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John Lewis: Staff-becoming-shareholders business model

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On March 15, the excellent financial performance of retailer John Lewis prompted Daily Telegraph reporters to remind us why Nick Clegg once called for Britain to become a “John Lewis economy”. By this, Clegg meant that companies should be owned by their employees. I hope that this article exposes what a hare-brained idea this is; the notion that the John Lewis model of staff-becoming-shareholders can be applied to all businesses demonstrates an alarming ignorance.

Unfortunately, it appears that this ignorance is rife as John Lewis’s chairman, Charlie Mayfield, wrote on March 12th that “it’s good business to own the firm”. I assume that it refers exclusively to employees, although even this is ingenuous given that two years ago he had to raise fixed-interest loans.

A simple example of the goods available from John Lewis, and the time involved in producing them, provides an immediate dilemma. Alongside food and hundreds of other goods, John Lewis sells lead pencils, which sport both an eraser and a ferrule.

Why does this matter? Essentially, the time required to manufacture such pencils runs into several decades. In Leonard Read’s ‘I, Pencil‘, a wonderful booklet published in 1958, it demonstrates that while a single pencil looks easy to manufacture, making them millions at a time is entirely another matter. Investment is required on a grand scale, involving various countries and many decades.

I, Pencil‘ tells us that “his family tree begins with what in fact is a tree, specifically a cedar tree of straight grain that grows in Northern California and Oregon. Now contemplate all the saws, trucks, rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes and motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods…” And so on.

“Once in the pencil factory, $4,000,000 worth (remember that Read is writing in 1958!) of machinery and building is needed, all capital accumulated by thrifty and saving parents of mine…“

The above paragraphs are little tastes of two major issues, crucial to living standards and growth:

  • The benefits of the division of labour; and 
  • The necessity of saving. For example, capital. 

For these reasons alone, I strongly advise reading this magical booklet.

It is important to realise that the standard approach to measuring GDP is fundamentally flawed, to the point where it is worse than useless. Even on its own terms, the difference between two successive annual GDP measures could be as much as ten per cent. More importantly, the treatment of businesses is plain wrong; investment is treated as a dragon consumption until it reaches fruition which, as we have seen above, can be a long time. Clearly, it is nonsense to lump all investment programmes under one roof, regardless of their “fruition periods”. 

Several writers argue that all investment, including intermediate stages of production, would be a better measure despite the apparent multiple counting. What Ludwig von Mises called the “roundabout method of production” involves far more time and investment before goods are ready for consumption. When they arrive, however, their quantity and quality is hundreds of times larger than before the days of mass production. It is interesting to know that business to business transactions themselves amount to about two and a half times GDP – which makes current GDP calculations a joke.

If John Lewis became anything other than a simple retailer, employees couldn’t even contemplate capital contributions on the scale that would be required. Furthermore, as we move to more complex goods, such as building factories for the mass production of cars, the idea of such co-operatives on a major scale is exposed as a sham. Providing for the masses, the Industrial Revolution was the whole point of capitalism, as opposed to guilds, co-operatives and syndicates. Without free-market capitalism, its mills, railways and infrastructures, then John Lewis, its employees and customers would still be living as paupers.

Nick Clegg’s dream world appears to be hankering back to those very institutions – by force, as opposed to free markets without force. Has Clegg any understanding about what lifts people out of poverty? Why, for example, with only a rock to stand on, have Hong Kong’s aggregate living standards come from nowhere some 40 years ago to overtake those of Britain today? The answers are surely free markets, low tax rates and high savings rates – all of which are anathema to Clegg, his cronies and nearly all of the political classes. Thus, we have big government.

From where I sit, big government is the culprit. It should be outlawed forthwith. Time is of the essence.

Terry Arthur is an author of various books including ‘Crap- A guide to politics’, a financial regulation fellow of the Institute of Economic Affairs and a fellow of the Adam Smith Institute.

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