The Path to Profitability
Anyone concerned with putting across the Conservative message to the people of this country has to start by facing one hard fact. Nearly always the Conservative case is the better one, but it is by no means always better presented than the case for Socialism.
Those of us concerned with the future of our country and our Party have to start by asking ourselves why this is so.
Partly it comes about because, as Lord Hailsham has said, most Conservatives do not regard politics as the most important thing in life.
There are many other values, from religion to family life, to which ordinary Conservatives tend to accord a higher place in their scheme of things.
In contrast the left wing tends to be totally obsessed with politics. All its hopes are pinned on drastic political change, and most of its activity centred on trying to bring it about.
The result is that for thirty years we in this country have been subjected to a steady remorseless stream of Socialist propaganda, some of it open and unashamed, but quite a lot of it under the mask of independent opinion.
It is no accident that this has been a time of increasing economic difficulties for this nation.
Socialism has never yet succeeded in improving our overall prosperity; it has taken only two years of Labour Government for four new records to be achieved—record taxation, record borrowings, a record Budget deficit, and a record low for the pound.
This Government indeed has given a new twist to an old story. While strangling enterprise and killing the goose that lays the golden eggs, it has been busily borrowing against the goose's future prospects!
This Government, like Labour controlled Councils, have shown that they are adept at overspending other people's money.
The people of Britain are learning the hard way what happens when a Labour Government is in office. But it is not enough to sit back and allow events to tell their own story.
Our aim is not just to remove our uniquely incompetent Government from office—it is to destroy the socialist fallacies—indeed the whole fallacy of socialism—that the Labour Party exists to spread. Otherwise it will be all too easy for the faithful to say, as they always do when confronted with the facts of Labour failure: “The doctrines of Socialism are still as true as ever; it is just that they have been badly carried out.”
If we are to succeed in doing this, in winning not just power but the battle of ideas, then we will have all of us to be, not as fanatic, because there is no place for fanaticism in Conservative thinking, but as keen, as resolute and as dedicated as those left-wing activists.
We have to fight Socialism wherever we find it: at Westminster in County Halls, in Borough and District Council Chambers.
For some of us there is the opportunity to counter attack with our votes on May 6th.
For the whole nation the moment of choice is slowly but inevitably approaching the moment for choosing whether we continue down the road of Socialist decline to the point where it becomes irreversible, or whether we decide to draw back once and for all from that dreary road to ruin.
I believe we can win this decisive battle, I know we shall. But if we are to do so we must be absolutely clear in our own thinking. We must become aware of the way in which in our daily lives our own thinking may have become affected, become tainted, without ever realising it, by the ceaseless flood of socialist and pseudo-socialist propaganda to which we have all been exposed for solong.
Let me give you two examples of the way in which the left has been able to spread totally false ideas about the running of society.
One of the most constant features of left-wing propaganda has been to claim some kind of moral superiority for socialism compared with other economic systems. Socialism they say represents co-operation, compared with the competition which is normal under free enterprise.
They claim that in a Socialist society decisions are taken in the interests of all, and they contrast this with what they describe as the selfishness and self-interest of private enterprise. Indeed, they boldly describe socialism as a system of orderly and rational planning, compared with what they call the chaos of capitalism.
The result of all this is to leave even some Conservatives with a vague feeling that the idealists are to be found on the socialist side. And yet nothing could be further from the truth. There is no difficulty in showing each of these oft-repeated claims to be false.
To start with socialist planning, so far from being the key to an orderly and rational future, too often has been shown to be a recipe for chaos.
This has been true in this country from the time of the groundnuts scheme on and it is true in the rest of the world. It has too often been true in local Government where the scale of things is so much smaller. Let me ask you who have been best able to provide the food required for their people, and a surplus for the rest of the world, the Russians—with all their apparatus of planning—or the Americans with a system of free enterprise?
Where is the confusion to be found, in the private sector in this country or in the nationalised industries which in spite of vast state subsidies have been conspicuously unable to satisfy the public?
It is no accident that the nationalised industries in Britain are in so unsatisfactory a condition.
By their nature they are liable to constant political interference as Sir Monty Finniston quickly discovered when he tried to produce his modernisation plan for steel.
But the reason state planning is neither orderly nor rational goes deeper than that.
Under free enterprise the consumer is constantly signalling his wishes and his preferences. Every time she goes into a shop the housewife is voting with her purse. Companies which meet the wants of the consumer grow and prosper, the others go out of business—unless they are hastily propped up with a state subsidy.
The shopkeeper has to provide value for her money or else yield to someone who can. But you can be certain that if the Council owned the shops as was proposed by the West Midlands Council and others—they would be kept going with rate payers money even if they could not compete.
State industries are not responsive to the wishes of the consumer in this way, which is why free enterprise is a much more democratic system, besides being a more efficient one.
As for the notion that socialism is in some way morally superior to a free enterprise system, to believe that you have to believe that it is better for an official to take a decision for you than for you to take it for yourself. What is more you have to believe that the bureaucrats and the Socialist functionaries who direct them are free from any of the normal human faults and actuated purely by a selfless desire for a public good.
The truth of the matter is that they are subject to all the weaknesses of human nature found in any society, but under socialism there is nothing to check them.
In particular you have to believe that those who are preaching the wickedness of our present way of life and the desirability of attaining the Socialist utopia, are free from envy, and malice, totally devoid of the desire to tear down and destroy, and driven only by the purest idealism.
As the Duke of Wellington remarked when a stranger said to him: Mr. Smith , I believe, “If you believe that you will believe anything!”
In the last resort, and this is why it is so dangerous, socialism represents a concentration of power in the hands of the state and of a tiny group of individuals. Never let us forget that all power tends to corrupt and absolute power corrupts absolutely. That great man Alexander Solzhenitsyn uttered a special warning about Socialism when he was last in this country. He said and I quote:
“The decline of contemporary thought has been hastened by the misty phantom of Socialism. Socialism has created the illusion of quenching people's thirst for justice: Socialism has lulled their conscience into thinking that the streamroller which is about to flatten them is a blessing in disguise.”
I would like us all to take those words to heart; that is the warning that we ignore at our peril. The freedom that goes hand in hand with a free enterprise system makes it morally far superior to any of the alternatives.
My second example is of a much subtler form of attack upon free enterprise. There is a constant attempt to make us ashamed of profit and the profit motive. There is the suggestion that there is something degraded or degrading about making a profit, that the profit motive is at best unpleasant and at worst repulsive. Sometimes the attack is more indirect than this. It is suggested that profit doesn't really matter, and we would all be a great deal better off if businessmen stopped worrying about it and concentrated on the really important things like investment.
Sometimes the attack is very violent. Profit is represented as a means of robbing the workers. Companies which make profits which look large are pilloried, regardless of whether the profit is well-earned or not, of whether it is a small percentage of turnover, or of whether large sums of capital are employed.
The worst of it is that some of those who work in industry are encouraged to believe that they will make themselves a lot better off if they prevent a firm from increasing its profits.
Even businessmen, who of all people should know the truth, are liable as a result of all this propaganda to become extremely apologetic about the profits they legitimately earn, Some try to use the word “surplus” to describe the earnings of their company, though it seems to me that it is not a very effective defence of something to refuse to use its proper name.
Is it surprising therefore if the man in the street begins to think that there is something shady? Something unsavoury even about the whole idea of businesses making profits? Yet if we had to point to one single notion which is calculated to damage our industrial performance, to prevent us competing effectively in the world and ultimately to undermine the basis of a free and diverse society, it is the idea that profit is somehow wrong.
Only slightly less damaging is the claim that in a modern industrial society profits are somehow not really essential, that businesses can function perfectly well without them so that they are really a form of optional extra.
Both these ideas are assiduously propagated by Socialist theorists and lazily tolerated by too many people who have never bothered to think about the matter.
One of the most useful things that as Conservatives we can do is to discard any residue of this defensive mentality and tirelessly proclaim that the prosperity and ultimately the freedom of this country cannot be secured unless the role of profit is recognised and indeed enhanced.
We can start by pointing out that those countries that have been most conspicuously successful in recent years certainly do not spend their time agonising about the morality of profit. One thinks of America, in its bicentennial year, leading the free world's recovery from recession with the aid of a private industry of almost unimagined power. One thinks of West Germany with a consistently low rate of inflation and a consistently strong balance of payments.
It is no accident, no coincidence, that these two most prosperous countries in the world with two of the strongest free enterprise systems, are countries where the vital role of profit in building prosperity is recognised and encouraged.
Then we can go on to say that as the Labour Government's own Diamond Commission pointed out, there are 14 million tax payers who save through life assurance, up to 11 million members of occupational pension schemes and 2¼ million tax payers receiving occupational pensions.
All these people are dependent to a greater or lesser extent on the profits that industry makes to pay their pensions, safeguard their savings and protect their standard of living as inflation rages.
It is true that there are also 2.1 million taxpayers who receive dividends directly on personal holdings of stocks and shares.
But before you start thinking that these are just fortunate and wealthy people look again at the findings of Lord Diamond and his colleagues.
In 1972–73, the latest year for which we have statistics, there were 1 million taxpayers with total incomes below £2,000 who received an average £227 apiece in dividends.
So already we see what a large proportion of the community benefits from the profits that industry pays out in the form of dividends.
And of course the fact that they do benefit in this way is of vital importance to industry.
The very last words of Lord Diamond's report run as follows:
“In the longer term, the returns to equity holding must be competitive with the returns which investors can obtain on alternative investments. If they are not, it is unlikely that the past level of savings for equity investment will be maintained” .
Translated out of the flat, complicated prose that Royal Commissions always seem to favour, this means that the profits companies make, and the dividends they pay, encourage and enable ordinary people to provide industry with the funds it vitally needs to operate and expand.
We hear a great deal about the need to make sure industry has enough funds to invest, and there is talk of setting up a state sponsored Equity Bank that might have a capital of £50 millions.
But since the beginning of 1975 the stock market has provided £1,500 millions of new money for industry. That is the reality of private enterprise.
But of course the dividends that industry pays out to these 14 or 15 million savers are only half the story.
A very large proportion of the profits industry makes are retained in the business, used to finance new equipment and provide new jobs. For every pound paid out to shareholders by companies, nearly £2 are retained by the firm.
This leads to perhaps the most important single point that can be made about profits. To listen to the Left-wing one would think that profits were much too high. When the figures are examined, however, a very different picture begins to emerge.
The most up-to-date study has been made by the economists at the Bank of England. The figures show that the rate of return that industrial and commercial companies made on their capital fell between 1960 and 1974 from 13 per cent to only 4 per cent.
Worse still, if tax is taken into account the rate of return by 1974 was approaching zero—absolutely nothing at all.
The situation is a little better now, as companies have been given some tax relief, but the plain truth is not that profits are too high, but that for most of British industry they are dangerously, alarmingly low.
How can a company borrow the money it needs to build new factories; how can it ask the public to invest its savings, if the money costs it more to borrow than it can possibly hope to make on its investment?
Many of Britain's problems are complex and deep-seated. But we only have to put the matter in these terms to see that this problem at least has a definite, a simple and a straightforward answer.
The best way, the surest way, indeed the only way of increasing investment is to encourage and allow companies to rebuild the profits that inflation, taxation and controls have so eroded.
And if at the same time the controls that have been clamped down for so long on the dividends are relaxed, the the savers who provide the money for industry—those 15 million ordinary citizens—will be better protected from inflation and better able to share in industry's renewed prosperity.
Together let us hammer home the message.
The way to improve industrial investment is to improve the profit levels on which it depends. Then the whole community will benefit, with high production, more jobs and a better standard of living.
That is, after all the purpose and the justification for restoring the profitability of British industry.
It is private industry that creates the wealth—Governments on the whole do no more than spend it—and to give industry the opportunity to go ahead and make its plans knowing that it can make a decent return from a successful investment will do more to raise the standard of living than any amount of exhortations from the Denis Healey Chancellor or Government-backed Committees.
This does not mean that the interests of the consumer will be neglected. Conservatives have always been to the forefront in this field.
What is more, consumers benefit when and only when industry is encouraged to introduce new products and new processes—and it needs profit if it is to do that.
Of course, it needs the discipline of competition too if everyone is to get a fair deal, and we intend to strengthen that.
Every time a bankfupt firm is bailed out, it means that failure is rewarded rather than success.
There is another thing that needs to be said and another thing that needs to be done.
What needs to be said is that a free and dynamic industrial system needs the profit motive, not just as an incentive, but as a means of making it efficient.
It is the return on an investment project that signals to the directors whether to go ahead with it, and that tells the public whether that firm is successful or not.
Free enterprise is only possible when companies are free to follow the most profitable paths, and without free enterprise there can be, in the long run, no freedom in the wider sense.
Now I come to what needs to be done.
It is easy enough to say that we must encourage the profit motive. What in practice does this mean?
It means that if industry is to flourish the State must make it possible for it to do so.
If more and more of the resources of the nation are pre-empted by the State for non-productive purposes; if, as happens at present, the State spends more than 60 per cent of the national income, then there are not nearly enough resources left for private firms.
There are many reasons why we wish to see Government spending cut.
One of the most important is so that the private sector may again have the opportunity to breathe and to flourish, and in doing so to provide the jobs we so sorely need.
I hope you will all of you join with me in a campaign to rehabilitate the idea of profit as something necessary and praiseworthy in our economic system.