The Impact of Theory on Practice

Almost 5 years after the crash, the UK economy remains in the doldrums. Now even the IMF is critical of the UK’s austerity programme. But the government is not for turning from its basic pursuit of austerity plus miniscule photo opportunity gestures like letting small businesses off their National Insurance contributions for a period. But it isn’t working. Is it conspiracy or cock-up?

Or perhaps it is both. There is an underlying conspiracy to promulgate the theory which explains and justifies decisions which are clearly against the best interests of the mass of the population. The democratically elected leaders then cock things up by swallowing the theory whole, implementing its most outrageously inequitable measures and, aided and abetted by a largely collusive media, offering the formulaic explanations provided by the theory.
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We are experiencing an explosion of inequality to levels not seen since the darkest days of the nineteenth century, inequality, not just of wealth but, as George Monbiot suggested (The Guardian, 2nd April 2013), also of ‘decency, honesty and kindness’. His analysis is that the 99% have the virtues, while the 1% have the vices, and the money. It may seem a bit simplistic, but there’s a whole lot of truth in it.

So why does the largely decent majority put up with it? Well, first of all, the media barons, such as Murdoch and Rothermere, are still calling the shots. And the corporates continue to invest billions lobbying to pervert true democracy, driving political momentum from the socially minded left of centre to a predatory finance dominated right. The 1% still rule, nurtured by 13 years of New Labour largely driven by the mindless free market ideology. But there’s still hope that common sense will prevail over dogmatic belief and practical experience over blind theory. Monbiot suggests that a spark of that hope lies in the Green Party.
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So President Francois Hollande has not given up on his election promise to levy a 75% tax on those who pay themselves, or get paid, in excess of €1m (£840,000) pa. The French high court rejected his original proposal, but it seems the revised version, to levy the tax on the payers rather than the recipients, may well prevail. The promise is that it will only be for two years, but Pitt said much the same when he introduced the first British income tax to pay for the Napoleonic wars. If it works, it will no doubt stay and perhaps be built upon.

Taxing the income of the very high paid at a higher rate than the low paid is part of what made the French vote for Hollande as President. The people want it. They apparently don’t like the idea that the wealthy are sneering contemptuously from their tax avoiding havens at the poor who are being clobbered left, right and centre. And in that respect the French are probably not much different from the Brits. If a British political party were to advocate a 75% tax rate, with no escape, for those earning a million or more, would it gain support from the mass of people?
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Every day, the BBC – in fact the whole media circus – faithfully report the progress of the FTSE100 share index, as though it were a portent of our economic future. Every day so called “experts” explain in detail the reasons for FTSE100 movements seemingly on the assumption that it still relates to the UK economy. But recently some mystification has been expressed over how, when the UK economy is doing so badly – resolutely refusing to respond to the inspirational George Osborne, even losing its triple A rating – yet the FTSE100 is doing so well, already up 8% this year following 5.8% rise last year, threatening to follow the Dow to hit an all-time high. There is a definite disconnect between FTSE100 share values and the real economy. Bank of England governor Sir Mervyn King’s enthusiasm for quantitative easing only further emphasises that disconnect, boosting share values but having no effect at all on the real economy and jobs.

The FTSE index no longer reflects expectations about the UK economy. So what does it reflect? There must presumably be some connection between share prices and expectations of future gains. But those future profits no longer relate to what’s going on in the UK. The FTSE has become a global index, comprising companies like the dreaded Glencore, Anglo American, Serco, Xstrata, and like global companies. Oil and gas and pharmaceuticals account for nearly 30% of the FTSE’s value. Basic resources (mining), banks and financial services make up another 30+%. And an increasing number of foreign companies find a London quotation beneficial, such as the recent Russian additions, steelmaker Evraz and gold and silver producer Polymetal International. Around two thirds of FTSE100 companies have limited relevance to the real UK economy.
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The media expressed shock and horror that Centrica should jack its prices up to its customers and pass £1.3bn of its surplus profits back to its shareholders. But why? That’s what Centrica’s directors think they are there for. And the media and most everyone else appears to share that misunderstanding that it’s the legal duty of company directors to maximise shareholder wealth. But it’s simply not true. It’s based on a lie. The capitalist system was much more soundly based than that, but is currently being destroyed by such dishonest, even criminal corruptions of the truth.
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Back in July last year, this site pondered what would replace the public company, formerly the most powerful institution in the economy (see http://www.gordonpearson.co.uk/11/what-will-replace-the-public-company/). Its numbers had halved over the past decade and the number of small and medium sized firms’ initial public offerings had declined by more than 80%. Shareholders’ funds appeared to be no longer of much worth to the public company, the flow of money having been reversed so that shareholders, and indeed the whole financial sector, were now taking rather than investing, Nevertheless, media interest in the FTSE100 and other stock market indices continues unabated, even though they only measure betting activity on such as M&A rather than real new investment. A posting last month offered a reasoned explanation of how democratic capitalism, which had delivered so much and promised so much more, appeared now to be approaching the buffers – http://www.gordonpearson.co.uk/20/democratic-capitalism/.
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Among all the debate about the vices and virtues of capitalism there is rarely any serious attempt to define its key characteristics. Whatever they are, they appear to work better than the best known alternative that’s so far been tried: centrally planned totalitarian communism. Whether good capitalism or bad, compassionate, predatory or even ‘conscious’, all capitalisms appear to depend on the ownership and control of the established legal entity known in the United States as the corporation, or the public limited company elsewhere. That is the corporate form Chandler described as ‘the most powerful institution in the economy’ on which the affluence and growth of the past century and a half has been based.

The corporation was the legal form which was enabled to issue shares to many dispersed individuals and so accrue sufficient funds to make large scale capital projects possible. Initially its legal creation required a royal charter, then an act of parliament and finally, after 1844, a company could be legally established by a relatively simple process of registration. Limited liability followed a decade later. This was the precious means by which industrialisation was enabled.

Right from the start, great care was taken, to quote a 1766 Act of Parliament, to protect ‘the permanent welfare of companies’ from being ‘sacrificed to the partial and interested views of the few.’ So early joint stock companies were governed by their members democratically, on the basis of ‘one man one vote’, irrespective of the number of shares owned. This was typically exercised by a show of hands at general meetings.

Over time, democratic voting was modified to give larger shareholders greater influence, both in the US and UK. But care was still taken to limit the number of votes any shareholder might have so that ‘large landholders and dynastic wealth’ would be prevented from exercising ‘unbridled power’ for their own benefit to the detriment of the corporation and the common good (quotes from Lawrence Friedman’s A History of American Law).

Thus, by mid nineteenth century, the ownership and control of corporations had been uniquely established. Ownership was indirect through share certificates rather than by the direct ownership of corporate assets, and enjoyed limited liability. Control was democratic. The corporation had been carefully established as an independent legal entity in its own right. However, the ‘large landholders and dynastic wealth’ didn’t give up on their ‘partial and interested views’.
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Advanced economies everywhere seem to be led by politicians who are media competent but practically inexperienced. They seem not to have learned from the experiences of 2012, but there are vital lessons to be learned and changes need to be made.

Recession: The much talked of double-dip morphed into talk of triple-dip and the lost decade, and, eventually in 2012, to the previously unthinkable notion that GDP growth might be a thing of the past for advanced economies. Systems thinkers warned of the classic systems life cycle characteristics which accompany permanent change from one phase (eg maturity) to the next (eg decline): for the first several time periods, the idea of permanent change is never accepted – ‘it’s a blip’, ‘a double dip’ – until the permanency of change is absolutely undeniable. By which time most opportunities for improvement have been lost. This scenario seems ever more probable, given the increasingly apparent limitations on earth’s capacities and the ever increasing demands placed upon it.

Globalisation: The globalisation of markets led to the globalisation of firms, but has not yet led to the globalisation of regulation. Globalised firms are therefore enabled to run rings round national governments, avoiding, by perfectly legal means, the payment of tax more or less at will – as flagged up in 2012 by the head line cases of Starbucks, Amazon, Google and others. A General Agreement on Taxation and Tarriffs (GATT) will have to be convened if the avoidance of national taxations is to be regulated.
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Sir Nigel Rudd is in the news again for selling off some more of UK Plc to foreign competitors. This time he has disposed of the hi-tech railway signalling and control equipment business of Invensys for £1.7bn to German competitor Siemens, recipient of the government’s £1.4bn Thameslink rail contract, in preference to Derby based Bombardier.

Rudd has himself been mentioned a couple of times on this site. He was Chairman of Boots the Chemist and oversaw its disposal to a private equity operation, got it saddled with most of the debt raised for its acquisition, and moved its registration to the tax avoiding Swiss canton of Zug (see http://www.gordonpearson.co.uk/11/what-will-replace-the-public-company/). The other mention was as a member of David Cameron’s special advisory committee of ten on economic strategy (see http://www.gordonpearson.co.uk/21/limits-of-economic-advice-to-the-coalition/). He was one of the asset stripping accountants on the committee. Asset stripping is in his blood, his speciality since he started out in 1982 at Williams Holdings. It is curious how our politicos reward such activity with knighthoods and ask such people for their advice.

The following extracts are from an article on the asset stripping business written 40 years ago for the New Statesman. It poses the question: “Are the City strippers, politicians and press all feeding at the same trough?”

Some things never seem to change.
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After the Rigor 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.
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