Remaking the Corporation

Humans have been on earth for around 195,000 years. But it wasn’t till around 300 years ago that we started to defeat famine and plague and so begin to prosper. Global population had remained stuck at a few hundred million. But then it began to take off.  By 1800 it had reached a billion, doubled again to 2 billion by around 1930, since when it has more than tripled to today’s estimate of over 7½ billion.

What had changed? 

As a moral philosopher, Adam Smith wanted to find out. He identified the division of labour as the prime source of economic progression. He observed how the specialisation of tasks, machinery and equipment revolutionised pin making, massively increasing output and reducing costs. It was the industry and inventiveness of people working together that has driven all industrial revolutions, enabled by there being a market for such increased production.

That made the argument for free markets.  The only snag was that free markets naturally evolve to becoming monopolistic and exploitative.  But that’s another story!

The joint stock company, or corporation, was the key organisational structure in which people were enabled to work together.  It raised the finance to fund technological developments as well as the economic growth they generated. It was originally established and protected by royal charter or act of parliament, with investors being held fully responsible for corporate activity.

The 1844 Joint Stock Companies Act made company formation easier and cheaper, with limited liability added in 1855 freeing investors from any responsibility beyond paying for their shares in the company. The full potential for the exploitation and abuse of limited liability was not immediately recognised, but has long since been more fully exploited.

Since then, various Companies Acts have made minor amendments to the corporate concept, but the basic idea was settled: the company was established as a legal entity, enabled to sue and be sued, with its directors required by law always to act in the company’s best interests.

However, there was a flaw in the corporate system of governance.  If a single shareholder, whether a human individual or another corporate entity, achieved more than 50% of the equity, then they had effective control. The company then so owned, would cease, in effect, to be a legal entity in its own right, and became instead an item of private property which the owner could direct as they pleased.

Since the 1980s, the legal requirement for company directors to act in the company’s best interests, has been dominated by a demand to focus on maximising shareholder interests. Milton Friedman expressed that change as ‘corporate officials’ having no ‘social responsibility other than to make as much money as possible for stockholders.’ [i]

While the real legal position did not change, custom and practice did, justified by support for and promotion of Friedman’s assertion of the primacy of shareholder interests.

The quickest and easiest way to make money for shareholders was not by persevering in the manufacture of pins or anything else.  It was most readily achieved through mergers and acquisitions to increase monopolistic market power and/or to enable asset stripping for financial gain which could be more profitably invested in speculative betting. Such M&As might be activated by aggressive stock market raids or by the collusion of company directors acting in their own self-interest rather than their employing company’s. The funds extracted might earn fastest returns increasingly through automated systems, operating in nanoseconds, with price movements being increasingly manipulated by deliberate feed–in of fake news.  The overall result has been a predatory extraction of value from real economy corporations for purely short-term speculative gain by the owners.

Though that predatory destruction is justified by a false argument for shareholder primacy – which is in conflict with the law – the resulting actions are all perfectly legal. The corporate entity, as defined by law, is vulnerable to such predation. In the UK, it has been encouraged by a dominant financial sector supporting political leaders who proudly proclaim their economies as being ‘open for business’. 

There are alternative routes for political economic decision makers to take.  Remaking the corporation in alternative formats could provide protection against stock market raids or illegal collusion of company directors to destruct their legal entity. That could assist rebuilding the real economy to focus on what really matters: sustainability, human rights including those of future generations, equal opportunities, and some level of social balance.

Such protection has been achieved in various ways. Co-operative formation in its various forms – employee co-operatives, customer co-operatives, community co-operatives – all provide protection against predatory attack.

Japan has provided protection for its real economy corporations with its long established keiretsu system of interlocking shareholdings. It includes members of the banking sector which held equity for long periods and did not actively trade in most of the equity they held.  Keiretsu makes gaining the 50%+ of corporate equity extremely difficult for outsider investors, unless agreed by all.

German corporates are protected by the two-tier board system comprising a management board with responsibility for day to day running of the enterprise and a supervisory board with various legally defined responsibilities including the appointment of management board members, but with no common membership allowed. Employees must have 50% of representation on the supervisory board for companies with 2000 employees.

There are many alternative corporate formats which provide the necessary protection from destruction. They could also include combinations of the various systems noted here. It has also been proposed to make limited liability available only if the corporate formation is compliant with agreed protective conditions.

The purpose of this article is not to identify a magic solution, but to flag up the need to remake the corporation so that it might create value for the real economy, rather than making it vulnerable to financial predation for the benefit of the few, and even that only for the short term.  In the long run, as the Covid pandemic constantly reminds us, we are all in it together.


[i] Friedman, M., (1962), ‘Capitalism and freedom’, Chicago: Chicago University Press, p133

Was Roosevelt Right? Or Keynes? It matters for 2021

The 1929 Wall Street crash signalled the beginning of the end of neoliberal economics. The subsequent austerity driven Great Depression almost finished the job and brought F D Roosevelt to the US Presidency. He introduced the New Deal investments, the second wave of which he introduced observing that  “We had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism and war profiteering. They had begun to think of the government of the United States as a mere appendage to their own affairs.  We know now that Government by organised money is just as dangerous as Government by organised mob.” 

A decade previously J M Keynes had ended his General Theory of Employment, Interest and Money with the observation that “the ideas of economists and political philosophers, both when they are right and when they are wrong, , are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men … are usually the slaves of some defunct economist.”

Who was right? Was it organised money that had messed everything up? Or was it economists? Or were they both right? Was it organised money being slaves to defunct economists? Or rather than ‘slaves’ were the various components of organised money, the corrupted and criminal slave drivers and exploiters of economists and everyone else? And does it really matter in 2021?

Neoliberal economics ended its reign of power after the Gt Depression, but it was carelessly left ‘lying around’ as Friedman put it, before adding his own distinctive variations such as the primacy of stockholder interests over customers, employees and all other stakeholders.  Then in the 1970s the eruption of inflation – caused by OPEC’s 300% rise in oil prices – together with economic stagnation – arising from the decline of 2nd industrial revolution activities – gave organised money and its defunct economics an opportunity to take over as political driver once again.

That does matter for 2021 because it appears, after four decades of neoliberal economics it is again being recognised as ever more obviously dysfunctional and unsustainable. In many ways we are in a repeat of the situation Roosevelt inherited. The 2008 crash was followed by a decade of defunct economist driven austerity. Only things are much more urgent now with global population having tripled since Roosevelt’s day. And we are much more aware of the many destructions we are now wreaking on planet earth. Moreover, we are reminded of all people’s interdependence, if we ever needed to be, by the coronavirus pandemic. In 2021, it all matters far more than it ever has previously.

New book, Remaking the Real Economy, acknowledges the positions of both Keynes and Roosevelt as well as the fundamental critiques provided by leading economists who reject being dominated by organised money. More importantly Remaking the Real Economy identifies the necessary actions for the real economy to be remade so as to achieve sustainable progression.

The first action has to be the setting aside in its entirety of defunct economics, not leaving it ‘lying around’. Understanding of the microeconomic processes of organisational systems has to be based on observation of reality rather than the blind application of mathematical models which bear no relation to the real world. Only then will organised money by constrained within sustainable limits and the real economy remade.

The American Challenge for us all

So the new US government, if it is to deliver to the next generation of working Americans, will need to have the courage to take on ‘Wall Street, the pharmaceutical industry, the health insurance industry, the fossil fuel industry, the military industrial complex, the private prison industrial complex and many profitable corporations who continue to exploit their employees.’ [i] That’s according to Bernie Sanders, who’s been around a fair bit and should know what he’s talking about.

He reckoned they’d be facing the most desperate situation since the austerity driven Great Depression which followed the 1929 Wall St crash. Well, Bernie’s memory isn’t that good!  For the record, Roosevelt’s version of those he had to take on – which he referred to as organised money – included ‘business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.’  He said they had ‘begun to consider the Government of the United States as a mere appendage to their own affairs.’[ii] More recently that section has grown to include, the shadow banking sector, financialised business, supportive strands of academia and the media now led by social media, and a political sector of richly funded think tanks and lobbyists.   

Organised money is clearly far more powerful now, than it was in Roosevelt’s day.  And it still, as Trump demonstrated only too forcefully, regards government as a mere appendage to its own affairs. And that is not just in the US, but also in the UK and beyond.

But Sanders was surely right suggesting that the new government will have to have the courage to take organised money on, if it is to achieve genuinely sustainable progression.  

It doesn’t need to be a head-on confrontation between two directly opposing forces. The one thing that has become apparent from planet earth’s ecological predicament, currently being emphasised by Covid-19, is the real interdependence of all humanity, present and future.

Organised money is not some criminal conspiracy to take over the world and exploit it for their own self-interested purposes.  The constituents of organised money are, like most other sections of society, made up of 79%, or thereabouts, of perfectly decent people who wish first of all to survive and prosper, and while doing so, to contribute positively to making the world a better place.

The 79% are likely to regret actions they take which have the opposite effect. A bright young person works hard through school, gets to university and completes, say, a good BSc in quantum physics and electronics.  They have the world at their feet.  They have been educated to contribute to some future progression. But the system such young graduates are invited to enter, offers far greater rewards if they join the ranks of organised money, rather than seeking to develop and apply their scientific training and knowledge. Moreover, they will be persuaded that the greater reward is a reflection of the greater value they will be contributing to the world. So it is not unreasonable that they become takers of value rather than its creators. Their scientific knowledge and understanding, that could be deployed, as intended, to advance society, is simply thrown away.  In short, those young people are corrupted, by the system imposed by organised money.  It is the system that does the damage and needs correction, not the individuals who join it in order to make a living and develop as human beings.

That is what Remaking the Real Economy is all about – https://policy.bristoluniversitypress.co.uk/remaking-the-real-economy –  It is the system the new American government will have to take on.  The brainless neoliberal economic modelling will have to be replaced by government decision making based on knowledge and understanding of the long term macrosystems within which all humanity exists.  And it will need to give full weight to human values on which decisions will in due course surely be judged.


[i] Sanders, B, (2020), ‘How to avoid a second even worse Trump’, The Guardian Opinion, 26th November.

[ii] Roosevelt, F D, (1936), Address at Madison Square Garden, New York, 31st October.  Original record held at FDR Presidential library  & Museum.

Remaking the Real Economy – Escaping destruction by organised money

Remaking the Real Economy is what this blogsite has really been all about ever since it began in April 2009. The first posting – ‘Free market capitalism vs company law’) – began as follows:

“A key tenet of free market capitalism is that businesses should focus exclusively on maximising shareholder value and not allow other considerations, apart from compliance with the law, to intrude on their business activities. As demonstrated in ‘The Rise and Fall of Management’, approaches such as corporate philanthropy, corporate social responsibility and business ethics, are only justifiable if they add to profitability. This appears to be a clear and simple model for businessmen to work.

But the law, for example the 2006 Companies Act, charges company directors with the duty to care for the best long term interests of their company, having regard to the interests of all its stakeholders, not just its shareholders. In fact this has been the case since mid-nineteenth century when limited liability was first established.”

So how far have we got since then? Well, progression has not been very impressive. Remaking the Real Economy is specific about what needs to be done – see further details at Policy Press including 20% discount.

Focused on the realities of organisational systems, the book offers a practical alternative to economic dogma. The paragraphs below are quotes from its cover:

“Pearson’s book is a ‘tour de force’ written from a position of management experience and robust academic research,” Mihaela Kelemen, University of Nottingham.

“Subtle theoretical reflection is combined with meticulous research to yield a ground-breaking analysis.  Highly recommended..” John Hassard, University of Manchester.

“At last, a business and economics book for critical thinkers … a stunning critique of microeconomic theory and practices that so damage our society.” John Carlisle, former Professor at Rhodes University South Africa and Sheffield Hallam and co-operative consultant-practitioner.

This book reveals how mainstream perspectives work for the benefit of  the organised money establishment, while causing all manner of destructions, inequalities and frauds, all conspiring against the common good.                  There is an alternative.

Destruction by organised money

80 odd years ago, F D Roosevelt argued that Government by organised money was just as dangerous as Government by organised mob. That assessment was shaped by experience of the run up to the 1929 Wall Street Crash which was followed by the austerity driven Great Depression. We now know it’s much more dangerous than that: leading to the destruction not just of jobs and whole economies, but many of the ecological systems we benefit from on planet earth.

He identified organised money as comprising “business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism (and) war profiteering”. Eisenhower added the “military-industrial complex”. Today, strands of academia and the social media would be included as they argue and promote the theoretical constructs which provide the coat of respectability for organised money’s activities.

The financial sector was largely called into existence to finance the industrialisation process which began in the 18th century and proved far beyond the capacity of the then possessors of capital, mainly the landed gentry. But the sector quickly found far easier ways of making bigger and quicker returns than by long term investment in industry. So the components of organised money came to dominate the financial sector with the ‘robber baron’ excesses which led inevitably to the 1929 crash. That pattern was repeated in the four decades leading up to the 2007-8 crash and subsequent austerity driven decade of lost opportunity.

Those lessons have been rejected by those in power. Government is dictated by organised money whose self-interested criminality is well documented. The Economist described the financial sector as mired in ‘a culture of casual dishonesty’.[i]That culture ignores unprecedented inequalities and denies the imperatives of ecological sustainability. It accepts, simply as a cost of doing ‘business as usual’, the fines for fraud and criminality, so long as they are paid by the corporate entity and the individual decision makers are not held personally responsible.

The saga of such criminality is far too long to reference here. The Financial Times reported that, ‘between 2009 and 2013 the 12 global bankers paid out £105.4bn worth of fines to European and American regulators.’[ii] They were fined for rigging the Forex market, as well as rigging various commodity markets, also for money laundering on behalf of various terrorist organisations and for Mexican drug cartels, not to mention tax evasion and the most energetic avoidance. Those 12 global banks had also made additional provisions in their accounts for a further £61.23bn of anticipated fines for crimes which presumably they knew all about, but which had not yet been uncovered. So a total of £167bn, which was ‘unlikely to be the final hit.

Most financial houses appear to have been behaving in similar fashion as indicated in Remaking the Real Economy.[iii]

So government by organised money is not just predatory on the real economy, and exploitative of the public, but in serving its own sectional interests, it has developed sophisticated means of avoiding and evading taxation and is willing to act with criminal fraudulent intent. Organised money is openly criminal and dominates government, notably in the US and UK.

The net effects are to create ever increasing inequalities of wealth and income both within and between economies, which must at some stage be reversed by whatever means. It also initiates all manner of ecological destructions which must similarly be reversed but within a defined time span.

One of the two first moves has to be to recognise the naked criminality of organised money which includes much of the financial sector. And to correct it.

The other move must be for classical/neoclassical economics to be set aside and disregarded in favour of understanding the practical realities of a modern economy . But that is another story.

Is Modern Monetary Theory the Answer?

Economic theory continues to evolve as it always has.  That is partly because the real world economy is itself continuously evolving.  But it is also partly because economic theories are far from perfect, but are retained till something better comes along.

Monetary theory is a highly pertinent example right now, given the evolving role of money. As a means of exchange, it has long been reduced to the role of lubricant for relatively minor transactions, with further reduced usage of notes and coin being trialled during the coronavirus lockdown. As a store of value it has long been outperformed by many alternatives of varying security from property to financial speculation. And its lasting function as a unit of exchange is now largely maintained in electronic form enabling further possibilities.

Neoclassical economic theory emerged in mid 19th century as the inadequate but mathematical expression of self-interest maximising humans, profit maximising businesses and efficient markets free from government regulation which the theory promised would be no longer subject to booms and slumps.

That was the context in which monetary theory was given its first coherent expression by Irving Fisher in early 20th century.  It was in the form of a simple equation of exchange: MV=PT, where M is the quantity of money, V the velocity of its circulation, P the overall level of prices and T the volume of transactions taking place in the given time period.  While the equation is a truism and identifies macroeconomic quantities, their content is largely immeasurable and its various interpretations susceptible to simplistic political debate.

Fisher became notorious for his repeated assertion that the stock market had reached ‘a permanently high plateau’. That was just before the 1929 Wall Street Crash, which was followed by the Great Depression, imposed and prolonged by the continued focus on M with policies of austerity. That was only ended by Roosevelt’s relaxing austerity and focusing on V with publicly funded New Deal job creation schemes aimed at putting money into the hands of the poor, who had no choice but to spend it immediately for their survival, thus increasing V and so generating further economic recovery.

The 1970s stagflation was observed by Piatier as having been caused by OPEC’s 400% oil price rises and the stagnation arising from the maturing and decline of 2nd industrial revolution industries.[i]  But neoclassical theorists argued stagflation to be the failure of Keynesian economics, thus enabling monetary theorists to resume control.  But after two decades of application, even leading quantity advocate Milton Friedman admitted the theory had largely failed.[ii]

The lessons of 1929 had been set aside and forgotten as demonstrated by the relearning experience of the early 21st century, a period referred to as ‘the great moderation’ for which both politicians and economists at the time took credit.  That was just before the 2008 crash, which was followed by a decade of austerity in the real economy, which produced only disappointing results, despite massive Quantitative Easing (QE) for the financial economy banking sector – an estimated $14trillion worldwide. [iii]   

That is the context in which Modern Monetary Theory (MMT) emerged, taking account of the limitations of the former theory as well as the evolving possibilities of money itself.  MMT explains how a government that issues its own currency, can control and guide its economic growth absolutely without monetary constraint. That must be the holy grail of modern economy. It does so by promoting growth when needed by increasing the quantity of money in circulation. It could also slow growth by increasing taxation if inflationary pressures threatened to exceed what is advisable. Control of money supply and taxation can both be selective so that the direction of economic growth can also be set. The avoidance of booms and slumps is thus held to be firmly within the grasp of MMT competent governments. The validity of such assumptions will become apparent over the next few years and hopefully it won’t simply be a repeat of the 1929/2008 learning experiences.

Within that broad model, the explosion of new technologies is enabling governments and central banks access to many more detailed control mechanisms which MMT can accommodate. It is a highly dynamic situation in which MMT will continue to develop or could even be replaced by alternative theoretical approaches. One such, currently being promulgated, is Transfinancial Economics (TFE), which takes fuller account of the technological possibilities of developing QE for the global economy.

At this point in time, the possibilities of economic theory, notably of MMT, appear immense, but unpredictable.  As always, the theory is underwritten by political considerations which were previously focused on the M-V dichotomy.

Now, the extreme possibilities of new technologies, make the Real and Financial economic divide absolutely crucial.  The Real Economy is what could produce the needs and wants of everyday life for all people within an environmentally sustainable context. The Financial Economy was initially established to raise the finance for the canals, mills, factories and railways of the first industrial revolution. But since then it has found easier ways of making faster returns than paying for those Real Economy activities. So the Financial Economy has become predatory on the Real by a variety of means, including a process of increasingly sophisticated Merger and Acquisition (M&A) followed by systematic asset stripping and closure of Real Economy organisations. 

It is a process which is ignored since the distinction between the Real and the Financial Economies is not made, a fact celebrated by the simultaneous combination of austerity and QE, symbolic of the global combinations such as tax haven corruptions and the climate crisis.

That Real-Financial dichotomy, so vital to Remaking the Real Economy, is completely ignored by economic theory, including MMT. In orthodox measures such as GDP, a $ is a $, whether it is earned through care home services, bets on the financial casino or prostitution.

However, MMT controls enable both money supply and taxation to be selective, so that the direction of economic progression could be focused on the Real Economy making the financial sector resume its former more restrained role as supportive provider of finance.

Moral philosopher Adam Smith started his inquiry into the nature and causes of the wealth of nations with observation of real economic activity (pin making), rather than theoretical argument. There was no theory at the time.  Real economic activity clearly didn’t require a theory. Today, further progression without detruction might be better achieved if freed from theoretical constraints and diktats.


[i]  Piatier, A., (1984), ‘Barriers to Innovation’, London: Francis Pinter.

[ii] Friedman, M., (2003), in interviews with Joel Bakan for the documentary film ‘The Corporation’, see https://www.youtube.com/watch?v=Y888wVY5hzw [accessed 10.January 2020].

[iii] Martin, F., (2014), Money: the Unauthorised Biography, London: Vintage Random House.

Economic Practice or Theory? Remaking the Real Economy or Destruction?

Devastating though the coronavirus undoubtedly is, it must not be allowed to obscure the fact that the world was already headed for some destruction. Covid-19 is a side show compared to those existential issues facing the world, largely resulting from the combination of reckless industrial expansion combined with the population growth it enabled.

Moral philosopher Adam Smith was motivated by the sudden economic growth generated by the industrial revolution, to inquire into The Nature and Causes of the Wealth of Nations. He started by observing the practical processes of manufacturing and noted the unprecedented gains in productivity from the coordination of specialised operations. In pin making he noted a productivity gain of over 240 times. From that practical account of the work and its outcomes, Smith drew some conclusions as to the creation of wealth, the details of which were later elaborated by what Drucker referred to as the management revolution.

As moral philosopher, he also developed ideas as to how that wealth might best be accumulated, employed and distributed among “ranks of people” as well as allocated to state provision of defence, justice, education and public works and institutions “which may be in the highest degree advantageous to a great society.”

That was the real subject matter for political-economic decision making. However, Smith also conjectured about theories of value which were later picked up by Ricardo and many others, developing what Marx later referred to as classical political economy. By mid 19th century that was being based on a mathematical modelling rather than the realities of production.

Thus, two distinct strands of explanatory analysis developed from the industrial revolution. One strand was based on the observation of real individuals, organisations, processes and systems. The other was based on the internal logic of mathematical models without reference to realities.

Theoretical modelling was necessarily based on a lot of simplistic assumptions such as self-interest maximising human beings, profit-maximising business units, and markets free from government regulation producing the best allocation of resources. Being purely mathematical they could make no accommodation with human values, with evolution over time nor with the social and ecological systems within which such economic processes function.

Subsequent generations of neoclassical-neoliberal economists have elaborated much further detail to that theoretical web, notably including the change of business aims from profit maximising to having ‘no social responsibility other than to make as much money as possible for stockholders.’

Right from the start that theoretical orthodoxy was subject to challenge and rejection. As early as 1862, Ruskin argued it lacked “applicability.” Nevertheless it was applied. Alfred Marshall, author of the first standard economics textbook which led economics to mathematical definition, pointed out the unreality of assumptions which the mathematics required. and their so called laws regarding “profits and wages that did not hold even for England in their own time.”

Economists agree the unrealism of neoclassical modelling. It was nicely summarised by Routh in The Origin of Economic Ideas, ignoring facts as irrelevant and as basing “its constructs on axioms arrived at a priori, or ‘plucked from the air’, from which deductions are made and an imaginary edifice created … orthodox economics becomes a matter of faith ad, ipso facto, immune to criticism.”

The outcomes from application of that highly theoretical orthodoxy are ever increasing levels of inequality, both within economies and between. Piketty’s analysis of Capital in the Twenty- First Century showed that a market economy based on private property, generated forces of divergence. They resulted from the fact that in such free markets, the % return on capital has been greater than the rate of growth of income and output. Wealth earned from the past grows faster than wages. The entrepreneur is therefore encouraged to move from real economy operations to the financial economy where their returns will increase faster, becoming ever more dominant over those without wealth.

At some stage that process will inevitably have to be reversed by some enforced redistribution of wealth. That will be achieved either by agreement. Or by disagreement.

Continued destruction of the real economy is justified by conformance to the neoclassical economic theorising, rather than focusing on practical realities. The result is not just continuously mounting levels of inequality both within and between nation states. It involves environmental destructions which will deprive future generations of a habitable domicile on planet earth.

That much is known. But yet, the powers that be do very little to achieve change. For them, the coronavirus may be a welcome distraction from their fundamental duty to contribute positively to ensuring humanity’s survival and progression.

The Care Home Pandemic Lesson

The mortality statistics reported as resulting from Covid-19 refer only to those who die in hospital. Those who die at home or in care homes are not included, even though, despite such obfuscation, it is known the death rate among the elderly and infirm accommodated in care homes far exceeds death rates among NHS patients. It has become clear that such care home residents have been abandoned, not by care home staff – there have been many stories of their heroic human caring – it is the system that has abandoned those in care. It is a valuable lesson, first learned decades ago, and it has far wider relevance than care homes.

That abandonment is longstanding and is well known and understood. The sector has been made available for rape and pillage with impunity, as indicated in the following quotes. The solution is clear.

The Lesson of Southern Cross, 10th June, 2011:
10th June 2011: “On 1st September, 1976, Professor Milton Friedman of Chicago University, economic theoretician and Nobel laureate, addressed the Institute of Economic Affairs in London. The title of his talk was “The Road to Economic Freedom: The Steps from Here to There”. Friedman, being the quintessential free market fundamentalist, took a dim view of the mixed British economy with around 60% of national income then being spent by government. He prescribed the ‘shock treatment’ of low flat rate taxes and wholesale privatisation which a few years later Margaret Thatcher implemented.

His justification for privatising provision of education and healthcare was simplistic in the extreme. ‘There is,’ he argued, ‘a sort of empirical generalisation that it costs the state twice as much to do anything as it costs private enterprise, whatever it is.’ Friedman didn’t actually have any data to support this contention, but added that ‘My son once called my attention to this generalisation, and it is amazing how accurate it is’ (See Friedman, M, 1977, From Galbraith to Economic Freedom, London: Institute of Economic Affairs, p57).

That simplistic assertion held sway for the next three decades and still rules our lives. His advocacy of privatisation of public provision justifies, among other things, the provision of care homes for our aging population by the likes of Southern Cross. It turned out not to be twice as efficient as any public sector provision, and it threatens to go bust leaving the state to clean up the mess.

The nub of the Southern Cross problem arises from another Friedmanism, that corporate officials had no social responsibilities other than ‘to make as much money as possible for stockholders’. In the case of Southern Cross, those stockholders were at one time the private equity firm Blackstone, headed up by ex-Lehman Brothers mergers and acquisitions specialists. Their interest in making as much money as possible led Southern Cross to the classic asset strippers’ strategy of the sale and lease back of its portfolio of care homes, realising an estimated surplus of £500m for Blackstone. It may or may not have been ‘as much money as possible’.” (https://gordonpearson.co.uk/2011/06/10/the-lesson-of-southern-cross/)

Big Society Public Services – the Next Government Shambles, 22nd July, 2011:
22nd July 2011: “The Open Public Services White Paper, announced on 11th July, sneaked out under cover of the Murdoch mess, looks like being the next government created shambles. Like its approach to the NHS, it betrays a breathtaking lack of nouse and understanding. The government claims its aim is to improve the quality and reduce the cost of all public services. This magical result is to be achieved by opening them up to provision by private and voluntary organisations, in competition with their existing public providers. … opening public services is likely to result in bids from the private for-profit sector, against the existing public provider. And private for-profit providers can, by definition, go bust. Health Minister, Paul Burstow says the new NHS regulator, Monitor, would ensure providers do not copy the “risky business model” of Southern Cross, the bankrupt care home provider.”( https://gordonpearson.co.uk/2011/07/22/big-society-public-services-the-next-government-shambles/#more-942)

Looting and Rioting – Bob Diamond Again, 15th August, 2011:
15th August 2011: “Over the past few days, the famine in East Africa, the US loss of its S&P triple A credit rating, the Murdoch disgrace, the Eurozone indebtedness and Greece’s odious debt, and even the World Championship Hen Races in Derbyshire, have all been driven from the front pages, at least in UK, by the looting and burning street riots. Consideration of their underlying causes and recommended solutions have dominated the media. Prime Minister Cameron, for example, expert in policing and broken societies, apparently wants to appoint a native from gun-toting America, to show British police how to do their job …

What is the main difference between those young people stealing mobile phones, laptops, trainers, and so on, and the likes of Fred ‘the Shred’ Goodwin, Bob Diamond and Stephen Schwarzman? One-time RBS CEO Fred Goodwin broke the bank with brainless debt and acquisitions and ‘shredded’ many thousands of jobs. Bob Diamond, currently CEO of Barclays Bank, has featured from time to time on this site primarily for his socially useless work and exorbitant take home pay. Stephen Schwarzman is billionaire boss of Blackstone Group, the private equity outfit that among other things, stripped the now bankrupt Southern Cross healthcare group of its main assets and made off with an estimated £500million. They differ from the looting, burning rioters in two main respects, Firstly, the scale of their looting far exceeds anything which has happened on the streets. And, secondly, what Goodwin, Diamond and Schwarzman do, has over the last thirty years been legalised, so they can do it with impunity.” (https://gordonpearson.co.uk/2011/08/15/looting-and-rioting-bob-diamond-again/)

Screwing care-homes still makes the easiest money, 5th September, 2015:
5th September 2015: “Taxpayers are going to have to pay for another big care home operator, throttled by tax avoiding financial predators. According to its chief financial officer, Four Seasons, which runs 450 care homes and 50 specialist care units, ‘is reviewing its finances with all options considered’. One option would be to close down, leaving the taxpayer to pick up responsibility for its 20,000 residents and patients.

Four Seasons is carrying debts of £500million on which it is paying interest of around £50million. It’s not immediately obvious how they got into so much debt nor why they should be paying interest at 10% pa when the official bank rate is 0.5%….
The tax avoiding financial predator that acquired Four Seasons was private equity Terra Firma Capital Partners, owned by Guernsey based Guy Hands. The acquisition was completed a few months after the collapse of Southern Cross had demonstrated how profitable such deals could be.

Terra Firma was in the news earlier this year with demonstrations against subsidiary Annington residential homes’ proposed demolition of 142 homes on the Sweets Way estate in north London. They were accommodating families on Barnet Council’s waiting list, but Hands’ plan was to replace them with 229 houses and flats for sale on London’s booming property market.

Four Seasons is losing money at a rate of knots, £26million in the second quarter of the current year. While they blame the losses on various extraneous factors, it is clear that public funding of social care for the elderly is inadequate. But the only way it will be increased is when the mess has to be sorted at public expense when Four Seasons goes bust. That the taxpayer has to pick up the tab is a major attraction of care homes and any privatised NHS services. Once privatised, the new operators can profit by delivering sub-standard service, till they go bust and the state has to pick up the pieces.

Guy Hands explains his perspective on private equity on the Terra Firma website http://www.terrafirma.com/private-equity-investment.html:
The private equity funds we raise are used to acquire asset-backed businesses that can be transformed through fundamental change.’

This is a rather more sophisticated way of making the asset stripper’s case as succinctly expressed in The Times by Jim Slater protégé, John Bentley, forty five years ago:
‘The theory of what we are doing is to release half the cash, half the assets and half the number of people employed.’
(https://gordonpearson.co.uk/2015/09/05/screwing-care-homes-still-makes-the-easiest-money/)

There are many long standing, ethical and professional operators in the care home sector. But they appear to have been largely deserted by the state. The Southern Cross and Four Seasons examples show just what a perfect opportunity care homes present for predatory exploitation. Being asset rich and earnings poor, means they can be acquired at low cost, their assets cashed in and they can then be driven on a shoe string and if they subsequently go bust, so what! The state will have to pick up the tab.

But the problem goes much wider than just the care home sector. Four decades of ideologically driven privatising and outsourcing of public sector provision, including health services, places much of the work previously fulfilled by the NHS in private hands. Predatory, tax evading and avoiding, private equity acquirers who are not subject to public quotation or review, could then fulfill their mission by extracting value and leaving enfeebled operations to be picked up and paid for by the tax payer.

The solutions are fairly obvious and have been highlighted many times in the past. The care home pandemic lesson in particular is a relearning experience and reminder of what needs to be done. But it is unlikely to be easy to implement.

F D Roosevelt identified the basic problem over eight decades ago when he referred to organised money, which “had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that government by organised money is just as dangerous as Government by organised mob.” (F D Roosevelt, announcing the Second New Deal, October, 1936.)

It remains to be seen if state responses to Covid-19 will amount to a 21st century New Deal, which as well as defeating the pandemic, will need also to  remake the real economy as well as escaping destruction by organised money.  And if planet earth is to be made fully sustainable, to do so on a permanent basis.

Fighting for Fairness

Fairness is envisaged as an extremely broad concept. It includes universal human rights and equal opportunities for all, with social balance and some limitations on inequalities of income and wealth and the means of their achievement, all applied within and between communities and nation states. It also relates to fairness between generations. We are making a total mess of everything, and unless we change radically, we will bequeath a planet earth to future generations which is simply not sustainable. We don’t need to. There is an alternative, as we are continuously being reminded.  But so far we have done very little about it.

We need to remake the real economy and escape destruction by what Roosevelt so long ago identified as organised money. The real economy is what employs most people, making and innovating the products and services of everyday life and their continuous improvement. It is distinguished from the financial economy which came into being mainly to support developing the real economy by enabling the necessary finance for investment.  But, latterly, the financial economy has become predatory on the real, focused on extracting value in order to maximise shareholder take (MST) and increase its portion of the overall economy.

That distinction between the real and the financial is not widely recognised, and it is completely ignored by orthodox measures such as GDP. The modern state and its regulatory authorities need to make the distinction and regulate each appropriately so as to achieve progression with fairness.

The real economy comprises three quite distinct layers which are nominated here as  the social-infrastructural layer, the progressive-competitive layer and technological-revolutionary layer. Each layer requires quite different forms of support and regulation so that overall,  progression without destruction might be achieved, with fairness for all.

Roosevelt identified organised money when he introduced the second round of the New Deal which ended the austerity driven Great Depression which followed the 1929 Wall Street crash.  He identified its various constituents as ‘business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism and war profiteering.’  He noted that organised money ‘had begun to consider the Government of the United States as a mere appendage to their own affairs’ and recognising its  criminal tendency, he  warned that ‘Government by organised money is just as dangerous as Government by organised mob.

Roosevelt and Keynes victory over organised money last but four decades.  Over the past four decades, organised money has been reborn as the self-perpetuating driving force behind governments in Anglo-America and beyond. Its various constituents have been the prime beneficiaries from the application of the 21st century version of neoclassical microeconomics. That free market, profit maximising model was born in the 19th century and didn’t change much till the 1980s when Friedman and colleagues refocused it on MST.

The simple truth is we don’t need a theory of how things work when the reality is there before us to observe and understand. And we certainly don’t need a 19th century economic theory which has been shown, so many times, to be utterly false. Understanding how the real world works is much more important. That understanding reveals the various constituents of organised money, including government itself, to be initiating and approving the most fundamental crimes against humanity ever conceived.

‘Remaking the Real Economy: Escaping Destruction by Organised Money’ (to be published by Policy Press, August 2020) identifies actions necessary to rebuilding the social-infrastructural layer of the real economy, re-establishing the progressive- competitive layer and refocusing the technological-revolutionary layer to achieve a fully sustainable planet earth.

The practicalities of such an agenda will require a host of corrective measures which will be dependent on the effective regulation and restraint of organised money and the complete displacement of neoclassical economics.

That can be achieved either with the realisation and support of constituents of organised money, or, by some more aggressive action by other constituents. It may not be easy. But if the necessary actions are not achieved, then it will be our generation which is condemned by our daughters and grand-daughters as the contemptible traitors who destroyed their world.

21st Century Robber Barons

A current concern is the re-emergence of organised money – the newly dominant, amoral, self-perpetuating financialised establishment. The robber barons emerged late 19C and in US were treated to anti-trust legislation such as the Sherman Act which broke up Standard Oil in 1911 and regulation as a public utility was inflicted on such as AT&T in 1913. Nevertheless the financial sector continued to dominate till the 1929 Wall St Crash, after which the world became, for a while including WW2, more cynical of the sector and its role.

Client experience with the Office of Fair Trading which enforced both consumer protection and competition law, and the Monopolies and Mergers Commission tells an interesting story. In the 1970s they were powerful bodies, which prevented anti-competitive M&A and were empowered to break up anti-competitive corporates. Since the 1980s, and especially since 1986 ‘big bang’ computerisation of capital markets, those regulatory powers have been progressively weakened.

The current generation of robber barons, the creators and controllers of the IT titans such as Apple, Google, Facebook, Amazon etc, are quite different. A year ago the Economist published an article (Taming the Titans, The Economist, 20.1.18) which acknowledged they had become increasingly dominant. Though The Economist was predisposed to defending them, it recognised the dangers they posed and raised the question of how they should best be controlled. Increasingly they not only dominated the market but were the market themselves (as platforms).

Many of their services appear to be free but customers pay for them by giving away their data. The Economist estimated their then current stock market valuations suggested they were expected to “double or even triple in size in the next decade.” Amazon had 40% of on-line shopping in US. Facebook had over 2bn monthly users, holding sway over the media industry. And in some countries, Google processed over 90% of web searches, Google and Facebook controlling over two thirds of online ad revenues.

While things move fast and some new tec giant killing upstart is feasible, the probability is fading as barriers to entry are rising. Facebook owns the world’s largest pool of personal data. Amazon has more pricing info than any other firm and is ever increasing its heft. China’s tec firms have the scale to compete but have yet no access to Western consumers. If trends continue consumers will suffer.

Better use could be made of existing legislation eg preventing anti-competitive takeovers, such as Facebook’s acquiring WhatsApp and Instagram. Also, it should be recognised that personal data has become the currency with which customers pay for products and services. So, just as in 19C, intellectual property was given protection by patent law, so the ownership and exchange of data also needs specific and limited protection laws.

The Economist concluded with the following points:
“If a user so desires, key data should be made available in real time to other firms – as banks in Europe are now required to do with customers’ account information. Regulators could oblige platform firms to make anonymized bulk data available to competitors in return for a fee, a bit like the compulsory licensing of a patent. Such data sharing requirements could be calibrated to firms’ size: the bigger platforms are the more they have to share. These mechanisms would turn data from something titans hoard to suppress competition, into something users share to foster innovation.

None of this will be simple. But it would tame the titans without wrecking the gains they have brought. Users would find it easier to switch between services. Upstart competitors would have access to some of the data that larger firms hold and thus be better equipped to grow to maturity without being gobbled up. And shareholders could no longer assume monopoly profits for decades to come.”

But, no action has been taken and even serious discussion has been limited.

On 15th March 2019 it was reported that Apple had unveiled their strategic push into video, news and finance, boosting its digital media and cloud services and reducing reliance on the iPhone. Apple chief executive Tim Cook unveiled a revamped Apple TV app which includes both original tv plus the ability to subscribe to third-party services, a games subscription service, a credit card in partnership with Goldman Sachs and a digital news and magazine bundle. These initiatives, while not particularly innovative in the Apple tradition, threaten to substantially increase Apple’s market power against the common good. Similar initiatives by the Facebooks, Googles and Amazons of this world, can be anticipated.

The proposal to use current legislation, eg to revitalise the OFT and M&MC in UK, so as to unscramble anti-competitive M&As and prevent them being repeated, seems a sensible start. As does applying patent law principles to big data to require data sharing.
Even the Economist agrees with that, but will it happen?

Remaking the Real Economy