What’s wrong with ‘demand’?

Offer bankers a cleaner’s pay and the choice of either occupation, and most would choose the executive role.  More generally, wages rise with power, status and stimulation.  It is arguable that jobs would be similarly allocated even without pay differentials. 

The difference, of course, is that most bankers are capable of cleaning, whereas most cleaners lack the skills and knowledge needed in banking.  And because some bankers make million-pound decisions every day, it makes financial sense to pay them vast sums if you believe in the slightest correlation between pay and performance. 

Instead of paying large bonuses to exact decent performance, we could reaffirm the risks associated with high rewards and take away employment rights for anyone paid over £100,000.  They would still have protection against discrimination, but would risk losing their job overnight if their performance is deemed unsatisfactory; the 2% of workers who receive such large salaries could rely on savings or insure themselves against a potential loss of income.  But the bankers might not fancy it, and their ability to exit any jurisdiction that displeases them gives them considerable bargaining power.

From the furore over bankers’ pay you might think it an aberration in the otherwise blemish-free record of market allocation.  Yet bargaining power works very differently at the other end of the pay scale. 

When the wealthy trade in the market, they compete with each other.  If the poor cannot sell their produce or their labour, and there is no welfare to protect them, their children may go hungry.  They compete with each other but must also race against the clock, as needs become more acute with every passing hour.  This makes them forced sellers, and the market offers them worse prices as a result.  Far from trickling down, the bargaining power that lies at the heart of every transaction drags wealth up from the most vulnerable.

The market would fill a rich man’s pool before quenching a poor family’s thirst because it fails to distinguish between needs and wants, equating them in ‘demand’.  It is hard to reconcile this with claims of market efficiency.  It also goes to the heart of the moral conundrum that has beset capitalism since its inception. 

Adam Smith got round this problem by claiming that “[the rich] are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made had the earth been divided into equal options among all its inhabitants”.(1)  History, and the intensification of competition due to the ten-fold increase in the world population, suggests otherwise.   

By exempting the market from moral concerns - by allowing us to equate our wants to others’ needs - Smith unleashed unprecedented incentives for output and innovation.  Yet, when he pondered his pin factory, could he have ever imagined the excess and squalor that characterise our world?

The advent of neoliberalism marked a return to the classical economics that Smith had begun to envisage.  After Thatcher and Reagan brought it to the UK and US, it was foisted on scores of developing countries no longer able to service their debts when interest rates soared during neoliberalism’s failed experiment with monetarism in the early 1980s.  By the end of the decade, and with varying degrees of enthusiasm, much of Europe had adopted neoliberalism after finding that the levers of Keynesian demand management no longer worked. 

Neoliberal dogma condemns us to taking whatever distribution of resources the unregulated market dictates.  Yet its benefits are far from clear.  In the UK, many eulogise the 1980s and castigate the 1970s, yet growth was the same for both decades while in the US, without the benefit of North Sea oil, growth fell.  Taking the OECD as a whole, and despite the benefits of the digital revolution and cheap oil, average growth fell from 3.8% in the seventies to 3.0% in the 1980s, and has continued to fall in every subsequent decade.(2)  Largely immune to the diktats of the IMF, only China and India bucked this trend, suffering considerable criticism for not deregulating and liberalising as rapidly as elsewhere. 

In general, markets remain the best way of allocating jobs, productive resources, investment capital and consumer goods.  However there is scant evidence that regulations, taxes and subsidies to guide markets towards desirable social outcomes necessarily undermine productive potential. 

The lack of regulation over the last three decades has resulted in massive social and economic costs.  Judged on its own terms, neoliberalism failed to deliver stronger economic growth.  Yet the price of the neoliberal experiment has been huge: there has been a marked increase in inequality both here and around the world, and the global economy has become much less stable, succumbing to frequent currency and banking crises. 

Capitalism is a hugely powerful tool; we should use it to get what we want, not get what we’re given.  We should determine our goals democratically and shape markets to achieve them, rather than accepting whatever change the market throws up.  The market should be our servant, not our master. 

(1) Adam Smith, The Theory of Moral Sentiments, Book IV.1.11

(2) World Bank Development Indicators, in constant US dollars.

Trading to a Fairer Future

Trade clearly benefits both sides or else they wouldn’t do it.  Still, there can be huge collateral damage among those not party to the decision: in a faultless application of free trade principles, the (predominantly English) landowners in Ireland exported wheat throughout the Potato Famine of 1845-49 because it was more profitable. 

Similarly today, an African landowner may profit more from growing flowers for export to Europe than food for local consumption.  The labourer still has a job, but what the local work, land and water produces is flown out of the country for the benefit of someone else. 

Without foreign trade, the landowner would have helped to feed his country instead of decorating ours, with more local food and lower prices.  The export earnings may raise the landowner’s profits without exerting any upward pressure on the labourer’s wage, perhaps funding labour-saving technologies that would instead push wages down and see fewer people employed on the land. 

Alternatively the money may be squirreled away in foreign bank accounts or, worse, used to buy guns and other technologies that insulate the rich in developing countries from the legitimate demands of the poor.  That means the poor lose twice over, seeing the product of their land, water and labour exported, and the tools of their repression bought with the proceeds. 

For the developed world, capitalism has been a liberating experience, creating a rights culture that culminated in the welfare state.  Capitalism permits ownership and commerce, arguably to the point of exploitation.  But ownership and commerce need protection: laws to guard against expropriation and to enforce contract on everyone from the monarch down, governing everything from employment to planning to commerce; and capitalism needs laws and rights to govern the society of strangers that complex production and city-living create.  Emile Durkheim first identified this over a hundred years ago.

These rights proved conducive to the development of civil society.  Marx understood this and insisted on a capitalist stage prior to socialism.  Without it, the personal freedoms we now enjoy would be simply unimaginable.  Yet capitalism did not yield our rights easily.  Instead we endured centuries of sometimes violent struggle as the working class exacted concessions from the industrialists and aristocrats, from factory conditions to the franchise.  However the challenge today has become far greater. 

As today’s poor try to exact political and economic concessions from their domestic elite, they must also contend with the diktats of the World Trade Organisation and International Monetary Fund.  Much of the real power is located elsewhere, largely immune to local demands.  No such ultra-power existed during our transition to capitalism, weakening the claim that free markets will lead to civil rights. 

Moreover it is not free markets we are foisting on vulnerable people but free trade.  The latter operates primarily at the supra-national level, constraining government subsidies and allowing goods and services to be sold in other countries without interference.  The national economies may still be monopolistic or corrupt, allowing the elite to keep the gains for themselves. 

Free markets liberated us from the undemocratic power of church and aristocracy.  Free trade can entrench power, concentrate wealth, limit the scope of civil society, and undermine prospects for economic and political development.  We are exporting the economics of capitalism while keeping the rights culture for ourselves.

If land ownership is widely spread, if people have political rights, if employment expands and profits are taxed, then the poor can benefit from trade.  But where people lack rights, where they can’t elect their government or join a trade union, those people are cheaper to employ and easier to exploit.  So free trade gives dictatorships a competitive advantage in the global economy.

Although buying from dictatorships cuts the cost of our imports, benefiting from such trade is both immoral and short-sighted.  It is fundamentally in our interests to see democracy flourish in the world.  Democracies account for the bulk of demand in the global economy, and tariffs that penalise dictatorships would help to level the playing field for international trade.

Obviously some countries would resist reforming the WTO to strip dictatorships of their competitive advantage.  The Chinese government would not be happy, as they benefit hugely from a captive workforce.  Still, it would help address an important imbalance in the global economy, and some Chinese would benefit from the switch towards domestic demand.  Others would lose their jobs, though that work would go elsewhere, perhaps to a fledgling democracy that could do with the help.   And the Chinese people might be the real winners from a global trade system that promotes democratisation rather than funding their oppression.

Capitalism is hugely powerful, and changes to the trade system could make it a force for good as well as for gain.  Democracies should use their dominance in the global economy to force human rights down the supply chain, exacting higher tariffs from countries that do not allow their populations to have basic freedoms.    

Making Corporations Truly Transparent

Amid all the current uncertainty, one thing we know is that government finances both here and abroad will remain under strain for years to come.  The crisis is bigger than the state of public finances and governments are not the only ones in debt, but they are the ones who can act. 

Large government deficits are common to many countries in the OECD, which still makes up two-thirds of the world economy.  Many people have seen their standard of living fall, and voters are already feeling squeezed by high consumption and labour taxes.  The only place left to look for additional revenues is capital. 

Taxing profits and assets is not a cost-free option.  Lower dividends would reduce the income of pension funds and insurance firms, pushing up premiums.  Individual shareholders would lose, too, and the rate of technological progress would probably slow as research and development budgets come under pressure.  There may also be a rise in unemployment, though this could be more than offset by using the revenue to cut income tax or national insurance.  

But what if we could raise more from companies without increasing corporation tax rates?  A simple but far-reaching accounting change could potentially net huge amounts of money: require all companies to publish all their bank accounts.  This would make tax evasion more difficult and tax avoidance more obvious. 

Why should the financial affairs of PLCs be private?  The public limits a company’s  liability, exposing us all to risks as suppliers and consumers, so we are entitled to see the books.  What should companies be permitted be hold back from their shareholders, workers and customers, or hide from governments and tax authorities?  The presumption should be in favour transparency, with the same principle used to make public agencies more accountable as well.

If companies are worried about commercial confidentiality, a similar argument could be made about requiring them to publish their accounts at all.  There would need to be safeguards for employee confidentiality, and a time-lag for commercially sensitive information.  But provided the same degree of transparency is imposed on their competitors, the level playing field is preserved and better information should help rather than hinder competition. 

Transparency is greatly undermined by the corporate use of tax havens.  They are essentially parasites on the productive economy, and their secrecy facilitates money laundering and corruption as well as tax avoidance and evasion.  Companies that avoid taxes gain an unfair trading advantage over companies that don’t, so action against tax havens is wholly justified.  We could tax all transfers to and from offshore banks, or ban them altogether, recognising their secrecy as corrupting, and corrosive to civil society and fair competition. 

The economy exists for people, not for companies.  Their development was opposed by no lesser personage than Adam Smith, who was against any separation of management from ownership.  To address the fear that managers would pursue their own interests rather than those of shareholders, company law imposes a fiduciary duty on managers to set aside any and all of their concerns in favour of maximising profits. 

In The Corporation, Joel Bakan argues that fiduciary duty turns companies into externalising machines.  If a company can displace any costs onto the wider community without too much reputational damage, managers have a legal duty to do it.  Greater transparency will enhance corporate citizenship and responsibility. 

Modern transport, information and communication technologies have globalised the economy, but politics is mostly national and sub-national.  We human citizens remain governed by countries and subject to immigration controls; the legal personality we afford to companies combined with the dramatic increase in capital mobility means corporations are now citizens of the world.  Allegedly this makes stuff cheaper, so we benefit as consumers.  But mobility is power, and it favours the corporate pursuit of profit over people’s concerns as citizens and as workers. 

Corporations may flee any jurisdiction that acts against their interests, so concerted action by national governments is essential.  But governments’ shared need for money makes this a real possibility.  Europe faces huge fiscal strain, and the US could clearly use a new income stream.  Even before the current crisis, successive US administrations spent more than they taxed, the current account adds to the stack of IOUs in Beijing every year, and unfunded pension and medicare obligations will balloon as the population ages. 

Corporate banking transparency would mark a fundamental redistribution of power, from corporations back to people.  The exponential rise in capital mobility has seen power flow in the other direction, and democratic governments have a duty to ensure that democracy is not side-lined completely.  As well as helping the weak fiscal outlook and strengthening democracy, transparency offers clear benefits regarding organised crime, corruption and terrorism.  

There are no guarantees that transparency will net significant tax revenues, if corporate tax evasion is very low, and the tax authorities deem their avoidance measures to be acceptable.  Even so, greater transparency is warranted: we should keep an eye on what companies are up to.  Why assume they are run morally when we insist that managers put morality aside?