One theme explored by Michael Sandel in his recent Reith Lectures is the link between morality and markets. But – given current concerns about the rampant excesses of various money-makers, city traders and financial speculators – one might be forgiven for thinking that no such link exists. Capitalists have created an advanced market system that over-rides moral concerns in the interest of profit – end of story. Yet if we look closer we can see that even markets need morals.

One argument developed by the American economist William J Booth, and more recently developed by UK social scientists Russell Keat and Andrew Sayer, is that economies are intrinsically moral, in so far as they are reliant on norms, values and ethical presumptions for their effective exercise. How might we demonstrate this?

Markets are socially embedded
[image of Leadenhall Market, London © 2008 Jupiterimages Corporation]

Firstly, (as I discussed in my posting on Karl Polanyi) economies can be judged moral because they are socially embedded within non-economic institutions (for example the state, but also institutions of family, religious, voluntary, charitable or communitarian origin) that help set norms and ethical frameworks for acceptable economic conduct. Despite coming under ideological attack from market-liberals, these institutions remain important for checking capitalist tendencies for unfettered accumulation of profit.

Secondly, because people are socially embedded, moral beings (and not just ‘rational’ economic actors), moral presumptions and conventions external to economic rationality are always heavily implicated in everyday patterns of economic exchange. These moral presumptions and conventions would include such motivations as love and care for others, respect, fairness and justice). So people must continually strike a balance between ethical and economic imperatives when transacting. In practice this means that most of us wouldn’t choose to sell our own mother!

Thirdly, economic institutions themselves operate according to intrinsic moral norms and conventions (even if this often appears hard to spot); for example in capitalism there are ethical standards that affect the application of property rights, reward systems, distributions of rights and responsibilities, as well as norms and values shaping the way we treat other people in economic situations (the exercise of ‘professionalism’, ‘business ethics’ and so on) – and these are not merely contractual in origin but involve ethical judgment. For economies to function there has to be moral framework for economic action.

What should properly concern us is not the absence of morality but the particular quality of morality...

However this is not to say that because the economy is ‘moral’ that it is intrinsically ‘good’. The persistence of greed, fraud, corruption and other economic crimes and misdemeanours indicate that this is not the case. But, equally to assume that economies are devoid of ethical substance is to misunderstand their character. To paraphrase Russell Keat what we should recognise is that "all economies are moral but some are nicer than others." What should properly concern us is not the absence of morality but the particular quality of morality inherent to different kinds of economic system. Providing we accept that any kind of economy is shaped by the norms of the community of which it is a part, then the political issue becomes not whether an economy is moral per se, but whether or not the particular moral principles of an economic system are compatible with (say) our own understanding of equality and our requirements for social justice.

Why is this important? By recognizing the moral basis to economic life we retain the theoretical ammunition we need to conceive of alternative economic futures – for if economies always have some kind of moral principles (derived from being socially embedded), this means they are amenable to transformation from within the social contexts that created them. This helps counter the market-liberal myth that certain ‘self-governing’ economic processes (e.g. ‘free hand of the market’) lay beyond social determination, but also checks ‘market fatalism’ – the belief we are powerless to transform capitalist economic institutions and practices.

Find out more

• Interested in listening to Sandel's Reith Lecture on markets? Get the 'Markets & Morals' podcast
• More from Open2 on the Reith Lectures 2009
• What do you think? Join the the Reith Lectures debate

About the author

Mark Banks is Reader in Sociology at the Open University. His research interests include the cultural and creative industries, popular culture, cities and urban space.

Subscribe to Mark Banks's posts

 

Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

As Gregg Wallace’s 'Recession Bites' Money Programme illustrates, the current global recession is presenting new and difficult challenges for consumers who want to shop ethically and sustainably, and the retailers who want to provide the goods that allow them to do so.

Over the last few years, consumers of all ages reported behaving more ethically, while six percent of the UK adult population (2.8 million people) are committed ethical consumers. However, this growth in ethical consumerism has taken place over a period of low unemployment, low interest rates, soaring house prices and healthy retail conditions. The increased cost of living, tighter lending standards, growing unemployment and global recession has changed the economic landscape, and now that consumer spending is under pressure, there are concerns that the growth in the sustainable consumer goods market will slow.

six percent of the UK adult population are committed ethical consumers

Others argue that this is too simplistic, and that while price and value for money have become more pressing issues for consumers, those who are genuinely committed to ethical consumption will not discard their ethical credentials. This is a dilemma for marketers: can they afford to pursue a sustainable agenda when it appears that the market for their products and services may be shrinking? Can they afford not to pursue that agenda, given the risks to their reputation and revenue if they turn their back on the ethical market?

Fast food: Burger.
[Image © copyright Photos,com]

As the corporate greed of many business executives and public figures continues to be exposed, many have criticised marketers for being complicit through their encouragement of unsustainable patterns of consumption with messages of rampant consumerism, endless credit and disposable culture. In particular encouraging even greater consumption of alcohol, fossil fuels, fast food and cigarettes, as well as over-packaging products, and building in unnecessary product obsolescence have done little to position marketing as the planet’s saviour.

However as our research and teaching at the Open University Business School highlights, when harnessed responsibly, marketing encourages us to recycle, reuse, buy fairtrade, eat healthily, drink sensibly, save energy and support good causes. The potential for marketers in this current economic crisis to promote sustainability and provide ethical products and services remains considerable.

Marketing is at the heart of the sustainability debate because of its interface between the forces of production and consumption. Brands built upon value, authenticity and integrity hold even more currency now that many companies have betrayed customer confidence. Consumers have always sought brands which they can trust, but increased cynicism will mean even closer scrutiny of what those brands are built upon. If marketers don’t deliver on value and values, in today’s climate, many consumers will shop elsewhere.

Winners and losers

Recent figures from the UK show that some ethical sectors, such as organic food are showing signs of suffering. Mintel have reported that 48 percent of all organic shoppers will cut back or even stop buying organic food in the next year. However, other ethical choices, such as local produce, fairtrade and animal welfare are gaining ground. 42 percent of UK adults would like more retailers and manufacturers to source from local producers, and 28 percent are willing to pay more for food if it meant supporting local farmers.

This reflects other recent studies that found not only are consumers willing to pay more for locally produced and UK-grown food, but in some cases, perceive produce sold at farmers’ markets to be cheaper than supermarkets. Although local production is not about to replace international sourcing within the food market, the desire to support local farmers and brands in times of recession is one that connects to consumers’ ethical intentions. Retailers who promote the welfare of local suppliers and stock their produce are likely to find favour with the socially conscious consumer.

Moral values are socially and culturally constructed, and culture filters our perceptions of what is ethical or unethical consumption. For example, many consumers focus upon very local causes, and as the recession deepens and local firms struggle to survive, we might expect to see a deepening commitment by consumers to buy local rather than imports as a socially conscious activity that lends support to local business, but also one that potentially reduces air miles and environmental impact, and helps sustain local communities.

Trading down?

Few could have predicted the consumer trade down across Europe and the United States, where discount supermarkets such as Lidl and Aldi have become favorites of middle class shoppers. Fears have been expressed that this may signal that the credit squeeze and pressures of daily life are overriding the affluent consumer’s ethical conscience.

Reported signs of business growth include in the UK, Domino’s pizza chain reporting a 9 percent increase in sales. As people seek to balance shrinking incomes and family demands, the fast food business is responding swiftly to address those consumer concerns. Even as healthy eating campaigners and policy makers take a collective sharp intake of breath, it is important to reflect that the fast food retailers are also, slowly but surely, embracing the ethical trend and have a chance to repair their unhealthy image as concerned shoppers move downmarket.

McDonalds, a long time target of environmental and anti-globalisation campaigners now boasts fair trade coffee, free range eggs, organic milk and locally sourced beef in its restaurants. As many consumers are forced to change where they eat out, there is an opportunity for fast food chains to demonstrate their ethical credentials. While question marks still exist in conscious consumer minds about employee conditions, wages, suppliers and animal welfare, if fast food restaurants can make consumers feel better about eating there when they are forced to, they may continue to visit when they are not.

Recognising that downturns change consumer behaviour, marketers need to formulate a recession strategy to understand how those changes are going to impact upon their business. Will consumers continue to make these choices when the upturn eventually comes, or return to their previous patterns of behaviour? Embracing branded labels when they have been purchasing generic, buying bottled not tap water, ordering Starbucks rather than McDonalds lattes will, to some extent, depend upon their satisfaction with these new consumption experiences and the authenticity of the value and ethics they find within them. If marketers can deliver on price and ethics now, then customer retention post-recession is more likely.

Take it further

• Why choose local food?
• Packaging and the environment
• Cut prices, cut corners?

Courses

• Marketing in a complex world
• Marketing and society
• Ethics in real life

As mentioned in the programme, many organisations are turning to automated call-handling systems, on-line self service systems and other forms of technology to interact with their customers. Customers can find these approaches off-putting at best – and absolutely maddening at worst, particularly when things go wrong. I am sure most of us have had occasions when we are trying to tell our bank, mobile phone operator, utility company or other service provider about a difficulty we are facing – and getting stuck in what seems like an endless loop of recorded messages, menus of options and requests to key in 16 digit customer passcodes!

However, in addition to providing a source of frustration, these systems also have other side-effects that may be even more detrimental for all of us. The increased use of technology, particularly information technology, to automate the customer interface means that increasing amounts of data about our use of services, our movements and our tastes and preferences are stored on databases of both private and public sector organisations.

For example, my local railway station has recently "retired" the gentleman that worked in the car park pay-station for many years. Rather than handing over coins and notes to pay for parking, while receiving a ticket and a cheery greeting from another human being, users of the car park now have the option of going online or sending a message via their mobile phone.

Rather than displaying a printed ticket on the windscreen, the online or phone booking and payment is recorded in the database of the car parking provider, and all cars in the car park are checked against this database. So, what was a previously private matter, where and when I parked my car, has now become an ongoing record in a corporate database. Replicate this over all the customer interactions that are now based on the use of IT and it is easy to see why many people are concerned about the amount of personal data that is held about all of us and hence the increased potential for misuse of that data. UK citizens are already viewed as the most surveyed in the world; data capture as a by-product of de-personalising the customer interface will simply add to this.

The subject of the collection and use of personal data both from consumers and from people in the workplace has formed a basis of ongoing research at the Open University Business School, see for instance Ball, Daniel, Dibb and Meadows (2009). This team of researchers, which have backgrounds in surveillance, information management and marketing, has recently won funding from the Leverhulme Trust to explore what they have termed “new uses of customer data”; that is, uses of data that customers may not be aware of or that firms are being required to undertake, for example, by regulators and law enforcement agencies.

"So, what was a previously private matter, where and when I parked my car, has now become an ongoing record in a corporate database."

 The focus of the work will be firms in the financial services and travel sectors, which is particularly relevant when two of the three guests on the programme are from the travel sector. Both the financial services and travel sectors espouse the benefits of customer relationship management and the related activities of customer profiling and segmentation. For these activities they collect and store considerable amounts of information on their customers, including personal details and a record of all their transactions and purchases. However, as the focus of the research suggests, this data may be used for purposes that are not obvious to those that are providing it and may have unforeseen side-effects or consequences, both for the individual customers involved and for society at large.

As more and more organisations make use of technology to automate their interfaces with their customers, this collection of data will increase. Indeed, as in the case of the use of my station car park, customers may not even be aware of the information about them that is being stored, let alone how it might one day be used.

Find out more

Open University Business School research project Taking Liberties: New Uses of Consumer Data in the UK

Who's watching you work? Surveillance in business

A Report on the Surveillance Society
by KS Ball, D Lyon, D. Murakami Wood, C Norris and C Raab, Surveillance Studies Network.

Democracy, surveillance and 'knowing what's good for you': the private sector origins of profiling and the birth of 'citizen relationship management
by KS Ball, E M Daniel, S Dibb and M Meadows
from Surveillance and Democracy
edited by M Samatas and K Haggerty

Coercion versus Care: Using Irony to Make Sense of Organisational Surveillance
by G Sewell and J Barker
from the Academy of Management Review, Volume 31, Number 4, pages 934-961

About the author

Elizabeth Daniel is Professor of Information Management at the Open University Business School where she undertakes research and teaching in the fields of e-business and information systems. Elizabeth also undertakes consultancy work for a number of blue chip and leading public sector organisations.

Subscribe to Elizabeth Daniel's posts

 

Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

Like-for-like retail sales monitored by the British Retail Consortium (BRC) present a mixed picture. The figures for Easter 2009 were, somewhat surprisingly, higher than many retailers and pundits predicted. Easter was very late (or, last year, too early), unusually sunny (or previously, too cold and wet). Even longer-term economic forecasts from organisations such as the National Institute of Economic and Social Research (NIESR) can be erratic. In the past two months, NIESR have predicted first, the worst economic recession in 30 years, and more recently its end. However, before we all reach for the waste bin to retrieve those pieces of our cut-up credit cards, we need perhaps to treat all these figures with some degree of caution. And any collective sign of relief from the retail sector would seem somewhat premature.

Is it up to our shopkeepers to entice you and me back to the high street?

At a town hall meeting in the ‘Save our Shops’ programme, Mary Portas admonished the good shop keepers of the English market town of Tewkesbury for not doing enough – it was up to them, she said, to save the high street. For the good of Tewkesbury, they must work together more creatively. With the closure of the towns destination Marks and Spencer store, visitor numbers were in terminal decline. The bakery was closing and those stalwart few who remained loyal to the high street seemed reluctant to consume. So, is it up to our shopkeepers to entice you and me back to the high street?

After all, what did you last buy from your local high street? The Mary Portas’ programme provides a timely reminder of the twin challenges faced by British town centre retailers. Glossy out of town shopping centres and the endless expanse of the internet have lured many of us away. These are seductive alternatives. No rush to get back to the car, no British weather, just the effortless worship of conspicuous consumption in these cathedrals of consumption. In 2007, the wholesale and retail sector accounted for 11% of the United Kingdom economy's gross value add. What we buy, as well as how and where we shop, is a significant part of our cultural identity.

Glossy out of town shopping has lured many of us away.
[Image © copyright Photos.com]

Despite the worldwide recession, the trade gap between the goods we import and export has continued to widen. Retail supply chains criss-cross the globe to bring us products we never knew we needed. We are seduced by chocolates from Ecuador, green tea from China and that pink T-shirt with the hand-sewn sequins from, where was it again, Sri Lanka? Cambodia? Arguably the modern day equivalent of Africa’s colonial railways, these retail trans-national networks produce and distribute goods cheaply and efficiently. This may not be the same thing however as providing effective, local, economic and social infrastructure. And is our approach really sustainable?

Whether out of necessity or in the hope of a fairer future, this current retail uncertainty offers us all a chance to pause, reflect and re-evaluate our shopping habits – will a renaissance in retail – when it comes – bring with it a change to our consuming culture? Only time will tell.

More from Open2

• Retail revolutions
• Household finances
• Join the debate

Further reading

• Baudrillard, J. (1970), The Consumer Society, London Sage
• London, T and Hart, SL (2004) Reinventing strategies for emerging markets: beyond the transnational model Journal of International Business Studies 35
• Pakenham, T. (1991) The Scramble for Africa 1876-1912, London Abacus
• Prahalad, C.K. (2005) The Fortune at the bottom of the pyramid: Eradicating poverty through profits Upper Saddle River, NJ Wharton School Publishing
• Ritzer, G. (2004) Enchanting a disenchanted world: revolutionizing the means of consumption, Pine Forge Press, 2nd edition

Take it further with Open University courses

• Continuing Professional Development – flexible online courses in business and management
• An introduction to business studies
• Investigating Entrepreneurial Opportunities
• Introduction to Bookkeeping and accounting
• Managing in the workplace

About the author

Caroline Emberson is a lecturer in retail management at The Open University Business School, having previously worked in the fashion and textiles industry. Caroline's research interests include managing in supply networks and the development of customer-responsive supply chains, in particular the use of business-to-business information systems.

Subscribe to Caroline Emberson's posts

 

It’s easy to show that size impacts profitability but, in practice, managers frequently can only make decisions that affect size in the medium to long term. In the short term they are highly constrained by their existing set-up, always limited by demand in the market place.

A container lorry.
[image by 28481k, some rights reserved]

All businesses have two types of cost: fixed costs (that do not vary with output) and variable costs (that increase as output increases). To illustrate with a simple example, suppose you had a heavy goods driving licence and wanted to run a trucking service. You buy a truck for £100,000 and you can use it for five years. Before you drive a kilometre, you have a fixed cost of £20,000 a year to pay for the basic equipment. Items such as annual insurance and road tax raise the fixed costs to £25,000. Leaving aside your salary, every kilometre you drive costs (say) £1 in diesel, servicing, tyres and so on. So you have fixed costs of £25,000 and variable costs of £1 per kilometre. In the short term you have to work within those constraints.

The size of your business is critical. If you can sell transport at £6 per kilometre travelled, you need to sell at least 5,000 kilometres to break even:

Suppose the physical limitations are that you can drive a maximum of 75,000 kilometres a year. You can see that your profitability will vary according to the amount of work you do. Below 5,000 kilometres a year, you have no salary and are making a loss. Between 5,001 and 75,000 kilometres a year, every extra kilometre adds £5 to your earnings (£6 price less £1 variable cost) so your earnings rise uniformly to £350,000.

However, the moment you increase your activity beyond 75,000 kilometres, you have to acquire a second truck and hire a driver, so profits would then decrease as size increases. You’re either too big or not big enough at that level of activity.

There is also the issue of whether there is enough business available so that you can expand without limit. Often this is not the case and, as you look to boost business, you have to reduce prices. In an ideal world you would maintain your basic price of £6 for some business and offer special deals to gain extra business. As long as you were getting more than £1 and you were already covering fixed costs, you should increase earnings. However, it is difficult to reduce price in a limited way and you may find that existing business moves down from £6 to perhaps £4, so your increase in size reduces the value of your sales while increasing your variable costs – you’ve got too big.

The effects of size can be both beneficial and damaging.

Size matters at the individual business unit level but it also matters in the multi-unit business. The effects of size can be both beneficial and damaging. On the positive side, a multi-unit business can spread its risks better. A costly, failed business initiative can wipe out a single unit business instantly, whereas a multi-unit business can more easily bear the risk of expansion. Also, a multi-unit business can afford to have in-house specialists who bring extra expertise to aspects of management of the business.

On the negative side, key decisions are usually made remotely from the business unit. Normally the group operates with business budgets that must be agreed the year before and then adhered to. This can build in inflexibility because there is usually resistance to departing from the budget to take advantage of an opportunity that presents itself. Equally, central management will be concerned at managing risk across the group, and may turn down an expansion possibility in one unit because it prefers to take a risk in another. The group will probably establish standard procedures that sometimes do not make sense at unit level.

The bigger a group is, the more remote central decision-makers are from front line businesses and so the more controls the group needs in place to monitor what is happening at the unit level. These added layers add costs and not profits, they cause delays in seizing opportunities and often end up making front line staff feel frustrated and unappreciated. Big can be stifling.

Find out more

Get to grips with the big business questions: visit The Open University Business School

Watch Evan Davis discuss the right size for companies

About the author

Professor Peter Walton is a member of the Accounting & Finance Unit at the Open University Business School. His research interests are in comparative international accounting and financial reporting in an international context.

Subscribe to Peter Walton's posts

 

Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

The adage that ‘cash is king’ in business appears to be even more powerful and relevant in the recession. The rapidity and unanticipated consequences of the credit crunch as it developed into a full blown financial and economic crisis created seismic shocks in sectors and firms in the economy.

In 2009, real Gross Domestic Product is forecast to contract by 0.5% in the global economy; 2.8% in the US; 6.2% in Japan; 3.5% in the EU; 6.1% in Germany and 4.8% in the UK. The rise in manufacturing output in the UK of 0.4% between March and April, notwithstanding, the drying up of liquidity in the banking system is still having profound effects on the ability of firms to survive and thus avoiding significant unemployment. At the heart of this survival is maintaining cash flow at whose court all enterprises must bow.

SMEs are squeezed between a rock and a hard place.

Avoiding bankruptcy has become challenging, as firms chase customers and side-step suppliers demands in order to maintain cash flow. For firms that trade globally, cutting off or suddenly limiting access to lines of credit, as orders have dried up, probably sounds their death knell. For example, in the first three months of 2009, global trading in stainless steel industrial products (sheeting coils etc) fell by 40%, due in a large part to the cutting off of lines of credit. Small and medium-sized enterprises (SMEs), particularly in manufacturing supply chains, are squeezed between a rock and a hard place. In order to cut costs, they reduce number of employees but frequently cannot afford to pay redundancy entitlements, leaving bankruptcy as the only viable alternative.

Unemployment is cited as a lagging indicator in the economy, in that it tends to follow on from a downturn. This is still true as unemployment is set to rise in the UK from its current total of around 1.7m to about 3m in 2010 (roughly just over 9% of the workforce on the International Labour Organisation measure). In this recession, unemployment has also been a leading indicator, in that rising unemployment totals in the US, and then Europe, were starting to become apparent at the onset of the credit crunch and financial crisis. This was pointed out by the outgoing external member of the Bank of England’s Monetary Policy Committee (MPC), Professor Danny Blanchflower of Dartmouth College in the US. If his and other warning voices had been heeded, then interest rates would have cut more sharply and some of the worst of aspects of the recession avoided, with the obvious consequences for SMEs under stress.

There are, however, more long term structural forces at play. The West Midlands is the industrial heartland of the UK in which 1 in 4 are employed in manufacturing. Many of the SMEs in this activity are part of global supply chains and are thus subject to monopsony power of their customers (the ability of large firms to dictate prices to smaller firm who supply them), for example the car industry. Despite the claims that we live in a web-based knowledge economy, many of these firms seem anachronistic in appearing to be a throw back to earlier times. They often produce low margin products in large bulk, using traditional production techniques on machines whose best days are behind them.

The rapid and sharp decline in world trade in the last quarter of 2008 and first quarter of 2009, created significant difficulties for which they had no strategic response. This is reminiscent of the British film Chance of a Lifetime made in 1950, which portrays a group of angry workers, who in protesting about their wage and working conditions at a plough factory are allowed to take over the operation themselves. It isn't long before they realize that you can't run a business on idealism and goodwill, as a large export order fails and the patrician factory owner returns and comes to the rescue. The only current patrician in town is the government but despite the very large bail-out of the financial system, direct aid in the form of wage subsidies to sustain employment during these difficult times is not on the agenda. This was a proposal made by Danny Blanchflower, but like many of his insights and suggestions, policy makers have ignored them.

King Cash may be in a comfortable counting house...

Rising unemployment in manufacturing is not just the price of defeating deflation, it is the price of lower demand for goods and services; less direct and indirect incomes in the locale and beyond; postponed or cancelled investment; less sustained knowledge and innovation; and very importantly in a UK context, skills. In an economy that has been termed one operating in a ‘low wage – low skills equilibrium’ this is the crucial factor. In exercising his divine right, King Cash may be in a comfortable counting house, but perhaps we need a new republic in which the government creates financial institutions to underwrite our industrial and manufacturing base. Without this base we all may be asked to eat cake by a latter day Marie-Antoinette.

Take it further with Open2

• Negative feedback loops
• Join the debate

Take it further with Open University courses

• Engineering the future
• Strategy
• Economics and economic change

About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

Subscribe to Leslie Budd's posts

 

Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

One enduring economic myth is that manufacturing does not matter in a modern economy as we move towards a comprehensive service economy. The evidence is appealing: in the United Kingdom, industry's share of national income is about 24%, whilst within this category manufacturing accounts for 15% of total national income. Services with around 75% and agriculture having 1% account for the rest.

In the US and Germany, manufacturing’s share is around 12% and 23% respectively. The economic crisis and ensuing recession appears to reinforce this myth, particularly their impact on the automotive industry. The bankruptcies of car companies and the desperate scramble to rescue ailing ones around the globe are testimonies to a sorry state of affairs. Or are they? In this heart of darkness, more fundamental issues are overlooked.

fundamentally there is a false division between manufacturing and services

The genesis of the financial crisis was in the financial services sector which is one and a half time smaller than manufacturing in terms of Gross Domestic Product (GDP) in the UK. Manufacturing is five times as big as wholesale financial services (found mainly in the City of London) – so size does matter as does manufacturing, although perhaps perversely.

More fundamentally there is a false division between manufacturing and services. During my career I have frequently asked students (and colleagues) whether software is a manufacture or a service. Most reply that is it the latter – in fact it is both. Manufacturing in the UK accounts for 75% of Business Expenditure on Research and Development (BERD) and is a significant source of demand for advanced producer services (one of the mainstays of the ‘knowledge economy’) for example, in aerospace among many others. In the demands to rebalance the world’s leading economies, manufacturing starts to look like the key sector to make the economy motor again. In this, the car industry will play a major role, notwithstanding the collapse of General Motors and Chrysler.

It could be argued that industrial behemoths, like GM and Chrysler, should be allowed to collapse: it is the verdict of the market. They overproduced in good times; produced poor build quality in their vehicles; escaped emissions regulations by producing massive numbers of SUVs: the charge sheet goes on. As has been too painfully displayed in recent times, markets are not rational and strategic industries support more than just the immediate production of gas guzzlers and widgets.This appears to be the view taken by the Obama Administration.

It could be argued that industrial behemoths, like GM and Chrysler, should be allowed to collapse

The motor industry is an important source of large agglomeration economies in the regions they locate in; creates important supply and value chains associated with regional and global production systems; is in the forefront of technological and process innovation and; is a living manifestation of Keynes’ multiplier as it sustains successive layers employment, income and output in related industries and services in the economy.

Moreover, important externalities and spillovers to the education system are overlooked in the balance sheet of the industry and by government policy. Science begets engineering; engineering begets manufacturing; manufacturing begets services, in which education and skills developed ensure inter-generational economic sustainability. In the rescue package for GM and Chrysler, the US government has put has $30bn into the former and taken a 60% stake in the case of the latter it will jointly own 12% with the Canadian government. This still seems small beer compared to the bailout of the financial system, in the order of $800bn in the US and in the UK the £5m bridging loan to LDV (and then withdrawn) pales into micro-insignificance. Furthermore, it does seem surprising that the Bank of England did not include car financing companies in its quantitative easing programme, part of the potential £150bn bail-out of the UK financial system. 

In the UK, the stress on the high-valued end of manufacturing allied to creative industries is a bit like a Thunderbirds (the television puppet show of the 1960s) view of the future. The comparative and not absolute advantage of manufacturing in the UK rests on a continuum of high to low end value added activities. We may wish to motor the economy towards a Rolls Royce solution but versions of the Trabi are still important. The post-crisis world offers an opportunity for a more balanced and sustainable economy, if we make manufacturing matter. It certainly is motoring the new economic global players along.

Take it further with Open2

• Lifecycle of the car industry
• Outsourcing
• Happy workers
• Join the debate

Take it further with The Open University Business School courses

• Engineering the future
• Strategy
• Economics and economic change

About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

Subscribe to Leslie Budd's posts