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Remaking the Real Economy – Escaping destruction by organised money

Remaking the Real Economy is what this blogsite has really been all about ever since it began in April 2009. The first posting – ‘Free market capitalism vs company law’) – began as follows:

“A key tenet of free market capitalism is that businesses should focus exclusively on maximising shareholder value and not allow other considerations, apart from compliance with the law, to intrude on their business activities. As demonstrated in ‘The Rise and Fall of Management’, approaches such as corporate philanthropy, corporate social responsibility and business ethics, are only justifiable if they add to profitability. This appears to be a clear and simple model for businessmen to work.

But the law, for example the 2006 Companies Act, charges company directors with the duty to care for the best long term interests of their company, having regard to the interests of all its stakeholders, not just its shareholders. In fact this has been the case since mid-nineteenth century when limited liability was first established.”

So how far have we got since then? Well, progression has not been very impressive. Remaking the Real Economy is specific about what needs to be done – see further details at Policy Press including 20% discount.

Focused on the realities of organisational systems, the book offers a practical alternative to economic dogma. The paragraphs below are quotes from its cover:

“Pearson’s book is a ‘tour de force’ written from a position of management experience and robust academic research,” Mihaela Kelemen, University of Nottingham.

“Subtle theoretical reflection is combined with meticulous research to yield a ground-breaking analysis.  Highly recommended..” John Hassard, University of Manchester.

“At last, a business and economics book for critical thinkers … a stunning critique of microeconomic theory and practices that so damage our society.” John Carlisle, former Professor at Rhodes University South Africa and Sheffield Hallam and co-operative consultant-practitioner.

This book reveals how mainstream perspectives work for the benefit of  the organised money establishment, while causing all manner of destructions, inequalities and frauds, all conspiring against the common good.                  There is an alternative.

Economic Practice or Theory? Remaking the Real Economy or Destruction?

Devastating though the coronavirus undoubtedly is, it must not be allowed to obscure the fact that the world was already headed for some destruction. Covid-19 is a side show compared to those existential issues facing the world, largely resulting from the combination of reckless industrial expansion combined with the population growth it enabled.

Moral philosopher Adam Smith was motivated by the sudden economic growth generated by the industrial revolution, to inquire into The Nature and Causes of the Wealth of Nations. He started by observing the practical processes of manufacturing and noted the unprecedented gains in productivity from the coordination of specialised operations. In pin making he noted a productivity gain of over 240 times. From that practical account of the work and its outcomes, Smith drew some conclusions as to the creation of wealth, the details of which were later elaborated by what Drucker referred to as the management revolution.

As moral philosopher, he also developed ideas as to how that wealth might best be accumulated, employed and distributed among “ranks of people” as well as allocated to state provision of defence, justice, education and public works and institutions “which may be in the highest degree advantageous to a great society.”

That was the real subject matter for political-economic decision making. However, Smith also conjectured about theories of value which were later picked up by Ricardo and many others, developing what Marx later referred to as classical political economy. By mid 19th century that was being based on a mathematical modelling rather than the realities of production.

Thus, two distinct strands of explanatory analysis developed from the industrial revolution. One strand was based on the observation of real individuals, organisations, processes and systems. The other was based on the internal logic of mathematical models without reference to realities.

Theoretical modelling was necessarily based on a lot of simplistic assumptions such as self-interest maximising human beings, profit-maximising business units, and markets free from government regulation producing the best allocation of resources. Being purely mathematical they could make no accommodation with human values, with evolution over time nor with the social and ecological systems within which such economic processes function.

Subsequent generations of neoclassical-neoliberal economists have elaborated much further detail to that theoretical web, notably including the change of business aims from profit maximising to having ‘no social responsibility other than to make as much money as possible for stockholders.’

Right from the start that theoretical orthodoxy was subject to challenge and rejection. As early as 1862, Ruskin argued it lacked “applicability.” Nevertheless it was applied. Alfred Marshall, author of the first standard economics textbook which led economics to mathematical definition, pointed out the unreality of assumptions which the mathematics required. and their so called laws regarding “profits and wages that did not hold even for England in their own time.”

Economists agree the unrealism of neoclassical modelling. It was nicely summarised by Routh in The Origin of Economic Ideas, ignoring facts as irrelevant and as basing “its constructs on axioms arrived at a priori, or ‘plucked from the air’, from which deductions are made and an imaginary edifice created … orthodox economics becomes a matter of faith ad, ipso facto, immune to criticism.”

The outcomes from application of that highly theoretical orthodoxy are ever increasing levels of inequality, both within economies and between. Piketty’s analysis of Capital in the Twenty- First Century showed that a market economy based on private property, generated forces of divergence. They resulted from the fact that in such free markets, the % return on capital has been greater than the rate of growth of income and output. Wealth earned from the past grows faster than wages. The entrepreneur is therefore encouraged to move from real economy operations to the financial economy where their returns will increase faster, becoming ever more dominant over those without wealth.

At some stage that process will inevitably have to be reversed by some enforced redistribution of wealth. That will be achieved either by agreement. Or by disagreement.

Continued destruction of the real economy is justified by conformance to the neoclassical economic theorising, rather than focusing on practical realities. The result is not just continuously mounting levels of inequality both within and between nation states. It involves environmental destructions which will deprive future generations of a habitable domicile on planet earth.

That much is known. But yet, the powers that be do very little to achieve change. For them, the coronavirus may be a welcome distraction from their fundamental duty to contribute positively to ensuring humanity’s survival and progression.

21st Century Robber Barons

A current concern is the re-emergence of organised money – the newly dominant, amoral, self-perpetuating financialised establishment. The robber barons emerged late 19C and in US were treated to anti-trust legislation such as the Sherman Act which broke up Standard Oil in 1911 and regulation as a public utility was inflicted on such as AT&T in 1913. Nevertheless the financial sector continued to dominate till the 1929 Wall St Crash, after which the world became, for a while including WW2, more cynical of the sector and its role.

Client experience with the Office of Fair Trading which enforced both consumer protection and competition law, and the Monopolies and Mergers Commission tells an interesting story. In the 1970s they were powerful bodies, which prevented anti-competitive M&A and were empowered to break up anti-competitive corporates. Since the 1980s, and especially since 1986 ‘big bang’ computerisation of capital markets, those regulatory powers have been progressively weakened.

The current generation of robber barons, the creators and controllers of the IT titans such as Apple, Google, Facebook, Amazon etc, are quite different. A year ago the Economist published an article (Taming the Titans, The Economist, 20.1.18) which acknowledged they had become increasingly dominant. Though The Economist was predisposed to defending them, it recognised the dangers they posed and raised the question of how they should best be controlled. Increasingly they not only dominated the market but were the market themselves (as platforms).

Many of their services appear to be free but customers pay for them by giving away their data. The Economist estimated their then current stock market valuations suggested they were expected to “double or even triple in size in the next decade.” Amazon had 40% of on-line shopping in US. Facebook had over 2bn monthly users, holding sway over the media industry. And in some countries, Google processed over 90% of web searches, Google and Facebook controlling over two thirds of online ad revenues.

While things move fast and some new tec giant killing upstart is feasible, the probability is fading as barriers to entry are rising. Facebook owns the world’s largest pool of personal data. Amazon has more pricing info than any other firm and is ever increasing its heft. China’s tec firms have the scale to compete but have yet no access to Western consumers. If trends continue consumers will suffer.

Better use could be made of existing legislation eg preventing anti-competitive takeovers, such as Facebook’s acquiring WhatsApp and Instagram. Also, it should be recognised that personal data has become the currency with which customers pay for products and services. So, just as in 19C, intellectual property was given protection by patent law, so the ownership and exchange of data also needs specific and limited protection laws.

The Economist concluded with the following points:
“If a user so desires, key data should be made available in real time to other firms – as banks in Europe are now required to do with customers’ account information. Regulators could oblige platform firms to make anonymized bulk data available to competitors in return for a fee, a bit like the compulsory licensing of a patent. Such data sharing requirements could be calibrated to firms’ size: the bigger platforms are the more they have to share. These mechanisms would turn data from something titans hoard to suppress competition, into something users share to foster innovation.

None of this will be simple. But it would tame the titans without wrecking the gains they have brought. Users would find it easier to switch between services. Upstart competitors would have access to some of the data that larger firms hold and thus be better equipped to grow to maturity without being gobbled up. And shareholders could no longer assume monopoly profits for decades to come.”

But, no action has been taken and even serious discussion has been limited.

On 15th March 2019 it was reported that Apple had unveiled their strategic push into video, news and finance, boosting its digital media and cloud services and reducing reliance on the iPhone. Apple chief executive Tim Cook unveiled a revamped Apple TV app which includes both original tv plus the ability to subscribe to third-party services, a games subscription service, a credit card in partnership with Goldman Sachs and a digital news and magazine bundle. These initiatives, while not particularly innovative in the Apple tradition, threaten to substantially increase Apple’s market power against the common good. Similar initiatives by the Facebooks, Googles and Amazons of this world, can be anticipated.

The proposal to use current legislation, eg to revitalise the OFT and M&MC in UK, so as to unscramble anti-competitive M&As and prevent them being repeated, seems a sensible start. As does applying patent law principles to big data to require data sharing.
Even the Economist agrees with that, but will it happen?

The Worst Possible Brexit

Why would the worst possible Brexit be of the slightest interest? Well, possibly because, on our politicians’ track record to date, the fact it’s the worst makes it the most likely to be inflicted.

It seems probable that Brexit with no deal will be ruled out. The Prime Minister’s deal has been soundly rejected by parliament. So they will most probably be driven to request an extension of Article 50 to give more time to come up with an alternative plan. But Slovenia, Greece or possibly Cyprus, will reject UK’s application because, for some curious reason, they want UK to remain in the EU. So UK is then forced to revoke Article 50 in its entirety, thus remaining as EU members.

So the Remainers will have won? Not quite.

Our EU membership will not be as it was before all this nonsense was started off by David Cameron and George Osborne. The current air of uncertainty will persist. Companies operating in UK as a member of the EU – eg the UK motor industry – are unlikely to have much confidence in our continued membership and their future investment decisions will be shaped accordingly. And, having messed the EU around for the best part of 3 years, the UK (and possibly Cyprus) are unlikely to be the most influential leaders of much needed EU reform.

But what will happen in the UK? Perhaps the current minority government will decide its time is up and call a general election. That will be won by one of the two main parties who will then most likely form a minority government committed to fulfilling the expressed will of the British people ie Brexit.

The Liberal Democrats might previously have made some contribution to debate if not having much influence over events. They would at least have offered an alternative perspective for consideration. But they appear to have lost the will to survive.

So, the UK will be back where it began. Apparently unwilling, and now increasingly unwelcome, members of the EU, with the 2016 expressed will of the British people echoing down the Westminster corridors, possibly being repeated, embarking on another three years of Brexit paralysis, led by who of the likely contenders?

That seems the worst possible Brexit, as well as being entirely feasible.

Economic Management Isn’t Just Applied Theory: It’s Much More Important Than That

Moral philosopher Adam Smith’s inquiry into the nature and causes of the wealth of nations started with observation of a pin making workshop, noting the tremendous cost savings that could be made by people specialising in different production tasks, collaborating in the overall manufacturing process.

The practical processes of production, as in pin making, were repeatedly adopted, with remarkable success by those involved in the first industrial revolution and in manufacturing and all real economic processes ever since. Understanding how those organisational systems work is the key to understanding the economy and how it might best be governed for a sustainable and prospering population. But it hasn’t been taught as an academic subject area.

Smith also conjectured about the labour theory of value – the value of anything being dependent on the amount of labour involved in its production. Those thoughts were were picked up by Riccardo, Say and others leading to the development of classical economics as an academic subject.

Its dubious theoretical foundations led economists to try to develop it as a ‘science’ in the form of mathematically based neoclassical economics. Its abstruse theories, hypotheses, models and unrealistic assumptions have all been falsified many times, but they’ve remained in place as a widely taught subject with increasing influence over those who rule.

Ruskin likened it to ‘alchemy, astrology, witchcraft and other such popular creeds’. All it lacked was ‘applicability’.

Almost every facet of it is wrong. For example, markets free from regulation, tend naturally to mutate from being competitive towards cartel and monopoly, being controlled for the benefit of the monopolist rather than the customer. That tendency was recognised in the US in the age of the so called ‘robber barons’ and regulated by the passing of anti-trust legislation such as the Sherman Act, and post the 1929 relearning experience by further regulation such as the Glass-Steagall Act limiting the power of would be banking monopolists, which Roosevelt referred to as ‘organised money’, Government by which was ‘just as dangerous as Government by organised mob.’
Continue reading Economic Management Isn’t Just Applied Theory: It’s Much More Important Than That

Brexit Again

Now the repercussions of leaving the EU are more apparent, a second Brexit referendum seems the only democratic way forward. And if the vote went for Remain, then we must endeavour to make changes within the EU that might go some way to satisfying all UK voters.

EU originated out of determination that Europeans should not start a third world war. Political union was part of the motivation right from the beginning. But by the time UK joined in 1973, that idea had seemed to be more on the back burner, the main gain being recognised as economic. That was what the UK joined for. Having a European parliament was never of huge interest to UK.

We should have vetoed creation of the European parliament in 1979. But as new members we failed to do so and it was duly established as a debating and rubber stamping chamber. It lacked the power to initiate legislation, its role being to approve and debate decisions made by the European Council and the European Commission. Enthusiasm for it, measured as voter turnout, has declined in every election since its formation. At the last election, turnout was less than 43%. Next year’s turnout will be interesting.

Enthusiastic Brexiteer, Daniel Hannon, described his experience when he first reported to Brussels as a newly elected MEP. He was given 1st class travel expenses from UK to Brussels irrespective of costs incurred which would enable him to trouser £1000 a week tax free. He was also given €14,000/month to pay staff who might include members of his own family, plus €4,000/month to cover general expenses. He was also provided with free and fully equipped office accommodation in both Brussels and Strasburg.

Given that there are 751 MEPs, it is not surprising that annual costs total over €1.8 billion. A political vanity project which adds little to the realities of EU functioning.

If a second Brexit vote were to go for Remain, then the UK should opt out of the European Parliament and invite other EU members not determined on full political union, to do the same. That strategy should be an essential part of the Remain offering in a second referendum.

Limiting the Tyranny of Organised Money

50 years ago, outdoor advertisers, Mills & Allen Ltd, was taken over by Barclay Securities Ltd, stripped of readily saleable assets, and a proportion of employees were declared redundant. Barclay was a financialised associate of arch asset stripper Slater Walker. It was headed up by one John Bentley, who became a media star, proclaiming ‘the theory of what we are doing is to release half the cash, half the assets and half the number of people employed’. That was how he rapidly became a multi-millionaire.

That was 50 years ago – so what’s new today? Well, technologies have changed and everything happens much faster now. Today, the equivalent of Barclay Securities would measure time in nanoseconds.

And it’s over 80 years since F D Roosevelt proclaimed that ‘government by organised money is just as dangerous as Government by organised mob’. By organised money he specified ‘business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism (and) war profiteering.’

So what’s new today?
Continue reading Limiting the Tyranny of Organised Money

Twin Track Europe: The Solution to Brexit

The British people have spoken. Three times. In 1975 to confirm whether to remain as a member of the common market, or more precisely the European Communities (Iron and Steel, Economic and Atomic Energy), that we had joined 2 years previously – 67% voted to stay in. The 2011 referendum was to decide whether to change the electoral system to the alternative vote system. Genuine proportional representation was not on offer, presumably because it might have been accepted. 68% voted against change. The 2016 Brexit referendum whether to remain or leave the EU resulted in 52% for leave, around 37% of the electorate. The British people had spoken, but not with any very clear message.

At least one sample post referendum survey (albeit non-scientifically sampled) suggested that over 11% of the leave voters did so because they were ‘so fed up with David Cameron, George Osborne and Nick Clegg’. There was no mention of Boris Johnson, Michael Gove, David Davis, Ian Duncan-Smith and the rather well spoken Jacob Rees-Mogg, though the 11%, all Labour supporters, would no doubt have included them as also influencing their vote.

That narrow vote to leave was muddied by the simple fact that, since no negotiations had taken place, it was not possible to define what leaving the EU would entail. The validity of the leave majority was further undermined by the revelation that the Brexit campaign was fraudulent, not just by its aggressive promotion of fake news and claims that leaving the EU, would help make Britain great again (to borrow a Trumpism). It was also guilty of targeting voters online with fakery as confirmed in evidence to the all-party digital media, culture and sport (DCMS) committee by former Cambridge Analytica employee, Christopher Wylie. The Vote Leave campaign has also been fined £61,000 and has been referred to police after the Electoral Commission found it had broken electoral law, exceeding its £7m spending limit, passing £675,315 through the pro Brexit youth group, BeLeave, whose founder, Darren Grimes, was also fined and referred to police for further investigation.
Continue reading Twin Track Europe: The Solution to Brexit

Interesting Times

We live in interesting times. The First Industrial Revolution used water and steam power to mechanize production establishing the factory system supported by new transportation systems (canals and railways) for people and freight, which was the source of unprecedented economic and population growth and a newly contested way in which its gains might be distributed.

The Second Industrial Revolution used electric power and the internal combustion engine to create mass production and new forms of transportation, multiplying the effects of the First. It also included some democratic progression in contesting how economic gains should be shared among the people. It also saw the revolutionary creation of socialist states aimed at returning power to the people.

The Third used electronics and information technology to automate production and computerise calculation, accelerating the speed of change in areas such as molecular and genetic engineering and enabling the coordination of physical, digital and biological developments to produce exciting new products and processes, demand for which now appears to be maturing. That revolution coincided with the collapse of the socialist experiment which had mutated into totalitarian communism. It also signalled the takeover of the world by the neoliberal witchcraft and institutional truths – the lies people are persuaded to buy into in order to prosper in their chosen careers.
Continue reading Interesting Times

Threats to Democracy

President Trump appears contemptuous of the great American contribution to democratic government: Lincoln’s ‘government of the people, by the people, for the people’.

It is an ideal which is never easy to achieve and maintain. That is because ‘the people’ is not a coherent whole, but the summation of a lot of disparate entities. The stated intent was that all people should be treated equally without differentiating between sub-groups of the population, defined by race, religion or any other classification. Should a sub-group be excluded from such equality they should have access to remedy. Should a sub-group be enabled to circumvent those principles and in so doing, exploit the rest, it would be a clear democratic malfunction in need of correction.
Continue reading Threats to Democracy