriums on new areas of development: the usual suspects being GM foods, stem-cell research and nanotechnology. This also affects business indirectly through the extension of consumer rights, and the focus on consumer protection and safety, including all those prominent initiatives on food labelling, measures to reduce obesity, the impact of smoking on staff and customers, and safety controls on fireworks.

Pioneered by the USA, many developed states have been adjusting economic regulation in favour of social policy objectives. Although often motivated by state legitimacy concerns, rather than by economic or financial factors, this expansion of ‘non-economic’ regulation has had an impact on business way beyond those directly affected by post-privatisation economic regulation. For example, businesses are now expected by government to act as ‘corporate citizens’ and take on wider social responsibilities to the community where it operates, to be seen to be treating fairly all its stakeholders (suppliers, customers, employees and so on), as well as meeting environmental targets, in areas such as waste control and combating CO2 emissions. One recent British instance is the ‘Broadband Britain’ initiative, where the government’s intervention in the telecommunications market to promote universal consumer broadband access is justified by social inclusion arguments.

Of course, social regulation has not come out of the blue. In Britain, the Health and Safety at Work Act of 1974 brought together earlier legislation in this area, and environmental laws like the 1974 Control of Pollution Act have existed for a long time. But it has moved on to a different level now; and one that has greater consequence for the way the market operates. As well as more environmental and safety-related rules influencing how businesses operate and focus their attention, business regulation covers wide-ranging ‘lifestyle’ issues, ranging from childcare systems to work-life balance to behaviour at work to personal health matters.

This trend in the state regulation of business highlights that the differences between Europe and the US regulatory systems, which are often the source of much mutual transatlantic criticism, are not as great as they sometimes appear. Despite the way the USA often criticises the EU as an over-regulated economy, the USA began earlier than Europe with the regulation of health, safety and environmental matters, and has some tougher measures, though the EU is catching up fast.

The line between economic intervention and social regulation is therefore becoming less clear. For example, social and environmental agendas are being used for economic ends, such as protectionism. In 1997, the World Trade Organisation (WTO) relied in part on international food safety standards to rule against a European Union ban on beef hormones affecting US exports. This dispute has ushered in a new era for the WTO in judging whether domestic social regulations are protectionist barriers to food trade or justifiable public health measures.

An unstoppable dynamic of regulation

The regulatory state has a momentum that looks impossible to stem. One contribution to this – the ‘cumulative impact’ effect – was well described by a former Tory cabinet minister Roger Freeman in a 2003 House of Lords debate: ‘The problem is that ministers and civil servants can always justify each new regulation on its merits. But if you look at one regulation incrementally added to the totality of regulation affecting business, there are always arguments for and against. Ministers are always eloquent in arguing that social justice, pressures from Europe, the need for the improvement of the interests of one section of our economy or society over the rest will justify the introduction of a regulation. The problem is that there is no one looking at the totality – not only of those regulations introduced during the course of the year but cumulatively.’ (Lord Freeman, House of Lords Hansard, 7 May 2003.)

But the relentless character of regulation today is not based on some innate logic within big complex organisations of not seeing the wood for the trees. The more important dynamic is provided by the political context of elites that have become myopic technical administrators, trapped in the present, in a more anxious, risk-averse culture. The presumption is always that the existing law or regulation is never adequate, and will need to be extended or modified.

This is why the supposed simplification of existing regulations often seems to result in more complexity. Take, for example, the pensions regime ‘simplification’ under way in Britain at the present time. Some of the perceived complification results from the hassle of adjusting to near continuous regulatory change, rather than from complexity per se. But in many cases so-called ‘simplification’ often requires more extensive clarification that can lead to more detailed and prescriptive regulation. The new pensions regime being introduced from April 2006 – the intricacies of which have already been dominating the personal finance pages for some time – is the product of bringing together the output of an array of government-appointed commissions, studies and task forces often set up to address different questions and challenges. The result, as every pensions consultant will endorse, is another mishmash.

Corporate governance reforms in the UK are another good example of the way that ‘simplification’ can muddle things further. No sooner have the 2003 reforms – the product of two official commissions – bedded down than a new consultation process begins this month (January 2006) on how problems with the new code can be ironed out and deficiencies rectified. It is unlikely that the resulting changes will bring about a simpler, more succinct code.

Britain’s first code of best practice – the Cadbury Code of 1992 – was two pages long; the 2003 version following the Higgs and Smith reports has expanded to 25 pages, and with accompanying guidance runs to about 80 pages in total. Management finds itself increasingly constrained in how it can handle its day-to-day operational challenges. As John Plender wrote in a Financial Times report on the world economy: ‘Never before have [top executives] been so pinned down by governance constraints.’ (John Plender, ‘Tilt in the balance of boardroom power’, Financial Times, 21 January 2004.)

Government ministers may even be sincere in wanting to limit the regulatory burden – the UK chancellor, for example, needs higher growth and stronger tax revenues to balance his books, so is sensitive to complaints about the regulatory constraint on economic growth. But the impulses towards risk management and social control trump such wishes. Since the underlying rationale for much of new regulation is the extreme uncertainty of our times, then there apparently can never be enough regulation. No regulatory measure can address all uncertainties so there’s always a ‘need’ for another regulation to meet the next perceived scenario.

Another red herring is the search for the main initiators of regulatory excess. UK chancellor Gordon Brown’s Treasury is frequently blamed for tinkering restlessly with micro-economic measures that have created unnecessary complexity and red tape. The Treasury, in turn, tries to blame Brussels for over-regulation. Brussels blames the British civil service tradition of gold-plating EU regulations and making them more onerous for British business than necessary – the different way the same EU shop hygiene regulations are enforced around Europe is a common illustration of contrasting practices (heavily in the UK, but sparsely in France and other continental countries).

This buck-passing, despite some valid observations, misses the common point that the momentum of market regulation is fundamentally irreversible.

Today the recognised alternative to specific regulation is not ‘no regulation’ but ‘better regulation’. The Pythonesque splitting of the UK government’s ‘Better Regulation Task Force’ provides another recent illustration of this seemingly unstoppable inner momentum to expanding regulation. In its place, Britain will have not one, but two, red tape regulators: the Better Regulation Executive – created, it is said, to reduce the burden of red tape on companies and rationalise the number of regulators and inspectorates; and the Better Regulation Commission – supposedly responsible for ensuring government departments cut bureaucracy. To this apparatus will be added the provisions of a Better Regulation Act that this government has promised to put on the statute books.

The irony of regulatory reduction and control needing the establishment of even more regulators and laws seems to pass government and most other interested parties by. Business is a big, if sometimes cynical fan, of ‘Better Regulation’.

Therefore there is no simple solution to ‘regulation-stretch’. A state that senses its lack of legitimacy, and which doesn’t have political ambition as a guide, gets pulled further and further into government by regulation to control a society that always seems to be on the verge of being out of control.

This is why even supposedly ‘deregulatory’ measures, such as Britain’s new alcohol licensing laws, mean more red tape and regulation. A measure initially suggested as being about modernisation and the liberalising of Britain’s antiquated licensing regime soon becomes caught up with fears about irresponsible landlords open all hours, binge drinking and late night street disorder.

A similar story could be told about government measures to simplify, liberalise and ‘deregulate’ the land-use planning system. As in other policy areas, the government has adopted multiple agendas with regards to urban and housing development – including handing over responsibility for social housing to private property developers, with ambitious targets for ‘affordable housing’, to the ill-defined ‘sustainable communities’ goal to environmental objectives including targets for higher density and for the use of brownfield sites. All these, often conflicting, objectives are overarched by the suspicion about undertaking large-scale, ambitious urbanisation projects at all. It is not therefore surprising that the planning regime is becoming more inflexible and onerous to everyone involved.

In fact the language of ‘de-regulation’ always seems to herald the extension of regulatory reach. The Gambling Act 2005 was also motivated as a liberalising and modernising measure, not least to take account of the growth of offshore gambling made possible by new communications technologies. However, the result is that the former Gaming Board of Great Britain has been replaced by a new ‘independent’ regulator, the Gambling Commission, with wider powers and responsibilities.

As well as centralising the regulation of existing gambling and betting outlets it will control the new larger casinos of specific sizes authorised by the new legislation (through a range of prescribed floor areas and numbers of slot machines and gaming tables), and assume authority over internet and telephone gambling. In addition it has the inevitable remit of safety and social responsibility – the ‘core objectives are to keep crime out, to ensure that gambling is conducted fairly and openly, and to protect children and vulnerable people’.

Self-policing

Another regulatory theme that crept into the new gambling regime is the spread of voluntary, informal provisions and controls. In the case of gambling, for instance, companies that want to set up casinos are encouraged to make a ‘voluntary’ financial contribution to assist in the campaign against gambling addiction. This is part of a much wider trend that presents regulatory agendas as not just being in companies’ self-interest, but often relies on non-statutory systems of self-policing.

This tendency arises mainly because the increasing formalisation of capitalist relations has proceeded in a period when politicians lack the confidence to lead, and when attitudes to state intervention remain overlaid by suspicion. The state’s role as regulator has therefore been supplemented by adopting the position of overseer and promoter of informal regulation – for what we can generically describe as informal (non-state) forms of formalisation, an apparently state-lite form of governance.

The state is often not perceived to be the main driver of recent regulatory extension. Businesses that want to limit uncertainty are reluctant to embrace state regulation enthusiastically, but find it easier to adopt voluntary rules with similar constraining effects.

Hence there has been a lot of support for self-regulation, voluntary mechanisms, and industry codes. This is not a total alternative to state regulation – rather, the two forms of regulation, statutory and voluntary, exist and evolve in tandem. Invariably the state initiates the move to voluntary mechanisms, and the resulting informal codes and practices usually operate alongside the explicitly formal laws and regulations. While the informal is often justified and regarded as more flexible and effective than the formal, over time it tends to become fully institutionalised whether by custom or law.

Self-regulation is now a well-established mechanism, though sometimes crudely driven by the state. For example, in relation to its obesity campaign, the UK government asked the food industry to regulate itself and promote healthy eating, but warned the industry that it kept the stick of legislation in reserve. More important, however, is how the culture of risk-containment can make the enforcement of self-regulation work more implicitly. Regulated self-regulation is most effective when it gives internal controls/business risk management systems a central role. As Michael Power put it, ‘Internal control is thereby the state in organisational miniature’ (Power, The Risk Management of Everything, p24).

Informal, even voluntary, controls can be even more restrictive and regressive than formal state law and mandatory regulation. Earlier we noted the way that the risk-management state has helped drive the self-regulatory form of regulation. As Power noted, the embrace of risk management right across society has facilitated this trend in allowing states to ‘trade depth for breadth in their operations’ (Power, The Risk Management of Everything, p24).

The common acceptance of the need to manage risk means that businesses and other organisations are only too happy to adopt their own far-reaching codes or procedures, without the necessity for state instruction or mandate. Being informal they are easier to extend whenever the changing climate demands, which is frequent these days.

The consequence is to spread the culture of self-regulation within private business operations. As Michael Power noted, ‘Above all the risk management state depends on internal control systems in organisation which proceduralise risk’ (op cit, p23). Often these control systems are specified in voluntary codes: in the USA, initially, the COSO framework from 1992, and in Britain the Turnbull guidelines, first published in 1999. But the character of risk-based state regulation makes it in a private organisation’s self-interest to play the game and follow the code requirements (P Skidmore, P Miller, J Chapman, The Long Game: How Regulators and Companies Can Both Win, Demos, 2003).

This shift to ‘regulated self-regulation’ or ‘enforced self-regulation’ relieves the regulator from playing too interventionist a role through in effect relying on the working of private control activities for public regulatory purposes. The state remains the ultimate enforcer but the regulatory agenda takes on the form of being adopted, in the main, voluntarily.

The UK’s system of corporate governance exemplifies this hybrid approach. It is based on the ‘comply or explain’ approach – the rules are voluntary but disclosure and explanation when the rules are breached is compulsory. This type of partial mandation is becoming the favoured international model.

The controversy that surrounds the US Sarbanes-Oxley Act of 2002 – a more traditional form of regulatory action by state law brought in after the Enron collapse – is the exception that proves this modern rule of informal regulation where possible. Ironically some commentators have noted that because so many companies have breached some part of Sarbanes-Oxley but are being allowed to continue with business as normal by the SEC, the US regulator, in effect ‘comply or explain’ is unofficially being adopted in the USA too (Robert Bruce, ‘A tale of two different ways of thinking’, Financial Times, 19 May 2005).

Nell Minow, one of the leading US corporate governance advocates, has made the pertinent point that the lasting legacy of Enron is less in laws and regulations but in the changed corporate mindset required to operate in the new climate. She explained how the entire business framework is evolving in the same direction. If a corporate executive doesn’t play along, they lose out in other ways than risking fines or regulatory intrusion. For example, Moody’s, the leading credit ratings agency, is downgrading credit ratings for companies with poor governance making it more difficult and costlier to raise funds for corporate activity.

Corporate governance – from actions to behaviour

The corporate governance movement illustrates another prominent feature of economic regulation today – the spotlight on ethics and behaviour. The tradition of corporate rules and legislation has been to protect the public and others susceptible to be disadvantaged from the consequences of corporate activity: hence the panoply of environmental legislation, health and safety and workers’ rights, consumer rights, and company law that protects investors from expropriation by insiders. This continues as we have already noted, with further extension and refinements, but we have also seen a shift in focus from corporate actions to management motivations.

Most recent business law reforms and the cult of corporate governance are driven by the loss of legitimacy and trust in the role of business and in their managers. One recent poll quoted by Professor Shoshana Zuboff, co-author of The Support Economy (Allen Lane, 2003) says 80 per cent of UK adults don’t trust the directors of large companies to tell the truth.

Developments in corporate governance reflect the tendency today for business to be judged by ethical rather than commercial or financial standards. Business is attacked not for what it does but for the motivation and character of its leaders. Some signs of the times: the French PM Jean-Pierre Raffarin (a conservative with a background in business) responded to the announcement of record corporate profits not by endorsing the success of French business but by warning businesses not to be too greedy (Financial Times, 31 March 2005); the infamous attacks by the German SPD on foreign investors as ‘locusts’ is from a similar perspective; and, away from traditional politics, Chris Martin of Coldplay denounces shareholders as the ‘the great evil of this modern world’.

Most of the recent corporate governance provisions take the form of regulating business-shareholder relations, but the content is motivated by concern about the impact of corporate activity resulting from dubious if not criminal executive behaviour. In essence the changes are really about the regulation of management to limit autonomous executive power, not some pseudo-democratic extension of investor rights or powers. The snag is that a corporate governance regime based on questioning trust, on the presumption of poor business standards and a lack of ethics, can itself generate widening distrust and suspicion. Formalisation of business relationships between managers and owners institutionalises polarisation and mistrust.

Business backlash?

It is a well-observed phenomenon that each new wave of more prescriptive corporate governance tends to produce a reaction of complaint from business leaders that, over time, tempers. What is regarded as an unacceptable imposition or encroachment one year becomes the accepted norm by the next. The disposition to defensiveness in business today simply reduces the time period of assimilation. However, the current level of business criticism of red tape and regulation in general seems to be more robust.

Red tape and regulation has replaced public spending as the biggest government-related problem perceived to be inhibiting the market. Businesses and economists regularly identify red tape as the main cause of languid economic growth. A figure of £100billion is often quoted as the annual cost to business arising from regulation – almost 10 per cent of national economic output. This seems a dubious figure designed mainly to grab the headlines as it lumps together license fees, estimates for the cost of form-filling and record-keeping, and all the estimated costs of implementing regulations, from health and safety measures to environmental measures to employment tribunal hearings and so on. How substantial is the criticism of red tape?

Business surveys regularly put regulation at or very near the top of their hate lists. For example, a survey by the Smaller Businesses Practitioner Panel in 2004 showed over 80 per cent of smaller businesses considered the Financial Services Authority’s regulatory framework burdensome. (In response, in a superficial attempt to head off business disgruntlement, the FSA is now trying to limit its antagonistic regulator role by passing itself off as a regular business offering ‘customer satisfaction’.) Similarly a survey of stock exchange-listed company chairmen and finance directors on the implementation of the latest 2003 corporate governance regulations reported that almost three-quarters believe they are spending too much time on governance at the expense of wealth generation (ACCA, 11 October 2004, www.accaglobal.com).

Even traditional ‘smaller state’ arguments are now sometimes presented as attacks on the burden of regulation and bureaucracy. In line with this re-balancing of government-caused problems, a recent critique of European public spending levels in the Financial Times by Ludger Schuknecht (principal economist at the European Central Bank) and Vito Tanzi (from the Inter-American Development Bank) began their attack not with the old favourite argument about ‘crowding out’ private investment but instead emphasised the ‘excessive bureaucracy that discourages investment and employment’ (Ludger Schuknecht and Vito Tanzi, ‘Less would be more in Europe’s public spending’, Financial Times, 4 August 2005).

The driver for the backlash is that regulation seems to have become businesses’ favourite scapegoat for their own problems. Easier to blame the unworldly bureaucrats in Whitehall or Brussels than recognise, never mind grapple with, the underlying tendencies to economic atrophy.

The superficiality of much of businesses’ criticism is that it tends to be more about compliance than content. They complain more about the burden of red tape and ‘heavy-handed’ regulation, about the costs of compliance – in money, time and management focus – than about the zeitgeist scepticism of technology and growth that informs so much of the regulation. There is little overt challenge to the underlying assumptions of expanding regulation: that financial services are inherently risky, that modern business is less safe for workers and customers, or that business is causing environmental damage.

The regulatory straitjacket

In contrast to the usual narrow complaints about compliance issues the soon-to-retire director-general of the CBI, Digby Jones, did recently draw attention to the bigger problem in attacking business’s defensive acceptance of the risk society, linking the burden of regulation with the culture of risk; rhetorically he asked, ‘How can an enterprise economy break through when the government presides over systemic, stifling red tape, a discredited planning regime and a society that becomes more politically correct and risk-averse by the day?’ (Steve Johnson, ‘Whitehall accused of failing to help small business’, Financial Times, 15 August 2005).

We can go further: the scale and scope of regulation that has emerged in recent years represents a much more significant problem for economic and social development than too much red tape. Regulation has two more serious effects. First, by formalising the informal workings of the market, the tide of restrictive regulationism holds back what remains of capitalism’s universalising tendencies. Second, it hinders innovation. Many contemporary schemes of regulation, not least those dealing with the environment and recent corporate governance rules, are expressions of self-imposed limits on the market, entirely in keeping with our age of uncertainty and caution. It is with justification therefore that some, though too few, economists highlight regulation as one of the most important medium and longer-term constraints on innovation and productive advance (including Roger Bootle, economics adviser to Deloitte & Touche, and the LSE’s Professor Nicholas Crafts).

Running capitalism by regulation both expresses and reinforces the climate of economic anxiety. It is a recipe for the stultification of innovation and sustained economic development.

A recent survey by City law firm Eversheds was more forthright than the usual commentary (Robert Pitcher, ‘A regulatory nightmare’, FTfm, 17 October 2005). It found that the ‘tidal wave of regulation’ is impacting adversely on growth and profitability. As well as the general corporate governance changes of recent years businesses see the most onerous areas of regulation as health and safety and environmental measures. The survey found that a lot of resources were being spent on compliance and red tape to the detriment of focus on ‘crucial’ business issues such as developing new products and markets. Unsurprisingly 94 per cent of directors have seen an increase in the amount of company resources put into regulatory issues. Some equity analysts spoken to reckon that companies have lost about five to 10 per cent of potential profits due to the resource being taken up by compliance and the cost of the regulatory burden.

But the research also found that company directors have become increasingly risk-averse and are de-prioritising business growth. Apparently three out of four directors (76 per cent) are more concerned about their personal liability than they were three years ago. The analysts, on this occasion at least, seemed to be perceptive in anticipating that this could lead to bigger problems further down the line because of business leaders failing to address the ‘critical business issues’.

Marital discord

While the government and business depend on each other more than ever, this marriage of convenience lacks permanent warmth. Capitalism-friendly governments are not always capitalist-friendly. Neither side feels able to trust the other, less for any hangover of ideological reasons nor of business attachment to the ‘free market’, than because cynicism and the blame culture are as evident here as in other areas of social life.

Hence government both reflects and occasionally cheerleads anti-corporate sentiments, a perspective the new opposition Tory leader David Cameron also seems to be adopting, while business bemoans the stultifying hand of government with the escalation of red tape and bureaucratic regulation. Both these perspectives express a fair amount of posturing. On one day politicians will be lambasting evil capitalism, the next day we’ll hear gushing eulogies to the benefits of business ‘enterprise’ and ‘creativity’. On another day business leaders will be attacking bureaucratisation, the next they’ll be tendering keenly for public sector contracts. To some extent the relationship always was this way. However, today, not only is this a symptom of the greater proclivity to grandstand, but, more importantly, in the absence of a clarity of vision and purpose on both sides, the day-to-day relations tend to be more uneven, erratic and volatile.

Underneath the fluctuating rhetoric, while government activity often does present itself as more pro-business than ever, this relationship has got nothing to do with a revived intellectual affinity to the market. Some right-wing Tories are developing a critique of the future prime minister Gordon Brown as being ‘pro-business, anti-market’. This makes an interesting counterposition to the dwindling bunch of free market supporters in Britain and the USA who broadcast their ‘pro-market, anti-business’ sentiments. For example, US right-wing think tanks have been notable in endorsing the Sarbanes-Oxley Act and the rest of the corporate governance clampdown on ‘corrupt’ businesses and self-interested corporate executives. Ironically such anti-business sentiment legitimises the state’s intervention to remedy ‘market failures’. The fashionable notion, especially on the left, that governments of all persuasions have signed up to liberal free market beliefs is a fallacy. It is discredited by state practices where market interventionism is less direct but much more pervasive than in the past.

The overall result is a diminution of the distinction between the public and private life of capital. Governments look to market solutions to offset their perceived inadequacies, leading businesses to assume responsibility for social agendas that were once the prerogative of active government. Governments in turn then pursue policies that have insidious effects in every corner of corporate life. Hence the workings of the state and the market are in practice more intertwined that ever. In the absence of any clear political project, the outcomes of government intervention have a tendency to be more perverse, undermining the efficacy both of the state and business in fulfilling their historic functions within capitalism.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem, IB Tauris, 2000 (buy this book from Amazon (UK) or Amazon (USA)).

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