Category Archives: Economics

Economics, Free Market Capitalism

Yesterday's Gods

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The “madmen in authority”, as Keynes characterised them, are still in thrall to “the markets” and the rating agencies. The people surrounding messrs Clegg and Cameron, as they struggle to an agreement, are more concerned that what they finally come up with will satisfy the markets, than that they will satisfy the electorate.

But, by definition, nobody understands the markets. That’s why speculative funds, such as hedges and private equity funds, can still make money out of them. Commentators can never predict future market moves, though they always explain in detail reasons for movements which have already occurred. Over the past few days it’s been repeated endlessly in the media, that the markets dislike uncertainty and want stability, but plainly that is the reverse of the truth: market volatility is what presents marketeers with the opportunity to make huge amounts of money, for which the tax payer will in the end pay. The question arises not so much as to why we still take markets seriously, but why markets should still be allowed such freedom to do damage. Surely the electorate should be given some protection.

If markets are free, protection might be expected through the credit rating agencies, Standard and Poor’s and Moody’s. But they contributed in no small way to the massive losses incurred by the electorate as a result of the credit crunch of 2007-8. The agencies gave AAA credit ratings (ie lowest risk) to the riskiest pools of loans, fuelling the sub-prime mortgage fiasco. Among many other cock-ups, they failed to notice the insolvency of the Icelandic banks and gave the Icelandic Government a clean bill of health till its economy imploded. If these were not cock-ups, they were something rather more sinister resulting from vested interests. The rating agencies offer no protection, and don’t deserve to be taken seriously.

What the “madmen in authority” need is a different economic perspective to replace the free market fundamentalism which still rules today. But there can be little expectation of that informing the Conservative / Lib-Dem negotiations.

Corporate Ownership, Economics, Free Market Capitalism

The Point about Profit

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Profit is wilThe idea of profit has caused much aggravation over the years and even today is still the source of heated debate. Marx borrowed Ricardo’s idea that profit was no more than the wages earned by labour but stolen by the providers of capital. This explained the grossly unfair divergence between the poverty of the labouring classes and the wealth of the capital owners. The neo-classical economists argued that the purpose of industry was to maximise profits, referring not so much to the theft of wages but the surpluses to be earned from industrial and business activity. Latterly, the free market fundamentalists, to which all three of the main political parties are to some extent in thrall, have argued that maximisation should apply to shareholder wealth rather than profit. This then seems to confirm again the inequity first argued by Ricardo, consolidating the position of the owner over that of the employee.

Clearly, none of these theoreticians have really understood the vital role of profit in industry and business. Adam Smith argued the self interest of the butcher, baker etc as vital to the effectiveness of their businesses, because that was how they earned a living and supported their dependents. The survival and long term prosperity of the business was what mattered, profit being some measure of that ability to survive and prosper.

The idea of maximising profit is based on a misunderstanding of business realities, which are concerned with, as Peter Drucker put it, the ‘real risk of ending up with an impoverishing deficit, and the need, the absolute need, to avoid this loss by providing against the risks’. But providing against the risks is anathema to the free market fundamentalist. They regard any such provisions against risk, such as spare or underutilised assets, as evidence of inefficiency and therefore grounds for replacing the business management with one that will maximise shareholder wealth, and this is most easily achieved through the firm being taken over and often being broken up..

Whatever profit is argued to be, it is a necessity for the survival of any business. Its theft by shareholders, or any other stakeholder, only serves to destroy the real economy.

Bank Bonuses, Company Law, Economics, Free Market Capitalism

Devastating Mistakes of Economics

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In 1792, William Pitt told parliament that Adam Smith’s “extensive knowledge of detail … will …furnish the best solution to every question … of political economy.” Since then it’s been downhill all the way. For Smith, the industrial firm (his famous pin factory) was the key to economic progress, with the market only serving to enable the division of labour. But economists have always given primacy to the market, almost ignoring the industrial firm, because they don’t begin to understand it. In late nineteenth century, economists adopted differential calculus to model the economy, which meant describing the firm as a “production function” comprising two variables, price and quantity, and seeking to maximise profit. This was not just stupid, but hugely damaging. Maximising one thing requires the neglect of everything else, which has done great damage to Anglo-Saxon industry. Finally, in the 1980s, still completely unable to conceive of what a firm involves, they adopted the agency idea, claiming that the managers of a firm were the agents of its shareholders and should not therefore be maximising profit but maximising shareholder wealth. It is a lie. Managers have no contract with shareholders, but with the firm which is a legal entity in its own right. Shareholders do not own the firm – if they did they would not enjoy limited liability. They own shares which entitle them to dividends and capital growth, both at risk. Maximising shareholder wealth, as required by Friedman and followers, requires neglecting everything else. When specific decisions have to be taken, notably in the case of hostile takeovers, this is crucial. It has destroyed much of what remains of Anglo-Saxon industry, the latest British example being Cadbury. It has also justified the obscenity of top executive share option bonuses, which unless reversed will be the source of what is called euphemistically, social unrest.

Co-operation, Corporate Ownership, Economics, Public Sector, Uncategorized

The Political Appeal of Co-ops and Mutuals

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George Osborne announced the Conservatives proposal to mutualise and co-op the public sector, describing it as the ‘biggest social revolution since Thatcher sold council houses’. But their proposal just shows how little they understand the essence of those movements. Mutuals and co-ops operate within the for-profit sectors but instead of paying surpluses over to external shareholders they pay some to their members and accumulate the rest within the business. That’s the whole point. That was how the great mutual financial institutions and building societies got to be so big and so successful. The rape and destruction of so many, almost including the Co-op itself, was sanctioned and encouraged by the Thatcher government.

So how would mutuals and co-ops operate in the public sector with no surplus to distribute and accumulate? What would be the point? Well, George Osborne says, they would be able to work without the central controlling bureaucracy. So, was he saying there would be no central regulation or control? Well, not quite that, Osborne admitted, there would still have to be performance standards. So what did this social revolution amount to, other than confusion? Well, it was a reply to Gordon Brown’s earlier announcement that mutualism and co-ops would be at the centre of Labour’s election manifesto. But not a very convincing reply. No more convincing, in fact, than Brown’s own commitment. It would be rather better if politicians thought through their policies before deciding on the accompanying sound-bite.

Accounting profession, Audit profession, Corruption, Economics, Shareholder Value

Financial Swindlers

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So it turns out the top brass at Lehman Brothers were deliberately lying about their indebtedness to the tune of $billions. Shades of Enron! So what’s new? Speculative markets are based on lies. In the old days financial institutions such as pension funds and insurance companies, served some social purposes. Today, hedge funds, sovereign funds and the like, serve no social purpose. They exist only to make money for their investors and themselves, both being in a position to take risks with ‘loadsamoney’. They have no moral compass beyond ‘making as much money as possible’ to quote the famous economic mountebank, Milton Friedman. So, of course, they are liars. The accounting profession are culpable, deliberately falsifying balance sheets so they appear less risky than they are. And firms of auditors are liars, declaring the accounts to be “true and fair” when they know perfectly well they are nothing of the kind. But very few of these parasitic liars end up behind bars.

Economics, Free Market Capitalism, Management Practice, Public Sector

The Case for Monopoly

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Keynes said he could see no reason why a government should become involved in owning a railway. However, the result of privatizing British Rail and trying to open it to competition, suggests Keynes may have been short-sighted. Monopoly might be a bad thing when exploited by some profit maximising economist, but the case against is by no means shown to be universally true.

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Company Law, Economics, Management Practice, Shareholder Value

Was Friedman right?

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Milton Friedman is given a rather severe critique in The Rise and Fall of Management, especially over his malign influence on industrial management, how it is taught and how it is done. The Friedmanism which best captures his contribution to that endeavour is the one which tells the world that ‘corporate officials’ have no ‘social responsibility other than to make as much money for their stockholders as possible’.

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Co-operation, Company Law, Corporate Ownership, Economics, Shareholder Value

The Destruction of Accumulated Surpluses

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The disposal of Cadbury is some kind of a marker. It was still a successful company and could have continued independently with no problem. It had a proud history which doesn’t need to be repeated here, but it also had a price. And that price was agreed by its board of directors who gained prodigiously from the sale. Cadbury’s loss of autonomy is surely the precursor of many cost reducing decisions taken at its new American headquarters without regard to the old Cadbury stakeholders, notably including its employees. Doubtless, in the end, Cadbury’s Bournville heritage will be preserved merely as yet another industrial museum, the dead remains of the once thriving industrial community. Such relics are strewn across the British landscape, commemorating our once pioneering roles in wool, cotton and silk textiles, machine tools, iron and steel, cycles, motor cycles, motor cars, trucks and buses, china and pottery and hundreds of other sectors where Britain was successful and achieved a strong position but then sold it off for the financial gain of the few and the bitter disadvantage of the many.

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