#36. Politics – a new template, part 2

THE PUBLIC PRICE OF PRIVATE CORPORATISM

In my previous article, I explained why we should stop thinking about politics in terms of “Left” versus “Right”, and focus instead on the gradient between “Libertarianism” (or individuality) and “Corporatism” (the institutional and the collective). I argued that Britain had become increasingly Corporatist in recent decades, and that this has done immense harm.

My original intention had been to explore the harm caused by Corporatism in this second and concluding article, but the interest expressed in this series has helped me decide to stretch it from two parts to four. Here I will focus on private corporations. In part 3, I’ll turn to Corporatism in the public sector and government. In the final instalment, I’ll look at what might be done about it.

I must reiterate that, by “Corporate”, I do not just mean large private organisations. Corporatism in the public sector and in the political process has been just as damaging as the activities of large private enterprises, indeed arguably much worse.

The general point being made in this series is that Britain has fallen ever further into the grip of Corporatism, which serves itself, not the broader community. It has weakened the economy, impaired living standards, undermined public services and debauched the political process. Unless it is challenged, the harm inflicted by Corporatism will become existential.

In brief, the indictment against Corporatism is as follows:

– Corporatism has damaged British society, undermining the political process and corroding public trust in institutions.

– It has weakened our public services, impairing service quality and responsiveness whilst adding hugely and unnecessarily to taxpayer costs.

– It has prompted poor economic and political decision-making, weakened and distorted the economy, shackled the country with unsustainable debts, undermined real wages and contributed to an unhealthy widening in inequalities both of income and of wealth.

– It is hugely costly and, less tangibly but just as importantly, it has undermined individual liberties.

With private corporations, there is one factor that must be borne in mind from the start. This is called “the divorce of ownership from control”. Historically, businesses tended to be managed by their owners, but increases in complexity and scale long ago led to the employment of directors to manage businesses on behalf of huge numbers of often small shareholders.

Theoretically, the interests of directors (and senior officers) are the same as the interests of shareholders, but in practice, of course, they are not. The banks are a classic instance of this, where huge rewards for senior employees have contrasted with dreadful returns for investors.

The ability of shareholders to remove senior officers, or to control board level pay, is absolute in theory but almost non-existent in practice. In effect, the directors and senior employees of corporations exercise almost unfettered control over assets which – and we should never forget this – actually belong to others. They are supported by many of the institutions which manage vast amounts of shares on behalf of small investors. All too often, these institutions are managed by people whose interests are markedly similar to those of corporate directors.

The State and the law connive at all this. When a corporation does something wrong, punishment is inflicted on the company (meaning the innocent shareholders) rather than on the executives with whom real responsibility so often lies.

If an individual obtains money by deception, this is known as fraud, and is punished accordingly. When committed by a large company, however, it is known not as “fraud” but as “miss-selling” and, if punishments are meted out at all, they are inflicted on the hapless shareholders, not the decision-makers responsible for sharp practice.

When banks fail, the government bails out not just the banks (which arguably is necessary) but the bankers as well, which clearly is not. At the very least, the bailing out of senior bankers flouts public opinion.

All of this amounts to near-immunity from the consequences of wrong-doing. As well as being harmful in itself – because it encourages irresponsibility – this contributes to a feeling of “us and them” which has been undermining British society.

Remarkably, too, government hands out huge subsidies under a process which has been described as “corporate welfare”. A forthcoming report will quantify annual cash hand-outs to Corporates from the British state at £14bn, rising to a colossal £85bn when wider “corporate welfare” is included in the calculation.

Even this huge figure excludes broader costs attributable to the low wages paid by many Corporates, which forces the State to make up the difference. Last year, £28bn was spent by the government on in-work benefits such as tax credits, housing benefits and council tax benefits, all of it made necessary by low wages.

The view taken here is that something is clearly very wrong indeed when wages are so low that working people cannot subsist without taxpayer help. In short, society is paying too much to subsidise Corporate profits.

There is not necessarily anything wrong with providing incentives. But giving the vast majority of the £14bn to giant (and usually multinational) corporations does raise the question of why such subsidies could not be diverted to smaller, British-owned businesses instead.

Not surprisingly, both government and the Corporates themselves are coy about the scale of support received from the State, and there are no readily-accessible figures for these activities. If we were to add to the above sums the social costs created by problem lending (estimated at £8bn annually), problem gambling and problem drinking, the total cost to government and society would become even more enormous than the £85bn cited earlier.

And all this, of course, is before we even consider banking support, or the notoriously low tax-take from Corporates.

The Corporates themselves, of course, insist that they are politically neutral, and that their only objective is to grow value for shareholders. The political neutrality of Corporates, seemingly contradicted anyway by their substantial expenditures on lobbying, was not much in evidence during the Scottish referendum debate.

Corporates’ interventions over Scotland are likely to be dwarfed by the efforts that big business will no doubt make to persuade the British public to vote in favour of continued membership of the EU. Membership of the EU suits Corporates – so who cares what the voters think?

So, whilst the claim of political neutrality may be true of party politics – no Corporate would want to antagonise one of the major parties by supporting the other – there are Corporate fingerprints all over the wider political debate and process.

The claim that the sole focus of Corporates is on shareholder value is true in many instances, where directors have a genuine commitment to shareholder interests, even if performance-related perks (such as stock options) can make motives somewhat opaque.

But we need to be aware that the interests of businesses are by no means the same as the broader objectives of society.

Nowhere is this more evident than where wages are concerned. For an individual business, it seems obvious that keeping wages low improves profits. If every company drives wages down, however, the result is a low-income society in which demand is weak – and companies themselves, of course, are big losers if customers cannot afford to buy what they produce. Henry Ford knew this, but the many less enlightened Corporates of today seem not to understand it.

A notably irony here concerns senior executive pay. According to the Corporates, typical wages need to be low if workers in Britain are to compete effectively with cheaper labour elsewhere in the world, most notably in the emerging economies of Asia.

The logical corollary of this, however, surely should be that board level wages should be lowered too, because the emerging economies certainly produce cadres of excellent, highly qualified people who could do a better (as well as a cheaper) job than many of the West’s often mediocre business leaders. Somehow, however, the globalised pressure on shop floor wages is never allowed to drive down board room pay as well, and FTSE100 director pay has increased by 278% since 2000, compared with a 48% nominal increase for shop-floor workers.

Strange, that.

Whilst Corporates want a low-wage economy (everywhere outside the board room), they also need high levels of consumption, and few, if any, seem troubled by (or even aware of) this contradiction. The contemporary model for all too many Corporates is to produce goods and services as cheaply as possible and then persuade poorly-paid workers to buy them.

Various policy strands follow from this. First, Corporates favour free movement of labour (including support for British membership of the EU), and often oppose legislation to guarantee minimum wages (let alone the Living Wage). Second, they also have a pretty mixed  track record on legislation to protect working conditions, and are opposed to worker co-operation and representation along German lines, despite the marked success of the German economic model.

The Corporates’ stance on regulation is more ambivalent. Despite favouring de-regulation in principle, they often seem to support regulations which, by imposing proportionately greater burdens on small and medium-sized enterprises (SMEs), entrench the competitive position of the Corporates.

Alongside their preference for cheap labour, big Corporates are the most vocal supporters of consumerism, and dominate the near-US$470bn global advertising industry. The problem with this is that the promotion of consumption alongside efforts to depress wages is inherently contradictory, and has been a major contributory factor in the escalation of household debt.

An equally serious shortcoming of a Corporate-dominated economy is that it tends to impair competition. Adam Smith is well known as an advocate of free markets, but much of his Wealth of Nations (1776) is a warning and a diatribe against monopoly and oligopoly. Corporates’ advocacy of unfettered commerce stops well short of encouraging greater competition, and many of Britain’s industries are over-concentrated. A recent illustration of the importance of competition has been provided by the discounters, who, by breaking up the previous domination of the food retail sector by a handful of giant supermarkets, have delivered great benefits to consumers.

The reality, of course, is that a thriving economy requires intense competition, not just to deliver best value for customers but also to offer the widest opportunity for the talents of workers. Historically, innovation has come overwhelmingly from small businesses, even if successful innovation then transforms these small companies into big ones. Likewise, abundant statistics show that small and medium enterprises are the main drivers of job growth, whilst giant businesses often engage in downsizing and “rationalisation” instead of organic expansion.

I would not want to convey the impression that big Corporates are necessarily a bad thing because, clearly, they have an important role to play. But the excessive influence of large Corporates can be bad news for the economy, not least because they stifle, crowd out, or use their clout to weaken new, smaller and more innovative businesses. Corporates all too often promote the dangerously contradictory logic of high consumption in a low wage economy, and their influence can push economic policy in the ultimately futile direction of “flexible” (meaning poorly-paid and poorly-protected) labour policies.

Corporates’ political influence is something to which I will turn later in this series. In part 3, we’ll look at the impact of Corporatism in the public services – a development which has been even worse than Corporatism in the private sector.

#35. Politics – a new template, part 1

BRITISH POLITICS AND THE MARCH OF THE CORPORATE

Throughout the post-war period, and very probably for a lot longer than that, we have been accustomed to thinking about politics in terms of “left” and “right”. In this article, I explain, first, why this is no longer a useful template, if indeed if it ever really was.

Second, I’m going to provide you with an alternative template which, I think, gives us a much more useful insight into how politics really works. This template divides politics. not into Left and Right but between the Libertarian (or individualist) and the Corporatist (or collective).

My conclusion, in brief, is that a modest move to the Right in British politics has been very much less important  than a very pronounced move away from the Libertarian and towards the Corporatist.

This is the product of much thought, because I’ve long been dissatisfied with the traditional “Left-Right” definitions. I invite you to consider it, to think about how it applies to the political scene and, of course, to contribute to the discussion here.

Let’s start with the traditional “right-left” alignment, pictured in fig. 1. This is how most of us have been taught to think about politics, and is typified by questions like these: “did Tony Blair move Labour to the right?”; “is UKIP a right-wing party?”; “is David Cameron more/less right-wing than Mrs Thatcher?”; and so on.

The general assumption is that the “Left” favours state intervention whereas the “Right” prefers private enterprise. Starting in the centre and moving Leftwards, then, we might progress via social democracy and socialism to communism, presumably ending up with Stalin’s Russia (or Fidel’s Cuba) at the “Far Left” of the chart. Going Rightwards from the middle, we go past Conservatives and Neo-Cons before finishing with a “Far Right” regime like, say, that of Mussolini’s Fascists.

Here, of course, is the first big snag – the extremes of Left and Right look pretty much the same. Was there all that much difference between, say, the U.S.S.R. in its heyday and Fascist Italy? They differed, certainly, but in many more important respects – such as the suppression of liberty – they had much more in common. And where do we put Hitler – does “National Socialism” really belong on the Left or the Right? Those who automatically place Nazi Germany on the extreme Right might be hard pressed to explain how Nazi butchery was different from the Stalinist brand. And was the Gestapo much worse than the KGB? I rather doubt it.

At a much less extreme level, can we really say that David Cameron is more or less Right wing than Mrs Thatcher – isn’t it likelier that he is to the right of her on some things, but to the left of her on others?

In short, the traditional Left-Right analysis is so full of holes and inconsistencies that it provides very little in the way of useful insights.

Fig. 1: Left-Right – the traditional paradigmPolitical diagram 1

My suggested alternative “direction of travel” is pictured in fig. 2. Instead of Left and Right we have Top and Bottom, labelled “Libertarian” and “Corporatist”.

By “Libertarian” I mean a situation in which the maximum degree of choice is permitted to the individual, whilst “Corporatist” is its polar opposite, where organisations (of many different types) exercise power at the expense of individual choice. To be extreme about it, you could place anarchism at the very top of the chart and, at the extreme bottom, George Orwell’s 1984.

I’ve used the word “Libertarian” because “Liberal” has been corrupted beyond redemption. Those on the so-called “Left” of politics often call themselves “Liberals”, but so, too, do those “Right”-wing enthusiasts for unfettered private enterprise.

The term “Corporatist” is not by any means limited to large private sector enterprises. Rather, it refers to any organisation capable of exercising power over the individual, a definition which includes, for example, government departments, government itself, political parties, any form of “collective” and, indeed, some religious organisations.

Fig. 2: Top to bottom – a new directionPolitical diagram 2

The characteristics of a “Corporate” entity are pretty well understood, but will bear brief reiteration here.

First, and perhaps because human beings have a natural need to belong to a group, corporates tend to have a cohesion based on loyalty to the organisation. The danger here, of course, is that loyalty to the organisation can all too easily transcend other loyalties.

An example here might be the use of gagging orders to prevent former members from “blowing the whistle” on the organisation. The widespread use of gagging orders in the NHS, which came to light in the aftermath of the Stafford scandal, was a classic instance of the imposition of organisational loyalty in way which was detrimental to the broader community. One of Benjamin Disraeli’s most famous remarks – “damn your principles, stick to your party!” – aptly typifies the way in which internal loyalty to an organisation can all too easily triumph over broader loyalties.

The second characteristic of the corporate body is the power that it can exercise, through numbers of loyalists, through wealth and influence, and through a sense of purpose which, being specific to the organisation, may be inimical to the broader public interest.

Together, internal loyalty and external power can all too easily result in insularity, in which the realities of the outside world come to be seen as less important than what is happening within the organisation.

Reflecting this, the fourth characteristic of the corporate body is the tendency to expansion. The tendency to growth is implicit within most organisations, and is a dynamic which operates largely independently of conscious intent.

Today, for example, the Foreign & Commonwealth Office employs roughly fifteen times as many people as it did a century ago when, as the Foreign & Colonial Office, it was responsible for administering almost half of the globe. Likewise, the combination of the departments of War, Air and Admiralty into the Ministry of Defence in 1964 was intended to reduce bureaucratic overhead yet, by 2010, the MoD employed some 75,000 civilians, a number which exceeded the combined uniformed strength of the Royal Navy and the Royal Air Force!

These are just some of the reasons why we should treat corporate power with suspicion.
Where, then, does Britain stand on the gradient between the individual and the collective? Fig. 3 tries to put some context into this by sketching the movements of the two main parties over recent decades.

Fig. 3: Britain – directions of political travelPolitical diagram 3

This diagram has two axes – Left versus Right, and Libertarian versus Corporatist.

From the era of Harold Wilson and Jim Callaghan, Labour moved to the Left before swinging sharply to the Right under Tony Blair. This did not (as some have claimed) turn Labour into a Right-wing party, but it did remove most of the ideological differences between Labour and the Conservatives.

The Tory party, meanwhile, moved to the Right as the generation of Ted Heath was replaced by the followers of Margaret Thatcher, and it might be argued that the party has moved somewhat further to the Right since then, at least in terms of public spending and the introduction of private enterprise into the public services.

There has, then, been a Rightwards move in the centre of gravity of British politics since the heyday of Heath and Wilson. Going back still further, the term “Buttskellism”, compounded of the surnames of R.A. Butler (Conservative) and Hugh Gaitskell (Labour) was coined to indicate the lack of any real ideological difference between the two parties in the period from 1950 to 1963. Such a term could not have been employed in the 1970s or 1980s, but something similar might, I think, have been compounded not that long ago, perhaps as “Blaguism”, derived from Tony Blair and William Hague.

In my analysis, the move towards the Right has been far less marked, and much less significant, than the swing from Libertarianism towards Corporatism. Labour, traditionally a pretty Libertarian party, became much less so during 1997-2010, when “sofa government” and the party machine tightened their grip at the expense of the Party Conference, local parties and even the Cabinet. There has been a similar direction of travel in the Conservative Party, which not so long ago was fiercely defensive of individual liberties (as, in fairness, many of its members still are).

Overall, then, the Rightwards drift in British politics has been far less pronounced, and much less significant, than the swing from Libertarian to Corporatist, from individualism to the collective.

Before looking (in Part 2) at what the implications of this swing might be – and I believe that these implications are overwhelmingly negative – I’ll leave you with a chart which attempts to locate the current standings of the parties on my “Political Grid” (fig. 4).

As we have seen, both Labour and the Conservatives have moved a very long way from the Libertarian towards the Corporate. The Liberal Democrats remain, in my analysis, somewhat to the Left of Labour, and are somewhat more Libertarian (or less Corporatist) than the larger parties.

The most interesting position here, I believe, is that of UKIP. Nigel Farage’s party, though well known for its loathing of the European bureaucracy, seems to me to be pretty anti-bureaucratic at home as well. Whilst I see no reason to locate UKIP either to the Right or the Left of the Conservatives to any meaningful degree, the party does seem to be far more Libertarian, which is very probably why UKIP appeals so strongly to those who feel excluded from the traditional politics of Labour, the Conservatives and the Liberal Democrats.

I’m going to conclude this discussion for now by extending a warm invitation to comment.

In part 2, I will endeavour to explain why the general drift from the Libertarian to the Corporatist has been so corrosive, not just of liberties but also of economic performance.

Fig. 4: Britain – current “Political Grid” locationsPolitical diagram 4

#34. “A poisonous combination”

NEW REPORT POINTS TOWARDS THE NEXT FINANCIAL CRASH

Six years on from the global financial crisis, is the economy returning to normality, or are we simply playing “extend and pretend”? Have we tackled the leverage dynamic that brought the financial system to the brink of collapse, or are we simply moving from one short-term fix to another, piling up ever more debt along the way? Have we really “got away with it”, or are we facing a second and perhaps worse meltdown? If the latter, where will it come from this time?

These are the questions that dominate – or most certainly should dominate – strategic thinking about where the economy is going. Readers familiar with my surplus energy economics analysis will know where I stand on this – the winding down of cheap energy availability has stripped the economy of growth, making our enormous debt exposure unsustainable, and meanwhile we’re playing “extend and pretend”.

What we really need here is objective data, and this is where an authoritative new report is so invaluable. Deleveraging? What Deleveraging? – number 16 in a series of Geneva Reports on the World Economy – reveals that global debt levels have continued to increase unchecked since the 2008 crisis, and that the much-vaunted process of deleveraging simply hasn’t happened at all.

The report supplies interesting data on indebtedness, dividing debt into two categories. The first is ex-financials, and comprises the debt of households, governments and businesses other than banks. The second category is total debt, and includes debt within the banking system. Both categories are important.

Globally, ex-financials debt rose from about 160% of world GDP in 2001 to almost 200% in 2008, with a big surge perceptible in the last three years of the period as the world manufactured its coming crisis. Since 2008, debt has carried on climbing, nearing 215% in 2013. So much for “deleveraging”.

Within this global trend, there has been a clear shift. Prior to 2008, most of the debt escalation was happening in the developed world, but now it is the developing world that is driving debt levels upwards.

China is a case in point. Since 2008, ex-financial debt – that is, the aggregate of households, businesses and government – has increased from 143% of GDP to 217%. This means that China has borrowed an average of 14% of GDP each year since 2008, something not dissimilar to Britain’s record under Gordon Brown between 2002 and 2008.

Moreover, charts of moving averages suggest that China’s economic growth is decelerating far more rapidly than is generally recognised. Other developing economies – including India, Russia, Brazil and Turkey – are in much the same predicament, albeit with lower debt ratios than China.

As part of something which the report calls “a poisonous combination”, the global capacity for growth is diminishing just as debt levels continue to escalate. Essentially, this means that “potential output” – basically a measure of future growth capability – is diminishing. This may reflect two things – first, that we have suffered permanent damage from the crisis, and, second, that high debt levels are undermining our ability to grow.

A reduced capability for growth means, of course, that our ability to carry debt is weakening just as debt itself is increasing.

The figures for all of this are stark, and the clear implication is that another crash is coming, the epicentre this time probably being the developing economies. Small wonder that central bankers are beginning to mutter about the over-extended valuations of global capital markets.

Of course, and as I have explained previously, over-inflated capital markets are themselves part of the “extend and pretend” game, because inflating capital markets has been a device for keeping yields (and therefore interest rates) low.

The Geneva 16 report should prompt us all to sit back and factor the following into our mental computers:

– continuing increases in debt

– clear deceleration in growth

– an ongoing deterioration in potential output

– a diminishing carrying capacity for debt

– the over-extension of capital markets as part of “extend and pretend”

You won’t need me to spell out for you how this must end.