The John Hann Letters

This is a series of letters to UK finance minister George Osborne, who has consistently claimed that stringent Austerity measures will somehow restore the UK economy, and particularly manufacturing industry to robust growth.
It has similarly been claimed that the United States has underinvested in manufacturing and technology as a result of the excessive growth in power of the finance sector. However, the UK seems to have been the worst affected.

Letter Two
Financialisation and UK manufacturing:

The impact of government policies and the financial sector

Speeches from across the political spectrum, including from David Cameron and Jeremy Corbyn, reveal a growing awareness of the need for manufacturing, and an awareness that we cannot rely on the revenues from the financial sector.

The financial sector, which includes insurance, pensions, accountancy and retail banking is a valuable part of the UK economy.

However, there are serious concerns about casino banking, in particular as to whether it may actually be harming rather than benefiting the economy. One of these concerns relates to the huge level of merger and acquisition (M&A) activity, which, although it generates huge revenues for those involved, seriously damages the manufacturing sector.

One of the orthodoxies that UK economists are obliged to accept is that the UK benefits from having an “open” economy. While this is true with regard to having an open market in goods and services, it is fundamentally wrong with regard to having an open market in UK companies, particularly manufacturing ones.

One problem with this orthodoxy is that UK companies can easily be taken over by foreign companies. There is a theory that it does not matter who owns UK companies, only how they are run. In practice, as opposed to in theory, this is fundamentally wrong. Inevitably, and this may take decades, manufacturing will be moved abroad. First the head office functions are moved, and then design, and finally manufacturing.

The other, just as serious, problem with the open market in UK companies is that the continual threat of hostile takeovers deters long-term investment.

The combination of these two problems has meant that almost every sector of manufacturing has either declined to almost nothing, or disappeared completely. This includes agricultural equipment, ceramics, electrical engineering, forklift trucks, machine tools, pneumatics, shipbuilding, textiles, toys, white goods and so on – the list is endless.

It is sometimes suggested that UK manufacturing has been in decline ever since the 19th Century. This is wrong. Although initially the UK had considerable advantages, by the 1890s other countries had largely caught up, and the USA had overtaken the UK decades earlier. UK manufacturing subsequently maintained its position relative to other countries right up until the 1960s, when financialization started to rear its ugly head – financialization which was later to be given free rein in the 1980s.

Financialization is the process whereby financial markets, and financial elites, gain greater influence over the economic policy of the country, and over other sectors of the economy.

While it is wrong to suggest that Mrs Thatcher destroyed our industries in the 1980s, her government did establish the system which has continued to devastate our manufacturing sector at a steady rate ever since.

Until about 1980 the City of London operated in a “gentlemanly” fashion and hostile takeovers were frowned upon. However, the breakdown of that system revealed that it was possible to extract large amounts of wealth in a number of ways. The most obvious way being by using hostile takeovers to take over and asset-strip those public companies which had built up large reserves of capital and were operating for the long-term.

In the USA they recognised the problem and introduced anti-takeover laws, which in particular allow the use of “poison pill” defences. The Thatcher government influenced by the theories of Milton Friedman, and doubtless by lobbying from the financial sector, not only failed to follow suit, but actually removed some of the previous regulations.

The effect of the now almost continuous threat of hostile takeovers was that the managements of public companies became compelled to consider the immediate interests of shareholders above those of the company and its employees. They became preoccupied with the next set of quarterly figures. Capital assets were sold; long-term investments including research and development were cut, while at the same time dividends were increased.

Inevitably manufacturing declined, and equally inevitably the weakened public manufacturing companies either disappeared, or fell prey to takeover by foreign companies.

Financialization also adversely affected private companies. In 1980 the UK still had a substantial “Mittelstand” of medium-sized manufacturing companies. These were operated for the long-term and often had considerable capital reserves. It proved possible, and lucrative, for city operators to buy these companies and strip their assets. Subsequently, without their original management or assets, they rarely survived for more than a decade.

In contrast the manufacturing companies of the “Mittelstand” in Germany have continued to prosper. “Mittelstand” companies in Germany have not only benefited by being surrounded by the successful manufacturing sector of their public companies, they have avoided being targeted for asset-stripping.

UK manufacturing has been very badly served by its government. To quote the former chancellor Lord Thorneycroft from a speech in 1975: “The main problem confronting an industrialist today is that it is very hard to find anyone, in either Westminster or Whitehall, who really understands the nature of his business or the risks that he is running”.

It is going to be an extremely long process to resurrect our manufacturing industries but, for the UK to have any chance of future prosperity, we will have to start somewhere. At present any new innovations are going to be exploited in countries with long-term financial systems.

There are no easy fixes. Improved infrastructure, or even improved training, will not solve the problem. We have first to reverse the decline in manufacturing.

To have a chance of success we have to first change our financial system to encourage long-term investment. This means restricting hostile takeovers by bringing ourselves into line with the USA. We will also have to make changes to our government bureaucracy so that, not only do they start to understand manufacturing, they desist from producing endless new initiatives and regulations.

Only by putting these basic problems right can we hope to reverse the decline in the manufacturing sector. And, only then, once there are some signs of growth in the sector, will it be possible to convince sufficient people to begin a career in manufacturing, or to set up manufacturing companies.

Without manufacturing companies we will ultimately be unable to afford our current standard of living, or to pay for the level of imports, or the level of services, we desire.