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fabian tract 453 
think small: enterprise and 
the economy

chapter 
1 industrial society at the turning point 1 
2 strengthening the economy 7 
3 making giant enterprises responsible 12 
4 creating more work 18 
5 reviving the cities 21 
6 removing barriers to enterprise 24 
7 what local government can do 27 
8 what central government should do 30 
9 organising for change 35 

the author: 
Nicholas Falk is ·the Managing Director of the Urban and 
Economic Development Group, a research and consultancyorganisation concerned particularly with the problems of inner 
cities and small enterprise. He previously worked for McKinsey

&. Company and Ford 'Motor Company and has degrees from 

Oxford and Stanford Business School. 

He is co-author of the Fabian research pamphlet " Inner City : 
local government and economic renewal II and of the Fabian 
tract II Towards a Worker Managed ·Economy". He is also a 
member of the Society's Arts, Science and Environment 
Committee. 

this pamphlet, like all publications of the Fabian Society, 
represents not the collective view of the Society but only the 
views of the individual who prepared it. The responsibility of 
the Society is limited to approving publications it issues 
as worthy of consideration within the Labour movement. 
Fabian Society, 11 Dartmouth Street, London SW1 H 9BN. 
January 1978 ISSN 0307 7535 ISBN 7163 0453 8 


1. industrial society at the 
turning point P 
Britain was the first country in the world 
to go through the "industrial revolution 
" and it is therefore not surprising 
that it is .the first to feel the long term 
after-effects. We have managed to achieve 
what classical economists would have 
considered impossible: a combination of 
high levels of inflation and unemployme'fl't, 
together with low levels of wages, 
productivity and investment, comparedwith our industria'! competitors_ As consumers, 
we increasingly choose foreignmakes, with over half our imports being 
manufactured goods, and imports having 
risen from 10 per cent to 17 per cent of 
the domestic market between 1965 and 
1974_ As employees, we astonish the 
world with our readiness to stop work 
apparently at the drop of a hat And as 
residents, we are voting with our feet to 
desert our great cities. This is certainly 
not the result of public indifference_ The 
media seems to have been covering one 
economic " crisis " after another for the 
past 20 years. The state of the economy,
rather than questions of justice, now 
seems to determine elections. Thus successive 
Prime Ministers have committed 
themselves -to securing economic change. 
With over half the nation's output passing 
through the public sector (which is 
supposed to employ the brightest and 
reward them well), .one might expect 
more progress than seems to have been 
made. 

But could it be that we have been on 
the wrong track, that the very measures 
we have adopted aggravate the problem?wm today's economists look in retrospect 
like the doctors who once used leeches, 
sapping the natural resilience of the sick 
patient in an attempt to rev•ive him ? 
This pamphlet suggests that we are at 
what has been called a "turning point",
where fundamental changes have taken 
place which make a repetition of past 
policies for regulating the economy irrelevant, 
at best, and counter-productive, 
at worst It took one hundred years, from 
1780 to 1880, for Arnold Toynbee to 
coin the phrase "industrial revolution " 
for a series of changes that profoundlyaltered the way people lived and worked. 
One hundred years later, we could be in 
the midst of a second industrial revolu


tion, where once again technologicalchange is sweeping away the foundations 
of our way of life. If this is so, it will 
demand different forms of organisations 
from the ones that grew up in the previous 
era. The central argument of this 
pamphlet is that, as we cannot expect a 
return to the trends that were prevailing 
pPior to the recession, we should shift 
from propping up the giants of yesterdayto encouraging the organisations that are 
more appropriate to tomorrow's conditions, 
and thaJt this will depend on a 
huge increase in the birth, survival and 
gr·owth rate of small enterprise. 

industrial evolution 

In the late 18th and first half of the 19th 
century, a number of changes .took place 
in the structure of society which came 
to be called the industrial revo'lubion-
Very crudely, new sources of power,
mechanisation and specialisation created 
the right technical conditions for the 
development of large factories. The release 
of labour from the land allied with 
sources of cheap food and materials from 
colonies made possible the growth of 
cities around railways and docks, which 
in turn led to a shift in where and how 
people lived. Simultaneously the financing 
device of joint stock companies,
coupled with the availability of privatewealth and a new class of entrepreneurs(often foreign) made it easier to set up 
firms to exploit .the technical possibilities. 

The industria'! revolution was characterised 
by the immense scale on which 
human endeavour was organised. Not 
since the building of the pyramids had 
so many laboured together in common 
purposes. In turn, the scale of this organisation, 
more than perhaps any political 
response to it, shaped the foundations 
of our present society. It has determined 
where most of us live and wmk, giving 
rise to giant cities and factories. Even 
more important, it has created the divisions 
of class and location within the 
political battlefield, with the labour party(broadly speak-ing) allying itself with the 
organised manual workers and with the 
places where the industrial revolution 


grew up -the cities and depressedregions. 

We are now living through a number 
of radical shifts in the basis of society, 
which future generations may well choose 
to describe as the second industrial revo· 
lution. In some ways, things are comingfull circle. These changes apply to aU the 
factors of production-labour, materials 
and energy, capital and land. They affect 
what people do and where they do them. 
They are creating new expectations and 
demands. And they transcend national 
boundaries. 

If we first consider labour, traditionallythe largest employers have been in manufacturing 
and transport, which have pro· 
vided the rank and file of the labour 
movement. Now, however, manufacturing 
accounts for only one third .of all jobs 
in the UK, and one fifth of jobs in 
London. Employment in the docks and 
the railways have also shrunk in recent 
years, largely as a result of changes in 
technology. This decline will continue 
as, by international standards, these 
industries are still over-manned. Hence, 
the traditional base of the labour movement 
is contracting. Employment has 
increased instead in the " growth services 
" like banking, insurance and public 
administration. At the same time, there 
has been a shift in the nature of employment 
within sectors. Firstly, a growingproportion of jobs are done by women, 
partly because more women want to work 
and partly because employers prefer 
women where repetitive and meticulous 
work is involved. Secondly, a growingproportion of all employmerJ>t is white 
collar ; there is no longer much demand 
for the " hewers of wood and toters of 
barges", and if all work can be said to 
comprise handling things, people and 
data, there is a definite shift from dealing 
with things to dealing with data, as a 
result of automation and the use of computers. 
This can be seen in the usA where 
white collar workers accounted for 40 
per cent of all employment in 1970 compared 
with 15 per cent in 1900: even in 
manufacturing, white collar staff now 
occupy one third of all jobs (Daniel Bell, 

The Coming of Post-industrial Society). 

Those manual jobs still left in large scale 
factories tend to involve mindingmachines and performing repe~itive tasks. 
There is a declining number of apprenticeships 
for the remaining skilled manual 
jobs and these are usually out of reach 
for the majority of today's school leavers 
who lack basic qultlifications. For a 
variety of reasons, it is foolish to expect 
a great increase in employment within 
large factories for manual workers. 

Nor will clerical or office jobs fill the 
gap. Roughly one quarter of those leaving 
school lack any CSES or o-levels yet 
there are few office jobs that do not 
require some evidence of school achievement. 
Furthermore, much of the pastexpansion in the service sector has been 
in what Bacon and Bltis call the " non· 
productive sector". This has risen faster 
than in other industrial nations, reflecting, 
one suspects, not consumer preferences,
but a growth in the administration of 
top heavy bureaucracies and cumbersome 
systems. (Consider, for example, the 
legions of parking meter attendants, or 
VAT inspectors who, with 1 to every 117 
traders, outnumber the French and the 
Italians by 50 per cent.) The British trend 
has been to have more people handling 
data-the " impersonal services "-while 
fewer deai directly with people. It is 
interesting to compare London with 
Paris, where jobs requiring no human 
.input, like giving out and collecting tickets 
on the Metro, are done entirely bymachines. In contrast, where we have 
supermarkets, self-service petrol stations, 
and service-less cafeterias and hotels, 
Par.is has more labour intensive small 
shops, restaurants and boarding houses, 
where the work involves personal contact. 
Some would say we should rejoice that 
.the mass of people can now " work " 
away from the sweat and noise of makingthings, in comfortable offices, where they 
can organise to stick up for their rights ; 
should we not congratulate ourselves that, 
for example, productivity has risen so 
fast, and that large supermarkets have 
kept down prices for ordinary working 
people? 

The answer depends on what alternative 
forms of work there are, what people 


can or want to do, and on the relative 
availability of different resources. For 
instance, the expansion of office work 
may soon be reversed because it is the 
repetitive paper handling jobs that are 
most susceptible to replacement by computers, 
whose costs are faUing fast. It 
is not here, but in the co-ordination of 
hand, eye and brain that man has the 
greatest comparative advantage. While 
there is a real limit to the amount of 
administration we can consume or export, 
there seems to be no limit to the 
goods or personal services that we want, 
which are limited to what we can pm-
duce from available naltural physical and 
human resources. 

Turning now to materials and energy, we 
know fmm the various studies that 
followed the publicMion of Limits to 
Growth that we live in a world of finite 
resources. Following the success of OPEC, 
we can no longer take for granted the 
·idea that the Third World will provide 
us with whatever primary goods we 
demand, taking ·Our manufactured goods 
in exchange. Rising material costs will 
put a new emphasis .on maintenance and 
repair. Rising transport costs will give 
an increased economic advantage to 
smaUer production units serving a localised 
market and drawing their employees 
from nearby. There are already signs of 
change in the re-emergence of bakeries 
and the growth ·Of local breweri.es, 
encouraged by the fact that they produce 
a more palatable and better value product. 

In contrast with the 19th century, the 
supply of finance £or ·industry has become 
far mo.re concentrated. An increasing partof the finance available for capital investment 
is tied up with the savings controlled 
by pension funds and insurance 
companies. For example, some 60 percent of stocks and shares are now owned 
by jnst~tutional investors. A great deal 
of finance does come from retained company 
earnings but this too is concentrated, 
as an increasing proportion of outputis controlled by muHi-nationa:l companies. 
The 100 largest companies account for 
40 per cent of output, a higher proportion 
than in most other countries, and 
increasingly the •investment of these corn-

parries has been located outside this 
country. 

Finally we come to land, where we find 
that our great cities are declining in both 
population and employmenrt, and that 
gr.owth is occurring instead in country 
towns with less than 5,000 population. 
Where once the great Victorian achievement 
stood-docks, gasworks, railwayyards, f.act·ories and mills-there are now 
derelict buildings and vacant land. 

Around them the communities decay,
trapped in the spiral of decline portrayed 
in reports from the Community Development 
Project and the Department of the 
Environmenrt's Inner Area studies, particularly 
on Liverpool. A combination of 
technological change, changing 1ocational 
advantage and lack of investment have 
made them redundant. 

tasks ahead 

Radical changes in industrial policy and 
thinking will be required to cope with 
the pressures created by the shifts in the 
economic base of Western industrial 
societies. However, a moment's thoughtwill con'firm that we have not lacked 
policies and idea·s but rather the capacity 
to implement them effectively. Hence we 
must consider whether the basic organisational 
structure of British industry is 
still appropriate for the tasks it has to 
execute. Have we, in effect, bred dinosaurs 
who will be unable to survive the 
equivalent of an ioe age? 

The main argument of this pamphletis that the changing demands placed on 
our industrial system can only be met 
by a vast increase in both the birth and 
growth rate of small enterpris·es. This 
will require radical changes in publicpolky at both national and local government 
levels, as these are currently geared 
to deaHng with giant organisations. If 
'the labour party is to r·espond to the 
challenge '(which both the liberal and 
conservative parties have seized), small 
enterprise must be seen as compatiblewith the basic objectives of socialism 
and the labour mo.vement. Before con



sidering the relevance of small enterprise 
to sa,tisfying the needs of the main 
" stakeholders "-consumers, employeesand .the local community-we thus need 
to review the relationship between small 
enterprise and socialist thinking, and to 
consider what are the aims of socialism, 
how these have been implanted in practice 
and with what effect. 

Until recently, there has been a growing 
gulf between socialist thinking and the 
small firm. To some socialists, the veryidea of small businesses is unattractive, 
with them being seen as sweat shops,
exploiting workers, evading taxes and 
operating inefficiently. At the same time, 
to many small businessmen, socialism is 
"anti-business", associated with high 
taxes and low benefits, bureaucracy, interference 
and wastefulness. 

In trying to make progress towards 
various socia'list ideals, such as more 
equal living standards, successive governments 
have ·encouraged indu~trial concentration 
in the belief tha:t larger firms 
would be more internationally competitive 
and provide better wages and working 
conditions. Widespread concern with 
the poor performance of much of Brittish 
industry has also led to the belief that 
the answer lay essentially in more investment 
and rationalised faci'lities. It was 
thought possible to resolve the problems 
of industrial conflict and responsiveness 
to the wider public interest throughnationalisation. Competition policy was 
neglected even though labour govern·
ments have been in the forefront of anti-
monopoly legislation. It seems that small 
firms were largely ignored. 

At long last there is a realisation dawning 
that a change of direction is needed. 
It is reflected in important speeches by 
,the Prime Minister and Peter Shore on 
the need to foster small firms in cities and 
in the subsequent appointment of Harold 
Lever to conduct a rev·iew of what policychanges are needed. The stereotypes on 
which earlier thinking was based are 
beginning to appear fa-lse; large firms 
are of,ten proving to be inefficient, while 
nationalised industries have had more 
than their share of labour disputes and 

frequently seem unresponsive to either 
the consumer or the wider public interest. 
At the same time, it is becoming evident 
that the most serious and intractable of 
all the economic problems facing this 
country is unemployment. Large fim1s 
are often over-manned by internrutional 
standards and will have to slim their 
workforce if they are ever to meet shopfloor demands for better real wages and 
conditions. Furthermore, as many of 
these firms are multi-national, they have 
considerable choice over whether to invest 
in this country or abroad and 
whether to use British made components 
or equipment. 

Consequently small firms are beginningto be ·taken serious'ly again by the government 
and large employers alike and there 
is a mushrooming group of associations 
seeking to represent the smaU firm. With 
the liberal and conservative parties committed 
to far reaching changes to assist 
small firms, will the labour party be able 
to convince the electorate that it is more 
able and wi'lling to take the measures 
needed to tackle unemployment in ways 
that create real work and hence are not 
infl.ationary ? Some progress is certainly'being made. Government measures such 
as tax reform, the expansion of the 
Department of Industry Small Firms 
CounseUing Service and investment in 
small firms by the National EnterpriseBoard are steps in the right direction. 
Many local authorities have appointedindustrial development .officers, are halting 
development schemes that threaten 
small firms and even mounting campaigns 
to help them. But isolated measures 
will not turn the tide which has 
caused the small firms sector to decline 
further and faster in Br·itain than in other 
comparruble industrial countries. 

There is a •case for the Lalbour 
Party " catching the whigs bathingand stealing their clothes". However, 
there is little point in providing greater 
incentives to enterprise as recommended 
by the conservatives and l·iberals if the 
resources small firms require to get started 
and grow remain outside .their grasp.
Hence, rather than encouraging people 
to jump higher, a socialist response should 


focus on removing the hurdles that stand 
in the way of productive enterprise.
The basic problem for the small firm is 
obtaining the resources it needs, manyof which have actually been released by 
the recession. Small firms complain that 
they cannot compete with large firms on 
equal terms in securing premises, personnel, 
finance and access to markets. 
As much of the supply of these resources 
is controlled by large institutions, changes 
in their attitudes and policies will be 
required. 

The essential argument for chang·ing the 
policies of large insti·tutions towards small 
enterprise is that nothing less will solve 
our economic problems and correct the 
underlying malaise that lies at the heart 
of so many industrial conflicts. 

Our economic performance depends on 
balancing the needs of ever more selective 
consumers with the aspirations and 
capacities of a diverse workforce, while 
also taking account of the interests of 
the surrounding community. Despi.te the 
advantages large firms have in sel'ling to 
mass markets and raising finance, their 
very size makes it hard for them to 
cope with the many competing and changing 
demands on them. They find it harder 
to build the trust required. Yet they are 
inherently vulnerable to disruption because 
so many goods and services are 
now very complex, involving the simultaneous 
collaboration of enormous numbers 
of people. This co'llaboration is 
becoming harder to ensure, perhaps because 
-the basic needs (food, shelter and 
clothing) have been met for the majority 
of employees and hence needs that are 
higher on what the American psychologist 
Maslow calls the " hierarchy of 
needs" (such as" self-esteem" and "selfexpression 
") take on re'latively greater 
importance. Consequently, more diverse 
ll!nd flexible types of organisation are 
required to accommodate these needs 
·and, however hard a giant organisation 
tries, the class ridden and suspicious 
nature of British society tends to make 
its efforts unconvincing. 

Now technology is mak·ing it possible to 
work in smaller units (with the obvious 

exceptions of industries like steel and 
cars which are untypical of the mass of 
industry). Simul•taneously, natural resources 
require different products with, 
for example, a greater emphasis on long 
life and repairability. Is ·it not therefore 
time for some of the giant organisations 
to wither·away ? 

Certainly some of the founding fathers 
of British socialism would have been 
aghast at the way " monopoly capitalism " 
has developed side by side with union 
control over the supply of labour. Karl 
Marx foresaw in Das Kapital that the 
concentration of power into " gigantic 
industri·al enterpris·es was at the expense 
of many small capitalists whose capital 
partly passes into the hands of their 
conquerors, partly vanishes". The pioneering 
achievements of Robert Owen 
and of the Rochdale Cooperators created 
an important strand in British socialism 
favouring self-governing small enterprises. 
William Morris (who must be due for 
a revival) ensured libert·arian principles 
were adopted at the time of the formation 
of the sooialist party. Socialism was 
not just a matter of improving the living 
standard of the working classes, for 
"Nothing should be made by new labour 
which .is not worth making or which must 
be made by labour degrading to the 
makers ". The aim was not the reduction 
of labour to a minimum but the minimisation 
of "pain in labour " or 
drudgery. Along with Morris, many of 
the other Ieading lights in the earlysocialist movement were proprietors of 
small business or self-employed artisans. 

The ideas of syndi.cll'list writers found 
respectability in the writings of G. D. H. 
Cole and the development of " guild 
socialism " with its emphasis on encroaching 
control within ·industry from the 
bottom up. The labour party introduced 
the first anti-monopoly leg·islation in 1948 
and set up the Prices and Incomes Board 
which probed efficiently in large organisations. 
More recently a number of 
books have argued the case aga·inst "corporatism 
" and in favour of small enterprise 
in terms with which most socialists 
can agree, like Fritz Schumacher's Small 
is Beautiful and J.a:mes Robertson's Profit 


or People ? There is now a flourishingSocialist Environmental and Resources 
Association which has helped to promulgate 
breakthroughs such as .the efforts of 
Lucas Aerospace workers in drawing up 
an alternative corporate pl-an based on 
appropriate technology (Dave Elliott, The 
Lucas Aerospace Workers Campaign,

Fabian Society, 1977). Finally, in recent 
months there have been importantspeeches by the Prime Minister, the Secretary 
of State for the Env·ironment -and 
the Foreign Secretary which cri.t,icised 
mammoth bur·eaucracy and praisedenterprise. 

The mood of the times is now againstsize and remote control and in favour 
of self-regulating systems. The labour 
party must adjust to this or be swept 
away as the liberal party was when its 
power base disappeared at the tum ot 
the century. As we lack the "colossi " 
to straddle the worlds we have created, 
we must cut the world down to size. 
There is nothing inherently soci,alist about 
working in the public sector, and it does 
not seem to have yet led to a nobler 
breed of men. As Daniel Bell put it: 
"The hallmark of conflict in postindustrial 
society is the dash between 
the professional and the populace, and 
the key to progress is not managing class 
conflicts but bureaucratic confl.icts ". Ralf 
Dahrendorf in Class and Class Conflict 
in an Industrial Society suggests "we 
have to look for the ruling cJ.ass in those 
positions that constitute the head of 
bureaucratic hierarchies ". 

Hence .the case for promoting small enterprise 
is a complex and far reaching one. 
The measures needed require more than 
simple tinkering with .our mixed (ormixed-up) economy. The following chapters 
consider in turn the contribution 
small firms could make to our three 
major problems-by strengthening the 
economy, creating more work and maintaining 
our cities. It examines why small 
firms have declined and sets out what 
local and central government respectively 
need to do to make it easier for small 
enterprises to obtain the resources theyneed. Finally, i.t summarises the keyingredients of an effective programme. 

Small firms as percentage 
of manufacturing 
employment 

50 

per cent 

40 

30 

20 


10~r-------,------.-----.---. 

1935 1958 1963 1968 1972 

source Report of the Committee of Enquiry on 
Small l'"ms, Bolton Committee. HMSO. 1971. 

Proportion of 
manufacturing 
employment in small 
firms 

70 

NORWAY 

-

-

60 

----------~S~WEDEN 

50 CANADA 

40 
30 



20-·~.-----------r-~--· 

1954 1963 1965 1968 

note: Small firms are those with under 200 


employees. excluding the self-employed. 
source : Graham Bannock. The Smaller Business 
in Britain and Germany, Wilton House. 1976. 



2. strengthening the 
economy 

Large companies, both private and public, 
have come to dominate the British 
economy to an unusual extent, producing 
a far more concentrated economythan our industrial competitors. S. G. 
Prais has shown that the hundred largest 
private companies have doubled their 
share of output in the last 40 years to 
well ov-er 40 per cent (see char.t on page 
17). This has been due more to mergers 
and acquisitions rather than to indigenous 
growth, the average number of plantsowned by these firms rising between 1958 
and 1972 from 27 to 72. A relativelysmall number of publicly owned enterprises 
control the basic industries of power,
transport and communications, accounting 
for 8 per cent of employment and 
19 per cent of fixed investment The 6 
largest nationalised industries purchase 
one third of all plant and equipmentand are significant buyers in the higher 
technology fields. The trend here, as in 
the priv.ate sector, has been towards the 
centralisation of power and the closure 
of smaller operating units. These have 
now been joined by g·iant publicly owned 
trading concerns in the motor, aerospace 
and ship building industries that compete 
with foreign firms. 

At the same time the -importance of 
smaller firms (employing less than 200 
employees) has declined rapidly in manufacturing. 
The Bolton Committee report, 
commissioned by Anthony Crosland, 
drew on the 1963 Census of Production 
which showed that 20 per cent of employment 
and 17 per cent of output in manufacturing 
was accounted for by small 
firms. This was the lowest proportionin Europe. John Bolton has since said 
that the situation has reached cl"isis point.
By 1971 the decline had begun .to reverse, 
with an 18 per cent increase in the 
number of small firms and a slight rise 
in their proportion of net output to 21 
per cent 1(see chart opposite). However, 
we still lag far behind our more successful 
industrial competitors (see opposite). 

The loss of small firms is very much 
bound up with the UK's poor economic 
performance. It reflects a high mortality 
rate, a low growth rate and, above all, 
a totally inadequate birth rate. Graham 

Bannock in Smaller Businesses in the UK 
and Germany calculated that Germany 
has 40 per cent more small firms perhead of the population. To give another 
comparison, the usA has roughly two to 
three times the birth rate and only one 
quarter the death rate for firms of the 
UK. The comparison is even more disturbing 
for tiny firms (under 10 employees) 
in relation to the population, 
many of which would be relatively new 
enterprises. There are one third more in 
the USA and twelve times more in Germany 
than in the UK. This means that• 
the bloodstream of our economy is not 
being renewed and we are not breeding 
the industrial leaders of the future. 

It has been argued that the decline of 
small firms is inevitable, a price to be 
paid for technical progress. But an 
economy controlled by giant organisations 
is surely contrary to the general public 
interest. This may seem heretical as the 
growth of big business offers distinct 
advantages to the corporate state. Large 
organisations are more convenient for 
government and civil service to deal with. 
They appear to be capable of creating 
jobs and exports in large numbers. They 
are also easier for trade unions to 
organise and hence tend to provide better 
pay and conditions than those small firms 
which operate in highly competitivemarkets. But these are not adequatereasons for relying on large firms to the 
extent we do. 

appropriate size 

Rather than trying to argue that small 
is inherently better or more beautiful-
for what matters is whether an organisation 
is appropriate to its environment! 
want to emphasise the need for a dispersal 
of power for three reasons. First, 
large org·anisations are prone to certain 
diseconomies of scale -basically low 
morale. This is reflected in industrial 
stoppages, resistance to improv·ed working 
methods and a failure to increase 
either the quality or quantity of output 
sufficiently to stop a flood of imports.
Thus international comparisons, such as 
the Central Policy Review Staff's report 


on the motor industry, have shown that 
our low growth of productivity is as 
much due to our failure to use existingmachinery to the full, as to the lack of 
·investment. Second, planning controls and 
incentives count for little when employment 
is dominated by giant multi-national 
organisations. Consequently there has 
been a loss of public control over investment 
and plant location and closure 
decisions. This is because once an organisation 
straddles a number of countries, 
it can concentrate investment wherever 
operating costs ·are lowest and the market 
is expanding fastest. Governments are 
encouraged to vie with each other in 
offering " bribes ". Third, large firms are 
more capital intensive and so the subsidies 
used to encourage employment tend 
to be dissipated in imports of plant and 
machinery. This helps to expla·in why the 
net contribution of large firms to the 
balance of payments is so low. Yet the 
public sector ends up having to pay most 
of the bill for the consequences of industrial 
run-down, such as unemploymentand retraining, and in many cases has 
also become the employer. 

The causes of our relatively pooreconomic performance are often attributed 
to such factors as low levels of 
investment, the calibre of our management 
or poor industrial relations. An 
alternative explanation is that we have 
created unmanageable and unresponsive 
organisations. Irreconcilable conflicts can 
arise when a large number of different 
units, and hence cultures, are combined 
with the bureaucratic quest for consistency. 
For performance depends on motivation 
as well as simply the kind of plant 
installed. Economists have long argued 
against oligopoly on the grounds that 
once an organisation becomes insulated 
from the pressures of the market through 
barriers to entry and the possibility of 
falling back on the government if all else 
fa:ils, then it becomes sloppy and unresponsive. 
The resulting lack of productive 
capacity and quality goods have led to 
imports making inroads in many markets 
that should be satisfied through domestic 
production. Oligopoly also restricts our 
long term economic performance because 
we are not breeding tomorrow's industrial 

leaders. In consequence, we are increasingly 
dependent on foreign technology, 
which supplies the high value-added 
components and machinery, leaving the 
UK to compete on labour costs and 
government subsidies. 

It is sometimes argued that we need 
giant enterpri·ses because they are better 
able to plan and organise production 
efficiently ·and to weather economic 
storms. This latter proposition is putforward, for example, by J. K. Galbraith 
in American Capitalism where he states: 
"The si:z:e of General Motors is in the 
service not of monopoly or the economies 
of scale but planning. And for this planning 
-control of supply, control of 
demand, provision of capital, minimisation 
of risk-there is no clear upper 
limit to the desir-able size. It could be 
bigger and better." However, this may no 
longer be so, due to changes in environmental 
factors (such as rising raw 
material and energy prices, and increasing 
conflict within industry) which favour 
a profusion of smaller units. 

A further factor that favours the small 
firm is .that subdued rates of economic 
growth, along with increasing competiticm 
from countries with low wage rates, will 
inevitably force firms to change what 
they produce. The continued expansion 
of choice will make consumers more 
discriminating (assuming that importcurbs are not introduced). The only viable 
response is for firms to seek out niches 
where they have a competitive edge and 
this is proving difficult. In the industries 
where there is comparatively little product 
differentiation, such as steel or 
chemicals, British firms can only compete 
if they can match foreign competition 
·in quality, reliability and price; on 
all these scores (except perhaps price), 
most British firms seem weak. While 
large firms (particularly ones relying on 
highly specialised assembly processes) are 
geared to meeting steady mass demands 
at low costs, they get into difficulties 
when circumstances change radically-
consider British Leyland and Chrysler.
There is therefore evidence that the prevailing 
management style of large companies 
is inappropriate to the manage



ment of complex, unpredictable situations 
and to the resolution of conflictingdemands. 

In contrast, the smaller firm offers certain 
benefits to the consumer which will 
continue to be important. First, they can 
be more flexible and responsive to particular 
needs than larger firms. These 
specialised needs include the luxurymarket, specialised components and the 
whole field of service and repair (which 
is likely to assume even greater importance, 
given the rising stock of goods,
and increasing replacement costs, which 
justifies the reconditioning of manyproducts). 

Second, small enterprises, and particularly 
new firms, turn o.ut to be an important 
source of innovation, developing new 
products or services that large companies 
may ignore or suppress. Though the 
Bolton Committee found no overwhelming 
evidence one way or the other, studies 
in the USA have shown that small firms 
introduce more successful innovations 
than the very large firms. Large firms 
tend to be conservative and may sit on 
an idea to prevent a competitor stealing 
an advance. As an example, though the 
transistor was developed in the large Bell 
Laboratories, it took what at the time 
was a small Japanese entrepreneur (Sony) 
to realise the potential use in pocketradios. A good deal of research effort in 
large firms is wasted, whether it be drugcompanies indulging in " molecule manipulation 
" to evade patents, people writing 
their doctorate theses in company time 
or people working on irrelevant projects. 
Large production processes are also unlikely 
to encour·age innovation and produce 
new work and techniques because 
of the do.minance of each part of the 
process by the .requirements of the whole. 
In addition, the unsatisfying nature of the 
work itself and the lack of opportunity 
for creative self-expression can mean 
that inventiveness and the interest in 
exploiting new ideas is lower in largehierarchical organisations than in small 
ones. 

still be argued that many pro-
processes are inherently large-

the examples of electricity, steel and cars 
always come to mind. However, these 
process industries are by no means typical 
of the mass of industry. Within manufacturing, 
four sectors account for half 
the net output of firms employing less 
than 200. These are mechanical engineering, 
o.ther metal production, paper printing 
and publishing, and timber and 
furniture. Significantly, with the exception 
of electrical engineering, these are the 
only manufacturing sectors whose employment 
grew between 1959 and 1973. ~ 
In contrast, as mass production ·involves 
repetitive processes, it is the most susceptible 
to automation. For example,
Italian-made robots have already taken 
over the basic welding jobs on the Volvo 
·and Rover production lines. In the long 
term, these large firms will have to shed 
much of their current labour requirements. 


Even within the giant industries, small 
plants are often more efficient. For 
example, in electricity, the higher morale 
found in smaller plants together with 
proven technology can result in lower 
costs, while the system as a whole becomes 
less vulnenuble to. a breakdown or 
dispute. As a consequence, there is a growing 
realisation among industrialists that 
many plants are too large both in absolute 
terms and .jn relation to the community 
in which they are located. The maximum 
desirable size seems to be 500. Unfortunately, 
however, the UK has one of the 
highest proportions of large plants in the 
world, many of which are in declining 
industries. To take a comparison, in 
Japan, France and Sweden, more than 
haH the manufacturing workforce is 
employed in factories employing less than 
200 compared with little more than a 
quarter here. Even in the usA, the large 
plant is the exception rather than the 
rule. Studi·es by economists such as Bain 
and Stigler have shown that the average 
American production unit has only 90 
employees. Only 14 out of 48 industries 
needed more than 50 employees to 
achieve optimum size. 

It is therefore perhaps predictable that 
the Bolton Committee found that the 
return on assets was higher in small firms 


than in large firms. Though there maybe some technological economies associated 
with size, the greatest returns often 
come from the greater "muscle " 
the large firm develops. However, after 
a certain size, organisational diseconomies 
frequently set in and the giant firm becomes 
•• muscle bound " or sluggish as 
a result of excess flab. It can obtain 
greater amounts of inputs but these 
are turned into fat rather than used 
efficiently. 

The problem for a large firm, particularly 
in Britain, is in developing a common 
sense of purpose and avoiding becoming 
top heavy with administration. Largecompanies may have gr·eater flexibilitybetween plants but this is at the expense 
of reduced flexibility within them. Trying 
to develop a consistent set of policiesin perhaps 75 plants, each operatingwithin a different local culture, can outstrip 
the capabilities of the most energetic 
management. The organisation then 
grows, not in response to the real needs 
of consumer or worker, but for reasons 
of internal "politics ". Rather like the 
Peter principle, in the absence of competition, 
organisations tend to growbeyond the point where they are 
manageable. 

the right balance 

The preceding sections have 'brought out 
the importance of choosing the rightscale for an organisation. They point to 
the need to minimise the numbers of 
people operating under any one hier· 
archical system except where the tech· 
nological economies clearly offset the 
diseconomies of poor morale and communications. 
In the past, organisational 
changes have often been carried out by 
management consultants to suit the convenience 
of "top " management. In the 
future, organisations will have to be 
changed to strike a balance between the 
attitudes and culture of the workforce 
on the one hand, and the demands and 
potential of the industry's technology on 
the other. The reasons for this are essential1ly 
practical. First, the humblest worker 
can now put a spanner in the works. 

Second, there are-vast differences in the 
objectives and capacity of work groups 
in different parts of the country, so any 
standard solution is bound to lead to 
upset somewhere. Third, whereas the 
technology of the first industrial revolution 
demanded concentration of activities 
in close proximity with one another, the 
new technology of the second industrial 
revolution makes dispersal possible. As 
this last point is not immediately obvious, 
it is worth sparing some thought to the 
effects of technOilogical change on locational 
decisions. 

Three distinct technological revolutions 
are going on-in transport, in communications 
and in capital equipment. Now 
that we have motorways and conta·iners, 
plants can be sited almost anywhere in 
the world and linked to each other allowing, 
in the case of say tractors, the 
marketing of a similar product throughout 
the world, with different countries 
specialising in the manufacture of 
different sub-assemblies. Second, enormous 
changes are taking place in the 
way information is handled and stored, 
which makes many traditional office 
functions irrelevant. For example, a great 
deal of the clerical functions associated 
with manufacturing, such as scheduling 
or invoicing, can be handled far better 
by computers. H is interesting to note 
that one third of all postal communication 
in the USA are machine generated ; 
the whole of the functions jnvolved, for 
instance, in reading an electricity meter, 
preparing a bill, delivering it, writing out 
and returning a cheque, could be handled 
just as well without human intervention. 
As much of this work is neither creative 
nor socially satisfying, we perhaps should 
not mourn its passing. 

The third change is in the automation of 
basic productive processes wherever long 
runs are inv-olved. The very processesthat serve the " mass '' market and which 
have done so much to narrow the gapsin the style of different classes are unlikely 
to need more lrubour, except with 
either considerable endurance or specialist 
skills. Finally, along with increased mechanisation 
there is yet another even more 
important trend. The Third World is 


committed to increasing its share {)f world 
manufacturing. Not only does this mean 
it is less likely to buy our finished products 
but also that it wiH be increasingly 
taking over mass production work-as 
the construction of new car plants in 
Spain ·and Korea aptly demonstrates. 
The more capital that is tied up in plant, 
the more important it is to secure undisturbed 
production runs. Simultaneously, 
once processes have been deskilled, the 
manufacturer is free to locate new plants 
wherever labour is most compliant and 
plentiful, and restrictions and taxati{)n 
are least onerous. 

Those trade unionists who are more concerned 
with protecting their existingmembers' interests than in expanding employment 
opportunities may well respond 
that large manufacturing firms are needed 
because they provide better pay and work 
conditions, particularly for office staff. 

But we must ask whether these benefits 
are worth the price we pay for them as 
consumers and as employees. For the 
ability of large firms to cosset their employees 
is not necessarily the result of 
more libera!l management or even greater 
efficiency in the use of resources but 
may well ibe due to their grell!ter freedom 
from market pressures. Is it desirable that 
some large companies affect the trappings 
and style of medieval principalities ? In 
return for the security and comfort they 
provide-a social world tha·t may compare 
very favourably with the loneliness 
and run down state of the surrounding 
neighbourhoods-they expect a degreeof allegiance and uniformity from their 
staff that is far removed from the rugged 
individua!lism supposedly associated with 
free enterprise. They can afford to construct 
monuments to corporate grandeur, 
in the shape of giant prestige headquarters, 
and to give executives all the advanced 
toys which technology can produce,
irrespective of whether these really create 
improved products of services for the 
consumer. They can regulate the rate of 
product innovation and price their goods 
so that they maintain a comfortable existence. 
And, if they cannot pay their 
executives more, they can always increase 

the attractiveness {)f fringe benefi·ts. 

Without direct government intervention, 
for example through effective planning 
ag·reements, such giants can be kept in 
check by three means {)nly: the first is 
the possibility that good staff may leave 
and start up their own companies in 
competition, which in the UK is both 
unfashionable and difficult to do. The 
second is that they may be taken over 
by companies who can see better ways 
of utilising their resources. But once firms 
grow above .a certain size, the only threat 
is nationalisation; however, the scalingdown of the National Enterprise Board 
makes this a fairly weak threat. The 
third possibility is a change in attitude 
on the part of management. 

There are several signs of changes in 
company thinking which offer some hope. 
The first is that large companies increasingly 
apprecia:te the advantages of having 
a number of semi-independent small 
factories which function as profit centres 
in an attempt to secure the commitment 
found in the smaller firms, but with the 
financial and counselling back-up that 
only the large firm can muster. The 
second is that some large firms who have 
come to dominate the areas in which 
they opera:te have 'begun to ·think of 
fostering new small enterprise as a means 
of providing them with greater flexibility 
with regard to hiring and firing ; this 
applies to such diverse companies ·as ICI, 
Tate and Lyle and BSC (see, for example, 
tb:e report of a seminar Creating Work 
Through Small Enterprise, organised by 
IBM and the Urban and Economic Development 
Group). FinaJily, there is increasing 
recognition within, for example, the 
National Enterprise Board and NEDC that 
the best prospects for increasing employment 
~ie with the smaller firm. But it 
would be foolhardy to think that transition 
to a more flexible and sociallyresponsive industrial structure can be 
accomplished through the efforts of corporate 
management alone. New government 
policies are needed for both bigbusiness and small enterprise. 


3. mal<ing giant enterprises 
responsible 
The growing power of the giant corporations 
is a major cause of concern to 
the labour movement. The problems have 
been well documented by Stuart Rohland 
and others. Carl Wilms Wright in his 
Fabian pamphlet on Transnational corporations 
: a strategy for control (1977)
gives examples of the undesirable effects 
they can have on national sovereigntyand government policies for investment, 
pricing and trading, competition, balance 
of payments and l<ibour relations. Pro-
posa!ls for checking their power which 
have found favour include the development 
·of countervailing power through 
more investment controls, international 
coUaiboration between unions, the extension 
of public ownership and the completion 
of planning agreements. 

However, for all the rhetoric, the fact is 
that we seem unable to create ·the 
machinery needed to make such policies 
work. Controls and incentives work best 
when private investment is highly profitable. 
When closure is threatened or when 
a multi-national company has a choice of 
countries in which to invest, neither the 
unions nor the government have anytrump cards to play. Furthermore, there 
is insufficient expertise or ·inside knowltidge 
to question and change investment 
decisions, for this requires an appreciation 
of the options. Consider, for 
example, how Ford Motor Company was 
effectively able to demand its own terms 
when it came to building a new engineplant in Wales, even though it partiallyreplaced existing faciWies at Dagenhamand there were in practice few alternative 
sites available in the UK. 

But legislation against restrictive practices 
is not adequate. When there are only a 
few leading firms, there will be a tendency 
for them to behave in a oligopolistic 
way, copying each other, for example,
in setting prices. So long as there are 
substantial barriers to entry, the big corporation 
wiH tend to behave in waysthat involve the minimum inconvenience 
and risk. Even if the government decides 
to be tough (for example on restrictive 
practices or prices) the astute giant company 
can usually avoid the penalties as 
the British Gas Corporation did in 

changing its accounting practices to show 
a lower profit, or as multi-national companies 
.can do ·through altering transfer 
prices. 

Nor does the answer lie simply in public 
ownership, since nationalised industries 
at times adopt the worst practices of large 
private companies. They can also be equa'l 
offenders in disregarding the publicinterest, as the acres of wasteland owned 
by public .corpora,tion in our cities bear 
witness. Instead of publicly owned 
industries being regarded as the leaders 
in terms of good practice, too often they 
are seen as the laggards. The most recent 
innovations (the creation of ·the National 
Enterprise Board and the first planning 
agreements) are undoubted steps forward 
as instruments for intervention but cannot 
be said to pose real threats to 
established power. 

There is therefore a strong case for rethinking 
the basis of industria:! poEcyaiming both at dispersing and checkingconcentrations of power. Rather than 
considering business as split into the 
public and private sectors, when ownership 
often makes little difference to the 
way organisations are run, we need to 
differentiate according to the scale of 
the organisations and hence the power 
they can exert. Specifically we should 
distinguish between the oligopolistic 
sector, covering firms with substantial 
market power, and the competitive sector 
covering the remainder. 

oligopolies 

The oligopolistic sector would comprise 
firms or divisions of firms that dominate 
significant markets-perhaps as a rule 
of thumb where 3 or less firms account 
for 75 per cent of a particular market. 
It would thus include nearly all the 
nationalised industries, some of the companies 
owned by the National Enterprise 
Board and a fair number of the tophundred corporations. 

In the oligopolistic sector, controls 
would still be applied over both pricing 
po'licies and wage levels, which could 


then be lifted for the rest of the economy. 
Instead of so-caHed free .collective bargaining 
between unions and management, 
bargaining would take p'lace between the 
government and the firms over strategic 
plans. The aim would be to reach a planning 
agreement covering a period of 
3 to 5 years, focusing in particular on 
plant expansion and closure decisions, 
and their employment and environmental 
imp'lications. A local dimension is re· 
quired involving local authorities, trade 
unionists and sim£lar bodies. Social and 
efficiency audits might be required as 
weH as the conventional financial audit. 
The government would then use its 
powers over expansion in the non-assisted 
areas and regional incentives to influence 
location decisions (as in Sweden). At the 
same time, these firms could be required 
to develop arrangements for employeeparticipation that were acceptable to all 
concerned. \Some aspects of implementing 
such a policy were described in 

Towards a Worker Managed Economy

(by Jeremy Bray and Nicholas Faile, 
F<i'bian Society, 1974). 

the nationalised industries 

In the rest of this chapter, the focus is 
on the nationalised industries. The concentration 
on those industries in publicownership is partly because they should 
be the easiest 'to change and partly because 
they should give a lead to the 
private sector. The need for planningagreements is indisputa~ble. But it seems 
impossible to ever develop satisfactory 
working relationships between government 
and the boards of the majorindustries, even when they are nation· 
alised. Conflicts over specific decis·ions, 
such as increases in pay and prices, delays 
in .approving long term plans, changes 
of direction over the location of new 
facilities and the proliferation of committees 
investigating one aspect or 
another of the nationalised industries, 
have widened the gap between government 
and the boards. They have depressed 
industry mora'le and possibly raised costs 
to the consumer and the public at large.
Not surprisingly, hopes for improved coordination 
and accountability remain 

largely unfulfilled. The changing economic 
and pdlitical climate now makes 
increased government involvement in 
industrial affairs inevitable. However, the 
basic problem still to be tackled is how 
to reconci'le two conflicting types of 
objective: on the one hand .companies 
must have a considera~ble degree of 
autonomy in commercial matters if they 
are to be motivated and efficient; yet 
on the other hand the government wants 
to ensure that industries receiving public 
finance act in the wider public interest, 
cutting across the single minded pursuitof commercial efficiency. 

Despite a number of authoritative studies 
and continual complaints from the 
nationalised industries themselves, government 
goes on acting in a largely prag· 
matic manner, best described as crisis 
management. As a consequence, the long 
term shape of the nationalised industries 

is being formed by the resp·onses made ' 
to immediate problems. The potential 
·benefits from sound planning are there· 
for·e being lost in the very industries that 
need it most. 

failures 

Planning is vital for three reasons. First, 
capital intensive and interconnected 
industries (such as electricity and railways) 
must be closely coordinated if their 
customers are to !benefit from the 
potentia'! economies of sca'le. Second, 
investment plans need to be coordinated 
within each sector to ensure that total 
capacity matches demand at minimum 
cost. Gradual adjustment would be too 
costly because of the interrelationshipsbetween the .industries and the inflexibility 
or lumpiness of any changes in capacity.
Third, the construction or closure of new 
facilities has huge side .effects on the 
surrounding area. Public ownership pro· 
vides government with another policyinstrument for manipulating the secondary 
consequences of the industry'sactivities on various public po'licy goa'ls. 
These include full employment, environmental 
improvement, a healthy balance 
of payments, economic growth and the 
control of i·nflation. It is this inevitable 


conflict of objectives that lies at the root 
of .our failure to make the most of publicownership. 

Ad hoc intervention tends to sap manage· 
ment morale and independent dr.ive. 
While a critica'l report, parliamentaryquestion or ministerial directive may 
cause an industry to .change course, their 
power for good may easily become 
neutralised in time. Attending enquiries,
often several simultaneously, and answering 
questions takes up considerable top 
management time. The resuHing uncertainty 
diverts management from focusingindependently on improving performance. 
Also instead of seeking to educate politicians, 
civil servants or the generalpublic by exp'laining the basic economics 
and options of their industry, boards 
become defensive, concealing .or certainly 
not publicising the implications of their 
actions and resisting requests for information 
needed to formulate public policy. 
The industries themselves begin to adoptcivil services mores and are unlikely to 
produce individuals prepared to rock the 
boat. 

Ad hoc intervention also reduces accountability. 
Directions without compensationfor the costs .incurred provide an excuse 
for disregarding financia'l targets. So 
long as the nationalised industry can act 
as the injured party, it may in a perverse 
way enjoy the loose relationship. In such 
a situation, policy making gets neglected. 
The lack of a sound framework of 
policies makes it difficult for the nationalised 
industries to ,develop their investment 
p'lans in a way that is consistent 
with the wider public interests. As a 
consequence, planners tend to lose heart 
and p'lanning becomes simply an exercise 
in public relations. 

Thus the most telling attack that can 
be made .on the nationalised industries 
is not that they are inefficient but that 
they fail to live up to their promise.
Also, like most large organisations, some 
suffer from the effects of obesity-acertain sluggishness in do.ing things and 
the need for higher inputs to keep them 
going. The answer to the problem is 
decentralisation, but how should it be 

done ? Three main .approaches to resolving 
the dilemmas have been put forward. 

First, government might establish a 
handful ·of objectives but leave the 
industries free to decide how to realise 
them. This is attractive in theory. But 
while at a certain level of generality there 
will be consensus, ·there will always be 
conflicts when one tries .to make the 
objectives openational. Almost aU of .us 
are in favour of goals like prosperity for 
all, reduced unemployment and cleaner 
air. The problem .is in expressing them 
in terms which are capable of resolvingthe inevita'ble conflicts that arise between 
different objectives. 

A second approach is to rely on the 
original Morrisonian concept of a public 
spirited board. But whi'le such an 
approach may well work where the basic 
conflicts of policy are few and comparatively 
simple, it is ill suited to the type 
of policy issues we face today. 

The third approach is for government 
to formulate policies for specifying output 
targets or else decision rules that 
would lead to the right output after 
making the tr.ade-offs between competing 
objectives. But this job is difficult to carry 
out in practice .as it requires government 
to know what is .technica'lly possible and 
the re!Med costs and uncertainties, whereas 
the necessary expertise will tend to 
be concentrated within .the industries. 

A better approach than all these would 
be to set up a close d1alogue over policy 
issues between the government, nationalised 
and those private industries receiving 
substantial public financial support.
Once a planning agreement has been 
made, it should ·last for some years,
whatever emergency comes up. Under 
such an approach, government would set 
the priorities by laying down guidelines 
for what policy consideration's industry 
planners should take into account. Industries 
in turn would establish the technical 
alternatives and work out the implications 
for the different policy goals and the 
obstacles that stand in :their w.ay. The 
industries would then be compensatedfor costs incurred specially for taking 


account of the public interest. A planning 
agreement would then be reached setting 
out what was required from both the 
industry and the government to resolve 
the key conflicts. Thus it wouLd "getdown to business " and not simply be 
the outcome of woolly discussions. The 
purpose of .the planning system would 
'be to put the important conflicts on to 
the political agenda and to ensure that 
the necessary fact finding and analyticwork was done. 

Turning to the record since the war, 
'instead af meaningful discussion there 
has been a " dialogue of the deaf " over 
investment plans and a tendency to interfere 
with minor matters while the greater 
strategic questions were inadequately considered. 
There are some fairly basic 
reasons embedded in the structure of 
government and the nationalised industries 
which help to explain why the task 
of policy analysis is done poorly or in a 
half-hearted fashion. The first reason is 
that the civil service and <the nationalised 
industries are neither primarily concerned 
nor organised to cope with the demand-
i.ng job of po'Licy analysis and formulation. 
The ~econd reason is that the processes 
that govern or guide ·the links 
between government and the industries 
are themselves il-l-adapted for bridgingthe gaps between them. 

Improved planning systems could help 
to support such a dial-ogue, but while 
weighty documents pass between indus-tries 
and the civil service, they fail to 
focus adequately on the key investment 
and operating decisions and on the basic 
policies and procedures. There is consequently 
no means of judging .whether 
industry has correctly identified the majorimprovement opportunities open to it, 
or for agreeing objectives in terms of 
key opera•ting results. In the absence of 
explicit objectives and clear policies, it 
is of course impossible to measure or 
evaluate performance objectively. 

To ·overcome these deficiencies, three 
types of change are needed. First, the 
scope and methods of po-licy analysis 
must be radically overhauled ; second, 
organisationa~ changes are needed to 
ensure policy analysis receives the atten


tion it deserves; and <third, planning and 
contra! processes must be improved to 
make it possible to delegate more 
authority to the industries while strengthening 
overall public control. 

Taking the first change, a clearer framework 
of guidelines is essentia-l if better 
decisions are to be made on the future 
shape of the nationalised industries. These 
guidelines must satisfy four criteria. First, 
policies should be stated explicitly for 
each goa•! of public policy. The second 
criterion is that policies should be backed 
up with appropriate incentives and regulations. 
The third criterion is that such 
policies must be based on careful eva:luation 
of the total costs and likely benefits 
associated with alternative policies. The 
final criterion is that policies should have 
a clear time horizon. 

The foregoing approach will be difficult 
to implement under the present structure. 
Because policies cross departmental lines, 
involve both the ministries and the 
industries, and require thorough and sustained 
analysis, a reliance on .the traditional 
approach of committees and the 
passing bacJQwards and forwards of 
memoranda is inadequa~te. Instead, re· 
'liance should be placed on ad hoc task 
forces, composed of a small group of 
ex,perts drawn from relevant depa•rtments 
within the civil service and outside, 
following the principles used in the 
NEDC sector working parties but with 
the inclusion of consultants. Their jobwill be to distill •existing broad policies 
into a set of guidelines and to identify,
ana'lyse and present policy alternatives 
in terms politicians can readily understanld 
and respond to. The task forces 
should consuLt with the many pressure 
groups, following the precedent set byTony Benn in energy policy. 

sector boards 

A new type of organisational structure 
is also needed in the na:tiona'Lised industries 
if a more total or comprehensiveapproach is to he taken to planning. The 
aLternative that wouid seem to fit in best 
with the approach to policy formulation 


advocated here is a "sector board" (orpolicy council), an idea which seems to 
have found favour .in the report from the 
NEDC. In the case of the existingnationalised industries, each sector board 
would be headed by a chairman reporting 
to junior ministers responsible for 
the energy, transport, communication and 
steel and .other industry sectors. The 
sector boards would have reporting to 
them the Chief Executives or Directors 
of .the industries making up each sector. 
In the case of energy, that would include 
coa'l, gas, atomic energy and electricity.
For transport it would include rail (passenger, 
parcel's and freight businesses), 
road freight, buses, domestic airlines, airports, 
inl·and waterways and docks. Certain 
of the anciUary activities such as railway 
hotels might well be hived off to a 
separate holding company within the 
National Enterprise BoaPd, as they do 
not impinge on transport or energypolicy, though they would remain closely 
connected as suppliers or customers. 

The power of these boards would be 
strictly defined to reflect the distinction 
between issues of public policy, sector 
policy and industry policy. The basic 
task of the sector boards would be to 
develop and implement .a coordinated 
plan for a particular sector, not to interfere 
in particular decisions. They would, 
therefore, within policies laid down for 
different government policy objectives,
exercise four main types of responsibility:

(a) formulating the basic assumptionsand guidelines on which industry plans 
should be based, for example, forecasts 
of market size; (b) approving draft 
investment and marketing plans and 
policies and resolving key issues or conflicts 
(including pricing and levels or 
types of service); (c) agreeing operating 
objectives f.or a'll the parameters of performance 
(including measures of social 
performance) and •reviewing .the performance 
of each industry ; and (d) interpreting 
government policy affecting the 
sector and assisting to develop it through 
analysis and representation of the 
industries' viewpoints. 
Since these boards would provide a major 
check on the industries themselves, they 

would replace the current boards, some 
of which have few or no outsiders on 
them. They would also replace many of 
the staff of the Department of Industry 
and Department of the Environment, 
whose responsibilities relate to specificindustries; many of these might be transferred 
to form the small central analytic 
staffs of the new boards, along with outside 
experts on energy and transportpolicy. The composition of the board 
members would reflect their basic duty 
of ·assisting the chairman in questioning 
and approving industry plans. They would 
be full time and generally chosen to 
reflect the different stakeholders involved 
and for their ability to play a policy making 
role. For example, the board might 
include people .representing local government, 
the City and indust·ry, as well as 
tmde unions and the consumer associations 
concerned. These members would 
be appointed by the minister and would 
not be delegates of the interests concerned. 
The board might also retain as 
consultants distinguished former members 
of management from the industries 
concerned as well as academic experts. 

Such an organisational arrangementwould br.jng five major benefits. First, jt 
would make it easier to coordinate the 
plans of different but interdependentindustries. Second, the proposed arrangement 
frees government to focus on the 
questions of public policy and removes 
many technical issues out ·of the political 
context. Third, it would make it easier 
to exploit certain opportunities for ration-
a_.lisation. Fourth, the sector boa·ros could 
provide an effective stimulus to industries 
to improve efficiency. The final benefit is 
that such an arrangement is conducive 
to a greater degree of workers' self-
management at the operationa-l level. 

planning 

To further reinforce the links between 
government and the nationalised industries 
some changes need to be made to 
the planning and control processes. Every 
plan should not only set out a preferred 
alternative but the reasons for rejecting 
alternatives with supporting data. This 


would get away from the tendency to 
present a fait accompli or to " make the 
ministry an offer it cannot refuse" and 
would allow more informed discussion to 
take place on the key issues. 

The plans could also be used to raise 
future policy issues to ensure that the 
necessary analytic staff work was pro·
grammed sufficiently far in advance of 
decisions having to be made for it to 
have an jnfluence on .that decision. FinaJly 
the plans would provide the bas.is for 
deciding what level of public assistance 
would be given, through regiona·l or 
industrial aid or major orders from the 
public sector. 

Closely allied to new planning systems 
would be the overhaul of the information 
systems. Some work has been done on 
developing improved indicators but publicannual reports need to be expanded to 
contain more meaningful indicators of 
performance. The reports might monitor 
operating efficiency (as measured byvariance from targets, comparisons with 
selected parts of other undertakings and 
so on) and adherence to public .policies. 
Finally, the accounts should set out 
additional .costs incurred for reasons of 
public policy, as far as these can be 
calculated. Such costs .would then be 
reimbursed by the department responsible 
for ·the particular area of policy. 

Once such an orderly arrangement had 
been set up, it would be possible to dele· 
gate considerable authority down to either 
regional ·Or functional executive management. 
The large monoliths could be 
broken up into manageable units that 
could then get on with running the 
business, varying their methods to match 
the resources and needs of their particular 
region or function. The precise form of 
decentralisation would depend on the 
industry. In a uti'lity like gas, the regional 
approach would be most appropri.ate and 
such a change could be linked to general 
measures of devolution to facilitate planning 
at a more local •level than is possible 
at present. In a manufacturing industry, 
'like ·British Leyland, a functional 
approach would be better, .perhaps breaking 
it up into lower priced cars, luxury 

cll!rs, commercial vehicles and special pro·
ducts. In both cases, .the sector board 
would still retain the key functions with 
regard to finance but operating more as 
an investment bank than as the executive 
management. It .is worth noting that this 
is the approach used with apparent 
success in GEC and is in line wi·th practices 
in other more successful industrial 
nations than the UK. The model could 
be applied to the private sector, through 
the introduction af two tier boards, which 
would bring us in line ·With Common 
Market requirements. 

Share of the 100 largest 
UK manufacturing 
enterprises : net output 

Share % 

50 

40 

30 

20 

10 


4. creating more work 
one of the main concerns of socialism 
is with the nature .and quality of work. 
To many in the labour movement, small 
firms are associated with offering worse 
pay and conditions, whiie .their proprietors 
are thought to take too much 
out of the business and avoid paying 
taxes. This argument is somewhat like 
the right wing a:ttack -on " scroungers 
living off state benefits" ; though there 
are undoubtedly many examples that bear 
O'Ut the truth of the caricature, it hardly 
justifies penalising the small firm. More 
likely the reason why small firms have 
lbeen treated so unsympathetically in the 
UK. is that .they lack the " muscle " or 
bargaining power -of the giant companies, 
a•re harder to organise and difficult to 
deal with from the centr·e. Here we will 
try to take a balanced view of small 
enterprise against a range of concerns : 
jobs, wages and conditions, job content 
and industrial relations, cooperation and 

entrepreneurship. 

jobs 

It is hard to generalise about the importance 
of small firms when there are such 
differences between say retailing and 
manufacturing, and when smaH firms 
range from sweat shops to sweet shops, 
from reminders of things past to the 
shape of things to come. Their significance 
not only depends on the kind of 
activity but also the location ; small firms 
tend to be most concentr-ated in certain 
inner city areas. As a general rule, the 
poorer the area, the lower the proportion 
of small firms and this applies across the 
nation, cities and regions, with the north 
east, for example, having 40 per cent 
fewer small firms per head of the popu-
lation than the UK. average (whichitself below most European nations' 

Though the cut-off point fo.r definmg .1 
small firm is typically taken as 200 
employees, lower numbers are used in 
construction and retailing. The Bolton 
Committee ·reported that "small firms 
account numerically for the vast majority 
of all business enterprises. Their diversity 
is even more striking than their number". 
There are roughly 6 million (one third of 

private sector work f<>rce) employed in 
small firms of which 2 million are classified 
as self -employed I(though this includes) 
gr-oups like doot<>rs who may largely work 
for one employer). T·aken in aggregate, 
therefore, small firms are big business. 

Of mor·e importance than just the present 
size of the small firms sector is their 
future. With unemployment on some 
estimates expected to -rise to 2 million, 
the most important 'long term problemfor the UK. is how to satisfy a high level 
of wants using the available work force 
to the full. Jit is now increasingly accepted 
within business circles, including the CBI, 
that even if the economy were to improve, 
there is little chance of large firms taking 
on more unskilled staff, as most firms 
already have more than they need. While 
more modern plant is often needed, it 
should be .recognised that this will often 
J.ead to further redundancies. 

The small firm on the other hand is 
typicaUy over stretched and short of staff. 
CBI studies show that small firms tend 
to operate much closer to capacity.
Furthermore, as small firms tend to be 
more labour intensive, any given investment 
could lead to twice -the direct employment, 
as the following figures from 
the Bolton Committee report suggest. 

COMPARA11IVE PRODUCTIVHY 
under 200 ·over 200 
employees employees1954 1963 1954 1963 

output 
per man 7·19 1 ,097 852 1,425 
capitalexpenditure 
per man 53 78 78 140 

The expansion in employment could 
come from a number of sources, probably 
in this order. First would be the increased 
survival rate of existing small firms, 
second the growth of those who currently 
cannot keep pace with demand, and 
thirdly an increased birth rate of new 
firms catering primarily for unmet needs. 

The extra demand would come in partfrom improved living standards and in 
part from import substitution. It is not 


that individual smaH firms a·re likely to 
provide many more jobs, but that the 
sector as a whole is the most fruitful 
source. 

wages and conditions 

Many of the sectors in which small firms 
predominate are associated with iow 
wages, for example shops or clothingfirms. Small firms rarely offer anything 
like the fringe benefits of the larger firms 
and are probably iess likely to meet the 
highest standards of health and safety 
at work. The reason is as likely to be the 
effects of competition as the graspingproprietor; here the concentration of 
purchasing power in both the pulblic and 
private sectors is often at the expenseof employees in small firms. However, 
the conventional socialist response to 
such a situation tends to be one of self-
righteous outrage-rather like gq,ums, the 
solution is seen as closing anything that 
:faits to meet the " proper " s·tandards. 
However, again employment is a little 
like housing. Just as slum clearance does 
not mean an end to poor housing conditions, 
and may oreate homelessness 
which is worse, so driving small firms 
·out of existence can hurt the poorest 
groups most. Thus, for example, home-
working has been attacked as exp1oitive ; 
yet it supplements the income ·Of poorimmigrant groups who would undoubtedly 
be discriminated against in largefactories and allows them to be with their 
children at the same time. 

Rather th'an employing still more inspectors 
or introducing further laws that are 
pr.actically i'm'possilble to implement,
would not a fairer and more effective 
answer jbe in widening the range of 
choice through stimulating the growthof firms and through improved training 
and union organisation? Providing communications 
are reasonable, conditions 
wiU then be improved simply because 
employers want to hang on to their staff. 

:At the same time, increasing concentration 
leads to a situation which makes 
free collective bargaining impossible. In 
many industries, firms with oligopolistic 

or monopolistic power face employerswith the power to bring industry to a 
halt. Such a situation encourages inflation 
and resuHs in the consumers with less 
bargaining .power (such as the elderly) 
:losing ·out. It a~so leads to reduced employment, 
hurting those who lack union 
protection, such as school Ieavers, while 
causing those on low pay to lag further 
behind. 

job content and 
industrial relations 

Many small firms survive, just as the 
UK should, by being resilient and skilful. 
One advantage they have is that 
they are much less prone to disruptions 
through industria~ action, which to some 
extent must ,reflect better Ja,bour relations. 
The Department of Employment Gazette 
for February 1976 carried figures which 
showed that where there are less than 
25 employees, disruptions ·are very rare, 
and that all the way up the scale, an 
increase in size of plant leads to a proportionately 
much higher number of days 
lost. This is one of the factors causing 
large employers to build new piants away 
f·rom where their work worce has been 
traditionally concentrated. 

INDUS'J1RIIAL 
STOPPAGE'S 
number of number of 
stoppages working days 
per 100,000 lost per 1,000 

plant size employees employees 
small &ms 
11-24 8 15 
25-99 
100-199 
19 
23 
72 
155 

200-499 25 329 
500-999 30 719 
1 ,000 or more 29 2,046 

There are several reasons for the :}ower 
rate of stoppages which a•re bound upwith job content. First, in most small 
firms there is a very short line of command 
and the .proprietor can usually 
turn his hand to anything. Second, the 
production ,process itself tends to be more 
flexible; compare, for example, a typical 
small light engineering firm with a car 
assembly line which, if some component 


is unavai1able or some operation not 
carried out, quickly grinds to a halt. 

The quality of life at work can be just 
as important as people's " free " time, 
considering the time it takes up. Hence 
the opportunity to work in close contact 
with other human beings and the chance 
to learn and practice a skill may be worth 
sacrificing some take-home pay for. It 
.is significant that many large companies 
are 'beginning to experiment with "jobenrichment " in order to retain employees 
and enlist their interest, the most notable 
examples being in Sweden at Volvo and 
Scania-Vabis. However, so ~ong as the 
firm is large, it is still difficult to convince 
employees that they are " part of it " 
without more radical changes. 

cooperation and 
entrepreneurship 

One of the objections of some socialists 
to the small firm is that they represent 
competition, which is seen as both wasteful 
and in conflict with socialist principles. 
In contrast, the spirit of cooperation 
is stressed, for example by the 
Industrial Common Ownership Movement, 
which succeeded in obtaining a 
private members' bi!:l providing £250,000 
to help start cooperatives. Cooperatives 
have also been put forward as a possible 
.answer to locil'l unemployment in places 
like Fife, Cumbria and Wandsworth. One 
of the inspirations is the success of the 
Mondragon Association of Cooperatives 
in the Basque part of Spain and common 
ownership firms like Scott Bader. 

However, there are certain facts of life 
that must be faced. Competition mayinvolve some waste but it is a good way 
of keeping large companies on their toes. 
It is significant that in countries like 
Poland smaU firms are being actively 
encouraged because the government now 
recognises that the varied and specialneeds of human beings are ill-served 
just by large companies which tend to 
adopt inflated and regimented forms of 
organisation. 

There is undoubtedly a great deal of 
scope for employees of firms or sections 

of firms threatened with closure to form 
themselves into cooperatives and to carry 
on the business or something similar, 
rather than join the unemp1oyed. This is 
:particularly true of family firms 
threatened with closure when the owner 
retires or dies. However, a great deal 
needs to be done to make the sale of the 
firm's assets to the work force easier 
while it is still .a going concern. 

But I am personally doubtful about the 
notion that new firms organised as cooperatives 
wiU contribute sufficient jobs 
for those who are presently unemployed 
{though they are well worth supporting 
on other grounds). I come to this view 
because starting a firm is always hard 
and requires a great sense of pui1pose,
which can usually only come from the 
founder. One needs a captain in a small 
boat in stormy water, whereas it is possible 
to be more democratic in .a largevessel on fiat open seas. The exceptionsto this generalisation are where the enterprise 
only employs a handful, where 
qualified staff are involved or where 
there is some common experience to 
forge a sense of unity. It would certainly 
be worth trying to repeat the Mondragon 
approach in a close knit community but 
cooperation should not be assumed to 
be a ready substitute for capital. There 
are undoubtedly many young people who 
are attracted to the notion of cooperatives 
and who tl!re reluctant to work in 
what they perceive as soulless bureaucracies. 
Furthermore, in some inner areas 
there are large groups of immigrantswho have enterpreneurial characteristics 
and cou1d extend back from retailing to 
manufacturing. 

Now that there are fewer opportunities 
in the public sector, many may prefer to 
set up in business. Interestingly, recessions 
are usually associated with higher 
.rates of business formation because traditional 
job opportunities are closed and 
many competent people are made 
redundant. 


5. reviving the cities 
The big question for our cities, and particularly 
those inner areas where many 
of the worst off live, is how they are 
going to revive themselves economically.
The problems of employment, small 
entei'prise, and run down areas like the 
inner city are interwoven and therefore 
hard to disentangle. There is a growingrealisation, reflected in the White Paper 
Policy for the Inner Cities, that economic 
problems lie at the root of urban decayand that the dedline of small firms must 
be reversed. However, impltementation of 
this changed attitude is still some w.ay off 
and it is therefore worth spelling out the 
importance of small enterprise to the 
viability ,of our cities. One of the major 
changes in our cities has been the loss 
of employment-now declining faster 
than population jn the inner areas of all 
the great metropolitan connurbations like 
London, Manchester and Birmingham. It 
is the loss particularly o.f manufacturingemployment which causes the most 
concern. For this is where the greatest 
job losses have been. Furthermore, manu· 
facturing employs a higher proportion 
of operatives and pays higher wages than 
does the service sector. As it is also 
government policy to expand the manufacturing 
sector to help the balance of 
payments, we need to consider where the 

jobs have gone. 

branch plants 

A great deal of job loss has been due 
to the rationalisation of large mu'ltiplant 
firms which have closed their older 
inner city factories and offices. In the 
London borough of Wandsworth, for 
example, seven eighths of the job loss 
was due to 10 large firms closing their 
plants. Two factors have encouragedsuch closures. First, operating costs in 
the inner areas are higher. These areas 
have smaller and older plants than e1sewhere. 
Their sites are usually cramped 
as the surrounding area has been built 
up. It may be difficult for employees to 
get to work, particularly those living in 
the suburbs. Goods movement is also 
difficult in many places. Second, a combination 
of the property boom and local 
.authorities 'buying land for building 

houses provided an additional incentive 
of securing a high price for the old 
factory site. 

Even where plants have not been closed, 
multi-plant firms tend to concentrate 
expansion outside inner areas, where 
resources are easier to come by, improved 
communications having made traditional 
central locations irrelevant. Thus the food 
and drink industries no longer need to 
be on the river; motorways have made 
rail connections unnecessary ; te1epliones 
and data transmission services mean that 
factories can be distant from head offices. 

A good deal of the argument about 
regional incentives and government control 
over the location of industry thus 
turns out to be misplaced. Comparatively 
few of the 500,000 jobs lost in London 
between 1961 and 1974 have gone to the 
regions or new towns-perhaps 1 in 6. 
Rather it is the high death and low birth 
rate of firms that is to blame. 

office jobs 

The decline in manufacturing is no longer 
being offset by the rise in service and 
office employment. Between 1961 and 
1974, the only major increases in employment 
in the service sector in London 
were in who1esale distribution, banking, 
other business services, education and 
hotels. There are several reasons whythe growth of office jobs is likely to taper 
off. With the decentralisation of population 
and rising transport costs, the 
banks and insurance companies (which 
accounted for much of the growth) are 
now moving the bulk of their administration 
to out-of-town locations where 
costs are lower and it is easier to attract 
labour. Those who require regular and 
easy contacts with other firms stay but 
the departments which do move tend to 
be the very ones that employ the more 
unskilled in routine clerica~ functions. 

A further cause of decline is that clerical 
jobs are often just as vulnerable to 
mechanisation as manual jobs. Indeed,
they may well be more dispens~ble than 
many manufacturing jobs which rely on 


the coordination of hand and eye. Com· 
puterisation of many repetitive functions 
can only be held back so long as labour 
is cheap, compliant and available. Yet 
shortages of adequate clerical staff like 
secretaries are a constant cause of complaint 
to employers. 

The public sector js unlikely to provide 
increased employment, with education, 
local government .and the health service 
being particularly vulnerable to cut-backs. 
Though improved living standards and 
increased tourism appear to create a 
demand for more personal services, typical 
services like hairdressing or cleaners 
have in fact been in decline. It is in fact 
the less developed and not the most 
advanced countries that offer the most 
personal services, as a comparison between 
Sweden and Singapore would make 
evident. 

New developments in technO'logy could 
transform our conception of what a city 
does and what an office does. In the past, 
cities grew up because there were many 
economies from the concentration of 
activity in close proximity. But once 
the predominant nature of work changes 
from moving goods to shifting data, the 
advantages of proX'imity disappear and 
the external costs become all too obvious. 
It is increasingly hard for staff to get into 
cities, as transport costs rise and as the 
apparent pleasure people get from driving 
their cars is replaced by the more 
obvious costs of waiting for public transport. 
In marked contrast the transmission 
and storage of data has become far 
easier. Not on1y do mo&t letters still 
·reach their destination the next day, but 
new developments in telephone technology 
allow people to have meetingswithout coming together and to obtain 
access to information without relying on 
.rows of clerks. 

If we relate these changes both in technology 
and relative costs to the question 
of the future of large offices, of which 
banking is a good example, we can expect 
firms to continue having luxurious suites 
of offices right in the heart of great cities, 
where they can impress customers and 
subdue suppliers, but they will have little 

need to accommodate the "other ranks". 
This prospect also opens up opportunities. 
For instance, the office of the future has 
a far higher level of capital equipment 
and more sophisticated buildings than 
the average factory; these will requireservicing. Someone has .also to make and 
maintain the hardware (and software) 
that make the changes possible. Thus 
the developments in banking may open 
up the greatest opportunities .for manufacturing 
and maintenance, particularlyfor the small local tfirm. 

Finally, against the argument that large 
companies are too tied to their headquarters 
by inertia and prestige to move, 
it should be remembered that New York 
has lost over a hundred corporate headquarters 
over the last decade. They left 
to escape the stress and high cost of a 
decaying city and to move where their 
executives lived or wanted to live. If 
property continues to be relatively dear 
in the centre of our cities, while the 
surrounding area deteriorates, there is 
no reason why the American patternshould not be repeated here. 

small firms 

.Nl1ied to the changing role and functions 
of large offices, the closure of large factories 
or thcir movement out of the city 
has meant that small firms are becoming 
the main source of employment in manufacturing. 
It is hard to say for certain 
how many people .are employed by small 
firms as statistics are unreliable. The 
1968 Census of Production revealed that 
40 per cent of people in manufacturing 
in London worked in smal:l units ; this 
is bound to understate the total as it 
excludes firms employing less than 11. 
The London borough of Southwark, for 
example, has over 2,500 firms employing 
less than 200 and only 40 employing 
more. 

Despite, and in many ways because of, 
the economic recession, there are now 
opportuniti·es for substantially expanding 
the small firms sector in a way that is 
unlikely for 'larger manufacturing firms. 
There are two great appeals of such a 


policy. First, small enterprise is uniquely 
suited to the conditions of many inner 
city areas where many problems are concentrated. 
Its operations are intensive in 
terms both ·Of the relationship :between 
labour and capital and also of the space 
it occupies. Thus small firms can often 
operate in old multi-storey premiseswhereas large firms would demand new 
single storey factories with space alongside 
for potential expansion. Second, 
unlike large firms, many small firms 
actually need to be near the centre of 
large cities to be close to customers, a 
range of specialised suppliers and a pool 
of trained labour. Many of the resources 
small firms require (and complain are 
difficult to dbtain, such as premises and 
personnel) are now potentially available 
and standing idle. 

At the same time, the concentrated and 
diverse character of cities creates the 
essential conditions for entrepreneurship 
and innovation to flourish. This point is 
well illustrated in Jane Jacobs' The 
Economy of Cities where she argues that 
innovation is a bi-product of work : 
" New goods and services, whether 
criminal or benign, do not come out of 
thin air. New work arises upon existing 
work, it requires 'parent work ' . . . 
(Cities) depend upon large numbers and 
great diversity of economic organisation, 
some of which of course grew large in 
their heydays." New firms are often 
needed to introduce innovation and there 
are now signs that the numbers are growing 
(see chart opposite). 

Small firms also help pay for the services 
provided in urban areas. At a time 
when local government is faced with 
rising demands for services and falling 
sources of revenue, it should not be forgotten 
that small businesses can be an 
important source of rates. Unlike many 
residents, sma:ll businesses are likely to 
contribute more than they cost ; theypay a higher rate in most urban areas and 
make few calls on local authority services 
that they do not pay for directly. 

Finally, there is the contribution that 
smaller firms make to keeping things in 
balance. In any industrial system some 

concerns will grow and flourish while 
others stagnate ·Or decline. By having a 
diversity of concerns operating in different 
markets, the community insulates itself 
from over-dependence on the success of 
one unit, juS>t as wise farmers avoid 
over-dependence .on any one crop. The 
various parts support each other, giving 
vitality and resilience to the whole. It 
is a tragedy that in some inner city areas 
the death of small firms and the low 
replacement rate has left large firms. with 
excessive influence. For example, in 
Canning Town, 75 per cent of the 60,000 
jobs there are controlled by 15 firms. It 
is not surprising that, in such a situation, 
half the workers experienced redundancy 
between 1966 and 1972. The more concentrated 
the area, the more rapid is 
the rate of extinction. While a full cost-
benefit analysis has not been attempted, 
there is enough evidence to suggest that 
a further fall in the amount of small firms 
operating in inner areas would be catastrophic 
for the urjban community as well 
as for the nation at large. 

UK manufacturing 
establishments with 10 
employees or less 

100 

Thousands of establishments 

80 

60 

40 

1930 19 40 1950 1960 1970 

source : Census of Production. 


6. removing barriers to 
enterprise 

The reasons often given for the decline 
of small firms in the UK are the various 
disincentives to entrepreneurship, such 
as the high cost of finance and tax rates, 
which bear heaviest on small firms. However, 
a closer examination suggests that 
other factors are equally important. For 
example, the low birth rate and higher 
death rate of small firms in the UK compared 
with the USA are bound up with 
the general business environment as a 
recent study by A. D. Little for the 
Anglo-German Foundation clearly shows. 
Comparing the poor showing of New 
Technology Based Firms (NTBF) in the 
UK and Germany with the USA, it points 
to the us advantages of a very large 
domestic market conducive to rapid 
growth and development; the availability 
of private wealth as a source of seed 
capital for new ventures ; a fiscal f,ramework 
which encourages the flow of 
private risk capital into new ventures ; 
the existence of an active (over-thecounter) 
market for the trading of shares 
in new ventures; social and behavioural 
attitudes which encourage entrepreneurship 
and the mobility of individuals 
between academic institutions and industry, 
as weU as the willingness of 
scientists to set up their own businesses 
in order to exploit their technical knowledge; 
and "a large and active government 
expenditure programme in hightechnology areas which provides significant 
opportunities for NTBF's endeavour, 
particularly through government procurement 
programmes". There may also 
be a greater personal aversion to takingrisks and getting one's hands dirty in 
the UK, though this is by no means 
universal. 

Equally, if not more important, there 
are also a number of barriers to entryand growth that need to be tackled at a 
loca:l level, particularly in finding premises, 
personnel and finance. 

premises 

It is increasingly hard to find a place to 
work at a price small firms can afford. 
This is largely the result of redevelopment 
and rising accommodation costs, 

both rents and rates. In the past, the 
inner area acted as natural seedbeds for 
innovation and nurseries for new enterprise. 
Entrepreneurs found it easiest to 
start in secondhand premises on a small 
scale, taking advantage of close proximity 
to customers arrd suppliers. Now, starting 
in business is harder. Many of the customers 
have moved out. Redevelopment 
schemes have sought to remove nonconforming 
uses and to provide more 
room for housing and open space. In 
the process, they have cut the supply of 
cheap workshop premises. They have 
also caused many established firms to 
go out of business and in the process 
severed important networks and linkages 
and reduced the viability of other 
firms. Various surveys suggest that between 
one third and one ha!;f of firms 
affected by redevelopment go out of 
business. Neither the private nor the 
public sector has replaced the premises 
that have been lost. 

personnel 

Personnel, paradoxically, can also be a 
problem for small businesses. There is 
an apparent contradiction between the 
views of employers that their chief problem 
is a lack of skilled workers and 
the views of local people who see the 
chief problem as Jack of jobs. Small firms 
find it particularly difficult to keep skilled 

workers when there are more secure and 
better paid semi-skilled jobs in the public 
sector or in large firms. Thus there are 
apparently more former skilled craftsmen 
working in the post office in Clerkenwell, 
once a thriving area, than are left in small 
firms. And one side effect of Ford's new 
plant at Halewood, for examp'le, was to 
attract away skilled craftsmen from small 
firms, thus weakening Merseyside's indigenous 
economy. Small firms find it 
hard to attract and keep young people 
prepared to learn a trade ; as a consequence, 
many firms are run by old men 
whose businesses will disappear when 
they retire. 

There are a number of other reasons 
for the shortage, though it is not yetpossible to assess their relative impor



tance. First, wages, opportunities for 
overtime and fringe benefits will almost 
certainly be lower than in large firms, 
operating in more oligopolistic conditions 
and a:ble to pass the cost on to the consumer. 
Second, working conditions are 
often unattractive, with many workshopsappearing Dickensian, cramped, dirty and 
cold. Third, young people have come to 
want clean office jobs or jobs in large 
factories where they can work with their 
"mates "; whi,le small business may appealto middle class radicals and ·conservatives, 
it is not in line with the self-image of 
most working class teenagers. Fourth, 
small firms operating in inner areas suffer 
from the generally low levels of training 
and apprenticeships. Fifth, the movement 
out to the suburbs of the more 
skilled is compounded by the deteriorating 
public transport services and the 
obstacles placed in the way of peopledriving to work. Finally, it is difficult 
for small firms to make contact with 
people who might be interested in learn· 
ing the business or taking .over the 
management when the owner retires. 
Finding staff is in many ways similar in 
its problems to finding a spouse. Personal 
contact is the main method and this 
suffers when communities break up.
Labour exchanges do not communicate 
the subtleties of the very specialised work 
most small firms do and are little used 
by the small firm. Advertising is beyondthe means of the small firm which can 
hardly compete with Fords or Marks 
and Spencers. 

finance 

A further problem is -that of securingfinance for starting up and expandingsmall firms. Evidence to the Wilson Committee 
suggests this is the main failing of 
the present system. With higher rates of 
taxation and higher levels of investment, 
it is certainly harder now than in Victorian 
times to save enough to start a 
small business or to borrow it from 
friends. Until recently, the high cost of 
borrowed capital has put a further brake 
on expansion. There is also a shortageof equity or risk capital, needed by a 
small firm before it can borrow from 

institutions. The clearing banks are 
essentially interested only in givingsecured loans, usually for short periods. 
Merchant banks and venture capitalorganisations generally have been uninterested 
in backing new ventures, as 
opposed to financing substantial ongoing 
firms. 

There is, however, considerable contro· 
versy aver whether changes in the 
financial institutions are required to help 
the small firm. The prevailing view is 
well put in Graham Bannock's study

The Smaller Business in Britain and 
Germany which stresses the impact of 
the taxation system. This tends to dominate 
the thinking of organisations such 
as the CBI. However, studies of successful 
entrepreneurs suggest that it is rarelythe drive for wealth alone that makes 
someone set up a business ; hence we 
may have to look elsewhere for explanations 
of the low rate of start-ups in the 
UK. There is also the view expressed by 
nine principal companies providing development 
capital in their evidence to the 
Wilson Committee on Financial Institutions. 
This is that the real problem is 
the lack of "equity" or risk finance and 
shortage of viable propositions. The alternative 
radical view is that the existing 
financial institutions which control the 
flow of personal savings in the UK have 
attitudes towards risk which inevitablyfavour the established and substantial 
enterprise, despite their undoubted con· 
cern with the plight of the small firm. 

There are a number of facts which support 
this view. First, a high proportion 
of personal savings are channelled into 
house purchase through building societies 
or into government securities. Second, 
the clearing banks (which dominate commercial 
credit) are primarily concerned 
to protect the savings of their depositors ; 
while they may lose all if a new business 
goes under-a common occurrence-
they do not share directly in the profit. 
The Bolton Committee discovered that 
though clearing banks are the main 
source of finance for the small firm, 
external borrowing accounted for only24 per cent of the financing requirements 
of small firms, compared with 39 per 


cent for quoted companies. The HighStreet banks, in contrast to the USA banks, 
do not identify with local communities 
as they are essentially national or international 
institutions. Nor do they necessarily 
have the specialised expertise to 
assess opportunities, the bank managerbeing more concerned with assets than 
prospects. Finally, the high cost of dealing 
with small firms makes the provision 
of venture capital to new firms relatively 
unattractive compared with assistingestablished organisations. Again it is verydifferent in the USA, where banks seek 
out researchers in universities whose work 
might lead to profitable products and 
where the Small Business Administration 
underwrites the !endings of specialisedSmall Business Investment Corporations. 

The high degree of concentration in our 
industrial structure creates other difficulties 
for the small firm, which add to 
their financing difficulties. First, small 
firms have to pay more for their supplies 
and those in manufacturing find it 
increasingly hard to obtain small quantities 
quickly from large firms. The bulk 
discounts offered to large purchasersreflect their purchasing power as much 
as economies of distribution. It is worth 
noting that this practice is illegal in the 
USA under the Robinson-Patman Act. 

Secondly, small firms have greater difficulties 
in •penetrating the mass markets,
with the growth of large retailing chains 
and the centralisation of purchasingwhich increase the minimum size of 
order. At the same time, small firms have 
failed to develop counter-vailing power 
through collaborative buying or marketing 
arrangements, which are common in 
other countries such as Germany, Denmark 
or Yugo lavia. 

Finally, even where the mall firm has 

ucceeded in elling to a large customer, 
there is a tendency for large firms to 
defer paying their bills, thus upsettingthe precarious ca h flow of the small 
firm. 

In summary, the concentration of market 
power in ever larger organisationswhich 
is more advanced in the UK than 

in any other mixed economy-produces 
an environment which discriminates unfairly 
in favour of the strong and established. 
It has also destroyed those natural 
self-correcting tendencies associated with 
a market economy which are supposedto bring resources and needs into 'balance. 


7. what local government 
can do 
The government has already directed 
that local government should give far 
more attention to the promotion of 
industry than it has in the past. Inevitably 
this means assisting small firms as large 
new factories will be few and far between, 
particularly in high unemployment 
areas such as the inner city. Encouraging 
small firms will be more difficult than 
either managing public monopolies or 
controlling giant companies. It will require 
a number of changes in government 
policies and practices, particularly 
at local level. The first set of measures 
are aimed at local government and could 
be introduced as part of the " new deal " 
for inner city areas. They are aimed 
primarily at making better use of existing 
resources rather than directly subsidising 
small firms. 

The first priority should be to widen the 
choice of employment opportunities, both 
through retaining existing industry and 
making it easier for small firms to set 
up and grow. With few resources at 
their disposal, they need a supportive environment. 
Access to resources, including 
premises, personnel, finance and markets 
must be made easier. To take personnel, 
for example, the government trainingservices can fill an important gap byproviding more relevant training to those 
groups who find it hardest to get jobs 
(basically the under 25s, the over 45s 
and West Indians). The MSC report,
Young People and Work, contains some 
useful proposals but these will amount 
to little if the expansion of training is 
unrelated to the requirements of employers, 
both existing and potential. This 
calls for the introduction of local labour 
market planning in which local authorities 
should take the lead. Similarly, transport 
authorities can improve accessibility byfocusing on the problems of getting to 
work and of moving goods within cities. 
The current emphasis on building new 
motorways or underground lines needs to 
be replaced lby measures to improve the 
services on existing routes, supplementing 
these with new bus routes that link up 
where people now live with where they 
can work. In both these cases, local 
authorities acting either independently or 
in groupings need to take the lead in 

bringing the different agencies together. 
But, above all, more small units of 
accommodation are needed at rents that 
small firms can afford, as demand far 
outstrips supply. This is a field in which 
local authorities have both some of the 
powers, expertise and resources and so 
is worth exploring in more detail. Paradoxically, 
despite the shortage of small 
work spaces in inner areas, there is an 
abundance of empty buildings and vacant 
sites that would be better used for 
industry than for other purposes. There 
are well over 20 million square feet of 
empty industrial floor space in Greater 
London, mostly in factories which are 
far too large for any likely .occupant.
If rehabilitated and .converted, many of 
these could provide cheaper and better 
premises for new and growing firms than 
fresh building. 

The Fabian pamphlet Inner City: Local 
Government and Economy Renewal byHaris Martines and Nicholas Falk set 
out the kind ·of planning and policieswhich are required. However, policieswill not by themselves be adequate if 
they are not backed up by new approaches 
to organisations that match the task in 
hand. Whereas in the past local government 
planning has tended to be reactive 
and restrictive, it will have to become 
more positive and catalytic in aieas that 
have lost their locational advantage for 
private enterprise. Four kinds of organisation 
are needed, which are described 
briefly here, and some o.f the implications 
for government policy and expenditure 
are taken up in the following chapter 
under the heading of "premises ". 

industrial housing 
associations 

At present, though it is often viable 
to convert old buildings to new uses, 
there is no established form of develop· 
mental agency. A financing capabilityand an organisation to take on the role of 
the housing associations in the industrial 
field are needed. The most logical source 
of this finance are the pension funds 
and insurance companies that invest so 
much in new buildings, but they will 
need a great deal of underwriting befor~ 


finance is available on anything like the 
required scale to stop the empty buildings 
deteriorating beyond the point of 
no return. Local government can provide 
the security required by makingavailable the premises, being flexible 
with planning permission and by taking 
a head lease. It should also grant rate 
free periods in industrial premises of say 
two years for new firms employing less 
than say 20, or which occupy emptybuildings, to help them get established. 
This is one of the useful measures contained 
in the Inner City White Paper.
The aim should be to create " working 
communities " in which a complementary 
range of small firms share the same 
building and, where appropriate, common 
services. There are certainly enough 
successful experiments in different parts 
of London-Covent Garden, Clerkenwell, 
Chiswick and Rotherhithe-to show 
that this approach can work. But it needs 
fostering if it is to be more than a set 
of isolated examples. 

industrial development 
agencies 

In some areas, new industrial estates or 
parks and small factories will be requi·red 
to accommodate growing firms. The 
land is certainly available, ranging from 
the vast former docklands, railway marshalling 
yards and gas works to former 
large factories often on main roads. The 
problem here is acquiring it at existing 
use value. Many local authorities complain 
that the nationalised "statutoryundertakers" have been particularly selfcentred 
in the past. The government can 
take the lead in instructing nationalised 
industries to hand over surplus land to 
local authorities at its existing use value 
(based essentially on the rent that can 
be secured from such uses as lorry parks 
and allotments). Excess rating of empty 
property is also desirable wherever land 
and buildings lie idle, as this will drive 
down the value of empty sites. Vacant 
land owned by local authorities must 
also be identified and incentives provided 
to ensure its early reuse. The 
finance and expertise for developmentis available from the private sector but 
it is the local authorities who will need 

to bear part of the risk and act as 
catalysts. What is needed are partnership 
arrangements with private developers 
or institutions, on the lines of the French 

societe mixte. 

The key to success is finding local resources 
and tapping them. These can 
include technological universities, polytechnics 
and industrial research establishments, 
though there is nothing akin 
to the Stanford Industrial Park in Palo 
Alto or the string of high technology 
firms around Boston that draw many of 
their products and some of their personnel 
from the creative work of the 
university la!boratories. A local industrial 
development agency, modelled in part on 
the Scottish and Welsh DevelopmentAgencies, could ensure the development 
of an integrated strategy in areas like 
the docklands that have lost their 
economic base and which require infrastructure 
improvements as well as the 
other measures described in this chapter. 

small enterprise centres 

Providing premises will be insufficient if 
small firms, particularly the fledgeling 
ones, are still weak. One way in which 
small enterprises can become strongeris through collaboration. Many small 
enterprises face similar problems to those 
encountered by large firms but have no 
one to turn to for help. By joining 
together, just as small shop keepers and 
farmers have done, they can begin to 
get equal treatment with the larger firms. 
Collaboration can involve sharing basic 
services such as secretarial facilities and 
reception within the same building. The 
same approach can be applied to a whole 
area. It can also involve combining on 
certain business functions, such as purchasing 
or distribution. In some areas, the 
Chamber of Commerce might take the 
lead ; in others, new organisations are 
needed, like the new Association of 
Covent Garden Enterprise. There is no 
reason why ·local authorities should not 
extend the idea of community development 
with funding for voluntary organisations 
to support for similar ventures 
in the economic sphere. Good examples 


of this are an association of Mers·eysidefirms involved with off-shore technology, 
backed by the local authority, and Enterprise 
North, which helps sma!J firms to 
get started, backed by the Departmentof Industry's small firms division. Given 
that many of the problems, and hence 
the solutions, are common to many areas, 
there is a strong case for a body that 
could bring together information and 
act as a central resource for independent 
local efforts, including advice and counselling. 
A good model here is cosrRA (theCouncil for Small Industries in Rural 
Areas) which takes in both the artist 
craftsmen, who receive public supportthrough the Crafts Advisory Committee, 
and the a:rtisan and other kinds of small 
firm, who do not. However, the key to 
success is organisation at the local level, 
with the Department of Industry's small 
firms information centres and local 
authorities providing back-up support.
The function,s of the Scottish Development 
Agency's Small Business Division 
could well he copied in other regions. 

local economic task forces 

Just as local authorities already accept 
responsibility for housing lower income 
groups and encouraging related services 
through community workers, so a similar 
effort is needed in the industrial and 
commercial field. Many local authorities 
have already accepted the need to do 
something about employment, have formulated 
industrial policies and appointedindustrial development and employment 
officers. But good intentions will have 
little influence if they are not backed by 
action. The designation of Industrial 
Improvement A·reas, which the Inner 
City White Paper encourages, should be 
followed by a coherent set of measures 
to overcome local business grievances.
This will typically involve improvements 
to public transport, flexibility with regard 
to parking restrictions, appropriate housing 
for key workers and environmental 
impro¥ements to make a run down area 
" come alive " again. Rather than the 
local authority trying to do everythingitself, it would be better advised to set 
up a " task force " drawing on local 

business leaders and others with a stake 
in an area's future. These must not be 
talking shops but bodies with the powers 
to get things done. They could be linked 
to the notion of partnership schemes 
between cent·ral and local government 
as proposed in the Inner City White 
Paper. 

Mounting an effective strategy will 
depend on concentrating on either a 
particular geographical area or a business 
sector and uniting all the departmentsinvolved. Such an effort must have top 
level backing, its own small team and 
budget and close links with local business 
and union leaders. There are now signsthat many local authorities recognisethe problem. There is still time to ensure . 
that small enterprise has a permanentplace in the life of our cities, but it will 
require a massive switch in attitudes and 
practices before business is once again 
a vital part of a balanced and self-sustaining 
community. It is therefore suggested 
that each local authority with a 
substantial numlber of small firms should 
appoint an Industrial Development Officer 
with specific responsibility for small 
firms. They should aim to introduce pro-
grammes of measures catering for existing 
small firms to help them grow or 
weather a rough patch. In appropriateplaces they should help to set up arrangements 
to encourage new firms to start 
up. Pioneering efforts in authorities like 
Tyne and Wear, Strathclyde, Southwark, 
Wandsworth and Northumberland deserve 
to be encouraged and copied more 
widely. 


8. what central government 
should do 
Government cannot avoid taking some 
responsibility for the imbalance in our 
industrial structure. First, successive 
governments have assisted the natural 
tendencies towards concentration and the 
elimination of competition by applying 
anti-monopoly powers weakly and bypromoting mergers, for example through 
the IRe. Though this may have been 
justified at the time in terms of strengthening 
the industry concerned, there is a 
good deal of evidence that the resulting 
giant companies have failed to deliver 
the goods. British Leyland is the most 
obvious example. 

Second, government has helped finance 
the expansion of giant firms with aid 
and tax incentives that effectively discriminate 
against the smaller firm, while 
at the same time making it harder for 
individuals to. save or borrow the finance 
required to start up a business. This is 
particularly true of regional incentives 
which have made it easier for large firms 
to close their older inner city locations 
and to obtain subsidies for equipment(frequently imported) and brand new 
factories at public expense. Not onlyhave these moves helped to erode the 
economy of our older cities but have 
failed to regenerate the poorer regions. 

Third, government has created a legislative 
and fiscal framework which bears 
most heavily on the smaller firm who 
cannot afford the time or administrative 
overheads that this requires. As a consequence, 
the national economy is now 
dominated by enormous publicly owned 
industries, by giant privately owned multi-
plant and, in many cases, multi-national 
firms. 

Together with policies aimed at checking 
the social and market power of giantfirms through planning agreements, measures 
are needed to reduce the barriers 
to entry and growth for the smaller firm. 
Often the resources which small fi·rms 
need (such as buildings and people) are 
availruble but under-employed. To succeed, 
any measures must be long term 
and they must provide an environment 
in which initiative can flourish. Britain 
lags far behind other industrialised 

nations such as the USA, Sweden and 
Japan in the quality and extent of the 
support provided to "Small firms. 

There are too many small firms with 
different situations for central government 
to deal directly with them. Nobody 
wants an expansion of central bureaucracy. 
Instead, it is more effective for any 
positive measures to be taken by local 
authorities, with central government providing 
incentives in the form of information, 
powers {where required) and 
supplementary finance. This could form 
part of the general programme of 
decentralisation and devolution. 

premises 

The Inner City White Paper recognises 
the need for premises and proposes legislation 
to enable local authorities to make 
loans of up to 90 per cent for industrial 
buildings and to give initial rent free 
periods. It also proposes industrial 
general improvement areas to make the 
environment more attractive. But this 
is only part of the answer. Unrealistic 
rental expectations and hoarding of land 
are still with us. As part of fhe new 
inner city programme, government should 
ensure the provision of land for industrial 
development schemes in their key sector 
programmes and in their acquisitionsunder the Community Land Act. It could 
also help to reduce the unrealistic valuations 
on many empty buildings and sites 
by requiring leases on major empty sites 
in public or private ownership to be 
offered for sale through an auction if 
they have lain idle for say more than 
three years. This is particularly important 
in the case of land owned by local 
authorities and nationalised industries in 
areas where industry is cramped and the 
local community suffers from the effects 
of blight and dereliction. 

As small firms need premises which are 
ready to move into, it is important to 
increase the supply of small units and 
this requires finance which could well 
come from the private sector. Government 
should enable local authorities to 
give rental guarantees to take head leases 


even on property they do not own in 
order to secure commercial finance. At 
the same time government should redress 
the lack of finance for conversion 
of empty buildings through a combination 
of the extension of derelict land 
grants, increased funding to the Historic 
Buildings Council for the conservation 
of fine industrial buildings and a new 
kind of improvement grant, analogous 
to home improvement grants, for bringing 
buildings up to the statutory requirements 
for fire and health (these regulations 
can account for an estimated one 
third of the cost of bringing emptybuildings into use again). 

Certain planning and building controls 
should also be relaxed. Local authorities 
must be encouraged to aUow non-conforming 
uses and mixed use of buildingswhere there is no local objection, and 
also to drop .redevelopment and reduce 
uncertainty where significant numbers of 
jobs are involved. A review of the va·rious 
building regulations is also needed to 
establish those which are no longer cost-
effective. An analysis of the division of 
powers both within and between authorities 
would determine how far presentorganisational arrangements are responsible 
for excessive uncertainty and delay 
with regard to both rehabilitation and 
new development. (A study by Slough 
Industrial Estates has shown it takes twice 
as long and costs on average 25 per cent 
more to build the same sized factory in 
this country as in other industrial na.tions, 
mainly because of ·problems at. the planning 
stage.) One .approach worth considering 
is to exempt firms employingless than say 50 from aH but the bare 
minimum of building regulations and to 
treat the regulations as a Code of 
Practice, desira,ble standards but not 
mandatory. 

The other major control, Industrial 
Development Certificates, would be 
better handled at the regional level so 
that they can be linked with local planning. 
IDCS should be dropped altogether 
for rehabilitation schemes involving subdivision. 
This will reduce some of the 
uncertainty and time wasting negotiations. 
At present, .the finance available for high 

risk areas like the docklands or the promotion 
of small firms is quite inadequate 
and partnership arrangements are needed 
to tap a;!l available sources of finance. 
The NEB co.uld play a distinct and useful 
role in inner city areas like the docklands 
by backing local developmentagencies. Alternatively, a new agency and 
more importantly a financing mechanism 
is needed to boost the effectiveness of 
local authorities through the creation of 
regional and urban industrial development 
agencies with the kind of powers 
exercised by the Scottish and Welsh 
Development Agencies. 

personnel 

Given .the difficulties individual small 
firms have in organising training pro-
grammes and their preference for experienced 
people, it is important to increase 
publicly funded training. The government 
should ensure the Training Services 
Agency (TSA) provides more help to small 
firms, particularly for in-house training, 
where appropriate through groupings of 
small firms. Sponsored training should 
be free for firms employing less than 
say fifty. 

There is also a need for short 
management courses which, unlike 
full time business courses, are not subsidised. 
Some of the Industrial Training 
Boards already provide these but their 
efforts could usefully be supplementedby directly funding programmes aimed 
at the new entrepreneur. The TSA should 
also seek to maintain and where justified 
expand public sector training pro-
grammes (such as local authority apprenticeships) 
so that there are no bottlenecks 
as far as skills are concerned. It could 
also require large firms which are completing 
a planning agreement with the 
government to extend their training pro-
grammes and "train for stock", since 
the best training is often providedthrough experience of working in a large 
firm. All these measures point to the 
need for a _review of the links between 
the various agencies at local level. One 
possible model is Sweden, where the 
Employment Services link up employer 


requirements, employee capabilities and 
the various training programmes (seeSantosh Mukherjee, Making Labour 
Markets Work, PEP, 1972). 

As well as faults in the planning and 
coordination of training and employment 
services which hit the small firm 
hardest, there are also disincentives to 
employing certain groups, given the competitive 
environment in which small firms 
work. The erosion of differentials for 
skill and experience and the increased 
difficulties of laying unsuita'ble peopleoff as a :result of the Employment Protection 
Act make firms more and more 
wary of taking on youngsters. A good 
way of overcoming these problems would 
be to subsidise the costs of employmentfor groups that have special difficulties 
in securing employment. This could be 
limited to employment black spots using 
a version of the Regional Employment 
Premium. A start has been made byoffering firms employing less than 50 a 
subsidy of £20 a week for each additional 
employee but this only appl.jes to Special 
Development Areas. Alternatively, a 
more general measure would be for the 
Department of Employment to cover the 
cost of national insurance and pensionfund contributions during the time before 
the value of the outputs of these groups 
had reached the cost of employing them. 
Belgium and France have introduced 
measures on these lines. Another alternative 
is a fixed payment to young people 
to allow them either to go for education 
or to be employed but at a lower wage. 

Finally, many of the restrictions on 
employment of young people are imposed 
by unions to protect their existing members 
and there is a need for a changeof attitude here. Increased costs of employment 
may otherwise simply hasten 
the loss of employment, either throughmechanisation or the transfer of production 
elsewhere. 

finance 

Successive governments have encouraged 
the concentration of industry into ever 
larger units. Though large scale industry 

normally pays considerable taxes because 
it is more capital intensive and more 
mobile, it receives greater help from the 
government in the form of investment 
grants and incentives, as well as the 
spin-offs from the New Towns Pro-
gramme and building of motorwaysbetween cities. The total governmentassistance has been estimated at £2,500 
million per annum, which is biased disproportionately 
towards large firms, particularly 
as, with their specialised staff, 
these are better able to know and exploit 
the various grants and tax allowances. 
Yet despite public support, big industry 
has not delivered the goods. In contrast, 
many of the grants have minimum cut-off 
points. 

There are a number of ways in which 
government could remove the financial 
disincentives to both starting up and 
expanding small firms. First, now that 
the original Job Creation Programme is 
being dropped, separate funding is needed 
for organisations which plan to be commercia1ly 
viable after a stipulated launch 
period, whether as cooperatives, partnerships 
or private companies. This could 
be .through low cost loans for capitalin the second and third years and through 
grants for the social products such as 
extra training. There is a good case for 
putting this programme under the Department 
of Industry's small firms 
division .to ensure that it is more than 
just a stop-gap. 

The second step is to change regional 
grants. The system of grants and incentives 
should subsidise the employmentand training of groups of people whose 
marginal product is low, rather than subsidising 
machinery which is frequentlyimpor.ted. International comparisons show 
that the UK incentives are amongst the 
highest in the world and the most biased 
towards capital intensive ventures. Theydo not apply .to many inner areas with 
high levels of unemployment. As largefirms say they disregard incentives in 
making expansion and location decisions, 
the opportunity should be taken to overhaul 
the system so that it helps .the people 
who are most in need and does not discriminate 
against the smaller firm. 


Furthermore, schemes for specific industries 
should not have minimum size 
requirements which effectively restrict 
them to .large firms who already have a 
built-in financial advantage. A better 
approach would be to encourage investment 
by keeping interest rates low and 
by introducing a gua·rantee system that 
covered part of the risk of either setting 
up a new business or expanding an existing 
one in areas of relatively high unemployment. 
This could be handled 
either through the clearing banks or 
through the local industrial development 
agencies referred to earlier. Funds mightthen be made available both for particular 
areas and also those industries 
it was public policy to encourage. 

The third, and most controversial area 
of all, is bus.iness taxation. In 1975-6 the 
government collected from VAT It times 
what it received from corporation tax, 
suggesting that company taxation bears 
most heavily on the small firm. The vital 
first step is to raise the VAT exemptionlevel to say £50,000 to help new enterprises 
to find their feet and reduce time 
wasting administration. This would be 
in line with German practice which 
allows the smallest firms to opt out. It 
has been calculated that three quartersof traders have a turnover of less than 
£50,000 and that while they contribute 
£185 million in VAT, it costs £218 million 
to collect. Certainly the total costs of 
collection to the firm as well as the 
Inland Revenue must exceed the .revenue 
from the smallest firms. A single rate 
should be introduced at once, possibly 
att 10 per cent, to simplify matters. 

There is also a clear need for greaterirrcentives which make it easier for firms 
to accumulate capital in their early 
stages. The government's aim should be 
to give small firms at least equal treatment 
to la.rge firms in terms of the effec· 
tive cost of finance and to compensatethem for the services they render to 
government in collecting taxes, national 
taxes, national insurance and statistics, 
and for the extra risk the personnel take. 
The suggested cuts in income tax should 
make a considerable difference but theycould well be supplemented by a pro· 

gressive rate of taxation on profits. It 
should not, however, be necessary to go 
nearly as far as the conservatives suggest, 
as there is little evidence to show that 
high marginal rates of income tax or 
ca,pital transfer tax are the factors that 
stop people setting up or expanding their 
business. Instead efforts should concen-
trate on reducing the deterrents, including 
company law which stops a new 
proprietor acquiring a firm out of its 
profits. 

Another major barrier to expansion is 
the high cost of borrowed capital which 
hits small expanding firms hardest. Evw 
if they can borrow, small firms end up 
paying interest rates perhaps 3 per cent 
above the norm. The best way to provide 
finance to small firms at lowest 
interest rates is through incentives to the 
clearing banks and organisations, like 
Finance for Industry, to provide capital 
for expansion and seed capital for new 
enterprises (for example through extend· 
ing the leasing of equipment and factor· 
ing services to much smaller firms). The 
public sector's role here is fi.rst to underwrite 
the risks of investment in new firms 
as the French Central Bank does for 
firms investing in priority areas defined 
in the National Plan. An alternative 
model is the 'Small Business Investment 
Corporation, which in the USA draws 
up to ,four fifths of its investment 
finance from the government's Small 
Business Administration. In 1976, the 
SBA provided a total of $2.6 billion in 
loans and loan guarantees which scaled 
down to the British level would require 
some £150 million. Second, the government 
needs to reduce risks and the cost 
of capital by bringing down the interest 
rates that small firms are charged. The 
advent of revenue from North Sea Oil 
should make this far easier as the public 
sector borrowing requirement can be cut. 

The final measure required (which already 
applies in the USA and France) is to 
develop preferential procurement schemes 
to reduce the barriers facing new small 
firms and to provide assistance to firms 
producing a " social product " (forexample, in cooperatives and trainingworkshops). Firms a·re often required to 


have operated for 3 years before they 
can be considered as government suppliers, 
while centralised purchasing can 
result in orders being too large for small 
firms to supply. Focus at first should be 
on developing domestic suppliers for 
items that are imported, for example bypromising contracts subject to satisfactory 
quality and providing help with 
design. There is also a case for advance 
or at least prompt payment for all procurement 
in the public sector from small 
firms in areas of high unemployment. 

information 

Information is also a resource and the 
small firm has neither the staff nor the 
access to expertise to obtain it. The need 
here is for a stronger small firms division, 
extending the remit of this division of 
the Department of Industry, and of the 
local information centres, some of which 
have already experimented with services 
such as counselling. They could organise 
a wider range of practical services to 
small firms which are starting up, such 
as in the areas of legal, accounting and 
marketing advice, as well as assistingfirms to develop project proposals for 
securing finance and acting as a 
.. broker". There are a number of possible 
models for the role that the division 
might play including the UK Council for 
Small Industries in Rural Areas, the 
American Small Business Administration 
and the measures in France and Japan. 
The main issue is how to make such 
efforts effective at the local level. 

There is a good case for the urban 
equivalent to the COSIRA. Experiencewith the Local Enterprise Development 
Unit in Northern Ireland is encouraging.
However, given the distrust that small 
businesses have of government and " hand 
outs", it might be better to work through 
locally lbased and locally controlled 
"enterprise centres", modelled perhapson the us Community Development Corporation 
model, which provides finance. 

The special interest of the labour movement 
in cooperatives and ~he fact that 
this country has lagged far behind many 

other nations (such as France, the Third 
World, Yugoslavia) makes it imperative 
to introduce the promised Cooperative 
Development Agency to help viable producer 
cooperatives establish themselves. 
The agency could help to provide advice 
services for undertaking feasibility studies 
and act as a "broker", preferablythrough the information centres. Typical 
"clients " could include firms started 
under the Job Creation Programme,
firms whose owner is retiring and even 
plants 'threatened with closure. These 
studies could then lead ·to the provision 
of !finance. 

Other measures with immediate practical 
benefits involve reorganising the flow of 
information. On the one hand, it is vital 
to reduce paperwork required from small 
firms by evaluating the cost effectiveness 
of different returns and administration 
arrangements. Sample surveys, for 
example, could be applied to all returns 
for firms employing less than 200, with 
no loss in accuracy and with considerable 
savings in cost. On the other hand, the 
government could make much better use 
of the information it collects to provide 
better information on market trends and 
prospects (for example, using custom 
controls to indicate opportunities for 
import substitution). As the subject is 
so complex, a review should be set up 
with representatives of both small 
business and the main agencies concerned 
to both streamline form fillingand to exempt the very smaU firm (under 
50 employees) from all but the minimum 
of requirements in areas of high unemployment. 
This problem has been given 
top priority in Canada and the potential 
benefits are substantial, including the 
elimination of soul destroying work and 
the freeing of management time to concentrate 
on more important matters. 


9. organising for change 
This pamphlet has argued that fundamental 
changes are needed in the scale 
of both production units and firms if 
our economy is to respond to the increasing 
and often conflicting demands placed 
on it by consumers, workers, the local 
community and suppliers of scarce 
natural resources. Specifically, it has 
suggested that a balanced industrial 
policy is needed which: (a) breaks upexcessively large organisations into 
manageable units; (b) regulates pricing, 
wages and plant closure policy decisions 
in firms with substantial market power;

(c) reduces the barriers to entry and 
expansion facing small enterprise. 
It has not been suggested that small is 
always better or beautiful, merely that 
some of our extraordinarily diverse and 
specialised needs cannot be fulfilled with· 
out a greater diversity of organisations. 
In particular it has argued that the 
adoption of such a policy offers the best 
chances of tackling the underlying causes 
of much of our present malaise: it would 
strengthen the economy, create more 
work, make giant enterprises more res· 
ponsible and revive the run down inner 
city areas. 

small enterprise 

The key problem now is no longer one 
of technology but of organisation. In 
particular it is the problem of how to 
mobilise our human resources in order 
to satisfy the needs of the community 
as a whole. The answer will involve the 
implementation of four inter-related 
principles: (a) the reduction of unemployment 
requires the creation of real 
work, not nominal jobs. More work can 
best be created 'through the expansionof small enterprise to meet growing areas 
of demand, and to reduce imports, rather 
than through propping up large firms 
indefinitely in declining sectors; (b)
living standards in real terms can onlybe increased through working more effectively. 
This means securing higher productivity 
and this in turn will demand 
better labour relations and a more skilled 
and flexible work force, for the investment 
to pay off; (c) labour relations can 

be improved by increasing the proportion 
of smaller production units both in existing 
and new firms and by creating more 
" wholesome " work, in which there is 
greater identification between the worker 
and the customer, and between management 
and the work force; (d) greater 
investment of a work creating kind can 
only be secured by creating a more stable 
and predictable society, which in turn 
relies on achieving greater diversity in 
the types of organisation and more 
dependence on self-regulating systems. 

Achieving these kinds of changes will 
requi.re shifts in thinking at both national 
and local government levels. Though the 
Bolton Committee report led to the 
creation of a small firms division within 
the Department of Industry, with onlyabout 20 civil servants it is too small to 
carry much weight. Its main efforts are 
confined to running a network of 11 
information centres, providing an excellent 
series of free leaflets and representing 
the small firm in relation to new 
legislation. This division needs to be 
bolstered to implement the changes set 
out in this pamphlet and therefore needs 
a minister of Cabinet status. 

There is a large list of measures suggested 
in this pamphlet affecting a number 
of government departments. A White 
Paper is therefore needed, followingHarold Lever's review. The next stageshould be the establishment of a Small 
Enterprise Commission, with representation 
of business associations and unions, 
to oversee the implementation of the new 
programmes. This would give a government 
department the credibility it needs 
if it is to raise confidence and interest 
in small enterprise. The Small Enterprise 
Commission would embrace the Cooperative 
Development Agency and would be 
responsible for initiating and funding a 
diverse set of measures aimed at helping 
new firms to sta·rt and existing small 
firms to grow. It should also take over 
responsibility for hand crafts and for 
the promotion of improved design. To 
implement responsibilities the DesignCentre, Crafts Advisory Committee and 
Council for Small Industries and Rural 
Areas should be transferred to this new 


agency in England, while in Wales and 
Scotland the respective developmentagencies would be responsible. 

In addition to the existing Small Firms 
Information Centres, other sources of 
advice and information will be required. 
These are best handled through local 
authority industrial development officers 
working with local Chambers of Commerce 
and banks. There would thus be 
a link (now lacking) between the Department 
of Industry and local authorities 
(Nicholas Falk, Haris Martines, op cit). 

As efforts tend to be concentrated on 
those with greatest "clout", small enterprise 
development units are needed in 
all the large institutions that deal with 
small firms. These include the Training 
and Manpower Services Agencies, local 
authorities, the banks and large corporations. 
There are signs that this is beginning 
to happen and the recommendations 
in this pamphlet are therefore intended 
to encourage the new initiatives that are 
being taken rather than to discredit them. 
Major changes are also required in the 
provision of finance to both new firms and 
cooperatives. In addition, ways should 
be found of allocating a proportion of 
major contracts influenced by the public 
sector to small firms, as this will provide 
the 'best form of financial underpinning. 
There is plenty of experience in the USA 
of how this can work. At the same time, 
a guarantee system underwriting say 75 
per cent of the cost of fixed assets should 
be implemented through the clearingbanks which should be encouraged to 
set up specialist small enterprise development 
sections to provide advice as well 
as financial assistance. The final keychange in this area is to provide a source 
of finance to allow either groups of 
workers or managers to buy out the 
owners of businesses threatened with 
closure, and set up cooperatives. 

big business 

As far as the regulation of large corporations 
is concerned, the main priority is 
to pull together the various organs of 
public policy, including the ector work


ing parties of the National Economic 
Development Council (where an industrial 
strategy is emerging for key sectors), the 
Central Policy Review Staff, the Monopolies 
Commission, the Price Commission 
and the various sections of the Department 
of Industry. The result will be expressed 
in the formulation of more planning 
agreements. It would also result 
in a much tougher attitude to mergerswhich threaten competition and to the 
break-up of any organisations which are 
no longer responsive to community or 
market needs. 

The main changes in legislation required 
are of company law, allowing employee 
interests to be more effectively represented. 
One possibility worth investigating 
is that of trading legal controls over 
unofficial strikes for the right of employees 
in large firms to have job security 
in areas of high unemployment, subject 
to reasonable behaviour. In this way,
rather like in Japan, labour would have 
to be treated as an equal partner with 
the shareholders and companies would 
therefore take greater steps to help new 
enterprises to set up. 

In conclusion, a major difference between 
the present period of change and the 
first industrial revolution is that we now 
have the information to understand and 
predict economic trends, together with a 
powerful public sector charged with 
ensuring the public interest prevails. This 
will count for little if the organisations 
that produce the wealth of goods and 
services that we want are unable to cope 
with the pressures on them. We have 15 
or so years of North Sea oil to allow 
us to manage the second industrial revolution 
in a planned and democratic way. 
Alternatively, we can fritter away the 
opportunities and face a perpetual and 
irreversible deterioration in all that we 
hold dear. 


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Nicholas Falk argues that industrial society is at a turning point where 
traditional remedies will no longer work. The scale of organisation is as much 
a problem as ownership. Consequently, the expansion of small firms is essential 
to strengthen the economy, contain the power of giant organisations, 
create more work and revive inner cities. The promotion and fostering of 
small enterprises is thus in harmony with the policies and priorities of the 
Labour Party. 

The author goes onto argue that a shift in industrial policy is required with 
more control over giant private and public corporations through effective 
planning agreements and other measures, and with correspondingly fewer 
constraints on smaller firms. Increased personal incentives by themselves will 
be ineffective. A comprehensive programme is needed to reduce the various 
barriers to the growth and expansion of small firms. The pamphlet contains 
proposals for making personnel, finance, information and advice more readily 
available. The private and public sectors must work in partnership. Changes 
in organisation are therefore needed including a Small Enterprise Commission 
at national level. and local economic task forces. 

fabian society 

The Fabian Socie:y extsts to further socialist education and research. It is 
affiliated to the Labour Party, both nationally and locally, and embraces all 
shades of socialist opinion within its ranks -left, right and centre. 
Since 1884 the Fabian Society has enrolled thoughtful socialists who are 
prepared to discuss the essential questions of democratic socialism and 
relate them to practical plans for building socialism in a changing world. 
Beyond this the Society has no collective policy. It puts forward no resolutions 
of a political character. The Society's members are active in their 
Labour parties, trade unions and co-operatives. They are representative 
of the labour movement, practical people concerned to study and discuss 
problems that matter. 

The Society is organised nationally and locally. The national Society, 
directed by an elected Executive Committee, publishes pamphlets, and 
holds schools and conferences of many kinds. Local Societie!r-there are 
one hundred of them-are self governing and are lively centres of discussion 
and also undertake research. 

Enquiries about membership should be sent to the General 'Secretary, Fabian 
Society, 11 Dartmouth Street. London SW1H 9BN : telephone 01-930 3077. 

Cover design by Dick 'Leadbetter. Printed by Civic Press Limited (TU), 
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