The Lessons of Carillion and Grenfell

Back in 1989, J K Galbraith addressed newly graduated women students of Smith College, Massachusetts. He was advocating the pursuit of simple truth and warning of the dangers posed by ‘institutional truths’. They were not truths at all, but overarching lies which had to be bought into if an individual was to survive and prosper in a particular setting.

Neoclassical economics was perhaps one of the most elaborate systems of institutional truths yet invented. Generations of dedicated economists have bought into it and then added further intricate detail of depth and breadth of institutional truth to the ideology.

The neoclassical foundation was built on simplistic assumptions of homo economicus, profit maximising business and a complete disregard for observed reality as well as for any wider context such as social and ecological systems. It also excluded any consideration of values and for the long term impacts of economic decisions. The maths simply was unable to accommodate such fundamental factors.

The generation of neoliberals associated particularly with Chicago University and in particular, Milton Friedman, added final touches to the ideology which was grasped by the Reagan and Thatcher administrations and has maintained its stranglehold on Anglo-America ever since. Those final touches include commitment to minimised flat rate taxation, minimised state involvement in the economy, minimised market regulation and the conversion of profit maximising business – which at least allowed potentially beneficial allocations of maximised profit – to shareholder value maximising which denominated everything, not just profits, as the property of shareholders.

The many institutional truths, that is lies, on which those various tenets of neoliberal economics are based have been well covered elsewhere on this website. Minimised market regulation doesn’t lead to competitive markets benefitting customers, but to markets regulated by financialised monopolists for their own benefit. Minimised government for the people by the people, doesn’t lead to freedom for the people, but to government by organised money for organised money. Minimised flat rate taxation doesn’t reduce the tax burden on the mass of people but on the rich monopolists who lead the self-perpetuating organised money establishment.

The collapse of Carillion which has flagged up the huge economic burden imposed by private finance initiative (PFI) projects long into the future, could be a ‘watershed moment’ as Corbyn expressed it. But that seems unlikely. The ideology has survived the Grenfell Tower disaster unscathed. Both Grenfell and Carillion highlight myriad flaws in neoliberal economics which is leading us to Armageddon.

Adam Smith had argued that ‘the rich should contribute to the public expense, not only in proportion, but something more than in that proportion.’ He had also argued that some of that taxation should be used to provide free education for those doing the repetitive mind numbing work required in the new factories of the industrial revolution.

However, one of the most decisive and lasting impacts from the Reagan/Thatcher neoliberal application is the commitment to low, flat rate taxes. The Thatcher government reduced the former progressive system of personal taxation, down to a simple dual rate system. The marginal rate had previously been as high as 98% for extremes of affluence, but Lawson’s 1988 Budget cut the top rate of income tax to 40%, which according to the Institute for Fiscal Studies reduced the state coffers by over £20 billion a year. The beneficiaries were those on the rich list.

State provision of health, education and the rest, nevertheless continued. But the anticipated ‘trickle down’ of that £20bn from the wealthy to the ordinary people, proved to be another institutional truth. It simply didn’t happen.

So the Major government hit upon the PFI scam, essentially a simple hire purchase application with the private sector paying for new projects and being repaid by the government over the following decades. That way essential public infrastructure such as schools and hospitals, were progressed without apparently increasing public debt, at least within that government’s term in office. All UK governments have since adopted that way of cooking the books, building up a massive PFI debt which will be a drag on all future administrations.

Profiteering by the private sector providers of public services was at first apparently straightforward, attracting companies solely interested in acquiring such contracts, with no particular expertise in the activities being bid for. G4S, Serco, Capita, Atos, Carillion and the rest, cover a huge range of services without specialised knowledge or competence as memorably demonstrated by G4S’s 2012 Olympic security fiasco. They are all financialised players driven by the aim of maximising shareholder wealth at the expense of all other stakeholders, notably including the state to which they are contracted.

As Whitehall became more competent at negotiating contracts, companies such as Carillion as well as those involved in building and maintaining the Grenfell tower, found it progressively more difficult to make a killing and inevitably increased their attempts to cut costs irrespective of the consequences and so head down the route which can only end in destruction.

What is the answer?

The practical problem of adequate public provision while containing public indebtedness is not solved by austerity and focus on the quantity of money in circulation. That didn’t work in the 1930s and it doesn’t now. The alternative approach is to focus on the velocity of money circulation and stimulate the real economy by adding funds to those in greatest need, who will necessarily spend what they have, rather than floating it away on speculative betting. That could only be achieved by a more progressive taxation system, so that the rich, as Adam Smith advocated, contribute more than proportionately to the development of the economy, rather than its destruction.

A one-off punitive windfall tax on the wealthy predators, the individuals as well as the corporates, that contributed to the Carillion and Grenfell disasters, would also seem appropriate.

But the real long term answer has to be to ditch the whole of the neoclassical-neoliberal economic institutional truths. It is not concerned with the real world. That much Friedman admitted, but defended it by arguing its ability to predict. But Friedman’s erstwhile colleague, Robert Lucas, gave that game away. Asked by the Queen why economists hadn’t been able to predict the 2008 crash, his response was that ‘economics predicts that such events are unpredictable.’

The dogma is not realistic and can’t predict. Furthermore, as already indicated, it’s leading us to Armageddon, a dictionary definition of which is ‘the final and decisive battle between the forces of good and evil … a vast decisive conflict.’

What’s the alternative?

One alternative, which dissident economists are beginning to investigate, is a systems analysis of the real world. Adam Smith is not usually represented as a systems thinker, though his pin factory example reveals several key systems concepts. Specialisation of function between co-operating system components is key to systems operation; as is the objective to achieve overall system aims. Recognition of the system‘s role within the larger social and ecological systems is also a core systems concept. Also, the maintenance of system components, for example the pin makers, so they continue to play their part in fulfilling overall system aims. These are all constituent parts of the systems model.

Smith’s misrepresentation is most obviously exampled by the UK based Adam Smith Institute (ASI) which claims to be ‘one of the world’s leading think tanks’. The Institute’s web site lists the first of its policy priorities as ‘Low, simple, flat taxes’ in conformance to neoliberal ideology. That is rather than the nuanced position of Adam Smith. He was concerned to observe and understand the real world in all its complexity: a true systems thinker.

Systems analysis provides knowledge and understanding of how the real world works. It is a world of systems within systems, recognising the interconnectedness of the whole as it operates on this finite planet. Understanding would be a significant first step towards to a fully sustainable future.

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