24 August 2022

Disaster socialists are exploiting the cost-of-living crisis


Owen Jones is glorifying French-style civil disobedience and direct action. Mick Lynch, between echoing Kremlin talking points on Ukraine, has called for the expropriation of North Sea gas. The latest union-led campaign, Enough is Enough, wants a £15 an hour minimum wage, rent caps, and higher taxes on corporations.

Everywhere you look, the cost-of-living crisis is being exploited by leftwing campaigners. They are demanding radical policies, from price caps to nationalisation, that would risk turning the crisis into a depression.

Activist Naomi Klein has written about disaster capitalism: taking advantage of shocks to introduce free enterprise policies. Today we are experiencing disaster socialism.

The disaster socialists are proposing simple solutions to complex problems: we just need to smash those profiteering businesses, force down prices, cut executive pay and ensure workers get their fair share. This can all be achieved by nationalising swathes of the economy and huge taxes on businesses.

We have heard this all before. Just look at Venezuela, the country that Owen Jones described as ‘an inspiration to the world’ in 2012. They expropriated the oil industry, scaring away foreign investment, and leaving the sector to languish with low productivity. The military was used to enforce limits on ‘profiteering’ and price controls. This resulted in mass shortages, extreme poverty and political oppression. Hardly an inspiration.

The socialistic arithmetic does not add up. They somehow want businesses to reduce prices, incomes to go up and higher taxes – all funded by reducing profits. In practice, this agenda would be unaffordable and force the closure of most businesses.

The entire narrative surrounding profiteering is theoretically flawed and built on false evidence.

It is unlikely that companies suddenly became profit-hungry in the last year. Companies are facing higher input costs, due to electricity prices, wages and supply chain issues, and thus have little choice but to increase prices. They have also faced significant demand, driven by Covid-related fiscal and monetary stimulus, which pushed up prices.

Most British businesses are not making big profits. Supermarkets, for example, tend to make around 1-3% profit. The profit in other industries, like rail, water and electricity suppliers, is heavily regulated. The higher profits in some sectors will likely be short-lived and eaten up by higher costs and broader inflation.

This has not prevented ridiculous claims about profiteering. Unite assert that 58.7% of the recent price jump is the result of increased profits while just 8.3% comes from labour costs. This is dubious. Unite’s report does not present the calculations and many of the numbers referenced to the ONS do not appear to exist in the underlying data.

In fact, the referenced ONS data suggests incomes have gone up faster than profits – incomes (compensation for employees) is up 13.5% while profits (gross operating surplus) are up 7.7% since the start of the pandemic. Consequently, profits have actually gone slightly down as a proportion of the economy since the start of the pandemic  – from 21.9% (2019 Q4) to 21.4% (2022 Q2). Incomes as a proportion of the economy have gone up – from 49% (2019 Q4) to 50.3% (2022 Q2). It hardly seems like business profits are skyrocketing.

In any case, prices are not ultimately determined by wages or profit-seeking. It is the relationship between supply and demand in a market.

The other fascination is redistributing from top earners to workers. But this is unlikely to achieve very much. The High Pay Centre, an ironic name for an organisation viciously opposed to high pay, reported that executive pay was £720 million for the 224 executives in the FTSE 100 in 2021. The London Stock Exchange has previously suggested that 6.8 million people are employed worldwide by these companies. Therefore, if all executive pay were distributed across their employees it would mean an annual pay rise of £106 per employee. A lack of leadership would also likely result in businesses ceasing to function. This hardly seems like a good trade-off.

The central goal of disaster socialists is not unobjectionable. The next few months are going to be extremely difficult. Everyone wants higher living standards. But their diagnosis of the problem and policy prescriptions are entirely wrong. We need policies, from planning reform and capital allowances to public sector reform, that boost productivity.

Disaster socialism, on the other hand, would just be disastrous.

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Matthew Lesh is Head of Public Policy at the Institute of Economic Affairs.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.