The Warrington Hotel, an imposing, lovingly restored Victorian boozer in Maida Vale, London, is buzzing. The bar downstairs is heaving upstairs, the restaurant has been largely full since it opened in February. The Warrington, the third in a chain of pubs-with-restaurants Gordon Ramsay built, glows with confidence. Clearly, there’s money in pubs.

But for every Warrington, there are perhaps half a dozen where the only building work is demolition or transformation into bijou flats. Last year 1,400 of the UK’s 58,000 publicans called time on their premises, says the British Beer and Pubs Association (BBPA), the fastest closure rate in history. Pub shares have suffered ‘extraordinary underperformance’ compared to a stock market that is itself hardly jumping, notes Kate Pettem of Landsbanki Securities. Many have retreated 50 per cent from their 2007 highs. Several chains, embracing high-street names such as the Slug and Lettuce, Hogshead and Walkabout, have collapsed or been forced to sell.

Campaign for Real Ale information manager Iain Loe notes that whoever is benefiting from binge-drinking, it’s not pubs, which continue to dry up at a lick that is leaving whole swathes of Britain shorn of locals, just as other outlets with important community functions, such as post offices, are also closing. ‘For the first time since the Domesday Book, more than half our villages are without a pub,’ Loe warns. Pettem has ‘no idea’ when the current closures will stop – most observers think 6,000 to 8,000 establishments are in the firing line, though she quotes estimates as high as 10,000 or 20,000.

Yet it is too early to write the local’s epitaph. Pubs and brewers are among the UK’s oldest and most resilient institutions, as well as a national treasure. Youngs, the London brewer, traces its line back to 1533, Greene King to 1799. Of Roman origins – pre-dating the university – the pub is even more venerable, having survived hangovers resulting from attacks by Puritans as well as fierce competition from the coffee shop and the gin trade. Today’s meltdown was foreshadowed a century ago with the bursting of a pub property bubble fuelled by a stock exchange boom, which left highly leveraged brewing and pub empires with debts they could not service from beer sales.

Plus ca change – except that this time the toxic combination of falling property prices and high debt is compounded by a number of 21st-century concerns. These include the smoking ban rent increases as pub owners try to compensate for declining beer sales rising prices of food, energy and beer increasing thickets of red tape competition from supermarkets and beer sales which, relative to outlets such as supermarkets, have been falling for 30 years. According to the BBPA, beer sales over the bar are at their lowest since the Great Depression.

Last month’s Budget measure, which put 4p on a pint, was the final straw for many, seen as hitting pubs particularly hard while supermarkets, which already use off-sales as potent loss leaders, are better placed to lean on suppliers and absorb the cost. Critics charge that this will accelerate the move from the pub, while doing nothing to curb cheap-booze-fuelled binge-drinking. ‘We seem to be entering a new era of prohibition,’ says Loe. ‘Pubs are harangued by councils and tied up in red tape. They should be treated as the solution, not the problem.’

Yet not everyone is drowning their sorrows. ‘There’s a real flight to quality,’ says Simon Emeny, managing director of London brewer Fullers’ Inns. ‘Yes, the market is oversupplied – we’re drinking less and eating out more – but good outlets with investment behind them and great staff will continue to do well.’ He looks forward to a rebound after the adjustment to the smoking ban is over. But further ahead, he believes that Fullers – along with other regional brewers sharing a long-term perspective, deep knowledge of the industry and a strong investment record – are well placed to sit out today’s ‘perfect storm’ and sift the pickings when the waves subside. They will lead continuing consolidation. More vulnerable, he says, are companies with shorter-term business models that have borrowed heavily to make a fast buck: ‘You can see that in the groups that are currently up for sale or refinancing.’

You can also see it in the shabby fittings of pubs at the opposite end of the spectrum from the Warrington. Some have changed hands so many times in recent years that locals no longer know who owns them. These are the pubs that are doomed to vanish, leaving a smaller, undeniably more upmarket, estate in their place – but also a niche that other, with luck better managed, establishments may come to fill in the future.

‘Throughout their history pubs have had to offer something distinctive,’ says Pettem. ‘At one stage beer was healthier to drink than water, at others they were the only places to sit and talk. Now bedrooms and kitchens are the places to invest in.’ If it does that, she says, the pub will still be entrancing tourists – and giving locals something to gripe about – in 100 years’ time.

The Observer, 20 April 2008

THE MBA is 100 years old this month. Is it a happy birthday? It all depends how you look at it. In numbers terms, things could hardly seem rosier. The first intake for Harvard’s newfangled Master of Business Administration comprised just 33 trailblazers according to the Financial Times , this year 500,000 will graduate globally with the coveted degree, 30,000 of them in China. In the UK alone, there were at the last count around 120 business schools turning out 27,000 MBAs from full- and part-time programmes.

MBAs are important both as brand flagships and a source of revenue: a two-year programme at a top business school costs up to pounds 45,000. But, successful as it has been in both those respects so far, the future is looking cloudier than the past.

One set of reasons is to do with market dynamics and demographics. On the demand side, much of the UK’s MBA growth has come from overseas, mainly China, India and the EU. But after a steep 10-year rise, student recruits from China are falling as the country increasingly grows its own graduates. And in the EU, the landscape of European business education will change radically from 2010 with the implementation of the Bologna Declaration, which seeks to improve professional mobility by aligning all European degree-granting arrangements. Hundreds of new business courses, many of them in English, some of them MBAs, are now being planned to compete for a more mobile student body. Falling within the subsidised university sector, some will charge minimal tuition fees, sharply undercutting high-cost courses.

Increasing competition does not only apply to students. MBA students paying dearly for their qualification demand good teachers, and these are in short supply. The Advanced Institute of Management Research (AIM) reckons that 4,000 UK business-school profs will retire in the next decade, far outpacing the supply of PhDs to replace them. In addition, even with fat consultancies available to professors at top schools, the rewards of an academic career are insignificant beside the mega-bonuses paid to their former students in the banking sector.

The other concerns surround what the MBA is actually for. Harvard’s original ambition was to make management a fully fledged profession. But that high-minded project withered on the vine and now the MBA’s basic, often explicit, proposition is the advancement of the career prospects – and, notably, the pay packets – of its students.

In this the qualification, at least from a top school, is largely successful: even today, a newly minted 28-year-old MBA will be picking up $100,000 or more at a Wall Street finance house. Much more problematic is what and how they are actually taught. In the past few years, a string of academic heavyweights have lined up to cast doubt on the offerings. Henry Mintzberg of McGill University in Montreal argues that ‘conventional MBA programmes train the wrong people in the wrong ways with the wrong consequences’, turning out ‘trivial strategists’ and desiccated number-crunchers rather than people able to exercise craft and judgment. The complaint is echoed by the University of Southern California’s Warren Bennis, who laments that messy, multi-disciplinary reality gets lost in the business schools’ misguided emphasis on a ‘scientific’ research agenda.

Gary Hamel of the London Business School has noted that teaching too often focuses on what passes for ‘best practice’, challenging neither the underlying paradigm nor the practices based on it. And in perhaps the most wounding intervention, a group including the late Sumantra Ghoshal at LBS, Stanford’s Jeffrey Pfeffer and Harvard’s Rakesh Khurana have charged that some of the concepts taught on MBA courses led directly to the corporate excesses that have discredited the past decade or so.

To be sure, MBA programmes are not uniform. With many specialised courses catering largely for practising managers, the UK is exempted from some of the sternest criticisms. And the system is tolerant enough that the professors cited above can continue to earn their living while voicing their strongly held views.

Yet the MBA is still in essence an Anglo-American cultural institution that has internalised the latter’s basic values. Perhaps this homogeneity explains why it has resulted in so little management innovation. Unlike in, say, medicine, all the management advances of the century, from divisional organisation to the Toyota Production System, have evolved out of practical experiment before becoming the subject of theoretical analysis.

In a recent discussion paper, AIM recommends that business schools embrace a range of different approaches to confront the more difficult times ahead. Experimentation and innovation will be needed in MBA programmes, too. After a century, the benefits of the pre-eminent business qualification to individuals are clear – but as for its impact on businesses and society, greater thought and application are called for. Must try harder.

The Observer, 20 April 2008

WE’RE SO used to the idea of business as separate from the rest of life that the extent of family business initially comes as a surprise. But look around: Ford, Wal-Mart, Sainsbury, Cadbury, Porsche, Michelin, Cargill, Samsung, Ikea, BMW, News International, LVMH… the list of major companies controlled or managed by members of a founding family, sometimes over many decades, goes on and on. According to one calculation, two thirds of the world’s businesses are family firms, contributing the same proportion to GDP. Among them are some of the world’s biggest – one third of the Fortune 500 are substantially family-owned or family-controlled companies, for example.

A moment’s thought, though, suggests that many, even most, firms start off as family enterprises, their name (sometimes with ‘and son’ appended to underline the point) emblazoned above the door and their genes embedded in the corporate culture. So family dynamics matter in business right from the start. Indeed, once remarked on, the relationship between companies and families is close and striking.

Logically enough, good firms aspire to ‘familiness’ – the mixture of trust, loyalty and openness that at best permits honest discussion and quick decision-making without recourse to bureaucracy or formal rules. Conversely, bad firms often reflect paler versions of the seething jealousies, denials and Oedipal conflicts that make dysfunctional families hell.

The degree to which business outcomes in even substantial companies are shaped not by the rational calculations of the textbooks but by unpredictable, sometimes violent, family relationships emerges with startling clarity from Family Wars (Kogan Page), by London Business School’s Prof Nigel Nicholson and Grant Gordon, fifth-generation scion of a UK family drinks firm.

In 24 case histories, ranging from Guinness, Pathak, Gucci and Lur-Saluces (Chateau d’Yquem) in Europe to IBM, Seagram and the Gallo and Mondavi wine families of the US, the authors elucidate some of the most lurid business feuds of the 20th century and their (usually) sorry aftermath.

The stories are fascinating. All entail massive damage to the families involved – in the cases of Gucci, Gallo and the extraordinary Shoen tribe, founder of the US trailer firm U-Haul, up to and including murder. The businesses suffer too, but not always to the point of collapse. In some cases the name and brand prove more resilient than the family (Guinness, Chateau d’Yquem). A very few, like Reli ance, the Indian conglomerate, emerge rejuvenated and re-energised.

Although, following Tolstoy, each unhappy family is unhappy in its own way, the unhappiness of business families plays out in ways that are instantly recognisable to students of corporate behaviour. Many business patriarchs are great creators who through lack of self-knowledge and self-discipline become equally potent wreckers. Thus, a founder’s obsessive business focus is strikingly often accompanied by abysmal parenting skills – the favourite child is really the firm – so destructive behaviour patterns are replicated over generations. ‘Genetic politics’ – the biological forces that both bind and separate families – supercharge everything, ensuring, for example, that bad blood breeds bad blood, seemingly aggravated rather than soothed by power and wealth. The failure of so many companies to establish succession plans is surely the psychological equivalent of the business patriarchs who (in extraordinary number) die intestate – a reflection of denial of mortality and unwillingness to let the children grow up to (challenging) maturity. The obverse of loyalty and familiarity is an insularity that discourages and even rejects outside advice. Very few of the firms described seek external counsel for their mounting problems – and none takes it.

Of course, not all family firms turn in on themselves or become psychotic – as the very partial list at the beginning of this article shows, many are doing just fine, thank you. Evolutionarily speaking, the family is (fortunately) a powerful and successful unit, even if individual ones can go spectacularly and tragically awry. Likewise for firms. In both, as the authors note, the key is to be aware of the strengths and weaknesses of gene

politics (successors will inherit 50 per cent of the founder’s genes, but which ones?) and build checks and balances accordingly.

At its best, family control can give firms a strength of purpose, insulation from the short-term pressures of the public market, and a flexibility that can be compared to a benign version of private equity. All it takes is psychological awareness, mentoring and parenting skills, exercising authority without authoritarianism, and perhaps above all fine judgment of when your time is up. Management as life, in fact.

The Observer, 13 April 2008

AS RECENT headlines attest, placebos – sugar pills and sham operations – make people feel better. Less widely known is that they work just as well in management, where their effect is both huge and almost completely ignored. Indeed, it’s not too much to say that the combination of placebos and systems (similarly neglected) turns management into an unparalleled force for good or an unparalleled force for ill.

The reason placebos and systems are both so powerful and so invisible is one and the same: because they deal with messy and malleable human beings, they are incapable of being expressed in the reductive equations of the rational-choice economics that underlies today’s management theory. So management theory doesn’t recognise them. Yet their consequences are no less real, especially when, instead of working simply on individuals, the power of belief is propagated throughout whole systems.

Consider, for example, the experiment in an Israeli army boot camp recounted in Bob Sutton’s quirky book Weird Ideas That Work. Incoming recruits were randomly assigned to three undifferentiated groups. Their instructors were (falsely) informed that one group had been singled out as having ‘high command potential’, unlike the other two, whose potential was average or unknown. Only the instructors knew about the rankings the soldiers had no idea they were in a trial. Yet by the end of the 15-week course, the ‘high potential’ group were objectively better shots, better navigators and better judges of tactics than the other groups. The placebo had worked. The evidence of this and many other studies is incontrovertible: that confidence, even if misplaced, makes people perform better.

Or, in a different context, take Apple’s Steve Jobs. Jobs has been much lampooned for his ‘reality distortion field’, his supposed ability to evoke a parallel universe where the apparently impossible is treated as not only possible but routine. But the joke is on the mockers: there is a distortion field, within which those who absorb the belief (mixed, it must be said, with a liberal dose of fear) perform feats of innovation that other companies only dream about. Henry Ford once said: ‘If you think you can’t, you’re right: you can’t.’ As Jobs shows, the reverse is equally true: if you think you can, you’re well on the way to doing it, even if by any objective criterion the odds against it are high. Hence the formulation of Sutton’s seventh ‘weird idea that works’: decide to do something that will probably fail, then convince yourself and everyone else that success is certain.

These examples show how ‘placebo power’ works: by altering reality into its own image, expectations become self-fulfilling. ‘The self-fulfilling prophecy is, in the beginning, a false definition of the situation, evoking a new behaviour which makes the originally false conception come true ,’ noted Robert Merton, the sociologist who first described the phenomenon in the 1940s. ‘The specious validity of the self-fulfilling prophecy perpetuates a reign of error. For the prophet will cite the actual course of events as proof that he was right from the very beginning.’

This is exactly what has happened in management. Left to themselves, almost no one recognises in themselves the self-interested, rational utility-maximiser – homo economicus – of conventional economics. But studies show that when people are taught conventional economics and the management that is based on it, that’s what they become. If people are taught that greed is good, it’s hardly surprising they become greedy if they learn that financial incentives motivate, they come to expect incentives and targets. Thus is the ‘reign of error’ perpetuated. As management professor Robert Frank put it, through the placebo effect, ‘our beliefs about human nature help shape human nature itself’.

In this way, systems and placebos turn management into a potent instrument of social engineering, and the organisation into a battleground for competing world views. Do we believe that people want to work, are basically honest, and are motivated by the job itself? Or do we believe that they are shiftless, untrustworthy, and only motivated by money? The choice has to be made – and the answer matters, because it shapes the outcome.

To its everlasting shame New Labour, by gullibly accepting the crude, self-interested model of human behaviour in the private sector, and actively promoting it in the public sector, has done its best to make that behaviour come true. Fortunately, its limitations have become glaringly evident in today’s turmoil. The City in general, and private equity in its corporate form, are the purest expression of the trustless economy, and their collapse is testimony to the latter’s unsustainable contradictions. Conversely, we should be all the more grateful for the success of companies such as John Lewis, Marks & Spencer and others, whose most important product may turn out to be not what they sell, but what they expect.

The Observer, 6 April 2008

Not much more than a decade ago, the second of the UK’s ground-breaking reports on corporate governance was headed by a certain Sir Richard Greenbury – who happened to be M&S’s combined chairman and chief executive at the time. Sir Stuart Rose must be reflecting ruefully that, far from being attacked for combining those two roles, his predecessor was invited to pontificate on directors’ pay.

Greenbury was building on the original report on governance by Sir Adrian Cadbury. Since then the edifice has been further altered and extended by others of the great and good: Hampel, who reviewed Cadbury and Greenbury (1998) Turnbull on internal controls (1999) Myners on investment (2001) Higgs on non-executive directors (2003) and Myners (again) on voting (2004). Between them they have constructed a comprehensive array of advice that has today acquired the force of holy writ.

Somewhat to its surprise, the combined codes have made the UK the corporate governance capital of the world, its principles-led rules being widely thought an advance on the rules-based regime of US. However, not everyone shares this Panglossian view. Critics charge that the effect of the combined codes is to enshrine shareholder value as the sole purpose of companies, and that, by focusing on principal-agent problems (how to ensure manager and worker ‘agents’ carry out the wishes of shareholder ‘principals’), they simultaneously overemphasise the control function of the board at the expense of creation and entrepreneurship, and complacently sanction rocketing executive pay.

Moreover, although researchers have found evidence that investors would be willing to pay more for what they see as ‘good governance’, at least in its official version the latter doesn’t appear to make companies work better: a 1998 meta-analysis of 85 separate studies showed that the proportion of independent directors on the board and the separation of the role of chairman and chief executive had no effect whatever on company performance.

Of course it’s conceivable – although impossible to prove – that the codes have improved performance negatively, by preventing some otherwise-dominant individuals from leading their companies to perdition. On the other hand, they are certainly not foolproof. They were unable to stop manifest governance failure at Northern Rock, where the board comprehensively failed to challenge a high-risk lending strategy when conditions changed last year.

Indeed, the same could be said for the disarray of the financial sector in general. It seems a bit rich that those who failed to notice the impending systemic scandal of the credit crunch should now be quaking with horror at the idea of Rose’s elevation to executive chairman at M&S.

Do the words ‘swallowing camels while straining at gnats’ come to mind?

The Observer, 6 Apreil 2008

ON TRIAL in the credit crunch is not the ‘banking system’ or the ‘international financial system’ or even the markets in which they operate. It is the fundamentalist model of management by which our institutions are governed.

Like a drunk at the wheel of a supercar, we’re careering full tilt up the wrong side of the motorway, bouncing from one pile-up to the next. Today’s financial wreck was always going to happen. It is the son of Enron, Tyco and WorldCom, just as they were the offspring of the dotcom boom and the grand-offspring of the great bull run of the 1990s. The crunch was as inevitable as the next England sporting humiliation – just as the next one will be if we don’t mend our ways. It couldn’t be otherwise when that’s what companies are set up to produce, through the blind folly of governments and regulators, backed up by a panoply of self-serving supporting interests.

What do the following have in common: sub-prime mortgages collateralised debt obligations and other instruments by which those mortgages are sliced, diced and sold on and excessive leverage, whether by banks, private equity or hedge funds? They are all reck less and conscious mis-selling, the product of an amoral, deterministic system that expects and gives individuals the incentive to maximise their gains, while barring them from taking into account the costs their profit-making imposes on society as a whole.

It is not just that ‘Wall Street is predicated on greed’, in the phrase of a former Bear Stearns director last week. ‘Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible,’ obligingly warned Milton Friedman, the patron saint of market fundamentalism. How the great financial centres have taken him at his word! Indeed, the present crisis brutally underscores the limitations of the social responsibility movement: what price ‘responsibility’ initiatives when most of the product range of the financial services industry – on which we’ve banked our future – is shot through with irresponsibility and moral hazard?

Together, markets and companies have in the past been a formidable driver of economic welfare. Without the dynamic of organisations and markets – the company proposes, the market disposes – no country has, or could, aspire to the levels of wealth achieved by the economies of the West. Indeed, the centrally planned economies broke in the attempt.

However, this is not the result of some immutable, pure, ‘free-market’ design, as the fundamentalists would have it (for real free markets, try Haiti, Nigeria or early post-Soviet Russia), but of man-made rules that foster creative interplay between the economic actors. So far, the rules have, just about, kept the balance sheet positive. No longer. As a former senior Esso executive, Oystein Dahle, predicted, while ‘socialism collapsed because it did not allow prices to tell the economic truth… capitalism may collapse because it does not allow prices to tell the ecological truth’.

He was using ‘ecological’ in the sense of ‘green’, but it could equally apply to the financial ecology. In fact, planetary and financial warming have much in common. They signal that the price of continuing the game under present rules, in which benefits accrue to a tiny group of insiders while the catastrophic externalities are borne by society as a whole, is too high. Returns to the present governance system are no longer diminishing: they’re negative. So no more extra time.

‘The Americans have invented a system with no commitment, trust or long-term relationships,’ wrote Will Hutton in this newspaper last week. This is not aberration, but design. Behind the City and Wall Street firms that epitomise, in Indian business guru Sumantra Ghoshal’s words, the ‘ruthlessly hard-driving, strictly top-down, command-and-control-focused, shareholder-value-obsessed, win-at-any-cost’ management model stands the invisible weight of half a century of agency theory, transaction-cost economics and game theory – as taught in business schools, solemnly embodied in corporate governance codes, reinforced by consultancies, aped by the public sector and duly absorbed into the executive bloodstream.

Slowing and then reversing this inertia will not be easy. But by exposing the degree to which the current management system is broken – riddled with perverse incentives based on false assumptions – today’s credit crunch may have done us a favour.

The showdown between management’s ‘dark’ and ‘light’ versions has come sooner than expected. If bad rules got us into this mess, better ones – which go with rather than against the grain of humanity, community and the physical realities of the planet – can get us out again. Capitalism is too important to leave to the capitalists. So bring it on.

The Observer, 23 March 2008

ACCORDING TO the Collins dictionary, ‘reform’ means ‘improvement, or change for the better’. Perhaps only in public services could it have come to signify something like the reverse: a grim trial of strength in which the centre imposes a new set of untried methods, often free-market-oriented, on reluctant consumers and providers in an attempt to alleviate the worst effects of previous reforms, often making things worse and dearer. The GP contract, the full horror of which is still unfolding, is a good example.

The theme of reform as trench warfare ran all through Gordon Brown’s dour article in the Financial Times last week on the ‘third act’ of public sector reform. After a first phase consisting of (inevitably) targets, league tables and ‘tough inspection regimes’, and a second of focusing on ‘tackling underperformance and variation’, it is now the turn of choice and competition to lead the ‘assault on underperformance’, with ‘no backtracking… no go-slow, no reversals and no easy compromises’.

Leaving aside the implausibility of imposing choice by central planning, why should ‘choice’ now be the answer? It’s clear enough that something else is needed – as even their champions admit, targets and whatever the second phase of reform consisted of have had moderate success at best (and even that calculation discounts their enormous direct and indirect costs).

In truth, however, like them, ‘choice’ is just another finger in the air, a hypothesis rather than a proven method. A couple of dubious pilots aside, there is scant evidence that it works or that the public wants it – except in fields where anything would be an improvement on the present service. Instead, choice is based on ideology, in particular an unshakeable belief that without fierce sticks and carrots providers can’t be persuaded to do the things recipients want.

But there are two fundamental objections to it. ‘Choice’ in this definition is our old friend ‘the wrong thing righter’: an extension of the bad old system that has given us services as centrally planned units of provision, doled out to those who can get through the picket lines that providers erect to control access. Self-evidently, choice among a greater number of inherently customer-unfriendly organisations is not much of a choice, and the only incentive it provides for suppliers is to cut corners and costs.

The other objection is that choice of this kind is an admission of bankruptcy – a wholesale transfer of responsibility from provider to recipient not only for their own service but for the improvement of the system as a whole. In the NHS, getting proper treatment in a fragmented system already demands near full-time management by a dedicated family member. Even its proponents concede that full-on choice would require that role to be formalised in the shape of ‘patient care advisers’, significantly adding to cost. As for elderly or otherwise vulnerable people having to assemble their own social care packages – isn’t that what adult social care was created to avoid in the first place?

Some degree of choice – call it flexibility – is of course necessary to keep any system running smoothly. But to expect it to ‘drive down underperformance’ in a badly designed system is hopeless: a costly placebo that won’t work.

By contrast, a reform that would restore to the word some of its positive connotation would be to accept that conventional economies of scale don’t work in services and abandon the vain attempt to deliver them through markets and mass production. Instead of force-fitting applicants into categories for predeter mined service packages, give people just what they want, and no more, upfront, before their needs become serious.

This involves analysing real demand (which, amazingly enough, almost never happens in public services) and designing provision to match. Contrary to all current trends, almost all public services, from policing to health, are best delivered locally and directly, so that providers can react to the specific needs of their own patch. Where this approach is used, ‘choice’ becomes a red herring, because people get what they need. When they are no longer fighting the system, citizens’ engagement increases. Public-service workers are remotivated too, because they are doing a better job (the best, and cheapest, incentive).

Ironically, in healthcare such a personal-service model already exists. It’s called the GP’s surgery. If it worked properly, why would anyone need a ‘patient care adviser’? Unfortunately, the government seems bent on dismantling it in favour of impersonal treatment and advice factories, where no one ‘owns’ the patient – no one except themselves, aided by the fabled NHS computer.

No wonder many in the public sector are battening down the hatches at the prospect of another round of reform. The phrase on their lips is another whose meaning is unique to the UK: ‘Bohica’, or ‘bend over, here it comes again’.

The Observer, 16 March 2008

WE LIVE IN strange times. In the private sector, market rules are so degraded that it has become the role of companies in the real economy, some built up over decades, to act as chips tossed around by high rollers in the City supercasino. Meanwhile, the public sector is in the grip of a central planning regime of a rigidity and incompetence not seen since Gosplan wrote Stalin’s Five-Year Plans.

You think I exaggerate? Well, as Exhibit A, consider the hedge funds that borrow company stock in order to vote for or against a proposal – a merger or takeover, say – not to further the interests of the company, but to make their previous bet on the firm’s share price come true. For Exhibit B, name another government since Leonid Brezhnev’s that prescribes 198 targets for local government, numbers and postings of junior doctors, reading methods for teachers in primary schools, cleaning techniques used in hospitals and how GPs should organise their appointment diaries.

Already individually dysfunctional in their own way, in combination these diametrically opposed management extremes deliver not the fabled ‘third way’, or at least not in any man ner intended, but an unholy mess, from which we get the worst of both worlds.

How have we got to this position? As a reader reminded me last week, our most illuminating guide may be the lamented Jane Jacobs. When she died in 2006, obituarists emphasised the Canadian writer’s regeneration opus, The Death and Life of Great American Cities. But in Systems of Survival (1992), she also put forward startlingly original and equally penetrating observations about the way economic life in general is organised.

From sources ranging from The Observer to medieval law and anthropology, Jacobs concluded that humans had developed two ways of gaining a living: ‘taking’ and ‘trading’, or ‘conquest’ and ‘commerce’. She also found that each of these survival systems had a corresponding ‘moral syndrome’, built out of precept and tradition, modified over time. For example, it’s hardly surprising to find that commerce thrives on a syndrome of honesty, competition, respect for contracts, initiative and enterprise, optimism, thrift, willingness to collaborate and agree, and avoidance of force.

The other syndrome, which Jacobs dubs the ‘guardian’ syndrome because it derives from territorial protection, by contrast emphasises loyalty, honour, tradition, prowess, exclusivity and the distribution of largesse. Trading is anathema to it. This syndrome governs the behaviour of governments and their bureaucratic and other agents, including police, armed forces and judges (also, incidentally, organised religion).

Three points are essential to understand how the syndromes work. The first is that they are practical and internally consistent, not arbitrary: they are ‘what works’, as evolved over time. Second, though mutually exclusive, they are also interdependent: commerce needs ‘guardians’ (the state) to establish and police the rules, guardians need commerce to provide energy and innovation, not to mention taxes. Finally, and crucially, they are systems. One characteristic of systems is that the parts work together and are self-reinforcing.

But by the same token it’s impossible to change or remove individual elements without causing unintended consequences all along the chain. In this case, so sensitive to tampering are the syndromes that combinations of the two produce not a milder median, but what Jacobs calls ‘monstrous hybrids’, with the perverse property of turning virtues in one syndrome into vices in the other.

The classic case is the Mafia, a rigidly ‘guardian’ organisation put to the service of commerce, making travesties of honour, loyalty, competition and industriousness in the process. But hence also the dysfunctional examples with which I began this piece. In fact, in 1992 Jacobs was already anticipating the buyout boom, which she interpreted as companies abandoning commercial morality (thrift, innovation, enterprise) to treat other firms as plunder.

Conversely, the disastrous results of the GP contract can be traced directly to the government’s determination to turn an essentially guardian organisation into a commercial one. GPs have responded to incentives in textbook fashion, by finding ways to meet the targets. The government has changed their motivation from intrinsic (the work itself) to extrinsic (outside rewards). But, as a patient, which GP would you rather consult, one motivated by money or by doing the best medical job?

The point about the syndromes is that one isn’t better than, or replaceable by, the other: they’re symbiotic. It follows that the ability to navigate between them, maintaining their integrity but knowing when to switch, is vital. If, as Jacobs suggests, such a capability is a mark of civilisation, we can only conclude we are going in the opposite direction to what New Labour intended: backwards.

The Observer, 9 March 2008

IN HIS witty column last week, my colleague William Keegan recalled Gladstone’s description of finance as ‘the stomach of the country, from which all the other organs take their tone’. Well, that stomach currently being convulsed by binge-induced indigestion and nausea, and the tone set for the other organs (which means for us) is a throbbing hangover, the effects of which are likely to get worse before they get better.

Coming after the dotcom debacle of 2000, today’s sub-prime saga – which still has some way to run – this indigestion confronts us with an urgent question: how to prevent the stomach’s chronic urge to binge again in another five or 10 years, maybe causing not just a bad headache, like this time, but a cardiac arrest.

One answer could be tighter international regulation: financier and philanthropist George Soros, French President Nicolas Sarkozy and Prime Minister Gordon Brown, to name but three, have all called for reform of international finance. But this is like trying to control obesity or binge-drinking by regulating global supplies of food and drink. What we need is for certain individuals to change their diet.

The origins of today’s financial crisis lie not in the mysteries of the global financial architecture but in the pay-for-performance practices of Wall Street and the City. Basically, these practices push the perverse incentives contained in all such schemes to the extreme. What marks out the financial sector is its offer of unlimited upside for inventors of clever wheezes like collateralised debt obligations (don’t ask) or mortgage-backed securities, with no downside. Not only are the fabulous bonuses paid before the toxic effects on the rest of the body are evident (and sometimes brazenly even when they are: see Stan O’Neal’s $161m and Chuck Prince’s $42m exit packages at Merrill Lynch and Citigroup respectively) – even worse, participants in the system are cynically aware that, as with Northern Rock, they can’t be allowed to go to the wall for fear of bringing down the whole structure.

The upshot is the ultimate moral hazard: as Martin Wolf has powerfully argued in the FT , the financial sector is an industry ‘that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders’ who, to add insult to injury, then are obliged to pick up the pieces with their taxes. In the terser formulation of playwright Bertolt Brecht: ‘Every 10 years a great man. Who paid the bill?’

We did. And it is at this point that the non-dom issue swims murkily into the picture. Of course, there are non-domi ciled, low-tax-paying UK residents of all trades, shapes and sizes – ship owners and business-school lecturers along with City traders and bankers. But be sure that most of the irritating high-pitched drone you’ve been hearing these last few weeks comes not, as you might have imagined, from the famous ‘mosquito’ device for dispelling rowdy teenagers in our town centres but, just as repellent, from high-earners in the City whingeing about the preposterous idea of having to pay tax on all their earnings.

Putting the two things together, let’s see if I’ve got them straight. To make the City safe as the world’s premier financial centre it needs to be free to pay unlimited salaries to incentivise people to devise ever more arcane, risk-bearing financial vehicles in the future, while it is the job of the authorities to pull out all the monetary stops to keep the music playing, in Chuck Prince’s infamous phrase. But not only that those whose extravagant pursuit of riches actually created the mess are now demanding partial exemption from responsibility for paying the clear-up costs, otherwise, like the Mad Hatter, they’ll move on to the next clean plate. Or am I missing something here?

Of course, we want London to continue to innovate and be a magnet for the financial sector, but for the right reasons, not the wrong ones. Maintaining a dubious status as an offshore tax haven, as the IMF named the UK last year, which is home to the largest community of non-dom tycoons in the world, figures among the latter rather than the former.

London owes it to the world, as well as the rest of the economy, to innovate in ways that improve the sustainability of the body as a whole rather than undermine it. That means embracing transparency and accountability, including, especially, the ways its big shots pay themselves. A system that generates colossal rewards for the few and crises and losses for the many is unsustainable in the long term even if it doesn’t auto-destruct in the short.

The UK’s stomach is out of control, demanding to continue consuming at the present rate even if it threatens to absorb all the other organs in the process. It needs to go on a healthy diet that will also nurture the rest of the organism. If it doesn’t, more unpleasant medicine may be needed. It could take a number of forms, but all of them will taste much nastier than paying pounds 30,000 a year to maintain their non-dom tax privileges.

The Observer, 2 March 2008

FOR SUCH an important announcement, the launch of the government’s ‘world-class apprenticeships’ scheme has evoked a curiously muted response. After all, the unsatisfactory interface between education and work is one of the UK’s most vexatious and long-running sores, crimping the lives of millions and helping to confound all efforts to raise the UK’s lagging productivity. In this context, guaranteeing every qualified school-leaver an apprenticeship by 2013 and boosting overall numbers to 400,000 by 2020, as the scheme requires, is nothing short of revolutionary – potentially the biggest change for 50 years.

Such worthy subjects have been thoroughly overshadowed by the latest turns in the City vaudeville show. But it is striking that while employer and professional bodies such as the EEF and Chartered Institute of Personnel and Development (CIPD) are broadly in favour of the initiative, they are hardly brimming over with enthusiasm.

One reason for the shortage of enthusiasm is that, as educationalists point out, this is a purely government initiative. In any other European country, a scheme of this magnitude could only have emerged as a joint commitment between government, employers, trade unions and the education system. The apprenticeships, by contrast, are a product of, and the main instrument in, the government’s plans to keep teenagers in full-time education or training until 18, and increase the stock of national skills. As Alison Wolf, professor of public sector management at King’s College, notes, the figures are top-down calculations derived from policy requirements rather than commitments of demand and supply on the ground, leaving question marks about the feasibility, and even appropriateness, of the numbers.

Many of the misgivings can be traced back to this central weakness. Everyone agrees that structured, flexible and appropriate apprenticeships combining training and education are a huge benefit to individuals, to companies that know how to make use of them, and to the economy as a whole. Schemes run by Rolls-Royce, BT and a number of other large companies, for example, have great cachet, set high standards and are greatly oversubscribed. Such companies run apprenticeship schemes because they believe they are essential for their future – the best way to prepare for key jobs.

More generally, they form the backbone of the whole employment system in Germany, where they provide an accepted guarantee of shared commercial and technical knowledge. Such apprenticeships are a key economic strength. But both the EEF and CIPD wonder how quickly demand and supply of such high-level programmes can be expanded. Currently, more young people want apprenticeships than can be accommodated, and overall numbers declined this year.

‘Apprenticeships aren’t costless,’ says the CIPD’s John McGurk, and require long-term commitment to set up and run. Both bodies warn that rebranding other lower-level initiatives under the apprenticeship banner to meet numbers would devalue the status and defeat the object. There are other doubts.

German Industry UK, an umbrella body for German companies employing upwards of 500,000 people in the UK, has long been concerned with the shortage of suitably qualified new recruits for skilled jobs – to the point where it set up its own vocational training school to complement on-the-job company training. Last year it met David Lammy, the minister responsible for apprenticeships, to air German concerns and offer help. ‘It’s not a question of saying Ger many is best or the only system,’ insists Bob Bischof, a board member of the association and 40-year UK resident. ‘But we do have a lot of experience – of apprenticeships in particular and of representing the interests of the ‘real’ economy, as opposed the chimerical world of the City, in general.’

This, he believes, gives the German opinion some weight – German employers believe further education arrangements are too complex, suffer from too many overlapping initiatives and fail to offer suitable curricula for serious business. Dividing responsibilities for apprenticeships between two new education ministries and changing the funding arrangements doesn’t help either.

Meanwhile, no one knows what the government’s new ‘diplomas’ are supposed to be for and how they fit with the other components of the system. In a wider context, Bischof says, most people ignore the fact that 50 per cent of German apprenticeships are in the nuts and bolts of commerce itself, providing an essential common structure of understanding for anyone going into business.

Without similar glue to stick it together, the latest in a long line of vehicles for getting non-academic British teenagers on to a worthwhile career path may come apart before it leaves the workshop.

The Observer, 24 February 2008