Since the war, investment in Britain has lagged behind that in Germany and Japan. If it is to be increased, the cost of financing investment must be lowered, or its expected profitability raised, or a mixture of both.
In explaining the poor British investment record, many analysts point an accusing finger at the banks and stock market - the main sources of investment funds. These institutions are accused of short-termism - the failure to take a long-term view of companies' investment prospects. This raises the 'cost of capital' for large firms, while for small firms it is the inability to attract venture capital that has attracted most attention.
There is some truth in the charge of short-termism, but too often the wrong culprit is being fingered. The people who think short-term are more likely to be the managers of large companies than their shareholders. Their salaries and rewards are too closely linked to maximising short-term profits, which are also seen as a defence against hostile takeover bids.
But the real problem is the volatility of much investment behaviour. Banks and fund managers often behave like speculators, not investors, following the crowd in and out as the stock market goes up and down.
Keynes wrote: 'Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on the whirlpool of speculation.'
Much of this volatility is caused by erratic government policy, including the stop-go cycles from which we still suffer.
There is also a significant correlation between share price volatility and the concentration of share ownership in institutions, suggesting that encouraging direct share ownership by individuals would help to stabilise investment. In plain terms, Aunt Agatha is less likely to sell her shares on last week's news than are nimble-footed fund managers. This is what the Government would like, anyway.
Last year the Prime Minister said he wanted it to be 'as natural to deal in shares as it is to invest in a building society or bank'. Yet while gross shareholder numbers have grown in the past decade, the proportion of shares owned by individuals has continued to decline to less than 20 per cent of the total.
Measures to reverse this trend would include lowering the 'hassle' costs for individuals buying shares, removing the tax advantages on pensions and mortgages, and improving communications between companies and potential investors. Statements, in plain English, of objectives, strategy, activities and performance could do wonders.
In 1989, when he was still Chief Secretary to the Treasury, John Major claimed that '. . . there is a great deal of evidence to show that the jobs and products of tomorrow are highly likely to come from the activities of the small business sector . . . in my judgement, the future belongs to them.' Certainly, in that year, firms employing fewer than 20 people accounted for 35 per cent of all employment outside central and local government, compared with 27 per cent in 1979.
The contribution of small firms to job creation continues to outweigh that of large firms, yet in this country small firms are starved of venture capital.
As the economy picks up, many small businesses will confront liquidity crises. Access to working capital is a key factor in the supply response to an increase in orders. With the fall in house prices, the collateral of many small-scale entrepreneurs has been severely depleted, so they will find it harder to secure loans. The Government could take steps to ease the cash-flow problems small companies face because of late payment of bills.
The big four banks have not helped. Small businesses continue to be crippled by the high price of basic financial services. It is wrong that banks should be able to levy such charges without an itemised invoice. In his last Budget, Norman Lamont extended the bank ombudsman scheme to include businesses with a turnover of less than pounds 1m per year, a useful reform.
The financing of small firms does not interest banks or the Stock Exchange, which operate on strictly commercial criteria. We need to use existing market institutions more creatively to help small firms.
The Unlisted Securities Market, currently under threat of abolition, provided finance for the most successful small firms in the Eighties. The Government could help to revamp this market by offering tax breaks on dividends reaped from firms quoted on the USM. This would encourage banks and others to invest in the small business sector.
The Germans have developed an institution designed to meet this area of failure, in the capital market. Kreditanstalt fur Weideraufbau, which provides long-term loans, behaves like a commercial bank, buying funds on world capital markets without having to pay dividends to shareholders. It annually lends more than 7 billion marks ( pounds 2.7bn) to small firms, through the high-street banks, at a mere 0.5 per cent above base rates. Many British small businesses regularly pay 9 per cent over base rate. The German government provided the cash to set up the institution; 40 years later, it has not paid out another pfennig. Should not the British government consider setting up something similar?
'The only thing we have to fear is fear itself,' said President Franklin Roosevelt at his inauguration in 1933. Today, many people fear that, whatever we do, we can never get back to full employment.
If robots can produce cars, what will happen to the workers who used to be employed producing them? The answer is straightforward. As long as wants remain unsatisfied, in British and world markets, productivity increases will not destroy jobs in the aggregate and are likely to add to them.
However, the fruits of productivity growth can be taken in the form of either higher income or greater leisure. In practice, it has been a mixture of both. As the wealth of nations continues to grow, the emphasis will surely shift more to leisure. But that is no excuse for forcing unwanted leisure on millions of people now.
We are in danger of becoming divided into a society of workaholics and idlers. Above and beyond the reduction in the 'natural' rate of unemployment, we will need to work out ideas to improve the distribution between work and leisure - in groups and over an individual's lifetime.
Continued improvements in technical efficiency will sooner or later, as Keynes put it, face 'man . . . with his real, his permanent problem - how to use his freedom from pressing economic cares, how to occupy his leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.'
Lord Skidelsky is professor of political economy at Warwick University. A fuller version of the articles in this series can be found in 'Beyond Unemployment', available from the Social Market Foundation at pounds 6 (071-222 7060).
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