Like it or hate it, profit is a necessary thing

JEREMY WARNER

The City is worried. Not about all the reforms Gordon Brown, the Chancellor, is trying to push through on monetary policy and City regulation. Nobody disagrees very much with all that. But about the forces of Old Labour, which now that the party is back in power, are with growing confidence beginning to stick their heads above the parapet once more.

First we had Chris Smith, the Heritage Secretary, who, by demanding that Camelot directors pay their bonuses to charity, has in effect challenged the principle that private-sector companies should be allowed to pay their staff and directors what they please. And then there was John Prescott, the Deputy Prime Minister, ranting and raving about Railtrack's profits in a manner which implied that privatised utilities shouldn't be allowed to make a profit at all. "It's basically taxpayers' money," he said of Railtrack's profits.

For the time being all this is just rhetoric, and judging by yesterday's developments at Camelot, rhetoric from which the Government can be persuaded to back away. Labour can hardly be blamed for wanting to play to its audience. Misguided and silly though these views might be, it is nonetheless what an awful lot of people think and no amount of explaining the value of profit and incentive is going to persuade them otherwise.

So far the new Government has confined its attack to the soft underbelly of business and finance, to the privatised utilities and the national lottery. These are public-service businesses or franchises, and monopolies to boot. To attack profits and pay in these companies is not the same as attacking a businessman's right to make money out of his own entrepreneurial success. Few people in the parliamentary Labour party, let alone the Government, would do that.

Even so, once you start attacking the idea of profit you are on a slippery slope. Such talk is hard to reconcile with Labour's supposed conversion to free market economics, for the whole raison d'etre of the capitalist system is the profit motive. There are no halfway houses here. Either it is accepted that the generation of profit is the best way of creating wealth, choice and value in the economy or it is not and Labour is back there with Lionel Jospin and the failed policies of a bygone age.

This is the case even with the privatised monopolies, where the idea of profit is not so easily defended. The fact that taking the axe to utility profits would be a breach of the terms under which these companies were sold is perhaps the least of concerns here. Lord knows, the City is as accomplished as the Government when it comes to the business of selling on the basis of a false prospectus. But the fact of the matter is that if you want the private sector to run and finance these things, you have to give it the incentive to do it. And it has been the overwhelming experience of privatisation, even among the water and electricity companies, that there are huge benefits in doing so, both in terms of quality of service and charges.

So the City is right to be worried. And not just because Labour may not be quite as "new" as it pretended during the election. The City too could find itself an object of attack and if it does, the City's super rich, many of whom are foreigners these days, are simply going to up sticks and go somewhere else.

Presumably Tony Blair meant what he said yesterday when he told European leaders to "modernise or die". Unfortunately he cannot yet claim all the high ground. Labour, it seems, has a little modernising of itself left to do. It is an uncomfortable truth that high profits and excessive pay is part of the price you pay for a successful free market economy. No amount of moral indignation is going to change that.

The Nationwide Building Society is bending over backwards to be nice to the ginger group of members who want it to abandon its lonely adherence to mutuality and convert like everyone else. The directors have even agreed to fund the dissidents' campaign expenses. But just being kind to the rebels is not going to persuade members to vote against them. Their campaign slogan, "if you want pounds 1,000, vote for us" has a very basic appeal which most of us are going to find hard to resist.

Nonetheless, I'm instructing my wife, who is a member, to vote against. Whether she'll listen is another thing, for there ain't much doubt that voting against conversion requires some self sacrifice. Nationwide has tried to argue otherwise, and to be fair their case is not a bad one. Over the longer term, the argument goes, you will actually be better off by remaining mutual than if you convert. This is because money which other societies are having to pay out in dividends to their new shareholders can at the Nationwide be used to fund keener borrowing and deposit rates.

This is no mere theoretical argument. The Nationwide was one of the few societies yesterday not to raise the cost of a mortgage in response to the Bank of England's increase in base rates, thereby widening the differential with the Halifax on a variable rate mortgage to 0.65 per cent. On a pounds 50,000 mortgage, that's worth pounds 30 a month, or pounds 360 in a full year. The problem is that most people have smaller mortgages than that. Furthermore bank shares have risen so strongly over the past month that Nationwide would probably be worth quite a lot more than pounds 1,000 per member on flotation. Add in dividends and the financial argument for staying mutual doesn't really stack up.

All the same, it would be a crying shame if the Nationwide, the last of the big mutual building societies, were to convert too. This is not said out of any nostalgic attachment to the mutual tradition. On the whole, I'm not one for preservation orders. Rather it is said because the Nationwide, by striving to provide a tangible mutual benefit to members, is adding some real competition to the market place. Without a shadow of a doubt mortgage rates would be higher and deposit rates lower if the Nationwide converted. That's not just at the Nationwide either, but across the board. The shareholder's gain would be the customer's loss. So don't do it. Stay mutual.

That Dick Brown, the American who came over here to run Cable & Wireless in the wake of Lord Young's spectacular boardroom row with James Ross, has gone and done it again. He's considered by many internally as a bit of a fruitcake, but the proof of the pudding... Already his deal-making acumen has succeeded in putting Mercury on a decent footing for the first time in its largely miserable existence. Now he's succeeded in establishing a long-term relationship with China Telecom in a manner which seems largely to safeguard the company's interests in Hong Kong. Fruitcake or not, he's certainly making waves.