Lessons for Advanced Economies from 2012

Advanced economies everywhere seem to be led by politicians who are media competent but practically inexperienced. They seem not to have learned anything from the experiences of the past year, only yearning for a return to business as usual. But there are vital lessons and changes need to be made.

Recession: The much talked of double-dip morphed into talk of triple-dip and the lost decade, and, eventually in 2012, to the previously unthinkable notion that GDP growth might be a thing of the past for advanced economies. Systems thinkers warned of the classic systems life cycle characteristics which accompany permanent change from one phase (eg maturity) to the next (eg decline): for the first several time periods, the idea of permanent change is never accepted – ‘it’s a blip’, ‘a double dip’ – until the permanency of change is absolutely undeniable. By which time most opportunities for improvement have been lost. This scenario seems ever more probable, given the increasingly apparent limitations on earth’s capacities and the ever increasing demands placed upon it.

Globalisation: The globalisation of markets led to the globalisation of firms, but has not yet led to the globalisation of regulation. Globalised firms are therefore enabled to run rings round national governments, avoiding, by perfectly legal means, the payment of tax more or less at will – as flagged up in 2012 by the head line cases of Starbucks, Amazon, Google and others. A General Agreement on Taxation and Tarriffs (GATT) will have to be convened if the avoidance of national taxations is to be regulated.

Income Inequality: Top incomes have exploded over the past thirty years at the same time as top rates of income tax have been slashed and legal means of tax avoidance have been developed. These changes were symbolised in 2012, on the one hand, by Bob Diamond’s £22m pay off entitlement when he exited as boss of Barclay’s Bank following the bank’s Libor criminality while he was in charge. The changes were symbolised on the other hand, by the slashing of welfare benefits to the poor and unemployed. Three decades ago, management expert Peter Drucker suggested that top earners could not imagine the ‘hatred, contempt and fury’ caused by their salaries being 20 or more times those of shop floor workers. Top earners in the large corporates now exceed 400 times the shop floor, while the unemployed no doubt experience real feelings of ‘contempt and fury’.

Trickle down: The justification for income and wealth inequality offered in old economic text books was that the surpluses of the wealthy were necessarily invested in the real economy, creating economic growth and jobs from which everyone gained. Since financial market deregulation, that argument has lost traction as surpluses have been invested by professional fund managers in the speculative swaps and derivatives which earn much higher returns than the manufacture of widgets until such time as the bubbles burst. Even the trickle down from the Bank of England’s £375 billion of quantitative easing (QE) has been negligible. Similarly in the USA. In 2012 even former Federal Reserve Chairman, Alan Greenspan, was surprised that QE had “very little impact on the economy.”

Financial Flow: The modern financial sector came into being in the 18th century in order to raise the capital necessary for building the early transportation infrastructure, notably the canal system, for transporting heavy raw materials and goods in large quantities. Typically a canal took seven hugely expensive years from its conception to earning its first revenues, but the returns when they eventually came might be substantial. The banks and stock and bond markets that arranged the financing of the canals, also enabled the railways, deep mines, mills and factories of nineteenth and twentieth century industrialisation. Now in the twenty first century, capital is starting to flow in the opposite direction in advanced economies. Rather than being the means of financing growth, they are used to enable founding entrepreneurs and top executives to extract value they contributed to creating. For example, Google’s initial public offering (IPO) in 2004 realised $23 billion, Glencore in 2011 realised £61 billion, and in 2012 Facebook’s IPO valued the company at over a $100 billion. The proceeds from these and many other IPOs join the same route as other funds claimed to be intended to ‘trickle down’.

Public Sector Management: Successive UK governments have attempted to minimise the public sector by selling it off to private operators wherever possible, or trying to create competitive market forces for activities which, for electoral reasons, were retained in the public domain. The main impact on natural monopolies such as gas, electricity and water, has been the necessity to pay for additional pseudo-competition creating, monitoring and reporting bureaucracy, as well as the provision of external shareholder returns. The shambolically privatised rail network was notable in 2012 for the incompetent failed attempt to auction off the West Coast train franchise, and ended the year with controversy over rapidly increasing rail fares. In areas such as health, education, policing, welfare, postal services and defence, privatisation has proceeded by stealth in the form of subcontracting or outsourcing operations that might be run for profit. That leaves only the non-viable activities in public ownership which government seeks to control by target setting and league table reporting mechanisms. These have had two main impacts: the creation of costly bureaucracy, and the destruction of professional expertise and morale.

Competition Regulation: Competitive markets used to be protected, for the benefit of the consumer, by legislation and by agencies such as the Office of Fair Trading and the Monopolies and Mergers Commission which could act to prevent a monopolistic market position being achieved. And if it was achieved, they could require its subsequent break up. Not any more. Since deregulation, the only action such agencies can take is to challenge the monopolist if they abuse their monopolistic power. And that will only be done with extreme care as the agencies lack the resource to conduct such challenge on other than the very rare occasion. 2012 was marked by Glencore’s takeover of Xstrata. Glencore had previously demonstrated its willingness to use its monopolistic price fixing power in global grain markets to drive up prices for its own short term gain at the expense of the third world poor. With Xstrata on board, Glencore now has the ability to fix global prices of nickel, zinc, platinum, chrome, copper, and thermal and coking coal as well as cereals. The fact is that competition is now regulated by private monopolists for their own gain, rather than by public authorities for public benefit.

Conclusions: The items outlined above seem to have two things in common. Firstly, they all appear to work for the monetary benefit of what the Occupy movement refers to as the 1% and against the interests of the 99%, exacerbating the already dangerous divisions in our society.
Secondly they all stem from an interpretation of neoclassical economic theory which was developed in the years when the ‘free West’ appeared to be threatened by the totalitarian Communist USSR and PRC. Though that threat is now history, the economic ideas it spawned, developed further by Milton Friedman and colleagues at Chicago University, remain dominant in the thinking of the current generation of ‘madmen in authority’.

A reasoned critique of the theory, together with practical non-violent solutions, are offered in The Road to Co-operation (See http://www.gordonpearson.co.uk/books/the-road-to-co-operation/).

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