Thursday, 3 July 2014

The End Of The Experiment? Part 2

The free market experiment began with the Thatcher government of 1979 and continued under Major, Blair and Brown. Looking back, many of the changes that occurred in the UK were not well anticipated by the arguments made for markets at that time. Yet despite these undisclosed outcomes, our political classes have yet to consider a 'null hypothesis' result.

The 1980s experiment was premised on a set of visionary promises about what the market could deliver. The vision centred on a critique of the State as a blockage on jobs, growth and competitiveness and a distorter of price signals in a market setting. Drawing on the sentiment, if not the detail, of the Bacon and Eltis thesis, it was argued that the public, non-marketed sector ‘crowded out’ private sector investment and enterprise. Similarly the debate over the public utilities was transformed by an Austrian view that the market would bring the rigour of competition and efficiency of co-ordination to cumbersome public utilities industries. The solution was wholesale de-regulation and privatisation to release entrepreneurial spirit and build an enterprise culture that would benefit ‘the public’ in its multiple identities: as producers, consumers and taxpayers.

The reforms may have had effects, but they were often not the effects that were expected. Surprisingly, public sector job creation increased, both absolutely and relative to private sector job creation under Tory administrations (figure 1). 86.4% of net new jobs created from the beginning of the Thatcher administration to the end of the Major administration came from the public sector. Whilst some of that is explained by the economic cycle, it was mostly the result of a secular decline in manufacturing jobs (over 3m net jobs were lost) which the growth of financial services could not rebalance (only 250k net new jobs were created). By the end of New Labour in 2007 this figure had risen: 4.4m manufacturing jobs had been lost since 1979, with only 330k new financial services jobs created to compensate. What the Conservatives - and later New Labour - discovered was that public sector jobs were a necessary cost, ‘filling in’ for (not crowding out) anaemic private sector job creation and buying in public quiescence at a time of unrest.

Figure 1

Equally unanticipated  was the lack of new entrepreneurial sole traders and SMEs, despite the promise that deregulation extended. From 1992 (when our time series began), the number of full time self-employed workers was virtually flat, until redundancy forced expansion after the 2007 crash. Instead, there was a growth in casualised, insecure low paid jobs: part-time self-employed jobs increased 116%, while part time workers for corporations increased 32% (figure 2). At the same time, large firms failed to show the entrepreneurial flair promised in the discourse of free markets, choosing often to sacrifice high risk/high return activities for modest returns, low risk activities plus scale. The free market experiment, in other words, created an environment where capital satisfices: large companies calcifying around the apparatus of the state, lobbying hard for the release of ever more low return but safe public activities.

Figure 2

This pattern of satisficing was also evident in investment, which always carries risk because it is a gamble on management's strategic and orgranisational competences. The free market experiment promised to stimulate investment, but these problems stubbornly remain. Investment as a % of GDP fell from 17.6% in 1980 to 14.4% in 2013; and the UK continues to have the lowest investment share of GDP among all G7 countries (figure 3).

Figure 3


If the hypothesis that markets would stimulate private sector job growth and investment proved faulty, it equally did not capture unexpected drivers of growth in a more marketised economy. Both Tory and Labour administrations assumed that growth would come from operating efficiencies, competitiveness and specialisation forged within dynamic markets. What they did not anticipate was the importance of credit and asset prices as key sources of growth in a liberalised economy. The push of newly minted credit against real estate assets allowed households to cash out equity gains as income. That income was spent, and GDP rose. It is a staggering fact that housing equity withdrawal was equal to 104.2% of GDP growth under the Thatcher administration and 101.7% of GDP growth under Blair (figure 4). And whilst equity withdrawals were not always spent on items accounted for under GDP measures, its contribution to growth should not be underestimated.

Figure 4


So what were the outcomes? It is clear that the opportunity culture did appear for some: house-flippers, upper income employees in the state subvented sectors, the (subsidised) financial services industry and certain professions all did well. But for many, the disposable income inequalities that emerged put a ceiling on opportunity as income mobility rates fell. By the end of the 1970s the tenth richest households (D10) had five times as much disposable income (before indirect taxes) as the tenth poorest households (D1). By the 2000s the average ratio was almost ten times. These effects were further amplified by the shift from direct to indirect taxes which hit the poor disproportionately: D10 to D1 inequality was 13.4 times on average over the 2000s, up from just over 5 times at the end of the 1970s by this measure (figure 5).

Rising inequalities between households should be understood within a broader context of disenfranchisement as household's lost their stake in GDP growth. At the beginning of the 1980s average disposable household incomes were – effectively – a lien on growth. That changed by the mid-1980s, so that by 2011 (when our series ends) the disposable household income growth of the bottom 90% of households had not kept up with GDP (figure 6). And even the top 10% of households had only just kept pace with GDP growth. Where did this share go? Labour’s pre-tax share of GDP fell 3.5 percentage points from 1979 to 2010 - this was almost identical to the growth of financial corporation gross operating surpluses share of GDP, which increased 2.9 percentage points; although taxes on products and production also claimed a similar increased share of GDP.

Figure 5

Figure 6

These unexpected outcomes may truly surprise us. But surprises are commonplace in all experiments. Learning from those unanticipated results – in this case – seems something that our political classes are less willing to contemplate.

Part 3 will be posted next week...


Manchester Capitalism

Monday, 30 June 2014

The End Of The Experiment? Part 1

Our new book, The End Of The Experiment? From Competition To The Foundational Economy  is now available  as an ebook on Kindle. Over the coming weeks we will be outlining its argument and we begin here with a sketch of the historical and intellectual context of the work.

The British economy has been in relative decline since the last quarter of the 19th century, and there has been debate about the sources of that decline since at least the great ‘national efficiency’ debate prompted by the failings revealed by the Boer War.  Britain, it seems, is the subject of eternal experiments. In the post-war years there have been two. The first was the post-war settlement, which delivered historically unparalleled prosperity and generous public goods in the form of the welfare state. That settlement floated on the ‘long boom’ (the thirty glorious years) and it sank alongside that long boom in the 1970s. For over thirty years now we have lived through a new experiment, symbolically inaugurated by the victory of Thatcherite Conservatism in 1979, but an era of experimentation which also encompassed the heady years of New Labour domination. That experiment had several well known features.  It created ‘flexible’ labour markets;  it dismantled the command economy represented by publicly owned industries;  it placed a bet on the creation of a ‘branch’ economy in manufacturing in a global division of labour, and on a financial services revolution in London; it prompted an outsourcing revolution which saw numerous public services franchised to private corporations; it created an audit state; and it ushered in a new era of micromanagement by the Whitehall elite.

The starting point of our book is the failure of this latter experiment.  The public occasion of failure was the great financial crisis, but the roots lie much deeper.  Our book explores four great deficits left by the thirty year experiment:

  • A competitiveness deficit: productivity stubbornly lags behind our competitors; the financial services sector  has failed to generate employment; and ‘branch’ manufacturing  has failed to solve the problem of the trade deficit.
  • A sustainability deficit: the post-war settlement delivered generous public goods; we show (for instance  in our broadband chapter and in the separate studies of the rail industry carried out in CRESC) that the privatised system isn’t delivering a sustainable infrastructure.
  • An accountability deficit: the thirty year experiment was legitimised in the language of accountability, but it has created new worlds of unaccountability – out of control corporate elites, franchises in privatisation and outsourcing shrouded in opaque accounting, constant uncertainty about accountability lines between politicians and service deliverers.
  • A competence deficit: the age of experiment has also been  a new age of fiasco -  outsourcing, PPI, rail privatisation, financial regulation; a hollowed out civil service unable to police the new franchises.


The metaphor of an experiment has an appealing ring: experimentation is, after all, the standard method by which the sciences learn, by  testing, refuting or confirming theories. But the British history of experimentation is very different: we show in the book that we live in a state that finds learning from experience very hard. There seem to be three political reasons for this:

‘Hyperpoliticisation’: in a world of extreme micro-management everything is turned into adversarial politics and what in the book we call the ‘antidote fallacy’

The closing of the metropolitan political mind: a drastic narrowing in the social and institutional range of elite recruitment (symbolised by the disappearance of the mass political party and domination of  politics by a narrow class of  professionals) is part of the problem; an equal problem is the rise, since Thatcherism, of a ‘TINAF’ mentality: There Is No Alternative Framework, and this drastically  narrows  the range of possible dissent from the official ‘line to take’.

The shrivelling of professional expertise.  Thirty years of centralisation and increasingly tight control of professional elites have left  (beyond devolved government) shrivelled alternative institutions in civil society  - and alternative sources of ideas.

We will develop these themes further over the next three blogs.

Manchester Capitalism

Monday, 23 June 2014

Piketty, or “Just the Facts”

“Just the Facts, Ma’m” is the catch phrase credited to Sergeant Joe Friday of the LA Police Department in Dragnet, the US television series of the 1950s. Friday wanted the facts because they would lead to a cycle of purposive effective action with arrest leading to conviction and detention of criminals who should be afraid when Sergeant Friday is onto their case. Professor Thomas Piketty of the Paris School of Economics also offers us the facts, in this case on the history of income and wealth inequalities. But these facts fit into a different kind of cycle of guaranteed inaction whereby society can recognise the problem of growing inequality without any prospect of effective redress so that the rich can sleep soundly in their beds

This is our explanation for the  bestselling success of Capital in the 21st Century (here after Capital), the English translation published of Le Capital au XXI siècle, published last year by Editions de Seuil (Piketty 2014). This is a prolix and inelegant 700 page doorstop of a book, published by an American university press and written by a little known author. It garnishes the facts on the historical development of income and wealth inequalities in twentieth century France, Germany, Sweden, Japan, the UK and the US with some musings on fictional inequality in the world of Balzac and Austen.

This book which failed to gain attention when published in French, has suddenly become a global must read. It has been on the top 100 non-fiction bestseller list of Amazon for thirteen uninterrupted weeks and on the New York Times bestseller list for nine weeks, topping the list for three of those nine weeks. Capital has been lauded by at least two Nobel-laureates (Krugman and Stiglitz) as the most important book in economics since the Wealth of Nations (1776) (Krugman 2014), has been reviewed by every serious economist and has been deconstructed and reassembled in hundreds of economic blogs.

While other economics professors grade essays, Professor Piketty has toured two continents as if he was a true rockstar, has been received for a private tête-a-tête at the White House by Obama himself, has talked to the great and good from the worlds of global finance and politics, has been invited to talk to the Dutch parliament and has earned enough in the form of royalties, according to his own assessment, to buy a piece of prime real estate in the 16th arrondissement of Paris – which easily amounts to four, five million euros.

The central exhibits in his text are U shaped curves of the shares of wealth and income claimed by upper groups. While the U shaped curve of wealth distribution is new (and now challenged in the FT), his curve which shows income inequality returning to pre-1914 levels is not new because (in one form or another) it has featured in a series of academic publications by Piketty and his associates since the mid 2000s. The central finding is also no surprise. Income and wealth inequalities since the 1970s in most developed economies have increased to levels typical of the ‘patrimonial capitalism’ of the late 19th century. But Piketty himself has been arguing this since 2003 (see Piketty 2003), alone or together with his compatriot Emmanuel Saez (see Piketty & Saez 2003). The doyen of comparative inequality studies, Tony Atkinson, has been ringing the warning bell for at least two decades (see Atkinson 1996). The web site with their data, the World Top Incomes database, has been public for at least three years.

This raises the question why Capital has become such a big success, and especially: why now? Our answer is that Piketty’s fact-led discourse suits mainstream thinkers in the present conjuncture.  Before 2008 distributional problems were covered up by growth figures artificially beefed up by debt-driven asset inflation, especially in real estate; after the outbreak of the crisis in September 2008 nobody can deny that financialized capitalism rewards the few and simply does not deliver for the many. Financialized capitalism is a benefit for multinationals and elites but a disaster for citizens and the masses. And this verdict is no longer radical critique from the Occupy movement, Los Indignados or a few elderly socialists, it is endorsed by economists like Paul Krugman, Joe Stiglitz and Larry Summers.

In the background, the high priests of neoliberal liturgy like the IMF, the World Economic Forum and the OECD have recently voiced grave concerns over the political effects of rising income and wealth inequalities in developed economies (see IMF 2014). Under the banner of inequality threatening the legitimacy of capitalism, the IMF has even bracketed its traditional aversion to cross border capital controls (IMF 2012). An even starker illustration of the concerns raised by increasing inequality among the global financial elite is the May 27 London conference on ‘Inclusive Capitalism’. Organised by an heir to the Rothschild fortune, the conference allowed the great and the good such as Martin Wolf, Christine Lagarde, Prince Charles and Mark Carney to lament increasing inequality (see Lagarde 2014).

Against the back ground of disaffection with main stream politics, it is hardly surprising that the great and good are now recognising that they have a problem about the legitimacy and attractiveness of financialized capitalism. While bankers’ bonuses in the City and on Wall Street are back at the level of 2008, ordinary households in the US and the EU are still facing declining disposable incomes, resulting in pretty severe cost of living crises on both sides of the Atlantic. The stock markets are at record highs with  price records being set again on art markets and in markets for prime real estate in New York, Paris and London. The unconventional monetary policies which central banks hoped would beat the ‘great recession’ have instead benefited the wealthy by boosting asset prices.

Led by Amazon and Starbucks, and advised by para-financial accountants and lawyers, large firms have succeeded in paying an ever smaller share of overall taxation, and hoard ever larger amounts of cash which is not invested. Households by default have to bear the brunt of both the austerity policies enacted throughout the EU and through higher prices or taxes pay for investments in the renewal of material and immaterial infrastructure (roads, rule of law, education) on which large corporates depend. Corporate lobbyists with trade narratives shield politicians and confuse citizens who nevertheless by majority in countries like the UK typically support policies like renationalisation of utilities.

Enter Thomas Piketty: a French economist with a reassuring CV that includes a PhD from the LSE and a stint as economics Prof at MIT. On the basis of carefully assembled historical data and an impressively sounding law of capitalism ( R > G ), Piketty warns that ceteris paribus we are returning to the  patrimonial capitalism of the late 19th century. Capitalism is an inequality machine because the return on capital (R) in a context of demographic decline will always be three to four times larger than overall economic growth (G), implying that income and wealth inequalities due to the forces of compounded interest and multiplication will by necessity grow. Mid twentieth century equality is according to Piketty an anomaly based on unrepeatable historical contingencies including war, destruction, financial repression, inflation, the rise of mass democracy and redistributive welfare states.

The strength of Capital lies in its careful presentation of the historical facts. As Piketty writes in the Acknowledgement: ‘this book is based on fifteen years of research devoted essentially to understanding the historical dynamics of wealth and income’ (p. vii). No more, no less. Thence the 18 Tables and 97 Figures, that have to prove beyond reasonable doubt that the phase before 1914 was capitalist normality, that the period between 1914 and  1970 was capitalist exception, and that in the past thirty years we have embarked on a trajectory which will bring us irrecoverably back to that earlier normality.

The book derives its unmistakable political seductiveness from it’s a-theoretical, empiricist factuality. Although Karl Marx figures prominently in Capital, the spirit in which it is written is one of classical (not radical) political economy. Piketty’s devices include accounting identities, economic laws (‘the first fundamental law of capitalism’) and echoes of classical demographic arguments; Capital resembles Thomas Malthus much more than radical theorists like Karl Marx who employed the labour theory of value of Adam Smith and his ilk to critique the exploitative nature of industrialized capitalism and predict its ultimate demise through crises of over accumulation.

The reader looks in vain in Capital for Marxist or Marxisant theoretical explanations around class and accumulation or bourgeois radical explanations around business  models, agents, power relations and politics. Piketty asserts R > G as an explanation for growing inequalities, but it is of course no such thing. One section poses the crucial question as to why the return on capital should be greater than the growth rate (p. 353 ff); but this section does not contain any answer other than a summary of the historical record. Growing inequalities are inherent to capitalism au naturel, that’s just the facts.

And facts have a value which is enlightenment. ‘Intellectual and political debate about the distribution of wealth has long been based on an abundance of prejudice and a paucity of fact,’ writes Piketty in the Introduction where he explicitly refers to Kuznets and his Whig expectation that economic progress would bring less not more inequality. Thus the main aim and the huge success of Capital (p. 2). This is the book which brings light where darkness reigned – not to debunk or demythologize or accuse, but to put the political debate on inequality on a more secure, empirical footing and (implicitly) when we know the facts, will we be able to assess, judge and act. Piketty hence subscribes to the positivistic view of science which colours to this day the self image of economics: positive economics is about facts not values, the technical facts not the political choices.

Piketty is the samurai hero of positive economics who lays about him with fearless sword play. Progressive readers can only cheer his skewering of the marginal productivity explanation for the rise of supermanagerial rewards since the late 1970s (p. 330 ff.). As Piketty contends, increased bargaining power does a much better job in explaining rising income inequalities than any other explanation. Yet this line of argument is not connected with the political economy and political science by scholars like Wolfgang Streeck (2014), Colin Crouch (2004) and Peter Mair (2013),on the increasing malfunctioning of democratic policy making in the late 20th century. The political backdrop for the return of patrimonial capitalism is never explored.

From this point of view, our core problem is disconnect between the median voter and his representative. This is explicit in the Eurozone troika countries, indirectly in the excessive deficit countries of the Eurozone, implicitly in all the other representative democracies. Everywhere it has created a democratic vacuum in which large banks and multinationals have been able to push through a silent coup. Just as the rise of mass suffrage marks the beginning of the great anomaly period of increased equality in the 20th century, so the end of mass democracy and the rise of post-democracy marks the back to the future return of income and wealth inequalities. But all this is never explicitly discussed in Piketty who simply avoids any kind of political explanation for the phenomena he describes.

In our opinion, this political reticence explains Capitals phenomenal success. In a conjuncture when capitalism is malfunctioning politically and economically, Piketty lets the undeniable facts speak for themselves. Thus, Piketty has succeeded in making his message about increased inequality palatable to an audience of important people who would have bridled at anything that smacked of contrarian leftism which in Marxist and Social Democratic  forms has always sought to organise politically on the basis of its economic analysis. Piketty does not offer an activist ideology; he deals in facts. No wonder that Larry Summers and Paul Krugman have claimed to see in Capital the birth of a new style of empirical economics. Away with models! Away with ideology! Away with theory! Here come the facts!

That is why Chris Giles launched his attack on Piketty in the Financial Times of late May and why it appeared so threatening to Pikettyites (Giles 2014). What if all those carefully assembled, speaking-for-themselves facts were wrong? What if the facts had overstated real inequalities? Would that not suggest that ideology lurked behind Piketty’s a-theoretical, a-political empiricism? If the facts did not speak for themselves and instead required political interpretation maybe there was nothing self-evident about Piketty’s facts? Inevitably, Piketty responded to Giles attack by claiming empiricist virtue: his work was transparent because ‘all Excel-sheets are available on Internet’; it was necessarily incomplete because ‘more data and more collaboration are needed’; and the adjustments were not biased because ‘colleagues have looked at off shore centres, suggesting that real inequality is larger rather then less’ (Piketty 2014a).

So far Piketty has done enough to see off Giles and other positivist economic critics who have until now only disputed the facts about the problem of wealth inequality and cannot find gross errors of the kind which the Amherst team found in Reinhart and Rogoff’s This Time is Different (see Herndon et al. 2013).  But, given his style, Piketty cannot do enough to see off political critics who would instead focus on his recommended solutions as the point of weakness.

When it comes to fixes for inequality, in Chapter 15 Piketty presents his widely discussed ‘useful utopia’ of a global progressive wealth tax and is the first to acknowledge that politicians are unlikely to implement a wealth tax due to insurmountable collective action problems. Piketty can then present himself as the high intellectual in a low political world: ‘for reasons of natural optimism as well as professional predilection, I am inclined to grant more influence to ideas and intellectual debate’ (p. 513). Or, as we would put it, the more a-political, a-theoretical and empiricist the analysis, the less likely it is to have credible fixes as corollary.

The fixation on a global wealth tax is however revealing.  If the problem of capitalism is R > G, merely analytically there are at least two different economic pathways and one more political pathway out of the predicament of increasing inequality. One could choose to structurally limit the return on capital, by means of an estate tax for example. That is Piketty’s preferred solution: < R. Alternatively, one could also choose to ensure that growth increases, either through investment, re-framing management and redefining economic activity.  An alternative economic solution is > G  through massive investments in infrastructure, managing the sheltered foundational economy through social licensing and innovation and redefining what goes into GDP

Finally, one could choose to change the distribution of rewards between capital and labour ( R : G ). This is a political solution because the means to do so are labour union renaissance and new modes of corporate governance with a stronger say for labour and other stakeholders. The aim would be to encourage demands for higher wages by recreating the bargaining power which organised labour had in the mid twentieth century and deny capital the gains it has made since the late 1970s when liberalisation loosened up the exit options of capital.  As Thomas Frank has argued, if we strengthen labour against capital, the market will deliver the outcome which Piketty seeks through progressive taxation (Frank 2014).

Piketty’s preference for the pseudo technocratic fix of progressive taxation is revealing of his rationalist concept of management which again helps to explain his brilliant success. Progressive taxation is the rationalist solution because the logic of the ratios and aggregates is countered by an adjustment to the one element of government taxation which finance ministries can vary (but never will with the present balance of economic forces in high income countries). But this helps smooth the reception of his book amongst elites and opinion formers who market the book to a much wider circle. Piketty has a seminar room solution for inequality which is economically thinkable but not politically possible and the importance of his book is that it allows us all to acknowledge the problem of inequality without danger that we might be endorsing or licensing any effective solution. Read Capital and demonstrate your concern while doing nothing.

References

Atkinson, A. (1996) Income Distribution In Europe and the United States, Oxford Review of Economic Policy 12(1): 15-28.
Crouch, C. (2004) Post-Democracy (Oxford: Polity Press)
Frank, T. (2014) The problem with Thomas Piketty: “Capital” destroys right-wing lies, but there’s one solution it forgets, Salon, May 11, http://www.salon.com/2014/05/11/the_problem_with_thomas_piketty_capital_destroys_right_wing_lies_but_theres_one_solution_it_forgets/
Giles, C. (2014) Data Problems with Capital in the 21st Century, May 23, http://blogs.ft.com/money-supply/2014/05/23/data-problems-with-capital-in-the-21st-century/
Herndon, T. et al. (2013) Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff, Cambridge Journal of Economics, doi: 10.1093/cje/bet075
IMF (2012) The liberalization and management of capital flows; an institutionalist view, November 14, 2012, http://www.imf.org/external/np/pp/eng/2012/111412.pdf
IMF (2014) Redistribution, Inequality and Growth, IMF Staff Discussion Note, February 2014, http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf
Krugman, P. (2014) Why We’re in a new Gilded Age, New York Review of Books, May 8, http://www.nybooks.com/articles/archives/2014/may/08/thomas-piketty-new-gilded-age/
Lagarde, C. (2014) Economic Inclusion and Financial Integrity—an Address to the Conference on Inclusive Capitalism, May 27, https://www.imf.org/external/np/speeches/2014/052714.htm
Mair, P. (2013) Ruling the Void: the Hollowing of Western Democracy (London: Verso)
Piketty, T. (2003) Income inequality in France, 1901-1998, Journal of political economy 111(5): 1004-1042.
Piketty, T. (2014) Capital in the 21st Century (Harvard: Harvard University Press)
Piketty, T. (2014a) Rebuttal, http://piketty.pse.ens.fr/files/capital21c/en/Piketty2014TechnicalAppendixResponsetoFT.pdf
Piketty, T. & E. Saez (2003) Income inequality in the United States, 1913-1998, Quarterly journal of economics 118(1): 1-39.
Streeck, W. (2014) Buying Time: the Delayed Crisis of Democratic Capitalism (London: Verso)


Dyfal Donc & Dutchman


Monday, 28 April 2014

Why The UK Is A Dead Duck Whatever Happens In The Scottish Referendum

Nobody can predict with accuracy what will happen in the Scottish independence referendum in September, though the unremittingly negative cast of the ‘no’ campaign is probably helping narrow the gap between the two sides.  That negative cast is certainly in part due to the obtuseness which is to be expected of a metropolitan elite trapped inside its own bubble: how else to explain the catastrophe of the CBI’s decision to alienate large sections of Scottish business, or Ed Balls’ decision to line up with George Osborne, a hated figure in Scotland, to try to put the frighteners on the Scots about currency union?

But the negative campaign is not mainly due to obtuseness.  It is due to influences which suggest that, whatever the outcome in September, the ‘United Kingdom’ as a historical project has had its day.  The ‘no’ campaign is overwhelmingly negative because the historical conditions that gave rise to a positive case for the United Kingdom no longer exist.  It is necessary to put the frighteners on the Scots because there is no longer a convincing case for the United Kingdom which can attract the Scottish imagination.  The idea of states and nations as ‘imaginary communities’ of course owes much to Benedict Anderson’s classic.  And it certainly conveys the notion that a political construct like the United Kingdom had a fictional quality: in Renan’s famous words, ‘getting its history wrong is part of being a nation.’   But it is not the fiction that is important; it is the success of the appeal to imagination.  A century of so ago any case for Scottish independence could have been met with a positive case that appealed to the imagination – especially to a Scottish imagination which was bound into the project that was the United Kingdom.  That project fused economic and militaristic imperialism (to both of which the Scots made a quite disproportionate contribution.)  It invoked Protestant providentalism, a providentialism which also drew special strength from the messianic character of Scottish (missionary) Presbyterianism.  And it promised unity under a crown which had invented a part Scottish identity via Victorian Balmorality.  Just imagine an attempt to mount a campaign now against the nationalists based on the empire, Protestant providentialism and unity under a crown: to pose it is to see immediately why it is necessary to try to frighten the Scots with horror stories.

This means that even if the ‘no’ campaign succeeds in the September referendum the conundrum of what the United Kingdom is about will still not be solved.  Solutions – and a positive campaign – are indeed conceivable, but they are not feasible for the metropolitan governing elite.  Just across the Irish Sea the problem of what to do about an exhausted national project was solved in the 1970s.  By that date it was plain that the Irish nationalism ‘imagined’ out of 1916 was exhausted: Ireland was never going to be a rural, traditional, Irish speaking, Catholic outpost sealed off from the modern world.  That was De Valera’s fiction, but a fiction which no longer commanded imaginative power.  The Irish nation was instead successfully reimagined as a modern community enthusiastically committed to the project of European unification: people gave up on speaking Irish, practising Catholicism and listening to the Kilfenora ceilidh band.  In principle it is possible to conceive a campaign against Scottish independence which reimagines the United Kingdom as precisely this sort of committed participant in the European idea.  And for  reasons that are obvious it is exactly the kind of campaign which hardly any Conservative can now imagine; and nor is it something which Labour, still grudging in its attitude to Europe and an intellectual prisoner of Unionism, is able to conceive.
On Friday 19 September, whatever the result delivered on the previous day, the problem of what the United Kingdom positively stands for will still therefore be unresolved.

Pooter

Wednesday, 2 April 2014

A 19th Century Institution Confronts 21st Century Problems

The publication in mid-March of a report by the Public Accounts Committee on the latest episode in the outsourcing saga (Contracting Out Public Services to the Private Sector, HC 777, 2013-4) represents the latest attempt by the institutions of parliamentary scrutiny in the UK to come to terms with the astonishing phenomenon of the new contractual state and the accountability issues which it has created.
The dimensions of this new contractual state are now well established.  The combination over the last thirty years or so of the privatisation boom and the outsourcing boom have created whole new areas of corporate enterprise and brought into existence new corporate giants.  The PAC report itself documents some dimensions of the phenomenon.  Government in the UK spends £187 billion on goods and services provided by third parties each year; about half of that is estimated to be directly connected to outsourcing contracts. The four outsourcing giants Atos, Capita, G4S and  Serco between them held government contracts worth around £4 billion in 2012-13.  Any financial configuration of this size and rate of growth raises obvious important issues of  accountability. The Public Accounts Committee, under successive chairs, notably David Davies, Edward Leigh and Margaret Hodge, the present chair, occupies an honoured position in this struggle: a string of PAC Reports over the years have thrown light on successive and costly fiascos in the outsourcing system and in public procurement more generally.  Democratic politics would be poorer without these interventions.

But the history of the Committee, and indeed its latest report, show key weaknesses of the accountability system.  In a sentence: this is a 19th century institution, with a 19th century set of values, trying to make sense of a 21st century world.  The PAC is an unusual Committee.  Most of the present range of House of Select Committees are creations out of the post-1979 reforms set in motion by Norman St John Stevas as Leader of the Commons.  The Public Accounts Committee, by contrast, traces its origins back to the middle of the 19th century.   It is a creation of the great budgetary reforms associated with Gladstone’s tenure as Chancellor of the Exchequer, and it reflects his famous insistence on the importance of economy in public spending – on the importance of ‘saving candle ends.’  The key House of Commons resolution,  of 1862, which still governs the Committee’s mission reads in part as follows:

‘There shall be a standing committee designated "The Committee of Public Accounts"; for the examination of the Accounts showing the appropriation of sums granted by Parliament to meet the Public Expenditure, to consist of nine members, who shall be nominated at the commencement of every Session, and of whom five shall be a quorum.’  

In 1866 Parliament created a key institutional connection which continues to shape the Committee’s work: it appointed the PAC as the overseer of the work of the Comptroller an Auditor General, who in modern Britain has morphed into the head of the National Audit Office.  As a glance at the hearings that underly the most recent report show, it is investigations by the NAO which now provide the main grist for PAC hearings and subsequent reports.

These 19th century origins have had two fatally narrowing consequences as the PAC has struggled to come to terms with the new contractual state.  The first is that the original ‘saving candle-ends’ emphasis on austere economy has turned, in the age of neo-liberalism, into a single minded focus on the extent to which outsourcing is governed by competitive markets, and the extent to which competition delivers ‘value for money’ –  delivering the most economic candle ends that money can buy.  This latest report, like earlier PAC investigations, is essentially about why the competitive market doesn't seem to be working in outsourcing. The second fatal narrowing consequence is that the work of the Committee has become focused on fiascos in the outsourcing system.  A subsidiary reason for this is that the investigation of fiascos, and the chastisement of senior executives in public hearings, makes for good media soundbites.  All modern chairs of the Committee have become minor media stars delivering excoriating judgements on firms’ failings on TV news and on the Today programme. And indeed the exposure of fiascos, of which there are plenty in the contracting system, is a legitimate task of the PAC.  But the overconcentration on media focused exposes, in the manner of a kind of parliamentary version of Private Eye, risks missing the bigger accountability issues raised by the rise of the huge outsourcing system.  Documenting that G4S keeps losing prisoners, or that it made a pig’s ear of the contract to provide security at the London Olympics, certainly provides good copy. But a focus on fiasco draws attention away from more important issues. Most of the contracting that takes place in the outsourcing business does not involve fiascos, for the very good reason that it is largely about making money from carrying out safe, easy to organise, mundane services: just how difficult can it be to administer the pension payment system for teachers?  Outsourcing means handing over to a small number of corporate giants a set of licences to print money.  And the relationships which govern the award of those licences, and more importantly the contractual conditions under which they are awarded and scrutinised, are largely missed in the search for candle end savings and the exposure of fiascos.

Pooter.

Monday, 17 February 2014

Introducing The Foundational Economy

The Guardian has just begun a series of articles following the ‘Enfield Experiment’.  That experiment attempts to use local authority initiatives to reverse a long history of economic decline in one of the most depressed parts of the supposedly booming London economy.  At its heart is a new conception of the obligations of business: one that stresses the obligation of enterprises as various as utilities and supermarkets to organise themselves to put  some of the profits they make from the community back into that community, in the form of business for local suppliers and jobs for local residents.

The Enfield Experiment is based in part on a developing argument being unfolded by researchers at CRESC. The notion that business has social obligations is hardly new, but the CRESC argument gives it added point by observations on the changing character of  the economy in the last three decades.  There are many ways of classifying economic sectors, plainly, but one key set of sectors has been created by the recent rise of two phenomena.  The first is the contract state: the vast extension, in the age of privatisation and outsourcing, of business activity which operates as a franchise sheltered by a contract with public authority.  That of course describes the way most utilities now operate in Britain. The second is the rise of the regulatory state: the rise of a web of regulations governing the terms under which business can operate, and often conferring on enterprises regulated protection from competitors: the classic example is the way planning regulations in effect confer local monopolies or duopolies on  supermarkets established in particular local communities.

The CRESC researchers dub all these activities part of  the Foundational Economy, and for an obvious reason: they involve the production and delivery of goods and services that are the very foundation of what we consider to be civilised life in Britain.  And they are not only foundational to everyday civilised life: if we think of utilities like energy, water and rail transport they are also foundational to the operation of the wider economic system.

One of the many paradoxes of the Thatcher Revolution is that it not only helped create and expand the Foundational Economy, through its development of the contract state and regulatory state; it also created the Foundational Economy as a series of sub-sectors sheltered from competition.  The Thatcher Revolution, in the name of privatisation and competition, vastly expanded the areas of business life carried on under the protective shelter of  public franchises: whether those franchises are openly acknowledged, as in the rail industry, or are implicit, as in the local monopolies conferred on supermarkets by planning law.  And it vastly expanded these sheltered areas of economic life in the name of individualism (‘no such thing as society’ in Mrs Thatcher’s words) and free enterprise, denying that enterprise had any wider obligation beyond the PR exercises of corporate social responsibility.  Yet a moment’s reflection shows that the licensed enterprises operating in the Foundational Economy enjoy huge social privileges; their operations have huge social consequences; and as a consequence they should be made to recognise their huge social obligations.
The Enfield Experiment is a first small step along the way to clarifying those obligations, and as the Guardian’s report shows it is paralleled by initiatives in other local authorities.  But this is not just a matter of localism.  The Foundational Economy is a national phenomenon, and it needs to be addressed by a debate about how we manage that national economy, and by policy measures that use state power to reconfigure the social obligations of business.

Note: to follow the CRESC argument further see  Andrew Bowman, Julie Froud, Sukhdev Johal and Karel Williams, The Foundational Economy: Rethinking industrial policy .  Manchester: CRESC, 2013, downloadable at: http://www.scribd.com/doc/122563517/The-foundational-economy-rethinking-industrial-policy-Andrew-Bowman-Julie-Froud-Sukhdev-Johal-and-Karel-Williams.

Pooter.

Thursday, 5 December 2013

Boris Johnson: Cheer Leading For Inequality

When he gave the annual Margaret Thatcher lecture Boris Johnson’s praised inequality in a calculated way. He was positioning to challenge the Tory leadership from the right, if and when Cameron and Osborne fail to increase Tory seats at the next election.

Perhaps in an attempt to block Johnson’s manoeuvring, George Osborne, in a softer way, repeated those sentiments in his comment on Johnson’s lecture: inequalities of outcome are inevitable; the important thing is to ensure equality of opportunity through schooling:

"I think there is actually increasingly common agreement across the political spectrum you can't achieve equality of outcome, but you should be able to achieve equality of opportunity… You should give everyone, wherever they come from, the best chance, and, actually, education is the key to this."
This is partly wishful thinking when schooling in so many ways reinforces inequalities driven by catchment areas and the residential segregation of different income groups. But the more troubling point is that the Tory Right are now trying to break with the Westminster consensus in several ways.

First, the five Tory back benchers who wrote Britannia Unchained have blamed our lazy workers for continuing underperformance: “The British are among the worst idlers in the world. We work among the lowest hours, we retire early and our productivity is poor. Whereas Indian children aspire to be doctors or businessmen, the British are more interested in football and pop music”.

Now Boris Johnson praises the deserving rich who are smarter so that they will inevitably succeed against the masses who, on his account, have low IQs not a deficient work ethic. Johnson presents us with the cornflakes pack account of social reproduction and income inequality:

“Whatever you may think of the value of IQ tests, it is surely relevant to a conversation about equality that as many as 16 per cent of our species have an IQ below 85, while about 2per cent have an IQ above 130. The harder you shake the pack, the easier it will be for some cornflakes to get to the top”

This analogy rests on a farrago of unjustified assertion about competitive struggle, half-truth about the contribution of the rich and sleight of hand about the IQ evidence topped off by a failure to distinguish between income and wealth inequalities.

1. Johnson’s whole argument is framed  in a familiar way by the assertion that our country and individuals within it are all engaged in ceaseless, striving competition:

  “Like it or not, the free market economy is the only show in town. Britain is competing in an increasingly impatient and globalised economy, in which the completion is getting ever stiffer. No one can ignore the harshness of that competition, or the inequality it inevitably accentuates; and I am afraid that violent centrifuge is operating on human beings who are already very far from equal in raw ability, if not spiritual worth.”

This is really a quite peculiar perception which hardly fits the facts. The balance between internationally exposed and sheltered activities in Britain has been decisively changed by the competitive failure of British tradeable goods. Real manufacturing output has not increased in the past forty years and manufacturing now accounts for no more than 11% of GDP; our export success is narrowly concentrated in financial services from London finance whose activity brings public risks as well as private rewards.

Johnson’s argument completely ignores the sheltered “foundational economy” of private and public organisations producing everyday goods and services. Pipe and cable utilities, transport infrastructure, food processing, supermarkets, health, education and welfare altogether now employ 40% or more of the workforce. In these sectors, pay relativities and minimum wages are not determined by competition from Guangdong Province but are a result of social choices intersecting with business models

2. Johnson tries to legitimise income inequality by making disputable claims about how “the rich” contribute to society through paying taxes.

“ When Margaret Thatcher came to power in 1979 they ( the rich) faced a top marginal rate of 98% and the top 1% of earners contributed 11% of the government’s total revenues from income tax. Today, when taxes have been cut substantially, the top 1% contributes almost 30% of income tax, and indeed the top 0.1%- just 29,000 people- contribute fully 14% of all taxation. That is an awful lot of schools and roads and hospitals paid for by the super rich”

We‘re fairly sure the 30% figure exaggerates the contribution of the rich. A quick google  search highlights a BBC story from 2009 which suggests that the figure is below a quarter for the top 1%. The 30% figure does not come from any kind of academic source since but seems to have been put into circulation by a stockbroking firm Oriel Securities which explicitly says it is doing “non independent research which constitutes marketing communications “

And the 30% of taxes claim represents the same sleight of hand as in the old trade narrative about London finance’s contribution which we dissected in our Alternative Banking Report of 2009. London finance highlighted its 30% contribution to corporation tax and ignored the fact that its contribution to all taxes paid was half as large and a sector like manufacturing paid more. So it is in this case where Boris Johnson highlights share of income tax without discussing the broader picture. Mrs Thatcher did not reduce state expenditure’s share of GDP, but cut income tax rates and shifted the burden of taxation onto regressive consumption taxes. So the share of all taxes paid by the rich is much lower than 30% and it is the poor and middle income groups who are paying for their own schools and hospitals

3. Johnson’s category of “ the rich” conflates inequality of income and wealth; if we dis-aggregate the two groups, the relation between IQ and income is positive but the relation between IQ and wealth is almost certainly non existent


Here is a standard sociologist’s take on the correlation between IQ, income and wealth. 
There is a loosely positive correlation between IQ and income, but it is not immensely strong. That is because, for example, there are many examples of institutions which pay modest wages to high IQ individuals – public universities being one good example. But the more interesting finding is that the correlation between IQ and wealth is completely absent. And the obvious explanation for that is because wealth is inherited without conditions as to intelligence, diligence or anything else.

Inherited wealth is the big problem for the new social Darwinists like BoJo. Not least because the past 30 years of widening income inequality will be followed by congealed wealth inequalities because the rich cannot easily be prevented from having children who will often be dim scions. These inevitabilities would be best addressed by a system of death duties and inheritance tax which (unlike the present regime) could not easily be dodged by setting up a family trust.

The fundamental problem is always the economic and social reproduction of inequality. But that is always invisible in Johnson’s discourse.

Dyfal Donc and Stanley