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.
But it’s worse even than that.
Continue reading The Cure for Monopolistic Exploitation
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
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.
Continue reading Our Madmen in Authority: the Bullingdon intellectuals
An article in the current issue of Harvard Business Review notes that there has been a ‘multi-trillion dollar transfer of cash from US corporations to their shareholders over the past 10 years’ [‘What good are shareholders?’, Fox & Lorsch]. The City of London achieved similar disinvestment. But that’s not what stock markets are supposed to be for. The money was supposed to flow the other way, from myriads of investors into new industrial, technological and business developments.
But public companies clearly no longer need to issue shares for sale on the stock market. Their funding is largely through retained profit and more and more of them are actually being taken private where disclosure and transparency requirements are less invasive. At the same time, the fast growing small and medium sized innovators on which a sustainable future depends, and which do need to acquire additional funds for future investment, don’t find stock markets a satisfactory means of raising the necessary. The fund managers and traders who control investment in stocks and shares want fast, low risk returns. But returns from SME innovators, even though they may be exciting and sustainable, are unacceptably long term.
Continue reading What good are Stock Markets?
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.
Continue reading What will replace the public company?
‘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?
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