The Occupy Wall Street protest has been described as a deeply instinctive movement to defend America’s traditional values. So far, it has been a peaceful, dignified and respectful, almost wistful, restatement by disparate groups of belief in fairness, individual freedom, democracy, the rule of law and, of course, the social mobility embodied in ‘the American dream’. The protest is against corporate America’s deliberate destruction of those values, through the greed and dishonesty which has been largely justified by theoretical economics.
Demonstrably, the theory doesn’t work. It led directly to the current crisis in which 99% of the population are continuing to pay for the excess of the 1% who caused the problem and who continue to enjoy excess. The bottom 25% are required to shoulder the greatest burden of all, with the bottom 10%, even in the world’s richest economy, being reduced to genuine poverty.
What is true of Wall Street is true of the City of London, which has an even more disproportionate share of its national economy. Both are driven by the same fundamentalist focus on financial interests, rather than a fair and democratic focus on the interests of the whole population.
The economic theory that underpins this state of affairs is based on mathematical models of how an economy works. A firm’s basic duty, in such a model, is to maximise its profits. If firms did not seek to maximise profits, then among other things, markets would cease to be efficient, and competition would not be effective. Firms are required to act within the law, but to maximise profits they must ensure that they exploit all legal opportunities. For example, firm managements have a duty to ensure they minimise tax payments and must investigate every possibility for doing so, including tax justified corporate structures, off-shore registration etc.
Some three decades ago, following theoreticians such as Milton Friedman, the emphasis moved from profit maximisation to shareholder wealth maximisation, which is the prime cause of the current betrayal of American values. Maximising shareholder value is easy to achieve in the short term through the extraction of asset values for shareholder gain. Several famous UK cases have been exampled on this site, including Boots the Chemist, Cadbury and Southern Cross.
Previously illegal forms of financial entity, such as hedge funds and limited liability partnerships, have been allowed by the deregulation of Wall Street and the City of London, on the back of economic theory. Their role is both to extract value from real economy firms, and to create value through the ‘socially useless’ casino business in financial ‘products’, which is now valued at several times the world’s trade in stocks and shares.
The nexus of interests among advanced economies, notably the US, EU and Japan, is to regulate financial sectors and require their fair reparation. To achieve that, the advanced economies would need to co-ordinate their legal and tax regimes, closing escape routes and raising barriers to firms from non-conforming economies. Such international co-operation is now more credible than ever before. The Occupy Wall Street protest, if joined by Occupy the City of London and other similar protests – there have already been voluble protests through the southern EU – would make such initiatives politically more feasible. Such glimpses of people power, as with the Arab Spring, might suggest an alternative future if governments fail to act.