September 26, 2018   3 mins

In his main speech at the Labour Party conference, John McDonnell announced a headline-grabbing plan to reform capitalism. Under a Labour government, the Shadow Chancellor pledged, big business (firms with more than 250 employees) will have to allocate 10% of equity and a third of its board seats to workers.

With this sweeping reform, Labour hopes to rebalance the rewards of capitalism towards workers. Who can blame them? Between 2007 and 2015, the UK was the only advanced country in which wages contracted while the economy expanded. The theory is that giving workers a seat at the decision-making table (also known as co-determination) will ensure their interests are championed, and giving them a stake in the companies they work for will increase their productivity.

Unsurprisingly, business leaders responded with hostility. Yet the plan is not hugely radical – in fact this model is the norm in one form or another across much of Europe. Predictably the conversation quickly turned to Germany and its famed industrial model.

Defenders of the policy, perhaps trying to quiet thoughts of Venezuela, pointed to Germany as a more responsible and socially just model of capitalism – the respectable counterpoint to the Anglo-saxon flavour of financialisation and short-termism. And while the academic literature is mixed, there is evidence that greater co-determination leads to higher wages, less short-termism, greater productivity, and even higher levels of income equality. If the aim is to give workers a fairer deal, McDonnell looks to have hit on the right polices.

On the other hand, detractors point to the scandalous lapse in corporate governance show by the Volkswagen emissions scandal, as well as industrial inefficiencies – Toyota makes as many cars as Volkswagen with half the workers. In the wake of the scandal, the cosy relationship between union leaders and the dominant shareholding families was blamed for facilitating the cover up. This would suggest that Germany’s more worker-friendly model has some worrying flaws.

The desire to look outside our borders for inspiration is not uncommon – market fanatics, for example, extol the virtues of Singapore, while anarchists wax lyrical about Kurdistan – but it is foolish. Because what the proponents of international examples too often ignore is national context. McDonnell’s plan would be implemented in a system institutionally distinct from its European cousin. In the UK, the form of banking, the concentration of shareholders, the character of industrial relations, and the basic corporation structure are all substantially different from Germany, rendering comparisons meaningless.

Rather than trying to copy and paste policies from abroad, politicians and policymakers need to examine how reforms will interact with our own institutions, and consider what other policies might be necessary as complements.

In the UK context, co-determination may not be as susceptible to the scandals it precipitated in Germany. The cover-up at Volkswagen was not the fault of the workers’ councils alone, but the product of easy collusion between them and the dominant shareholders in the Porsche and Piëch families. While such a setup is par for the course in Germany, ownership in the UK is much more broadly dispersed – in about 90% of companies listed on the London Stock Exchange, no shareholder owns more than 25%. Comparatively, the Porsche family has majority voting rights in Volkswagen. In theory, this may minimise the risks of co-determination experienced in Germany, making it a safer bet in the UK.

Ultimately, however, it will take more than co-determination and shared ownership to rebalance British capitalism towards workers. The UK has myriad, long-standing economic problems which amount to a new British disease. For a start, the UK’s financialised model is driving a culture of short-termism, which sees big business prioritise share buy backs over investment in training and wages. It’s difficult to see how McDonnell’s reforms will shift the obsession with quarterly earnings – shareholders will still expect those returns.

It is also far from clear how the reforms will boost private sector R&D investment – the UK has the lowest level in the whole of the OECD – which is essential for driving innovation; and innovation is key to boosting productivity and therefore wages. And nor will they help the many towns around the UK struggling to attract jobs and stimulate growth – yet a geographical rebalancing of the economy is essential if workers are to thrive outside of Britain’s cities. McDonnell’s commitment earlier in the year to Community Wealth Building funds, aimed at supporting co-operatives and mutuals at a local level, hints at a model of inclusive growth unmoored from Whitehall bureaucracy, but the idea needs fleshing out.

Yet with UK capitalism in desperate need of comprehensive reform, it is nonetheless the Labour party that seems to have the most promising plan. McDonnell has pledged that a Labour government would take on socially irresponsible businesses, overhaul the accountancy cartel and introduce legislation to strengthen the rights of insecure workers. If you look past a few headline nationalisations of public utilities, despite the much-noted Marxist connections of the leadership, Labour’s plan is about reforming capitalism, not replacing it.

Daniel Gayne is an editorial assistant at UnHerd. He is a politics graduate, focused on cronyism and capture within capitalism.