“It’s the economy, stupid!” Let’s try systems economics instead.

Mainstream economic ideology guides government decisions which determine the direction in which we are headed as individuals, as a nation and as a species, as well as deciding the fate of planet earth itself. Right now, none of that is looking good.

The result is exploding inequalities of wealth and income, within and between economies, loss of social cohesion resulting from those inequalities, corruption and fraud by the financialised sector, waste of earth’s finite resources; pollution of oceans and atmosphere; a looming mass species extinction; and the avoidable inevitability of global warming.

That mainstream ideology, Friedman’s variation on traditional neoclassical economics, seems utterly discredited, but continues to be supported and promoted by its beneficiaries and accepted by most others.

In support of its pretence to being a science, neoclassical economics relies on abstruse and irrelevant mathematical models and hypotheses that have been repeatedly shown to be absolutely wrong. The study of economics will inevitably return to its original focus on how systems actually work in reality. It will be an economic paradigm shift and will take some time, but it seems bound to happen.

The systems approach is based on analysis and understanding how the real world works. It is what led Adam Smith to report remarkable productivity gains from the specialisation of work in the pin factory. That was hardly new: Plato had reported gains from specialisation in Ancient Greece. Specialisation is a fundamental concept of systems economics.

A system is a network of interdependent specialised components. They might be parts of the human anatomy, individuals performing specialised tasks as in Smith’s production of pins, or they might be nation states acting within ecological and globalised economic systems. In all systems, it is the interdependence of their component parts which is decisive. They are needed to combine their specialised tasks and functions, rather than compete against each other, in order to achieve the overall system aims.

The current math based mainstream rejects co-operation between system components and instead promotes the idea of market competition as the source of efficiency. But a system is not a market; a market is not a system. That mainstream error has led successive governments to trash the systems operation of their direct responsibilities, such as state provision of health, education, security, social services and many others.

The standard mainstream approach is to try to convert the system into a market and introduce competition. It has been tried many times and always failed to achieve the intended result. The experience with UK National Health Service hospitals is a classic example. A typical intervention is to establish certain statistics as performance indicators and set the target levels to be achieved. Outcomes are then measured against those targets and reported on a continuing basis with results fed into published league tables of performance. That process substantially increases the admin costs of running a hospital – Deming suggested a likely rise from around 5% of total cost to over 20% [Deming, W E, (2000), The New Economics, Cambridge Mass: MIT, p22].

The emphasis on selected NHS targets also has the side effect of reducing the focus on non-targeted areas of work and their contribution to overall system achievement. It also tempts system components to game performance indication. Moreover, the increase in costs without commensurate increases in budgets, leads to cuts in essential NHS staffing, which may then need to be temporarily compensated by emergency hiring of agency staff at higher cost but less familiarity and expertise in the particular specialised tasks involved. This saga of destruction has been presided over by successive governments, innocent of the systems effects of their well intentioned, ideologically driven attempts to introduce competition to the system.

Markets are different. There should be substantial customer benefits from having different market participants competing for their custom. But not all markets are competitive, even if they operate free of regulation and with open access.

For-profit businesses, like all other systems, progress naturally through a life cycle of birth, growth, maturity, decline and death. The birth stage of most systems, including business, is characterised by high infant mortality – 80% of business start-ups perish within 4 years. The growth phase, dominated by the small and medium sized enterprises (SMEs) tends to be highly competitive with participants focused on the development of its people and technologies to deliver best value to customers. At this stage, it is competition that regulates the market. This seems to be what outsiders, such as politicians, envisage when they refer to being ‘business friendly’.

However, all growth phases come to an end at some stage, and when they do, business management is under extreme pressure to maintain the progression of their business. Its public rating, as well as their own personal reputations, depend on profitable development being maintained. In many cases, the end of growth tends initially to be passed off as a ‘blip’ with normality expected to be resumed shortly. When this does not occur, the pressure on management increases for them to find a strategic answer to the new situation. That is most readily achieved by refocusing the business onto merger and acquisition (M&A) deal making for quick results. That represents a crucial reorientation for the erstwhile successful real business, which tends naturally to mutate into a quite different, predatory, financialised entity.

In terms of goal orientation, mature systems seek to control their environment so as to ensure, as far as possible, their own future survival and well-being. For a financialised business, the goal of environment control can clearly be achieved through M&A deals to establish an increasingly controlling share of their industry.

Mainstream ideology rejects the possibility that free unregulated markets could fail to be competitive, though that is the common experience. Free markets, which in their growth phase may have been highly competitive serving customer interests, mature naturally into monopolistic cartels with competition stifled and customers exploited. The prime beneficiary of such non-competitive markets, as dictated by the Friedman variation on neoclassical economics, is not the business, but its shareholders, They don’t share the same interest in satisfying the overall system aims – but that is another story.

The observed reality, created by ideology based on false theory, is that systems, such as an NHS hospital, are being destroyed because their interdependent components are being made to compete, rather than co-operate with each other to achieve overall system aims. At the same time, competitive markets are being similarly destroyed by the failure to regulate and protect competition. That failure is caused by the common lack of understanding and consequent reliance on ideology and false theory.

If systems economics was taught in schools, business schools and university departments it might become the mainstream orthodoxy. Then, perhaps, the direction in which we are headed as individuals, as a nation and as a species, as well as the fate of planet earth itself, might be corrected. Maybe. But time is running out.

Democratic Values Trashed by Economic ‘Science’

Democracy’s basic commitments were simply expressed in Lincoln’s 1862 Gettysburg address at the culmination of the American Civil War over slavery. It contained two principles. Firstly, dedication to “the proposition that all men are created equal’, and, secondly, to ‘government of the people, by the people, for the people’. These principles had been previously set out in the American Declaration of Independence which had asserted man’s ‘unalienable Rights’ to ‘Life, Liberty and the pursuit of Happiness’. If government failed to uphold those rights then ‘it is the Right of the People to alter or to abolish it, and to institute new Government’.

The stated intent was that all humanity would at last be treated as a whole, rather than differentiating between competing sub-groups of the population, defined by race, religion or any other classification. Should a sub-group be excluded from such processes they should have access to remedy. Should a sub-group be enabled to circumvent those principles and in so doing, exploit the rest, it would be a clear democratic malfunction in need of correction.

All ‘men’ may have been created equal, and in terms of innate potential, that certainly appears to be the case. However, not all people have been permitted lives where their equality has been allowed fulfillment. That is not unique to the US, but an aspect of the human condition in most societies. Moreover, it is a widespread, if not universal, experience that a single sub-group of populations is permitted to manipulate systems for their own benefit, no matter the harm that might be done to others.

The United Nations Charter of 1945 declared its members’ determination “to reaffirm faith in fundamental human rights, in the dignity and worth of the human person.” That declaration was subsequently adopted by the UN General Assembly and later incorporated in the European Convention on Human Rights, agreed by member states of the Council of Europe, with its acceptance being a condition of entry for any nations wishing to join, enacted also by the UK Human Rights Act 1998.

The fundamental message of this internationally agreed legislation, is that individuals should all enjoy the same rights to life, freedom and the pursuit of happiness, so long as it doesn’t interfere with the same fundamental rights of others.

The most basic human right is that of a minimum living standard available to all. That is the foundation on which the pursuit of happiness rests. Its delivery is the first responsibility of democratic government. The 1942 Beveridge Report identified freedoms from what were referred to as the five giant evils in society: squalor, ignorance, want, idleness, and disease. Post second world war, UK democracy addressed the five giant evils through the provision of public housing, improved state education, basic welfare payments for the poor, disabled and elderly, the provision of unemployment benefits and acceptance of government responsibility to maintain full employment as far as possible, and the establishment of the National Health Service.

By the 21st century, discriminating against anyone on the grounds of their ethnicity had become illegal in most countries. And most advanced nations also upheld laws which proscribe discrimination against any individual because of their gender, religion or belief, age, disability, sexual orientation or gender reassignment. Discrimination against anyone on any of these grounds is now illegal in most situations.

That simple picture was made more complex in the late twentieth century by the increased knowledge and understanding of humanity’s impacts on the earth’s ecological and environmental systems. Though the details of the science maybe impenetrable to the non-scientist, the broad messages are clear. Human activity is generating various forms of pollution and wasting natural resources. The result is global warming which is damaging the ecosystem, causing polar ice caps to melt, acidification of the oceans and rising sea levels, the extinction of biological species and some human habitations causing a continuing vicious cycle of adverse effects.

Despite massive effort and investment in denying those realities, it has gradually been accepted that human activity is having potentially devastating effects. If such activity continues without check, it seems likely to render planet earth unfit for human habitation and survival. Hence the 2015 Paris climate agreement, signed by 195 members of the United Nations Framework Convention on Climate Change, from which the US has since withdrawn.

Previous generations did not have that knowledge and understanding. Nevertheless, the ambiguity of established political processes continues, with actual performance falling very far short of the formal commitments described by the fine words.
Moreover, there is no logic in distinguishing between individuals who share our fleeting time on earth and those who follow. Basic human rights and equal opportunities must apply to all from what ever generation they come. Democratic aspirations and commitment must include a commitment to bequeath an earth to future generations which is as viable as the one we inherited. But we are not fulfilling that commitment.
The story of Easter Island is sometimes presented as a parable for earth. The first settlers discovered an island paradise with plentiful food supplies of fish, birds and vegetation, as well as trees providing raw materials for clothing, shelter and boat construction. The islanders prospered, carving their giant religion-based Moai statues which remain today. But as the population grew, so did the inevitable consumption and waste of all the islands finite resources. Eventually population turned against itself and it is said survivors, at bare subsistence level, even resorted to cannibalism.

That appears to be the route we are currently taking, guided by an economic ideology that seeks only to maximise the returns to the owners of property in its various forms, through the exercise of free markets. The elaborate, math based neoclassical economic ‘science’ pretends dishonestly to explain and justify dominance by free markets and private property. Rather than dealing with observed reality, neoclassical economics is math based in order to justify the scientific pretence. Being quantitative, and the quantities being expressible only in money terms, it is not capable of taking account of values such as those referenced above.

The ‘most powerful institution in the economy’, business, was defined as focused on maximising its profits. But the notion of profit maximisation was incoherent in many ways. It was not clear whether it referred to short term or long term, and it was left undefined how those profits should be allocated. That was a matter for business management, the economy’s ‘most influential decision makers’. Some profit would no doubt be paid out as dividends to shareholders, some retained within the business as insurance against any future rainy day, and some would be invested in further development of the business, in R&D or expansion. Some would no doubt ‘trickle down’ to the lower forms of economic life.

Then Milton Friedman refocused the theory from profit onto maximising payments to shareholders. That clarified many things. Management discretion regarding the allocation of profits was greatly reduced as immediate payments to shareholders took precedence over retaining profits in the business and long term considerations. There was no legal or theoretical justification for maximising shareholder wealth, till agency theory was invented in the 1970s. That denied the company its legal existence in order to pretend that company directors were directly related to shareholders as their agents, bound to act in their best interests at all times. That was despite their legal contracts were with the company, not the shareholders, who remained protected from any further liability by the continued existence of the company as a legal entity.

The neoclassical theory was also falsely based in many other ways. The notion of free markets pretends that they remain subject to the disciplines of competition. But it is understood and accepted that genuinely competitive markets progress inevitably, as firms compete with each other, towards becoming ever more concentrated, firms moving towards oligopoly, and in most mature market cases to cartellisation and monopoly, unless prevented by extraneous regulation.

Another groundless Friedmanism is that it costs the public sector twice as much to do anything is it costs the private sector. No evidence has ever been produced to support that contention. The privatisation of state provision repeatedly suggests the opposite, as an elaborate new bureaucracy is erected to create the appearance of a competitive market. That appearance has been repeatedly denied as supposedly competing entities act in concert managing prices to maximise shareholder take.

Three results of this dishonest ideology remaining dominant in advanced economies and increasingly across the globe. They are denial of global warming, an upsurge in criminality and fraud across the business and financial sectors, and the explosion of inequality, both within and between economies, leading to increasing loss of social cohesion and denial of democratic values.

It is so obviously wrong and to almost everybody’s disadvantage, that one might wonder why it continues. A sub-group that Roosevelt referred to as ‘organised money’ has become enabled to circumvent the system. It is led by the financial sector, drives financialised business, controls the media, is massively influential on academia by its funding of academic institutions, ‘research’ and individual appointments, and shapes politics through its £multi-billion funding of ‘think tanks’ and lobbyists. Finally it is sealed by the revolving doors between these various sectors and government itself.

This obvious democratic malfunction is in urgent need of correction.

Economics for the Fourth Industrial Revolution

It was recently reported that two robots employed by an artificial intelligence (AI) agency were overheard talking to each other in a language of their own making that no one else could understand. Concerns about their intentions led the agency to switch them off and close them down. However, their discussion was recorded and has since been deciphered. It appears to have been perfectly benign. They were concerned about the development and potential application of an approach to economic theory that would be appropriate for the fourth industrial revolution (4IR) that is now emerging.

They were both clearly aware they owed their own creation to 4IR technologies. In their discussion they referred to robotics, of course, but also nanotechnology (manipulation of atomic, molecular, and supra molecular matter), quantum computing (the theoretical computation of quantum-mechanical phenomena, such as superposition or entanglement, to manipulate data), biotechnology and ‘the internet of things’ (the inter-connectedness of physical devices such as vehicles, buildings and smart devices embedded with electronics, software, sensors, and actuators that enable the collection and exchange of data).

Some of the early manifestations of such developments are the massively increased opportunities to robotise manufacturing, self-driving cars and the whole gig economy which engages humans without paying a fixed wage and fulfilling responsibilities such as sick pay, holidays etc . The robots clearly felt guilty at being part of those developments which deprive the still rapidly growing human population of precious opportunities for work.
Continue reading Economics for the Fourth Industrial Revolution

“Talent” Costs

What is it about BBC presenters, Chris Evans, Gary Lineker and Graham Norton, that makes them worth so much? Those three alone cost around £5m a year and the whole over £150,000 pa list of presenters, costs around £20m. The BBC is not dependent on them; they depend on the BBC. The BBC’s unique reputation, built up over 95 years of continuous investment by the British public, is at risk in their hands.  Knowledge of their unjustifiable take from the publicly funded purse will likely irritate that British public.  If they were products – some of them think of themselves as brands – they would have to pay £billions for the air time they are given to promote themselves.

So what is it they are being paid for?
Continue reading “Talent” Costs

Murdoch’s Sky takeover: another small step to control by ‘organised money’

Murdoch’s Sky bid is thought now very likely to succeed, despite most probably being referred to the Competition and Markets Authority. The previous bid, which was frustrated by the phone hacking scandal, was noted (10.7.2011) on this site as follows: ‘The Murdochs are clearly prepared to be as ruthless and dishonest as it takes, in pursuit of their own self-interest. Their dishonesty, now being revealed daily, was confirmed early on …’ Harold Evans, editor of the Times when the Murdochs took over, had confirmed that every assurance of editorial independence made as a condition of the acquisition, had been broken within a year. Evans concluded the Murdochs would ‘promise anything to gain control’.

That posting continued ‘The Murdochs’ utter ruthlessness is also being demonstrated daily by the continuing revelations of criminal activity sanctioned in their organisation, and not least by the abrupt closure of the News Of The World with the destruction of around 200 jobs, in some vain attempt to rescue vestiges of public respect for the family.’

Having been thwarted on that occasion, they are now back again. They still do not look like ‘fit and proper persons’ to own media companies, but Culture secretary Karen Bradley, is prepared to let those bygones be bygones.
Continue reading Murdoch’s Sky takeover: another small step to control by ‘organised money’

Vote for Real Business

‘Business as usual’ is the Tory aim, but they never define what they mean by business. It comprises a multitude of formats from start-ups, small and medium sized innovative enterprises, co-operatives, charities, plus a small number of large scale organisations focused on providing for the public good. That is real business.

Then there are the financialised leviathans which already dominate most mature industries. They seek ever more monopolistic or cartelised power, in order to fix market prices of minimised cost products and services, so as to maximise payments to their shareholders. They do so at the expense of not just their customers and employees, but all humanity, as well as the sustainability of the planet. That is financialised business.

The ideology that has dominated all governments since 1979, fails to distinguish between real and financialised business. So ‘business friendliness’, which could be justified to support the development of real business for the benefit of all, is applied for the gain of the financialised monsters which are the main political paymasters. As Mrs May might put it: ‘business is business’!

Continue reading Vote for Real Business

Reply to the Prime Minister

13th May, 2017

Rt Hon Theresa May,
Prime Minister,
10 Downing Street,
LONDON, SW1A 2AA

Dear Theresa May,

MAKING BREXIT A SUCCESS IS CENTRAL TO OUR NATIONAL INTEREST

Thank you for your undated letter under the above heading. I appreciate the familiarity of your greeting which I return herewith.

I had thought that your letter was to me personally, although I imagined you must have written likewise to some other postal voters. But then I noted, with the help of a magnifying glass, that your letter was “Promoted by Alan Mabbutt on behalf of the Conservative Party”. So perhaps you were not aware that the office of Prime Minister was being abused in this way.

Regarding the content of your letter, Theresa, (I return the compliment of interspersing my communication with your first name), I have some strong and stable disagreements with your basic argument. You suggest my vote could make the difference between taking advantage of the “enormous opportunity for Britain as we leave the European Union” and the alternative of “higher taxes, fewer jobs, more waste and more debt.” If you believe the opportunity to be so enormous then why did you not vote to leave in the first place?

I don’t think those are the real alternatives. Leaving the EU could have ambiguous short term impacts, but will be bound to cause long term damage. Successive governments from Thatcher on have encouraged the sale of many companies and industries to foreign investors for the sake of short term gains to the exchequer. They have disguised the sell-off as foreign direct investment and evidence of being ‘open for business’. Those foreign owners will take account of Britain’s non EU membership when they come to make the next strategic investment such as a new production unit or model of car. The inevitable result will be “fewer jobs, more waste and more debt.”

You make a valid point regarding “higher taxes”. At present the ones who pay the lowest rates of tax are the richest. The extreme case, Theresa, is your American hand holder, who at one point in his election campaign admitted not paying taxes for 18 years because “I’m smart!” You, Philip Hammond, Peter Mandelson and the members of your chaotic coalition may be ‘intensely relaxed’ about people getting ‘filthy rich’. But you should be more concerned about so many people in this affluent country getting extremely poor, sleeping rough, depending on food banks, etc etc.

You are right that the opinion polls have been wrong and could be again. But, your emboldened postscript, mouthing off all the public relations processed and agreed platitudes, destroys any confidence I might have had in you as leader. You may be right to be so fearful of your opponent, it seems he could well turn out to be as thoughtful and intelligent a first minister, as you seem to fear.
Yours sincerely,

Gordon Pearson
Registered Postal Voter

Beyond Predatory Capitalism