Category Archives: Competition

Capitalism to the Rescue

There are an increasing number of live initiatives for making the capitalist system more sustainable and equitable. Improving environmental, social and governance performance would be steps in that direction. Transparency in terms of measuring and reporting progress would also be important. Including content on sustainability and equitable governance in the mandatory curriculum for all secondary, further and higher education students might start to change the general understanding of these critical issues. Creating an alternative system of ethically focused capital markets and enlightened financial institutions might challenge the financial sector to a more enlightened capitalism role.

These initiatives are all positive and worthwhile. But if the generally held core belief persists, that a successful economy depends on people all seeking to maximise their own material self-interest, such innovations will remain niche, if they remain at all. Their impact would be both limited and short-lived.

The original purpose of the capitalist system was to fund industrialisation. That generated the economic gains for entrepreneurs and their stakeholders and the industrial infrastructure paid for by taxes, as well as providing for the common good by improving health, education and general living standards.
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Why the ‘big six’ energy suppliers are “ripping off” consumers

David Cameron has recently claimed to know a thing or two about economics. So why is he surprised the privately owned ‘big six’ energy providers appear, as Ed Milliband put it, to be “ripping off” consumers? It’s not that they are particularly evil, unethical or exploitative, but that they are dominated by the same economic ideology which led the Thatcher government to privatise gas and electricity in the first place and which Cameron claims to understand. And that same ideology dictates that it is the legal duty of those private companies to maximise shareholder wealth. Such maximisation necessarily involves them in taking decisions which result in the disadvantage of parties other than shareholders, including, as far as they feel is judicious, their customers. So why is Cameron ‘disappointed’?

It is the ideology of Milton Friedman, simplistic populariser of the neoliberal belief. A cornerstone of the ideology is Friedman’s “empirical generalisation that it costs the state twice as much to do anything as it costs private enterprise, whatever it is.” The message was often stated. That particular quote is from a lecture Friedman gave to the Institute of Economic Affairs, free market think tank lobbyists, much loved by Margaret Thatcher, some 18 months after she had become leader of the Conservatives. The only supporting evidence offered by Friedman was that his son had pointed it out to him. If it turned out not to be true the basic justification for privatisation would be shown as quite spurious.
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UK Economy: Conspiracy or Cock-up?

Almost 5 years after the crash, the UK economy remains in the doldrums. Now even the IMF is critical of the UK’s austerity programme. But the government is not for turning from its basic pursuit of austerity plus miniscule photo opportunity gestures like letting small businesses off their National Insurance contributions for a period. But it isn’t working. Is it conspiracy or cock-up?

Or perhaps it is both. There is an underlying conspiracy to promulgate the theory which explains and justifies decisions which are clearly against the best interests of the mass of the population. The democratically elected leaders then cock things up by swallowing the theory whole, implementing its most outrageously inequitable measures and, aided and abetted by a largely collusive media, offering the formulaic explanations provided by the theory. Continue reading UK Economy: Conspiracy or Cock-up?

Centrica and the Existential Lie

The media expressed shock and horror that Centrica should jack its prices up to its customers and pass £1.3bn of its surplus profits back to its shareholders. But why? That’s what Centrica’s directors think they are there for. And the media and most everyone else appears to share that misunderstanding that it’s the legal duty of company directors to maximise shareholder wealth. But it’s simply not true. It’s based on a lie. The capitalist system was much more soundly based than that, but is currently being destroyed by such dishonest, even criminal corruptions of the truth.

In real competitive markets, exploitation of customers, employees and the rest, for the sole benefit of shareholders, is constrained by competition. So everyone benefits. But where a market is carved up between a small number of monopolistic giants, exploitation is inevitable. Some markets are like that. Gas is one. So are most privatised markets because government attempts to create pseudo competitive conditions invariably fail, succeeding only in establishing an additional layer or two of bureaucracy to handle the unavoidable extra regulation.
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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.
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The Real Costs of Globalisation

Globalisation reduces the cost of goods and services as their production migrates to the lowest cost parts of the world. The lower prices are a benefit for everyone and the low cost parts of the world, which are only now beginning to industrialise, gain tremendously in terms of economic growth and employment. So globalisation is a good thing, But there are some downsides. Jobs disappear in the advanced economies as production moves to the developing world. Up to now, the advanced economies have grown, bar a few booms and busts, more or less continuously, for the past 250 years in UK’s case. But the migration of jobs now seems likely in the advanced economies to be permanent and to be bringing the growth phase of their economic development to an end.

Permanent changes like this are difficult to forecast, and even appear difficult to recognise when they have happened. The initial response is to identify the change as a blip. Commentators today are identifying this quarter’s UK GDP data as indicating the end to the ‘double dip recession’. If miniscule GDP growth is recorded two quarters on the trot, commentators will surely be referring to ‘green shoots’. But it is equally likely that the slightly encouraging data this quarter is a blip and from now on, the lack of economic growth will be the steady state in advanced economies, which might more aptly be described as post-industrial.
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Our future and effective innovation

Will Hutton is courageously idiosyncratic about innovation, proposing a simple combination of general purpose technologies (GPTs) and good capitalism as the explanation for the rapid rise in living standards in the west over the last 250 years. For Hutton, the source of growth is ‘the combination of science’s capacity to transform how we live and a capitalism constantly pushed and prodded by democratic governments towards exploiting those opportunities.’ [See ‘Britain’s future lies in a culture of open and vigorous innovation’, Will Hutton, The Observer, 14 Oct 2012].

However, the massive empirical and theoretical literature on innovation presents quite a different story. Hutton suggests one exemplar GPT was the steam engine. First identified as a possibility in ancient times, drawn up in some detail in late 15th century by Leonardo da Vinci, it wasn’t till late 18th century that the first working engines were built by Thomas Newcomen for pumping water out of Cornish tin mines. Newcomen’s engine was taken several stages further by James Watt, with among other refinements, an external condenser and rotary drive which made it feasible to run the new cotton mill machinery invented by Arkwright, Crompton and the rest which had previously been driven by water power, the whole made more efficient by the greater precision of machining developed at Watt & Boulton’s Soho foundry and powered by coal made economic by the new transport infrastructure provided by canals. The steam engine wasn’t a GPT. It was an important component of a technological revolution, comprising a whole collection of fundamental innovations which, while not all strictly interdependent, tended to feed into and reinforce each other.
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The Glencores, Xstratas and Blairs

Almost 18 months ago Glencore first featured on this blog – Glencore and others are screwing the world – a posting which highlighted the predatory nature of financial monsters like Glencore. The Financial Times had reported Glencore’s ability and willingness to fix commodity prices for their own profit and everyone else’s loss and how they were expected to increase their monopolistic stranglehold in key markets. Glencore was in the news at that time because of its imminent initial public offering of shares to the London Stock Exchange which was expected to value the company at between £60 billion and £73 billion and facilitate its further expansion through mergers and acquisitions. The FT also reported how the world’s largest commodity trader had paid “almost no corporate taxes on its trading business for years in spite of bumper profits.”

The FT’s report described how Glencore had exercised their monopolistic power to raise prices in the Russian wheat market for a quick profit, at the expense of those millions already struggling on the breadline. That was revealing of the sort of business Glencore is, and the sort of business practices it was prepared to embrace in order to make its money.
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Our Madmen in Authority: the Bullingdon intellectuals

When J M Keynes used the term ‘madmen in authority’ he was referring to his contemporary equivalents of David Cameron and George Osborne. At the end of last year, though he talked about it incessantly, it was clear that Cameron had limited understanding of the need to rebalance the economy – see http://www.gordonpearson.co.uk/09/mr-cameron-doesn%e2%80%99t-understand/. The real business of making and distributing things for people to use and consume creates real jobs. But Cameron didn’t seem to understand the difference between that real economy and the speculative, bonus driven financial sector. He said he understood, but then always succoured up to his friends in the City.
His lack of understanding, or his duplicity, seems only surpassed by fellow Bullingdon intellectual and purveyor of the greatest budget shambles in living memory, Chancellor George Osborne.

The financial columns have recently suggested full state ownership of RBS was being discussed by senior ministers and treasury officials. It would cost around £5bn. But Osborne was against it. A rational objection was that it would mean taxpayers taking on full responsibility for the bank’s toxic debts, as opposed to the 82% responsibility they already have. But Osborne’s real reason was his dogmatic focus on cleaning RBS ready for sale back to the private sector, even though that won’t happen any time soon. Only Vince Cable has come out publicly in favour of nationalisation so as to boost lending to industry, especially innovative SMEs, in order to get the real economy moving again.
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What will replace the public company?

The public company, the corporate form that Chandler once described as the most powerful institution in the economy and which made industrialisation possible, is rapidly becoming an endangered species. Over the past decade the number of public companies in the UK has almost halved and declined by 38% in the United States. Similarly, the number of Initial Public Offerings (IPOs) has declined by over two thirds, and in the case of SMEs by more than 80%.

These statistics are quoted in a recent article in The Economist which puts the rapid decline down to the over regulation of public companies. This is the only explanation available that fits The Economist’s free market dogma. The article cites the case of Boots the Chemist as an exemplar of how ‘now it is perfectly respectable to choose to “go private”’. This is a distortion of what happened to Boots. Under the leadership of asset stripping accountant, Sir Nigel Rudd, Boots merged with Alliance Unichem which was preliminary to the opportunistic takeover by an American private equity firm, which saddled the company with the debt raised for its acquisition and moved its registration to a tax avoiding canton in Switzerland. What part of that sad story is ‘perfectly respectable’ is open to debate. The result is that a great British company was raped and pillaged for the benefit of a small number of individuals, mainly in an American private equity limited liability partnership.
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