At last week’s Labour Party conference, Ed Miliband drew plenty of criticism for his distinction between wealth creators and asset strippers, or producers and predators, if you prefer. He was performing to the public gallery, and in particular making sure the unions were still on side despite him refusing to back the strikes that will hit public services this winter. But the press reaction the following day was dire: Miliband was widely mocked and derided, with many columnists pointing out the one-sided treatment of private equity firms in particular was far too simplistic.

If truth be told, sometimes private equity does get things wrong – although in the case of Southern Cross, many of the mistakes were made after the company went public in 2006. But for every failure there have also been success stories, such as the turnaround at Crown Paints. And that sort of example, in particular, highlights how difficult it can be to differentiate between ‘asset strippers’ and true ‘wealth creators’.

Ultimately, if a company is uncompetitive then one of three things will happen. First, the company may go bust, everyone will lose their jobs and pensions will be at risk, perhaps even having to rely on the UK’s pension protection fund. Second, the company would go bust, but because it poses a systemic threat (or politicians really like it), the government steps in to shore up the balance sheet and prevent administration. In that instance, taxpayers are essentially subsidising the wages of every staff member at that firm. Neither of these two options is especially palatable, particularly given the size of the deficit that the UK is currently trying to close.

The third option is that the firm has to transform itself to become more competitive. That could mean cutting production, employment and maybe even assets in order to ‘right-size’ the company; shrinking the cost base to a level that matches revenues (or ideally is slightly lower). That could mean shutting down and/or selling off one of the three production plants. It could also mean cutting 200 jobs. But, fundamentally, if the end result is a sustainable business – including 1000 jobs saved, that would otherwise have been lost as well – then that process of transformation would be a positive thing for the economy.

How, though, could we distinguish this sort of ‘good’ behaviour from asset stripping? It seems to me that it is nigh on impossible to write down hard-and-fast black-and-white rules that we can use to distinguish between ‘good’ and ‘bad’ companies. If we do want some form of government regulator to make this kind of distinction, there will have to be a lot of judgement involved.

But maybe the need for such a regulator is actually diminishing. With the advent of modern social media, consumers have far more power to air (or vent!) their view of corporate entities. It is easier to put pressure on Coca-Cola to improve working conditions in its African factories because it is far easier for potential coke buyers to get together and set up an online campaign or even a Facebook group. And it is not just direct accountability that matters: firms like Nike and Primark face significant pressure to ensure that even their suppliers abide by strict agreements on working conditions and rights. Ultimately, companies need to worry about these things, because if they do not, the reputational damage could hit their revenues and hence the bottom line. Brand and reputation matter. As consumers, we can bring a lot of pressure to bear on companies that really does hit them where it hurts, and based on the issues and factors that matter to us. That, ultimately, is the key strength of a market economy – companies have to respond to their customers’ desires, or else they will fail. In turn, that process of failure is how capital gets reallocated to other firms and opportunities.

Clearly, Facebook is not going to stop all asset strippers or predators. But the appropriate way to address that balance is probably through things like the recent changes to the Takeover Code. Fundamentally, Ed has a point that we should want to support good, sustainable companies over less desirable types. But some of the responsibility has to lie with us as consumers; the market can still be by far the most effective way of influencing company behaviour.

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