#39. Capitalists would be crazy to ignore inequality


Regular readers won’t need me to remind them that capitalism has been getting a bad name in recent years.

Free market economics has been blamed for the Great Recession (wrong: this actually resulted from dangerous banking practices, feeble regulation and debt-based economic policies). Banking and corporate scandals, we are told, are the product of free markets (wrong: scandals simply result from bad behaviour).

The latest and most powerful indictment, set out to good (or at least controversial) effect by Thomas Piketty, is that capitalism is the cause of widening inequalities of wealth and income.

What has disturbed me most about this is the way in which supporters of the free market have rushed, in their droves, to defend inequality. The all-too-frequent response to Piketty seems to be that capitalism and inequality are Siamese twins, and we should like it or lump it.

Frankly, this is dangerous nonsense.

It is dangerous because, if capitalism accepts the inequality tag, it will go the same way as feudalism, the French ancien regime and the Russian Tsars.

It is nonsense because free markets, founded in competition and operated ethically, do not create inequality. Corporatism, on the other hand, does create inequality, just as surely as absolute monarchy, feudalism and communism.

Supporters of popular capitalism need to put the record straight. I’m delighted to have been invited to write on this for CapX, which incidentally is a first-rate source. You can read my article here.

As ever, your comments are very welcome.


#38. Politics – a new template, part 4


Thus far in this mini-series on British governance and politics, we’ve seen that the real issue isn’t “Right” versus “Left”, but “Corporatism” versus what I’ve called “Libertarianism”. I’ve examined the nature of Corporatism in articles about the private sector, and the public services and government. This article concludes the series by examining what, if anything, might be done about it.

I’ll cut to the chase here. The rise of Corporatism has been bad for Britain. It has weakened our economy, undermined the living standards of the vast majority, driven Britain ever further into debt, corroded trust in the political system, and created a widening gap between “us” and “them”.

Relentless though the rise of Corporatism has been, it is by no means unstoppable.

Reversing the trend would require two things – organisation, and people-power. Later in this article, I’ll explain what this means.

First, though, I’d like to stress how bad the drift towards Corporatism has been for Britain. Once we understand this we’ll be better equipped to assess some solutions.

In economics, Corporatists favour both a low-wage economy (usually called “a flexible labour market”) and an economic system driven by consumption. The inevitable result of this is the escalation in debt that we’ve witnessed over the last decade and more.
If people are encouraged to consume, but at the same time the real value of their wages is held down, the only way of squaring the circle is to make debt easily and cheaply available, and that’s precisely what’s happened. In Britain, our dysfunctional housing market has been the preferred conduit for channelling debt into consumption.

In the public services, the hallmark of Corporatism is a system in which the organisation takes precedence over the public, and this is reflected in an almost total absence of accountability, especially at higher levels and even when things go horribly wrong.

Politics, meanwhile, has become centralised, such that two (or occasionally three) lookalike parties control everything from candidate selection to policy and presentation. Historic checks to centralised executive power (such as the Cabinet, the senior civil service, local government, party conferences, and local party organisations) have been eroded.

In the preceding article I described the power elite as “the directorate”, and the inter-linking of this directorate goes far beyond the “revolving doors” which enable individuals to move between government and business.

The State all too often looks the other way when major scandals occur, rather than imposing accountability on the officials involved. Activities which at a lower level would count as fraud become the more innocuous “miss-selling” when practised by large companies. Sanctions may be inflicted on companies (meaning their largely innocent shareholders), but are seldom if ever imposed on the decision-makers at the top of the Corporate structure.

The rescue of the banks became, unnecessarily and almost seamlessly, the rescue of the bankers. An estimated £85bn is handed out annually to big business in “corporate welfare”, and a further £28bn of taxpayers’ money is spent boosting the incomes of workers whose wages are too low. A Corporate-friendly low-wage agenda is given official sanction, and a policy of easy access to cheap borrowing is maintained.

Big business does tend to keep out of party politics – which has become almost irrelevant anyway – but the Corporate interest is evident in non-party issues, such as the recent referendum in Scotland. We should expect weighty Corporate lobbying in favour of continued EU membership if the public is indeed offered a referendum on the issue.

I wouldn’t want you to think that this is some kind of conspiracy, because it isn’t. Rather, the system has evolved in ways which favour Corporatism, and changes of this sort tend to become cumulative.

It does not require much imagination to work out where this process could end. Despite a rather tepid recovery, Britain’s economic viability is threatened by a dependence on borrowing which is most evident in property markets, in the fiscal deficit and in Britain’s dire financial relationship with the rest of the world. Her enormous debts, no less than her on-going dependency on borrowing, mean that Britain is very poorly positioned to confront the new financial crisis that I, for one, regard as highly likely. Politically, the combination of widening inequalities and the breakdown of trust in government has, historically, almost always ended badly.

What is required, then, is a process of reform which harnesses public opinion to roll back the Corporatist tide in ways that matter. The catalyst for this needs to be an organisation dedicated to channelling public opinion in constructive directions.

There are some pretty obvious chinks in the armour of the Corporatist system. First, and as recent events have shown, the public are quite capable of voting “none of the above” when what they are offered is the same old choice between two or three established Corporatist parties.

Second, there is justifiable public anger over a range of issues including inequality, low (and falling) real wages, immigration, scandals (like Stafford and Rotherham) and membership of the European Union.

An economic campaign against Corporatism should focus on the issue of low wages. Essentially, the case for the living wage needs to be supported. An independent, reputable organisation needs to award a “fair wage” kite-mark to any large or medium-sized business which undertakes to ensure that no employee is paid less than, say, £10 per hour. The critical issue is that the public should be persuaded not to give their custom to businesses which do not have this fair-wage mark of approval.

The political corollary of the fair-wage initiative is that candidates at Parliamentary elections should be asked to commit to a simple “public contract” or “charter” (I would have called this a “pledge”, but that reeks of prohibition!). The contract idea is not new but, perhaps surprisingly, has not been used in any significant way for about 100 years.

This way this works is that, in each constituency, each candidate is asked if he or she is willing to make a four-point commitment.

The four points would be:

– A promise to support an in-out referendum on EU membership.

– A guarantee of support for legislation limiting net immigration to, say, 50,000 per year.

– A willingness to vote for legislation making the living wage mandatory for all large and medium-sized businesses.

– A promise to vote for an anti-profiteering law capping the earnings of former politicians and civil servants.

Of course, it would be up to each individual candidate to decide whether or not to sign up to the contract. The critical point then would be for voters to support those who did sign up to it, and ask pointed questions of those who, at least by implication, favour EU membership, high levels of immigration, a low-wage economy and the ability of individuals to move from government into ultra-lucrative private sector positions.

The proposed commitments on the EU and immigration would be designed to require candidates to support clear public preferences on these issues. In both cases, the obvious public preferences – withdrawal from the EU, and a strict limit on immigration – would be significant blows to Corporatism, which favours both EU membership and high levels of immigration.

The point about the living wage is that Britain’s established parties all, to a greater or lesser extent, support a low-wage economic model that cannot succeed. If a low-wage economy was the route to prosperity, Ghana would be richer than Germany, and Somalia more prosperous than Switzerland.

The reason why the low-wage economy is a mistake is simple – without well-paid workers, demand is weak. Combining a low-wage economy with pressure to consume leads directly to dangerous levels of indebtedness. The model that Britain should be pursuing is a high-skilled, high-wage, high-productivity entrepreneurial economy, not a form of “lowest common denominator” race to the bottom.

The restriction on the movement between government and business would be to ensure that government is not seen by the public as a road to riches. As envisaged here, a new law would cap the annual earnings of former ministers and government administrators at £200,000 annually for a decade after leaving post.

Such a limit can hardly be called onerous, and would leave former ministers and civil servants free to earn a very substantial income in the private sector. Set at such a level, this limit would be largely symbolic for the vast majority of those affected, but would send a decisive signal that government service is not a route to wealth.

To set the ball rolling, two forms of organisation are required.

One of these would have the simple task of awarding recognition to businesses committed to the living wage.

The second would organise the charter, giving each and every candidate for Parliament the opportunity to sign up to an avowedly populist agenda.

At the end of the day, there’s nothing very revolutionary about any of this.

It’s called democracy.

#37. Politics – a new template, part 3


Welcome to part 3 of my mini-series looking at the current state of British politics and governance.

In contrast to the traditional division of politics into “Right” and “Left”, I have explained (in part 1) that the really important distinction is that between “Libertarianism” and “Corporatism”. A pretty modest move to the Right in British politics has been dwarfed by the rise of Corporatism, to which many of the ills of British politics, society and the economy can be traced.

After an examination of the role of private corporations (in part 2), my focus here is on Corporatism in the public sector and in the conduct of government. However bad you think private Corporatism may be, I can assure you that the public sector and political versions are even worse.

The public sector presents a conundrum. On the one hand, the public services ought to be highly effective. On the other, the quality of service often falls far below what we should be entitled to expect, sometimes catastrophically so. Why is this?

Resourcing does not seem to explain this conundrum. Despite recent budgetary constraints, spending on public services (of £411bn) remains 16% higher now, in real terms, than ten years ago*. The public services employ 5.3 million people, and a further 1.1 million probably work for the State indirectly via out-sourcing. The vast majority of these people are dedicated and hard-working. The public sector, then, seems to be resourced and staffed sufficiently to deliver public services of the highest quality.

The reality is rather different.

Whilst there have undoubtedly been grave policy failings by governments of both parties, Corporatism is the compelling explanation for most problems with the public services. In the public sector, as indeed in much of the private sector, the rise of Corporatism has resulted in services being run for the benefit of those who manage them, not those who use their services or pay for them through taxation.

Let’s recap what we would expect to see when an institution becomes Corporatist. First, we would expect a combination of internal loyalty and external defensiveness, in which mistakes can all too easily be covered up and accountability undermined. Second, and resulting from the absence of sanctions for failure, we would expect a deterioration in management quality. Third, we would expect excessive growth, especially in bureaucratic functions. Fourth, we would expect outsiders (which in this instance means the public) to be treated with arrogance and disdain.

The National Health Service (NHS) exemplifies many of the shortcomings of Corporatism. For a start, the expansion in numbers of managers has been extreme, helped by the fragmentation of the model from central command to a proliferation of “Trusts”, each, inevitably, with its highly-paid management cadre. Most GP practices now have well-remunerated “practice managers”, an unnecessary development which drains resources without improving patient care. The cost of administering the NHS has become colossal, at about £15bn, or 14% of the entire budget. Research seems to show a steady deterioration in value for taxpayer money, with measured output falling ever further adrift of government funding.

In short, the NHS seems increasingly to be run for the benefit of its managers, rather than for the benefit of taxpayers and patients.

The second big Corporatist characteristic exhibited by the NHS is lack of accountability. The Stafford hospital scandal, in which as many as 1,200 patients may have died unnecessarily, shows this at its worst. Given the scale of this tragedy, one might have expected individuals to be punished, certainly with loss of jobs and quite possibly with removal of generous state pensions as well, yet no senior heads rolled after a series of extremely expensive investigations.

In other words, the Corporate body turned in on itself, defending its own interests rather than pursuing the public good, which surely called for exemplary sanctions. Later, it emerged that it was common practice in the NHS to use “gagging clauses” and other methods to stifle “whistle-blowers”, a classic instance of Corporatist internal loyalty to the organisation triumphing over broader patient and taxpayer interests.

Another chilling example of Corporatist excess in the public services is provided by the horrifying revelations from Rotherham, where an estimated 1,400 women, most of them children, have been raped, intimidated and otherwise abused since 1997. The reports of this abuse by the victims and their parents were ignored by the authorities, and little or nothing was done about the perpetrators of these horrors. A State which can prosecute a handful of well-known people over offences committed decades ago has seemed powerless – indeed, frankly dismissive – of the industrial-scale sexual exploitation of huge numbers of vulnerable girls. The main reason for this seems to be that the system wishes to prevent its own failings being exposed to public scrutiny.

Although some individuals (to their great credit) have resigned, no-one has yet been sacked, or stripped of their pension. Without wishing to seem vindictive, the public is entitled to feel that failures of the magnitude of Stafford and Rotherham should be met with suitably severe sanctions, and the lack of a suitably punitive response causes considerable public disquiet. Where, in the absence of exemplary punishment, is the deterrent to the repetition of these disasters?

The way in which complaints by victims of the Rotherham tragedy, and by their parents, were ignored typifies, albeit in extreme form, the arrogance which is so often engendered by Corporatism. H.M. Revenue and Customs (HMRC) famously asserted that it had “nothing to apologise for” after millions of taxpayers’ affairs were mishandled. Taken together, arrogance and a lack of accountability are an unpleasant combination.

The shocking aspect of events like Stafford and Rotherham is less that they happen at all than that they are hard-wired into the Corporatist system. Where accountability is weak, failures are almost certain to recur.

What ought to happen when things go wrong is that failures should be investigated thoroughly and sanctions should be imposed on individuals responsible, sending a clear message that mistakes are unacceptable.

Instead, what actually happens is that the organisations involved immediately adopt an insular, defensive posture, play down errors (sometimes to the point of outright denial) and make the claim – a ritual one in most of these situations – that matters are now improving. To any outside observer, it may seem self-evident that the public service involved – be it the NHS, a local authority, social services or the police – has failed woefully, yet no sanctions ever seem to be imposed on those responsible.

We could, of course, examine numerous other public sector disasters – the NHS IT programme; the Border Agency, immigration and yet another costly State IT mess; the West Coast rail bidding fiasco; the top-heavy staffing of many departments; enormous over-runs on procurement projects; and an increasingly arrogant treatment of service users – but the explanations almost always follow along the same lines. Failure happens because of a Corporatist culture in which accountability is easily avoided.

The two basic lessons to be drawn from this depressing litany are obvious. First, the instinctive response of the Corporatist public sector is almost always one of “circling the wagons”. This typically involves denying responsibility; drawing heavily on internal loyalties; suppressing (and sometimes gagging) whistle-blowers; blaming someone or something else (often the supposed parsimony of the Treasury); indeed, doing anything rather than come clean about what has gone wrong, and why.

The second instinctive response – or, rather, lack of one – is a characteristic failure to apportion responsibility. To be sure, individuals in low-ranking positions may sometimes be punished, but the higher (and even middle) levels of the administrative machine are invariably shielded from any consequences. Indeed, these people not only escape sanctions but their career paths often seem to be unaffected. Much of this leaves the public angry, baffled or resigned, and reinforces the feeling that there is a clear “us and them” division where accountability is concerned.

This necessarily prompts one question above all – why do politicians fail to respond? Why, after tragedies like Stafford and Rotherham, do ministers seem to fail to pin responsibility where it belongs? Why do senior civil servants so often seem to emerge unscathed from disasters which, logic suggests, ought to have serious consequences? For that matter, why aren’t ministers themselves apportioned at least some of the blame when their departments’ affairs go horribly wrong?

The explanation for this lies in the fact that politics, no less than the public services, has become Corporatist. The failure to tackle senior level accountability in the public services can be bracketed with government’s complicity in the largesse of “corporate welfare”, which, as we have seen, currently stands at about £85bn annually.

The creeping tide of Corporatism in politics and government can be tracked pretty closely by anyone who is prepared to look at how politics has changed over five or six decades, and particularly since the 1990s.

In the 1950s, membership of political parties was in the range 5 to 8 million, depending largely upon how one treats affiliate membership through unions. Labour, at least, was a pretty democratic party, taking policy votes at Conference and vesting considerable power in the National Executive. Both parties had vibrant local organisations, whose privileges included selection of candidates for Parliament. Additional checks to the executive included independently-minded MPs, the considerable power vested in the Cabinet, and the substantial independence exercised by senior civil servants.

Since then, much of this has changed, in ways which empower the executive and create fertile ground for Corporatism. Party membership has fallen to pretty derisory levels as the powers of local organisations (and, at the same time, of local authorities) have been taken over by the centre. Candidate selection has largely been taken over by the centre, and party conferences have been transformed from decision-making gatherings into exercises in content-free presentation.

The famous “sofa government” techniques employed by Tony Blair (and not reversed by his successors) has turned Cabinet into a rubber stamp for decisions made by the Prime Minister and his immediate coterie, with media strategists (“spin doctors”) now having considerably more influence than Cabinet ministers. Civil servants have found their influence undermined by the proliferation of “political advisors” and other outsiders drafted in to the bureaucracy. When the message becomes more important than the substance, the first resort is almost always to denial when failures occur.

These trends, bolstered of course by Britain’s constitutional shortcomings, have resulted in an ever more monolithic state. The “first past the post” (FPTP) electoral system entrenches existing parties and makes it difficult for new parties to challenge the incumbents. The absence of an American-style separation between the legislature and the executive leads to inadequate legislative scrutiny, whilst the lack of a written constitution has smoothed the way for the weakening of essential rights, most notably the right of free speech. There has been a steady increase in the tendency to stifle free speech whenever it conflicts with the officially-sanctioned orthodoxy.

All of these weaknesses are linked to increasing Corporatism – in government, in the public services and in business. A characteristic product of Corporatism is a division into Insiders and Outsiders, or “us and them”, and this has become a distinctive feature of British governance.

The overall picture can all too often seem to be a division between the general public on the one hand and, on the other, a “directorate” of political, administrative and business leaders. This directorate, seemingly interlinked by the “revolving doors” between government and business, has become fenced in behind barriers which protect its power and wealth, freeing it both from the economic hardship and accountability experienced by the general public.

In the concluding part of this series, I’ll look at what might be done to bridge this gap.


*In 2013-14, total government spending of £714bn comprised public services expenditures of £411bn as well as interest expense of £48bn, pension costs of £143bn and welfare spending of £112bn. The sum spent on public services in 2003-04 was £277bn, equivalent to £353bn at 2013-14 values.