More Carrot—Less Stick
INCENTIVES
By CHARLES CLORE
MosT, if not all, of our economic problems could be solved if only we could increase our productivity. This, I think, is beyond dis- pute. But how are we to achieve this increase? Some of it, at any rate, we could get if we were to adopt modern techniques and employ modern machinery. This, however, immediately raises problems, for not only will large-scale capital expenditure be required—and this, with Bank rate at 7 per cent and a severe limit on bank overdrafts even at high interest rates, is not easy—but also the workpeople must be per- suaded of the need for new techniques and be willing to adapt themselves to them. In any case, whether or not enough modernisation can be introduced, the crux of the matter is increased productivity. How, then, can it be obtained?
In my view it is possible to do this in present conditions in one way only: by providing in- centives. Exhortations, talking, encouragement: these by themselves are not enough in industry in peacetime. In wartime, it is true, many people—most people, perhaps—will be prepared to work their hardest because they see the ob- jective before them and because they realise the alternative if they fail. What is more, they will often do it without thought of personal reward. And in any case the state in wartime can always fall back upon the weapon of direction of labour, a weapon which, although it is an in- fringement of personal liberty, is recognised by the great mass of people as being necessary in such an emergency. Management, too, will react in the same way and bend all its efforts to organise and promote greater output. But this method, which subordinates everything to sheer mass of production, is hardly likely to be the most efficient or the most economic. It produces the goods—large numbers of goods, but almost certainly at high cost and with a great deal of wastage.
It had one great factor in its favour. It pro- duced an incentive—and it worked. What we have to do now is to devise incentives which are acceptable in our present circumstances and will encourage people to increase productivity. It goes without saying that this can only be done if people clearly recognise and accept the incen- tives offered to them. We already have for prac- tical purposes a basic minimum standard of living, and the fear of poverty and hunger no longer applies. The individual must therefore be offered something more than he already has and, in particular, an improving standard of living and the freedom to spend his money or save it as he wishes.
This matter of savings is one which I think is of special importance in improv- ing our economic situation and I have one or two suggestions to put forward. I believe that savings would receive an enormous fillip if, after he reached a certain age, a man's income from invested savings were treated as earned income for tax purposes in the same way as a pension is. The purchase of homes should also be encouraged in every way possible—and this means practical assistance—and so should other methods of saving. Unnecessary expendi- ture could be restrained (and savings indirectly encouraged) by the imposition of a sales tax on all articles except essentials. This tax would at the same time produce revenue, as also would a non-selective employment tax, which, either at a flat rate or as a percentage of wages, would have an immediate psychological effect on em- ployers, who would have a strong incentive to reduce the number of employees who are not fully employed. But since these two taxes would bring money in to the Treasury, it would also be possible to provide yet a further incentive by reducing the rates of income tax, perhaps sub- stantially.
But, you may ask, if people get more money in their wage packet, won't it cause more in- flation'? Not necessarily. The fact that they've got more in their wage packet doesn't mean they are going to spend it all. Remember, we have just been considering some of the ways in which saving can be made more attractive. And a sales tax such as I have suggested would, by raising the cost of non-essentials, siphon off much of the extra money which was not attracted into savings. Today savings are virtually a non- runner. But with the improved terms for saving which I have spoken of, a man would once again have a genuine element of choice in how he used his money. This, together with a reduction in the rates of income tax, would have a pro- nounced psychological effect on the majority of workpeople. Far too many of them think—and have thought for years—that the effort of work- ing overtime or longer hours or taking promo- tion isn't worth while when so much of the extra money goes in tax.
This minor revolution (for that is what it would be) in the outlook and attitude of the workpeople could rejuvenate management. At the present time many in management are ex- hausted and demoralised by the battle. In their own minds they have given up the struggle,
and are carrying on with their jobs in an effort merely to contain the situation, not to improve it. And what would be the incentives for the management side? There are many men of fifty years of age and upward who have lost all am- bition or incentive to earn more and are merely working out the years before they can retire on pension. This would be a disaster to the eco- nomy of any country. For the higher manage- ment, reductions in the rate of income tax and the scaling-down of surtax, either by reduced rates or by earned income allowances, would give some degree of practical encouragement. At the level of ownership of a business, either by an individual or a small group or a large group as shareholders of a public company, the problem of incentives still remains, since, if their profits are heavily taxed and their hopes of capital appreciation severely mulcted, there will obviously be little incentive in the long run for people to build up businesses or to put up money for others to do so. A special solution is needed here.
Obviously the whole problem of productivity is not an easy one, but it seems to me that it is being tackled in the wrong way. Some of my suggestions may seem to be those of an arm- chair theorist, but I do in fact speak from hard practical experience over a wide range of in- dustries and I would have thought that the one infallible way of discouraging people from working harder and more efficiently is to drain off their spending power by taxation and other repressive measures. The average man wants to have control of what happens to his earnings and would very much prefer to save what he wishes and buy what he desires, even if he has to pay a sales tax on such purchases, provided, that is, that the load of income tax pressing on him were lightened. He wants to feel that it is worth while struggling and working to earn more money to better himself and his family and to improve his standard of living. Over the last few years we've had enough stick. Let's have some carrot.
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