Moral Questions
Richard Turnbull
Introduction
Poverty is a scar on humanity.
Samuel Johnson, a high Tory, claimed in 1770 that ‘decent provision for the poor is the true test of civilization.’[1] For R. H. Tawney, a socialist, there is nothing that ‘reveals the true character of a social philosophy more clearly than the spirit in which it regards the misfortunes of those of its members who fall by the way’.[2] Another Tory, Lord Shaftesbury, described the continued cruelty, oppression and indeed deaths of child sweeps as ‘a disgrace to England’.[3]
Today the same agreement on the unacceptability of poverty would cross party, think-tank, academic and faith divides. However, any accord is largely limited to the problem itself. This is a shift historically and potentially damaging to the quest for genuine solutions. The collapse of the consensus over poverty focuses around three questions, although the underlying problem is a deeper one.
First, the debate about measurement. How should poverty be measured? A concern about poverty in an absolute sense (adequacy of food, clothing, housing) may focus on safety nets and a richer role for voluntary societies, whereas an emphasis on relative poverty (the bottom 20 per cent) is more likely to see a greater role for government redistribution. Hence the debate moves from poverty to inequality. To this question we will return.
Second, the debate about the role and size of the state, specifically the welfare state. Tory utopianism in the nineteenth century masked the fact that voluntary charity provision was patchy. However, the provision of universal state benefits also has unintended negative consequences: the squeezing out of the voluntary sector as well as a loss of personal responsibility and moral compass. The state has become the answer to every question. Excessive emphasis on ‘relative poverty’ and ‘income inequality’ distorts the role of the state and leads to an ever-larger public sector, which becomes more concerned with redistribution than with the prevention of poverty.
The suggestion is sometimes made that for advocates of market capitalism the state has no role. However, ‘friends of capitalism do not argue that the state has almost no useful role to play.’[4] To suggest otherwise is potentially very damaging to the cause of poverty relief since creative partnerships between the state, the voluntary sector and the market can play an important role in social welfare. If we are, as a society, to have a sensible, well-informed debate around the common objective of ensuring that as few as possible of our citizens live in poverty, then it is imperative that the role of neither the market nor the state is stigmatised.
Third, the role of the voluntary sector. Intermediate institutions that lie between the individual and the state are the bulwark against extreme individualism and an excessively powerful state. Is it possible to harness the locality, dynamism and community spirit of the voluntary society to the efficient and effective elimination of poverty on a national scale and in a consistent way? Can ‘market-based’ solutions to social evil, with their strong historical precedents, assist today?
There is a long history of a dynamic voluntary sector in the provision of social welfare within the UK, alongside appropriate provision and protections provided by the state. The industrialisation of Victorian Britain exemplifies this approach. Large-scale movements of people, the accumulation of capital, the development of cities all contributed to both economic growth and the complexities of poverty, housing and employment conditions. The voluntary society provided a key response to the challenges of poverty. Leading campaigners such as the Earl of Shaftesbury encouraged the formation of a wide range of local voluntary societies to provide, inter alia, schools, hospitals, training and apprenticeships. The key features were local and voluntary – not a part of the machinery of state. Shaftesbury and other campaigners also understood that the market had a role to play, and they pioneered what we would call today micro-finance and impact investing. Shaftesbury himself was a Tory, a Christian, and passionate about the poor and vulnerable. Voluntary provision was, of course, sporadic and of variable standard, but was particularly successful in reaching the poorest sections of society, those who fell beneath the radar of other provision.[5]
Poverty is no longer a moral problem (around which people unite) but a political one (around which people divide). This prevents some questions from being asked and tends to militate against new and creative approaches. Gertrude Himmelfarb notes, ‘it became a moral principle to eschew moral distinctions and judgments.’[6] She suggests that this ‘de-moralisation’ came about due to the theory that ‘society was responsible for social problems and that therefore society (in the form of the state) had the moral responsibility to solve those problems.’[7]
In order to find and develop solutions to poverty, we need to restore the debate to a moral level. Hence judgements are required over personal responsibility, social policy, the role of the state and the voluntary sector. We need to remember that efficiency is not the preserve of the Right, nor compassion the preserve of the Left.
Poverty and inequality
The confusion that has arisen between ‘poverty’ and ‘inequality’ potentially harms the generally desired outcome of relieving poverty. The poverty charities have bought into the concept of relative poverty. The consequence has been not only the politicisation of poverty but also the politicisation of charity. So, for example, the Joseph Rowntree Foundation defines poverty as follows:
When we talk about poverty in the UK today we rarely mean malnutrition or the levels of squalor of previous centuries or even the hardships of the 1930s before the advent of the welfare state. It is a relative concept. ‘Poor’ people are those who are considerably worse off than the majority of the population – a level of deprivation heavily out of line with the general living standards enjoyed by the majority of the population in one of the most affluent countries in the world.[8]
The usual definition is 60 per cent of median income. In other words, income inequality is the driving force.
If absolute poverty is a moral question, then relative poverty is a political one. The losers are the poorest in society. If the concern is entirely with the ‘bottom 20 per cent’, say, then there are three consequences. First, the emphasis on the relative may actually disguise real abject, soul-destroying absolute need at the bottom of the segment. Second, excessive concern with relative incomes will inevitably lead to an enhanced redistributive role for the state. Third, the greater the weight given to relative need the less focus there is on the reasons for poverty and the exercise of moral responsibility and judgement both in its cause and its solution.
The necessity of economic growth
Too much of the debate about poverty takes place out of context. It is impossible to reflect on poverty, its causes and solutions without an appreciation of the role of the market, the creation of wealth, economic growth and trade.
Economic growth is a contested area. Richard Heinberg asserts: ‘From now on, only relative growth is possible: the global economy is playing a zero-sum game, with an ever-shrinking pot to be divided among the winners.’[9] However, without the wealth creation generated by the market, which leads to economic growth, it is impossible to deal effectively with issues of poverty and social welfare irrespective of the policy prescriptions: ‘higher per capita income is strongly correlated with some undeniably important factors, such as longer life expectancy, lower incidence of disease, higher literacy and a healthier environment.’[10]
To turn to the United Kingdom by way of example, economic growth, measured as GDP per capita in international dollars – hence measuring comparative purchasing power – grew 19 times from 1700 to 2008.[11] Hence there ‘is much evidence that economic growth in recent decades has delivered substantial improvements in living standards’.[12] This pattern of economic growth, wealth creation, adding to the production of goods and services is an essential prerequisite for dealing with poverty.
The need for a market economy
The most effective mechanism for achieving such economic growth is the market economy. As Michael Novak notes:
Of all the systems of political economy which have shaped our history, none has so revolutionized ordinary expectations of human life – lengthened the life span, made the elimination of poverty and famine thinkable, enlarged the range of human choice – as democratic capitalism.[13]
He adds that his definition of democratic capitalism is ‘a predominantly market economy; a polity respectful of the rights of the individual to life, liberty and the pursuit of happiness; and a system of cultural institutions moved by ideals of liberty and justice for all’.[14] The evidence for the positive impact of the market on poverty reduction is insurmountable. Extreme poverty has fallen.[15]
Related to the argument concerning the market and growth is the principle of trade. The market brings buyer and seller together, who trade, to mutual advantage, at the agreed price. William Bernstein tells the extraordinary story and history of trade and the overwhelming mutual benefit humanity has gained from the principle of trade: ‘World trade has yielded not only a bounty of material goods, but also of intellectual and cultural capital.’[16] Hence a reasonable conclusion to draw is that the market system and economic growth are both necessary conditions for the relief of poverty, irrespective of decisions over specific policies. These basic points are lost all too frequently.
However, if the market and growth are necessary conditions for the relief of poverty, are they sufficient?
The market is an efficient mechanism, but it is not perfect. There are problems of monopoly, oligopoly, price fixing and the fact that the market is populated by individuals who are themselves not perfect, but flawed. In the same way that the benefits of the market cannot be ignored, neither can its imperfections. Similarly, economic growth may accrue unevenly. Thus the market may lead to inequalities. Does that matter?
Problems of inequality
There are wide disparities globally in income distribution. The Gini coefficient is the generally accepted standard measure of inequality. It uses a scale of between 0 (everybody has an identical amount of income) and 1 (all the income is owned by one person). In respect of the UK, the Gini coefficient increased through the 1980s (note that the very large reduction in the top rate of income tax inevitably contributed to this rise). From the 1990s onwards the co-efficient stabilised and has since declined slightly. So, for example, in 1979 the Gini coefficient in the UK was 0.274; in 1990, 0.368. However, from 1990 to 2013 we have seen a high of 0.362 in 2001/02, with a modest decline – albeit with fluctuations – to 0.332 in 2012/13.[17]
So in the aggregate, inequality has fallen in the UK over the last 25 years.
However, what the Institute of Fiscal Studies has shown by comparing ratios of different income percentiles is that whereas the ratio of the 90th to the 50th and the 50th to the 10th percentiles has remained largely stable, that of the 99th to the 90th percentile has, albeit with some quite dramatic fluctuations, increased significantly.[18] Hence whereas overall there is stability, the top 1 per cent have pulled away. The income level required to be in the top 1 per cent is £150,000 per annum.[19] More recent government policy has actually targeted the most wealthy – it will be interesting to see what impact, if any, this has on the Gini coefficient.
In any event, one can almost hear the clatter of hooves on the cobbles as familiar hobby horses from the Right and the Left canter out of the stable door.
The question is, does it matter?
In reality there is a tension. If too much emphasis is placed on inequality, and hence on relative poverty, there is the potential danger of loss of focus on those most seriously in need because of an unhealthy obsession with the top 1 per cent of income earners. This is particularly the case if the potential for an increased tax-take is limited – as suggested by the Laffer Curve, which measures tax rates against total tax-take (though politicians and economists will argue over the exact position on the curve). The encouragement of the middle class, of entrepreneurship and SMEs can and will play a significant part in spreading the aggregate economic growth.
There are, however, negative consequences to inequality, and in the case of extreme inequality these factors may be seriously damaging. Inequality may lead to a loss of opportunity as well as inequality of output. The ability to access justice, constitutional rights and indeed welfare services more generally can be seriously compromised by significant income inequalities.
There is, however, a level of dishonesty in debates around welfare. The assumption that the prime objective is to ‘reduce the gap’ or reduce inequalities is a political argument that misses the point about the essential purpose of welfare provision; that is, not to achieve equality but to ensure that poverty is defeated.
Poverty and moral responsibility
Poverty and moral responsibility are closely linked. Gertrude Himmelfarb’s argument is that since welfare and poverty were ‘de-moralised’, the responsibility for the resolution of the problem moved to society or the state. This issue of personal responsibility, its meaning, extent and consequences is essential to any coherent discussion of social welfare and the defeat of poverty.
Historically there was a very close correlation between local, voluntary provision, the exercise of judgement, and moral responsibility on behalf of both provider and recipient. The removal of notions of personal responsibility has been disastrous for an effective system of welfare. This is not just about ‘assessing the feckless’ – the issue of what to do with those who fall through the safety nets for any reason remains in a civilised society. The issue of personal responsibility goes much deeper and indeed wider. Thus Ruth Porter has commented: ‘We have stripped people of part of their dignity, forcing them to look first to the state before looking to those around them.’[20]
The move from a contributory to a means-tested approach was a further factor that encouraged dependency by reducing incentives either to work or to avoid welfare dependency. To avoid such undesirable consequences any effective welfare system:
requires participants to maintain necessary levels of personal diligence (i.e. work and saving) even though they know they will probably not benefit from them. It requires them not to exaggerate their level of need, even though they would probably benefit from doing so … In short, it requires sufficient and sustained virtues of diligence, honesty, and trust to nullify or overcome the free-rider problem.[21]
This encapsulates both the importance of personal responsibility and the levers within the present welfare system that push against it. Any debate on the future of welfare needs to engage with this inherent tension within the system. Indeed, for the critics of the market, that the market is flawed and subjected to greed, this is a salutary reminder that the welfare system suffers from the same problems.
Moral responsibility is both personal and communitarian. However, the acceptance of individual moral responsibility for work, for income and for welfare within families and communities is an essential starting point without which any form of state provision will become burdened by bureaucracy and failure.
The responsibility to work requires an understanding of work. For some, work is drudgery and wages are a reflection of subjection. In these circumstances the attraction of welfare will be significant. Deirdre McCloskey points out that work prevents poverty – ‘wages make people better off than the even more terrible alternatives.’[22] Indeed, she adds that the regulation of wages and excessively protective policies, by preserving old jobs and preventing the creation of new jobs, has the effect of preserving poverty.[23]
How then do we resolve the tensions between ‘protection’ (minimum wages), ‘subsidy’ (tax credits), personal responsibility and protection against poverty? There are, of course, a variety of answers that have been offered, but a move away from the rhetoric of inequality to one of relieving need and protecting the most vulnerable within a context of personal responsibility might at least allow for an honest debate.
Re-energising the market
How might the market be re-energised for the modern age in the quest against poverty?
Social entrepreneurship
Social entrepreneurship is not new. Indeed, the sector is not without its problems. Professor Alex Nicolls suggests that ‘social entrepreneurship is best understood as a multi-dimensional and dynamic construct moving across various intersection points between the public, private, and social sectors.’[24] So one consequence of this is a wide variety of organisational structures and funding models. However, the real opportunity comes from recognising that ‘what is new and most distinctive about social entrepreneurship is not the particular organizational forms that are used but the entrepreneur’s continual pursuit of greater social or environmental impact.’[25] The generation of social value, once accepted, generates its own questions of measurement and metrics. Indeed, the very meaning of ‘social’ is contested space.[26]
Social enterprises have become one of the new modes of business organisation for social purposes. The most effective social enterprises use a variety of means of capital, including venture capital and private equity. In addition there will be robust governance structures, highly skilled individuals, diverse partners and a clarity of social vision. In this way it is possible to harness significant funds to achieve social purposes through the application of business skill and commercial objectives. These enterprises will increasingly make use of commercial income streams and provide a return to investors. The larger the scale, the greater the opportunity for external finance. Smaller enterprises may also be very successful in local areas but carry the danger of an overdependence on grant finance and hence may display the characteristics of a traditional charity. The point is diversity, capital, scale and social objectives. Thus, ‘money and mission are intertwined like DNA in the social enterprise, yet they are not always equal partners.’[27] There are a variety of models, from the embedded model (the enterprise and social operations being interlinked) to the external (external profit-making enterprises service social programmes). The outcomes can be as dynamic in the contemporary market as they were historically.
Social impact investing
Social impact investing is effectively a new asset class in which investment funds are harnessed for capitalist return in investments with social objectives. This means of investing is a scaled-up version of the historic model, which was essentially small and local. Hence it enables larger-scale investment on a global scale for social objectives. So these funds take an enterprise approach to poverty alleviation by building commercially sustainable companies that create jobs and empower the poor to improve their livelihoods. They adopt the principles, discipline and accountability of venture capital investing but with a sub-venture capital rate of financial returns.[28]
The full story is told elsewhere, but one example is the Kuzuko Game Reserve in South Africa. Here, as well as the rehabilitation of land, conservation and eco-tourism, the game reserve provides employment, higher than average wages, proper contracts, training, participation in profits and investment in housing. So precisely like Lord Shaftesbury’s efforts, these ‘projects help the poor with both employment as well as capital building … either intellectual (through education and skills training) or asset (ownership of a taxi, a cow or share equity)’ and are ‘critical to poverty alleviation’.[29] They require investor confidence, expertise in both management and investment, long-term commitment and political stability. We should not underestimate the impact and the ability of such funds to harness capital for good on a global scale.
Corporate structures and objectives
The corporate social responsibility (CSR) reports of public companies seem, rather like audit reports, to get longer and longer in order to say less and less. That is not to argue that community involvement, philanthropy and social concern by companies large and small are other than good things. However, the traditional approaches to CSR emphasise the disconnection between a company’s core purposes and its ability to deliver wider social objectives. Section 172 of the Companies Act 2006 requires a director to promote the success of a company for the benefit of its members as a whole. This has given rise to the claim that directors must act to maximise shareholder value. Section 172 adds that directors must ‘have regard to’ various other matters including long-term decision-making, the interests of its stakeholders, ethical behaviour and the impact of its operations on the environment and community. It is doubtful whether section 172 requires shareholder value maximisation even without the sub-clauses. However, the use of ‘have regard to’ effectively lowers the priority given to the more inclusive vision.
This has led to other suggestions about how corporate structures can best serve wider social objectives. Business, social values and community do not necessarily stand in opposition to each other. The history of the Quaker businesses bears ample testimony to this.[30] The problem has occurred as ever greater distance has emerged between ownership and control. As Professor Colin Mayer has pointed out, the effect has been to weaken both governance and accountability.[31]
How, then, might the business community respond in terms of corporate structure? Two particular suggestions are worth noting in the space we have available. Colin Mayer advocates the ‘trust company’ in which a second board (the trustee board) exists to oversee and ensure the long-term stewardship of the company’s core values over time. This can be reinforced by differential voting rights for shareholders, such that those who have held investments in the company for more than ten years carry greater weight. Another recent approach has been that of the ‘B corp’ movement. A ‘C corp’ – in US law, but the point of principle remains – is a standard corporate structure in which the company has separate legal personality. A ‘B corp’ is a corporation that embodies specific social objectives into its articles of association or other constitutional documents. In the UK this involves adopting the general legal framework of section 172 of the Companies Act 2006 but specifically including societal and environmental benefits and a requirement that the interests of different stakeholders be treated equally.
Challenges and lessons
Poverty is scandalous. The causes of poverty are complex and that in itself means that diverse solutions are likely to be the most effective.
Poverty is a moral issue. The compartmentalisation of life into different strata – family, business, society – has essentially privatised morality. This is the conceptual reason why solutions to the problem of poverty have proved so elusive. It is essential to reverse this trend, but to do so will challenge vested and political interests. We must recover the ability to debate in the public square the morality of poverty, to exercise moral and public judgements – about responsibility, work, incentives and welfare.
A new social contract is needed that recognises that business, welfare and government are all needed to collaborate together in order to enhance the values that underpin society. The challenge to the Right is to recognise that those values are not merely individual but social. The challenge to the Left is to recognise that government cannot be the sole answer and may even hinder the achievement of our shared values, and that the market rather than being inimical to social welfare can play a central role. So here are a few final thoughts:
Work and enterprise are essential to defeating poverty
We cannot, and indeed should not, escape from the conclusion that work and enterprise lie at the heart of combating poverty. Incentives to work are central; as are incentives to avoid dependency on welfare. There are, of course, debates to be had about the quality and nature of work and employment. However, the over-emphasis on relative poverty and inequality devalues the central role of paid employment as the essential means of reducing poverty. In the same way, policies that encourage business and enterprise lie at the heart of any response to poverty.
The tax system should incentivise social objectives in the market
The government has a role to play but its size, complexity and cost mean that government cannot be solely relied on, and nor should it be. Social objectives in private-sector philanthropy and investment should be incentivised through the tax system. In the same way that the Enterprise Investment Scheme provides tax incentives to start-up companies, so similarly should investment in social enterprises and social venture capital also be encouraged. The removal of corporation tax from SMEs with social objectives (so that trading income streams are not taxed), VAT relief, together with investment and employment incentives could be transformational in encouraging social entrepreneurship.
The protection of the vulnerable is essential in a civilised society
None of this should take us away from the proposition that the protection of the vulnerable is a basic moral value in a civilised society. This will require a clarity of public moral intent, the harnessing of resources, the collaboration of faith and other communities and a willingness to debate the real issues.
New asset classes and ownership structures should be encouraged
The development of new asset classes for social venture capital, of new and diverse models of social entrepreneurship and of new corporate structures for commercial companies should be advanced and encouraged. The maximisation of shareholder value should perhaps be replaced by the idea of the maximisation of stakeholder values. In the same way that the introduction of limited liability enabled the broadening of ownership and the raising of equity capital, so we must be willing to enable and develop new structures for the modern age that give reality to long-term value and to social and environmental concerns.
In short, the issues of social welfare are so important that they cannot be left either to government, to the market, to the community or to the individual. However, we cannot continue with the current unsustainable models and the lack of proper debate. The moral debate must be restored to the centre of the stage, and that means a moral debate about poverty, its causes, work, welfare, incentives, personal and family responsibility and both the role and limits of government. After all, the future reduction or elimination of poverty depends on the clarity of the moral debate.
Notes to Chapter 1
[1] Quoted in Gertrude Himmelfarb, The Idea of Poverty: England in the Early Industrial Age, London and Boston: Faber & Faber, 1984, p. 3.
[2] R. H. Tawney, Religion and the Rise of Capitalism, New Brunswick, NJ and London: Transaction, 1998, p. 268.
[3] Richard Turnbull, Shaftesbury: The Great Reformer, Oxford: Lion Hudson, 2010, p. 197.
[4] Philip Booth and Ryan Bourne, Institute of Economic Affairs, ‘What the Market can Provide’, Institute of Economic Affairs, 2015.
[5] For the full story, see Turnbull, Shaftesbury.
[6] Gertrude Himmelfarb, Poverty and Compassion: The Moral Imagination of the Late Victorians, New York: Random House, 1991, p. 384.
[7] Himmelfarb, Poverty and Compassion, p. 384.
[8] See www.jrf.org.uk/sites/files/jrf/poverty-definitions.pdf.
[9] Richard Heinberg, The End of Growth: Adapting to Our New Economic Reality, Gabriola, BC, Canada: New Society Publishers, 2011, p. 2; emphasis in original.
[10] Wayne Grudem and Barry Asmus, The Poverty of Nations: A Sustainable Solution, Wheaton, IL: Crossway, 2013, p. 47.
[11] Angus Maddison, Maddison historical GDP data.
[12] European Environment Agency, ‘Continued Economic Growth? (GMT5)’, Copenhagen: European Environment Agency, 2015.
[13] Michael Novak, The Spirit of Democratic Capitalism, Lanham, MD: Madison Books, 1982, 1991, p. 13.
[14] Novak, Spirit of Democratic Capitalism, p. 14.
[15] United Nations, The Millennium Development Goals Report 2015, New York: United Nations, 2015.
[16] William J. Bernstein, A Splendid Exchange: How Trade Shaped the World, London: Atlantic Books, 2009, p. 384.
[17] Office for National Statistics, ‘Gini coefficients 1977–2012/13’ (equivalised disposable income).
[18] Jonathan Cribb, ‘Income Inequality in the UK’, London: Institute for Fiscal Studies, undated.
[19] HM Revenue and Customs, ‘Percentile Points from 1 to 99 for Total Income Before and After Tax’, 2012; updated March 2016.
[20] Ruth Porter, ‘The Case for Connection’, in Nick Spencer (ed.), The Future of Welfare: A Theos Collection, London: Theos, 2014, p. 26.
[21] Nick Spencer, ‘Welfare and Moral Community’, in Spencer (ed.), Future of Welfare, p. 114.
[22] Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World, Chicago, IL: University of Chicago Press, 2010, p. 424.
[23] McCloskey, Bourgeois Dignity, p. 425.
[24] McCloskey, Bourgeois Dignity, p. 425.
[25] Rowena Young, ‘For What It Is Worth: Social Value and the Future of Social Entrepreneurship’, in Alex Nicolls, Social Entrepreneurship: New Models of Sustainable Change, Oxford: Oxford University Press, 2006; repr. 2013, p. 59.
[26] Alex Nicholls and Albert Hyunbae Cho, ‘Social Entrepreneurship: The Structuration of a Field’, in Nicolls, Social Entrepreneurship, pp. 104–6.
[27] Sutia Kim Alter, ‘Social Enterprise Models and their Mission and Money Relationships’, in Nicholls, Social Entrepreneurship, p. 206.
[28] Brian Griffiths and Kim Tan, Fighting Poverty Through Enterprise: The Case for Social Venture Capital, Coventry: TBN, 2nd edn, 2009, p. 29.
[29] Griffiths and Tan, Fighting Poverty, p. 42.
[30] Richard Turnbull, Quaker Capitalism, Oxford: The Centre for Enterprise, Markets and Ethics, 2014.
[31] Colin Mayer, Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust In It, Oxford: Oxford University Press, 2013, p. 153.