Category Archives: Free Market Capitalism

The economic theory from Adam Smith, through Ricardo, Say, Mises, Hayek and Friedman

The Care Home Pandemic Lesson

The mortality statistics reported as resulting from Covid-19 refer only to those who die in hospital. Those who die at home or in care homes are not included, even though, despite such obfuscation, it is known the death rate among the elderly and infirm accommodated in care homes far exceeds death rates among NHS patients. It has become clear that such care home residents have been abandoned, not by care home staff – there have been many stories of their heroic human caring – it is the system that has abandoned those in care. It is a valuable lesson, first learned decades ago, and it has far wider relevance than care homes.

That abandonment is longstanding and is well known and understood. The sector has been made available for rape and pillage with impunity, as indicated in the following quotes. The solution is clear.

The Lesson of Southern Cross, 10th June, 2011:
10th June 2011: “On 1st September, 1976, Professor Milton Friedman of Chicago University, economic theoretician and Nobel laureate, 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”. Friedman, being the quintessential free market fundamentalist, took a dim view of the mixed British economy with around 60% of national income then being spent by government. He prescribed the ‘shock treatment’ of low flat rate taxes and wholesale privatisation which a few years later Margaret Thatcher implemented.

His justification for privatising provision of education and healthcare was simplistic in the extreme. ‘There is,’ he argued, ‘a sort of empirical generalisation that it costs the state twice as much to do anything as it costs private enterprise, whatever it is.’ Friedman didn’t actually have any data to support this contention, but added that ‘My son once called my attention to this generalisation, and it is amazing how accurate it is’ (See Friedman, M, 1977, From Galbraith to Economic Freedom, London: Institute of Economic Affairs, p57).

That simplistic assertion held sway for the next three decades and still rules our lives. His advocacy of privatisation of public provision justifies, among other things, the provision of care homes for our aging population by the likes of Southern Cross. It turned out not to be twice as efficient as any public sector provision, and it threatens to go bust leaving the state to clean up the mess.

The nub of the Southern Cross problem arises from another Friedmanism, that corporate officials had no social responsibilities other than ‘to make as much money as possible for stockholders’. In the case of Southern Cross, those stockholders were at one time the private equity firm Blackstone, headed up by ex-Lehman Brothers mergers and acquisitions specialists. Their interest in making as much money as possible led Southern Cross to the classic asset strippers’ strategy of the sale and lease back of its portfolio of care homes, realising an estimated surplus of £500m for Blackstone. It may or may not have been ‘as much money as possible’.” (https://gordonpearson.co.uk/2011/06/10/the-lesson-of-southern-cross/)

Big Society Public Services – the Next Government Shambles, 22nd July, 2011:
22nd July 2011: “The Open Public Services White Paper, announced on 11th July, sneaked out under cover of the Murdoch mess, looks like being the next government created shambles. Like its approach to the NHS, it betrays a breathtaking lack of nouse and understanding. The government claims its aim is to improve the quality and reduce the cost of all public services. This magical result is to be achieved by opening them up to provision by private and voluntary organisations, in competition with their existing public providers. … opening public services is likely to result in bids from the private for-profit sector, against the existing public provider. And private for-profit providers can, by definition, go bust. Health Minister, Paul Burstow says the new NHS regulator, Monitor, would ensure providers do not copy the “risky business model” of Southern Cross, the bankrupt care home provider.”( https://gordonpearson.co.uk/2011/07/22/big-society-public-services-the-next-government-shambles/#more-942)

Looting and Rioting – Bob Diamond Again, 15th August, 2011:
15th August 2011: “Over the past few days, the famine in East Africa, the US loss of its S&P triple A credit rating, the Murdoch disgrace, the Eurozone indebtedness and Greece’s odious debt, and even the World Championship Hen Races in Derbyshire, have all been driven from the front pages, at least in UK, by the looting and burning street riots. Consideration of their underlying causes and recommended solutions have dominated the media. Prime Minister Cameron, for example, expert in policing and broken societies, apparently wants to appoint a native from gun-toting America, to show British police how to do their job …

What is the main difference between those young people stealing mobile phones, laptops, trainers, and so on, and the likes of Fred ‘the Shred’ Goodwin, Bob Diamond and Stephen Schwarzman? One-time RBS CEO Fred Goodwin broke the bank with brainless debt and acquisitions and ‘shredded’ many thousands of jobs. Bob Diamond, currently CEO of Barclays Bank, has featured from time to time on this site primarily for his socially useless work and exorbitant take home pay. Stephen Schwarzman is billionaire boss of Blackstone Group, the private equity outfit that among other things, stripped the now bankrupt Southern Cross healthcare group of its main assets and made off with an estimated £500million. They differ from the looting, burning rioters in two main respects, Firstly, the scale of their looting far exceeds anything which has happened on the streets. And, secondly, what Goodwin, Diamond and Schwarzman do, has over the last thirty years been legalised, so they can do it with impunity.” (https://gordonpearson.co.uk/2011/08/15/looting-and-rioting-bob-diamond-again/)

Screwing care-homes still makes the easiest money, 5th September, 2015:
5th September 2015: “Taxpayers are going to have to pay for another big care home operator, throttled by tax avoiding financial predators. According to its chief financial officer, Four Seasons, which runs 450 care homes and 50 specialist care units, ‘is reviewing its finances with all options considered’. One option would be to close down, leaving the taxpayer to pick up responsibility for its 20,000 residents and patients.

Four Seasons is carrying debts of £500million on which it is paying interest of around £50million. It’s not immediately obvious how they got into so much debt nor why they should be paying interest at 10% pa when the official bank rate is 0.5%….
The tax avoiding financial predator that acquired Four Seasons was private equity Terra Firma Capital Partners, owned by Guernsey based Guy Hands. The acquisition was completed a few months after the collapse of Southern Cross had demonstrated how profitable such deals could be.

Terra Firma was in the news earlier this year with demonstrations against subsidiary Annington residential homes’ proposed demolition of 142 homes on the Sweets Way estate in north London. They were accommodating families on Barnet Council’s waiting list, but Hands’ plan was to replace them with 229 houses and flats for sale on London’s booming property market.

Four Seasons is losing money at a rate of knots, £26million in the second quarter of the current year. While they blame the losses on various extraneous factors, it is clear that public funding of social care for the elderly is inadequate. But the only way it will be increased is when the mess has to be sorted at public expense when Four Seasons goes bust. That the taxpayer has to pick up the tab is a major attraction of care homes and any privatised NHS services. Once privatised, the new operators can profit by delivering sub-standard service, till they go bust and the state has to pick up the pieces.

Guy Hands explains his perspective on private equity on the Terra Firma website http://www.terrafirma.com/private-equity-investment.html:
The private equity funds we raise are used to acquire asset-backed businesses that can be transformed through fundamental change.’

This is a rather more sophisticated way of making the asset stripper’s case as succinctly expressed in The Times by Jim Slater protégé, John Bentley, forty five years ago:
‘The theory of what we are doing is to release half the cash, half the assets and half the number of people employed.’
(https://gordonpearson.co.uk/2015/09/05/screwing-care-homes-still-makes-the-easiest-money/)

There are many long standing, ethical and professional operators in the care home sector. But they appear to have been largely deserted by the state. The Southern Cross and Four Seasons examples show just what a perfect opportunity care homes present for predatory exploitation. Being asset rich and earnings poor, means they can be acquired at low cost, their assets cashed in and they can then be driven on a shoe string and if they subsequently go bust, so what! The state will have to pick up the tab.

But the problem goes much wider than just the care home sector. Four decades of ideologically driven privatising and outsourcing of public sector provision, including health services, places much of the work previously fulfilled by the NHS in private hands. Predatory, tax evading and avoiding, private equity acquirers who are not subject to public quotation or review, could then fulfill their mission by extracting value and leaving enfeebled operations to be picked up and paid for by the tax payer.

The solutions are fairly obvious and have been highlighted many times in the past. The care home pandemic lesson in particular is a relearning experience and reminder of what needs to be done. But it is unlikely to be easy to implement.

F D Roosevelt identified the basic problem over eight decades ago when he referred to organised money, which “had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that government by organised money is just as dangerous as Government by organised mob.” (F D Roosevelt, announcing the Second New Deal, October, 1936.)

It remains to be seen if state responses to Covid-19 will amount to a 21st century New Deal, which as well as defeating the pandemic, will need also to  remake the real economy as well as escaping destruction by organised money.  And if planet earth is to be made fully sustainable, to do so on a permanent basis.

Energy, Competition and Pretence

One of the most important challenges of management in the real world is how they can make their businesses truly competitive. Competition drives firms to be efficient and effective and to invest in technological innovation to provide improved ways of satisfying customer needs and wants. Such progress depends on the continuing ability to make sufficient profit to ensure survival in the short term and to invest for greater success in the long term. That is what real business is about.

Economists, such as Michael Porter, influenced generations of the leaders of finance, industry, the media, academia and politics, with their theories of competitive strategy, which were based on the not very profound equation that sales revenue minus cost equals profit. Therefore the way to maximise profit – which, for these theorists, is the whole purpose of business – is to have the lowest costs or highest prices.

The way to achieve the lowest costs is to have the biggest sales volume and therefore the greatest economies of scale. The way to achieve the highest prices is to make the product different in some way for which customers were prepared to the highest premium. So long as these processes are not interfered with by government regulators, then, according to the theory, the rules of perfect competition will apply and the consumer will be the ultimate beneficiary.

How does all this apply to the energy supply market?

Continue reading Energy, Competition and Pretence

There is an Alternative

According to the current edition of the Economist, Britain appears to be questioning the wisdom of its devotion to ‘the liberal economic credos of its recent past.’ Those are the credos which include free trade with open access to unregulated markets, minimised public sector, and so on and so forth – the whole baggage of neo-liberal economics to which the Economist itself is committed.

This questioning was prompted by popular responses to the threatened closure and disposal by Tata of its British steel operations. They were said to be losing around £1m a day, at least in part as a result of Chinese dumping cheap steel on UK markets. The outrageous suggestion had been made that the Brits should protect their domestic industry by charging an import duty on Chinese steel so as to at least level the playing field. Thus the classic dichotomy was drawn up between the two childishly simple minded economic ideologies: free trade on the one hand; protectionism on the other. These are the tips of the two ice-bergs of neo-liberalism and totalitarian communism. Continue reading There is an Alternative

UK ‘Open for Business’

In this election campaign, much is being made of whether or not the main UK Parties are business friendly. The fire sale of British owned assets, euphemistically nominated as foreign direct investment, is held to indicate that the UK is ‘open for business’. Over the past 35 years, company after company and industry after industry has been sold off to foreign ownership. The same has been achieved with the sell-off of public assets, the latest example being Eurostar, and public services and utilities which have been privatised and in the majority of cases sold to foreign owned entities.

It all has nothing to do with being ‘open for business’. The political motivation is to achieve a short term (ie relating to the next election) economic gain, completely ignoring the long term costs. The short term stats appear to be all that matters, so they can be quoted ad nauseam in media interviews.

Being seen as business friendly is clearly conceived as being worth either a lot of votes or a lot of money. So Parties shrink from confronting or challenging in any way what they conceive of as “business”. They appear ‘intensely relaxed’ about business people getting ‘filthy rich’. They seem tolerant of tax fraud on a massive scale. They shrink from regulation of markets. They are in awe of the financial sector. They talk about support for the SME sector, but do little. It seems they simply do not understand what business is about. Why should they? They’ve none of them been near it except for photo-opportunities.
Continue reading UK ‘Open for Business’

The Defunct Professor Friedman?

‘Practical men who believe themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist’. Practical men, say, like Bob Diamond. You can’t get much more practical than a man of limited intellect who takes from his place of work £17m a year, less a bit for having led a banking operation now officially recognized for its lack of ‘skill, care and diligence’, not to mention its criminal fixing of international money markets. Bob, himself, admitted his favourite economist is none other than Milton Friedman of the Austro-Chicago school of laissez faire, free marketeers.

Friedman’s influence still dominates government, finance and business, not just billionaire bankers. When he first came to the fore it was as a monetarist. The way to a small government and light touch regulation was to grant maximum freedom within a tightly controlled framework: the quantity of money in circulation. According to Friedman ‘too much money chasing too few goods’ would inevitably cause inflation. With Thatcher and Reagan, that simple aphorism replaced the Keynesian economics that had ruled since the second world war. But it didn’t work. There were too many unknowns about the quantity of money and the velocity of its circulation, and that rendered monetarist policy ineffective. Friedman himself expressed his disappointment at the ineffectiveness of monetarist policy.
Continue reading The Defunct Professor Friedman?

A New and Legal Orthodox Wisdom

Unilever’s Paul Polman must be a Chief Executive in a million. Or more. In his interview with Guardian Sustainable Business, Polman calls on business leaders, politicians and NGOs to recognise they cannot deal with the world’s environmental and social challenges by pursuit of Milton Friedman’s target of maximising shareholder wealth. Polman names a few other companies who are moving in that same direction, and suggests their numbers are growing. But it is a drop in the ocean.

“Why,” he asks, “would you invest in a company which is out of synch with the needs of society, that does not take its social compliance in its supply chain seriously, that does not think about the costs of externalities, or of its negative impacts on society?”

Sadly, the answer is simple and obvious: to make a quick buck. Friedman said that corporate officials had no other social responsibility than to make as much money as possible for shareholders, and that is what the business schools and university departments have been teaching ever since. So that is how the world now works. The world – business leaders, politicians, academics, and even the people in the street – have come to believe that it is the legal duty of those who run businesses to maximise the wealth of shareholders, and to hell with everything else. But it is simply not the case. We should not need heroic figures like Paul Polman to change the world. It should simply be a matter of compliance with the law.
Continue reading A New and Legal Orthodox Wisdom

Public Services and Predatory Shareholders

The trouble with the provision of public services such as health, education and the police by private for-profit companies is pretty obvious. Successive governments from Thatcher on, have pursued this flawed policy which derives from a hopelessly simplistic ideology. Private providers, who are subject to the discipline of the market, are held to be more efficient than public providers. The late lamented Milton Friedman claimed they were twice as efficient. Therefore, the argument goes, services would be most efficiently provided by private firms operating in competitive markets so that, for example, NHS patients have choice, and providers who are not good enough to get chosen, will fail. That’s how markets work.

So far so good, despite the famous lack of supporting empirical evidence, and the difficulties, where real markets don’t exist, of creating pseudo-markets without the costly bureaucracy of targeting, monitoring and supervising pseudo-competitive performance. But another thread of that same ideology, most famously enunciated by the same late lamented Friedman, is that those who run for-profit businesses have no social responsibility other than to make as much money as possible for shareholders.
Continue reading Public Services and Predatory Shareholders

Mr Cameron Doesn’t Understand

Mr Cameron really doesn’t understand what’s going on. When he talks of rebalancing the economy he appears not to have the faintest idea what has unbalanced it. He doesn’t understand the crucial difference between real markets and financial markets. Demand for real things is essentially finite – when you’ve had enough, you’ve had enough; demand for high yielding financial “products” is essentially infinite. An investment, such as a ‘carbon credit’ which would yield ‘up to 398% return’ (see: http://www.gordonpearson.co.uk/06/pity-the-poor-banker/), would attract anyone. Would you invest in a widget maker earning 10% a year at some risk, when you could be earning up to 398% risk free? Consequently, despite the sub-prime fiasco of 2008, money is still leaving the real economy to be bet on financial “products” which are high on promise, but low on substance. That’s the rebalancing that’s actually going on, with Mr Cameron’s approval.

The only rebalancing towards manufacturing and the job creating real economy results from the ingenuity and efforts of practical people achieving results on the ground, through co-operative rather than exploitative means (The Road to Co-operation is due out Gower in April). This achievement is despite Mr Cameron and his friends.
Continue reading Mr Cameron Doesn’t Understand

Tax and Grow

Aside from IQ, what do Fred ‘The Shred’ Goodwin, the Duke of Westminster, the Prince of Wales and dear old Bob Diamond have in common? Well, it’s not absolutely certain, but there’s a strong probability that they pay a lower rate of tax than you do. The interesting thing is ‘why?’ There are two reasons.

There is an elaborate theoretical structure which seeks to justify not taxing the rich. It operates at many different levels. There’s the Tea Partyish argument that tax is Bad. This is because government is Bad. Because government can only stop things happening, get in the way and generally inhibit the entrepreneurial dynamism of people like Fred, the Duke, the Prince, and Bob. Government and all its works should be minimised.
Continue reading Tax and Grow

The Real Economy Being Drained Away

The UK government hasn’t yet been able overcome its undergraduate belief in, and commitment to, markets free from government interference as the source of the most effective and efficient way to grow the economy. Unemployment has not yet reached the level, and persisted long enough, for that fundamental belief to be disturbed. But as unemployment grows, fears of further unemployment increase and result in general belt tightening which further reduces the prospects of economic growth. It is therefore only a matter of time before the government is forced to recognise its error.

Till then, and despite having made massive investment in the banking system to avoid Armageddon, the government will refuse to take control of the banks it owns. So, even though paid for by the tax payer, the banks remain free not to support the entrepreneurial businesses on which future employment growth is believed to depend. Any such interference in the free market would be anathema to this Chancellor. So, more quantitative easing, which it should be noted is a pretty fundamental interference, is likely to be effected without direction or control.
Continue reading The Real Economy Being Drained Away