Just when all the financial excitement was beginning, Paul Krugman wrote an article for the New York Review of Books entitled ‘Who was Milton Friedman?’ Was he the economists’ economist, profound theorist, universally admired by professional economists? Or was he the simplistic ideologue, populariser and propagandist of monetarism and the free market doctrine, whose ideas proved unworkable in practice and whose intellectual honesty was at least questionable? Krugman’s answer was that Friedman was both of these.
The problem with this dichotomy was that Friedman, the simplistic populariser, gained huge credibility from Friedman, the profound theorist. And his intellectual dishonesty was evident in his populist exploitation of that credibility. For example, on 1st September, 1976, Friedman, addressed the Institute of Economic Affairs in London. The title of his talk was ‘The Road to Economic Freedom: The Steps from Here to There’. His prescription for Britain was the ’shock treatment’ of low flat rate taxes and wholesale privatisation, both of which a few years later the Thatcher government implemented. Continue reading Saving the Friedman Legacy→
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?→
So President Francois Hollande has not given up on his election promise to levy a 75% tax on those who pay themselves, or get paid, in excess of €1m (£840,000) pa. The French high court rejected his original proposal, but it seems the revised version, to levy the tax on the payers rather than the recipients, may well prevail. The promise is that it will only be for two years, but Pitt said much the same when he introduced the first British income tax to pay for the Napoleonic wars. If it works, it will no doubt stay and perhaps be built upon
Taxing the income of the very high paid at a higher rate than the low paid is part of what made the French vote for Hollande as President. The people want it. They apparently don’t like the idea that the wealthy are sneering contemptuously from their tax avoiding havens at the poor who are being clobbered left, right and centre. And in that respect the French are probably not much different from the Brits. If a British political party were to advocate a 75% tax rate, with no escape, for those earning a million or more, would it gain support from the mass of people? Continue reading Grasping the Nettle Now→
Every day, the BBC – in fact the whole media circus – faithfully report the progress of the FTSE100 share index, as though it were a portent of our economic future. Every day so called “experts” explain in detail the reasons for FTSE100 movements seemingly on the assumption that it still relates to the UK economy. But recently some mystification has been expressed over how, when the UK economy is doing so badly – resolutely refusing to respond to the inspirational George Osborne, even losing its triple A rating – yet the FTSE100 is doing so well, already up 8% this year following 5.8% rise last year, threatening to follow the Dow to hit an all-time high. There is a definite disconnect between FTSE100 share values and the real economy. Bank of England governor Sir Mervyn King’s enthusiasm for quantitative easing only further emphasises that disconnect, boosting share values but having no effect at all on the real economy and jobs.
The FTSE index no longer reflects expectations about the UK economy. So what does it reflect? There must presumably be some connection between share prices and expectations of future gains. But those future profits no longer relate to what’s going on in the UK. The FTSE has become a global index, comprising companies like the dreaded Glencore, Anglo American, Serco, Xstrata, and like global companies. Oil and gas and pharmaceuticals account for nearly 30% of the FTSE’s value. Basic resources (mining), banks and financial services make up another 30+%. And an increasing number of foreign companies find a London quotation beneficial, such as the recent Russian additions, steelmaker Evraz and gold and silver producer Polymetal International. Around two thirds of FTSE100 companies have limited relevance to the real UK economy. Continue reading The FTSE100 and the UK Economy→
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. Continue reading Centrica and the Existential Lie→
Back in July last year, this site pondered what would replace the public company, formerly the most powerful institution in the economy (see http://www.gordonpearson.co.uk/11/what-will-replace-the-public-company/). Its numbers had halved over the past decade and the number of small and medium sized firms’ initial public offerings had declined by more than 80%. Shareholders’ funds appeared to be no longer of much worth to the public company, the flow of money having been reversed so that shareholders, and indeed the whole financial sector, were now taking rather than investing, Nevertheless, media interest in the FTSE100 and other stock market indices continues unabated, even though they only measure betting activity on such as M&A rather than real new investment. A posting last month offered a reasoned explanation of how democratic capitalism, which had delivered so much and promised so much more, appeared now to be approaching the buffers – http://www.gordonpearson.co.uk/20/democratic-capitalism/.
The still dominant Friedmanite version of capitalism is now being seen to self-destruct with its array of naïve beliefs and illegality. Company law (eg Companies Act 2006) charges company directors, Friedman’s ‘corporate officials’, with the legal duty of looking after the best interests of the company having regard to the long term and to the interests of all stakeholders. Friedman argued they had no other duty than to make as much money as possible for shareholders. Friedman clearly won hands down against the law, and that despite the fact that ‘corporate officials’ have legal contracts of service and employment with the company, not its shareholders, and those contracts invariably charge them with the duty of looking after the company’s best interests. Continue reading Glencore, PwC and Horsemeat→
Among all the debate about the vices and virtues of capitalism there is rarely any serious attempt to define its key characteristics. Whatever they are, they appear to work better than the best known alternative that has so far been tried: centrally planned totalitarian communism. Whether good capitalism or bad, compassionate, predatory or even ‘conscious’, all capitalisms appear to depend on the ownership and control of the established legal entity known in the United States as the corporation, or the public limited company elsewhere. That is the corporate form Chandler described as ‘the most powerful institution in the economy’ on which the affluence and growth of the past century and a half has been based.
The corporation was the legal form which was enabled to issue shares to many dispersed individuals and so accrue sufficient funds to make large scale capital projects possible. Initially its legal creation required a royal charter, then an act of parliament and finally, after 1844, a company could be legally established by a relatively simple process of registration. Limited liability followed a decade later. This was the precious means by which industrialisation was enabled. Continue reading Democratic Capitalism→
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. Continue reading Lessons for Advanced Economies from 2012→
After the Libor rate fixing scandal, and the PPI mis-selling fiasco, we now have hysteria over gas and electricity companies fixing market prices to their advantage at the expense of the general customer. Well of course they’ve been doing that, it’s what they do. They aren’t charities. They charge whatever the market will bear. That’s how markets work. If the markets were competitive it would be a different story and the customer would reap the benefit. But with the fixable, non-competitive markets which have been allowed to proliferate over the past thirty years, the customer loses out to the supplier. And since the suppliers are driven by the Friedmanite rule that they exist to make as much money as possible for shareholders, it’s the shareholders who really gain at the expense of customers. But since shareholdings are largely controlled by financial intermediaries, investment banks, hedge funds and the like, it is they who are the ultimately winners at the consumer’s expense.
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. Continue reading Our future and effective innovation→
Fighting for Fairness by Remaking the Real Economy 