And You're Working for No-one but Us

 “And you’re working for no-one but me” is George Harrison’s sign off to the first song on one of the greatest British albums of all time, the Beatles’ Revolver. But compared to what follows it has always struck me as rather a damp squib – lyrically one extended whinge about how Surrey mansion dwellers pay too much in tax. I suppose to be fair to the author, Harrison was very anti-war and he objected to unwillingly paying millions in tax – at the time the top rate stood at 92.6% – so governments could bomb people.

Nonetheless it is quite sad that of all the sentiments the Beatles expressed, “in the end” it was those of Taxman that had the greatest longevity. You need a lot than love, and giving war a chance now seems to be the spirit of the age (alright that was Lennon). But thanks to Margaret Thatcher, Ronald Reagan, and the sprouting up of numerous tax havens around the world successful pop stars need no longer fret about governments getting their paws on their money.

But from the perspective of nearly sixty years, to sing “you’re working for no-one but me” with reference to His Majesty’s tax collectors seems faintly ridiculous. We’re definitely working for someone but there are people much further up the queue than HMRC. Perhaps their silhouettes need more light shone on them:

Landlords and Banks

The first thing we all need is somewhere to live. After rising above inflation for years, rents increased by 9% in 2024, the highest surge on record. The average rent now consumes over a third of renters’ income and more than half of it in London.

Though there are only 11 and half million renters in the UK, their numbers are inexorably rising. But they are still below the so-called “owner occupiers”. Except in many cases, while they occupy, they don’t own anything. The ‘owners’ are paying off a debt (which everyone calls a mortgage to avoid calling it a debt) to the actual owner of their property, usually a bank. And since interest rates have ballooned in the last few years – in the context of house prices inflating by 1,000% since the early 1980s – that debt has become much more expensive.

Banks, by the way, are sharing the pain by making record profits – HSBC amassed £24 billion in 2023, an 80% increase. This windfall results from the interest they receive on mortgage payments and loans being so much higher than the interest they pay on their savings accounts. Why this discrepancy should exist is a bit of a mystery. Theoretically, the two should cancel each other out and banks should not be laughing all the way to the bank because interest rates have been hiked. Maybe Sir Kier – who gave HSBC’s chief executive a knighthood in December – can enlighten us.

It’s good to know the people your monthly labours are paying off are having a hard time too.

Utility companies

Next on the identity parade are water and energy companies. In the past, these two public services were nationalized. But in our post-Thatcherite wasteland, sorry landscape, they are the play things of private equity firms who load the owners with debt and expect their captive customers – us in other words – to pay for the privilege of being compelled to use them. I just love the free market.

And when, as with Bulb Energy, these wealth destroyers experience liquidity problems, they can rely on the taxpayer, in the form of the government, to bail them out. Not that we have any say in the matter.

When the direct debits kick in every month, a lot of the damage to your balance is down to these two suspects. Energy bills are about 50% higher than they were pre-Covid. As with rent and mortgage payments, only in a semantic sense is this not taxation. Unless you want to live in a cave somewhere, or on the streets, you need a home and you need heating and water. Contrary to American monetarist proselytiser, Milton Friedman, we are not “free to choose”.

And it’s going to get worse. The average water bill will increase by 36% over the few years.

“If you get too cold, I’ll tax the heat,” Harrison sang in 1966. He meant, “I’ll raise the energy price cap”.

Corporations and things like eating

In common with all living beings, human beings need to consume if they want to continue living. But the cost of consumption keeps going up. If consumer inflation has fallen from its highs of a couple of years ago, that doesn’t mean prices will return to their former levels, just that they will continue to rise at a slower rate (although inflation seems going up again now anyway).

But the ever-increasing cost of essential goods is not solely due to ‘impersonal’ factors like the cost of raw materials. It is also down to the power of the huge corporations that dominate the market to increase costs above the ‘natural’ rate of inflation. For example, in the UK, “price mark ups” – price increases above the production costs to produce profit – rose from 58% in 2002 to 82% in 2020. The profits of the 350 largest companies on the London Stock Exchange have swollen by 73% since 2019.

This price gouging is symbolised by internet providers typically hiking raising annual broadband fees – now essential for doing most things in life, including work – by CPI (inflation) plus 3.9%. Why? Because they can.

What is now hitting home is that, contrary to the advertising, the Thatcherite revolution did not enthrone the consumer as king. Everyone knew that workers would have to suck it up, but the customer was felicitated. But that’s not how things have turned out. All regulators have a duty to protect the consumer but, as evidenced by the failure to compel banks to pay interest on savings in line with hikes in interest rates, this is just honoured in the breach. And with Reeves’s drive for deregulation, such a responsibility is going to become even more threadbare.

 You have to crane your neck to see the real beneficiaries.

Only in the perverse universe we now inhabit, could a privately educated ex-stockbroker who claims to be “keeping the flame of Thatcherism alive” and controls a company masquerading as a political party be the one to take advantage of this situation.

It’s enough to make you gently weep.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Truth about Capitalism

 

 This is a continuation of an earlier post

The economist John Maynard Keynes, hugely influential in the 20^th century, is now seen as a sort of ghostly admonisher, berating us – or rather the elite – for the gross errors that never seem to be corrected by experience. For example, his adage that “you don’t balance a nation’s books by cutting its income” is widely seen as a pithy riposte to the circular austerity logic that we seemed destined to repeat until the end of time.

But it’s seldom noticed how wrong Keynes’ predictions could be. For example, he claimed in 1930 that in a hundred years’ time – i.e. around now – economic progress would mean that we’d all be working 15 hour weeks and three hour days, and our main dilemma would be how to spend our abundant leisure time. In reality, we are busier than ever and the major source of that immersion is the need to work to earn enough to live on, which in many cases still isn’t enough.

Similarly, he thought the major economic problem of the future would stem from the fact that increasing prosperity would lead people to save so much that they wouldn’t spend enough on consumption, thus impeding the ‘circular flow’ of money so vital for economic health. In reality, despite (or perhaps because of) mass consumerism, everyone nowadays – individuals, governments, and corporations alike – is massively in debt. The parent company of the insolvent Thames Water, Kemble, is £18 billion in the red for example. And that’s just one company. Owing money to someone else and having to make regular interest payments to them – rather than saving too much – is the defining characteristic of our age, contrary to what Keynes imagined. Although I suppose you could say that many corporations seem to bring off the counter-intuitive trick of hoarding money and being in debt at the same time.

This leads to the rather disturbing insight that virtually no-one – including followers of esteemed critics like Keynes – really knows what capitalism, as it exists now, really is. If they did, their predictions and remedies wouldn’t be so wide of the mark.

Puff the Magic Dragon

Take for example the explanation of why “capitalism is good” by German theoretical physicist and science explainer Sabine Hossenfelder. She is a world away from the conspiracy dwelling, propagandising populists who justify current economic arrangements while blaming others – usually immigrants and ‘cultural Marxists’ – for why things are going wrong. But her vindication of capitalism seems to emerge from an alternative universe.

Capitalism, she says, is all about people “sitting on a big pile of money” they “don’t know what to do with”. Seeing that other people need finance to make their business idea a reality (she gives the example of someone with thousands of apples who needs a juice press to turn them into apple juice), the capitalist lends them the money, while expecting “something on top” for the risk they are taking.

“The capitalist is a person or institution who provides capital to those who want to launch a new business, someone who’s able and willing to take the risk that this capital will never have a return on investment,” she says.

This system is “pure genius” and is responsible for the huge social progress that has occurred over the past two centuries although it needs to be set up and regulated properly.

Hossenfelder’s apologia has been justly criticised in the American socialist magazine Jacobin for being “a compendium of common arguments people make in defense of capitalism when they haven’t taken the time to actually hear out any of the system’s critics.” The writer, Ben Burgis, says that in reality capitalism is a system of exploitation “disguised by the legal form of a voluntary agreement between equal parties”.

Social Regress

I completely agree, I’ve even written a book about how the voluntariness of capitalism is a mask that shields its essential compulsion. However, I also think that Hossenfelder’s defence of capitalism ignores something else rather important – that modern capitalism is largely nothing to do with providing finance so that people’s business ideas can be transformed into reality. It is simply a system of using money to make more money in ways that are entirely unrelated to improving production or enabling social progress, and are in fact often harmful to these processes.

The economist Michael Hudson, for example, has pointed out that since the mid-eighties in the USA – the archetypal ‘free market’ system – the number of company shares “retired” has exceeded those created. What this means in plainer English is that companies have bought back more shares than they have issued. The purpose of buying back shares is to raise their price while reducing their overall quantity so that dividends increase for the existing shareholders. The point of issuing new shares is to raise capital investment to expand your business. Companies have been pressured by their shareholders to amass huge debts (IBM is the classic example) in order to buy back (or retire) their shares, thus sacrificing the capital investment that capitalism is supposed to be all about.

So in the heartland of the ‘free market’ over the past 30 years there’s actually been a net reduction in capital funding new business ideas or just plain business expansion. The Dragons’ Den image of capitalism that Hossenfelder takes for reality – and most people share – is revealed to be just propaganda. Although it’s a fascinating insight into the nature of propaganda that this fiction has achieved mass penetration just as the reality it hides has definitively effaced the fantasy.

There are many ways in which really existing capitalism – the compulsion to make more money from the investment of money – is actually detrimental to the creation of wealth and social progress. The 2008 Financial Crisis, the after-effects of which we are still experiencing, was based on capital flooding into pooled mortgages and related ‘insurance’ schemes, which exploded after the real-world US housing market nosedived. This resulted in a huge destruction of wealth and productive capacity, exacerbated by an austerity mania that shows no sign of abating.

Twenty-first century capitalism, by virtue of the huge volume of money seeking returns, also creates shortages of the basic necessities of life where they don’t really exist. In the past 15 years there have been two global food crises, based on betting by hedge funds etc. that the amount of wheat and other foodstuffs available in the world would fall when in fact it didn’t. But the effects on prices were all too real, pushing millions into extreme poverty and even famine.

And then we have private equity, which involves taking over companies by borrowing money, dumping that debt on the company, and maximising pay-outs to investors. As shown in part one, private equity is on the march throughout the Western world despite the fact that the indebted companies it creates, such as Thames Water which may well go bankrupt soon, are incredibly vulnerable to rises in interest rates.

Nothing here involves financing new business ideas or spurring social progress, unless you have a rather strange concept of social progress which entails pumping sewage into rivers or increasing world hunger.

The Wolves of Wall Street (and the City of London and Frankfurt etc.)

The ultimate question is why is this happening? In the past the defenders of capitalism could point to the fact that despite its downsides, the system did increase overall affluence. Today, once you take China out of the equation – which pursues a very different variant of capitalism – that isn’t the case.

Some say that the problem is financialisation. Banks and asset managers, who invariably run private equity funds, aim to devour the lion’s share of society’s income by placing everyone in debt (thus compelling them to pay tribute in the form of interest payments). Their intention is to own, and thus gain a steady income from, assets like corporations, housing or privatised public infrastructure such as water or health services.

The hollowing out of formerly publicly owned health systems, like the National Health Service in Britain, can be directly attributed to the growing and malign influence of private equity ‘investors’. Similarly, the divestment of the major oil companies from fossil fuel extraction is fatally undercut by the fact that these activities are usually sold to PE groups who merrily continue them out of public view.

What these asset managers are not interested in, however, is the longer-term practice of funding capital investment in businesses because it’s too risky and doesn’t produce enough yield in the moment. Hence the term ‘financialisation’ because it involves establishing very profitable, but usually short-term, claims on companies or privatised public assets without stumping up the investment to improve them. The result is astronomic levels of inequality, increased vulnerability to economic crises, unmitigated global warming, and moribund economic growth.

Thus someone like Carolyn Sissoko, who we met in part one, can say that when capital was funnelled into projects like building railways or laying undersea cables (or in today’s world investing in renewable energy we might say), there was a tangible benefit to society. Now, however, when the dominant trend is to place companies in debt and make money from the interest payments and through soaking their customers that mutual benefit has disappeared.

The solution – evinced by people like Michael Hudson – is to radically change public policy. Tax policy needs to be overhauled to, for example, tax interest more than equity investment to return the system to its former purpose of funding growth-enhancing activity. Additionally private banks need to be replaced by publicly-owned ones which can provide basic services at minimum and support capital investment in businesses.

All this is about returning capitalism to its original purpose, much as in its infancy in the 19^th century the system needed to be prised away from the power of predatory, unproductive, landowners.

Speculate to Accumulate

However, there is an alternative explanation for our economic tribulations. This position doesn’t dispute the trends highlighted above but says they are a symptom rather than a cause. The cause is the capitalist system itself which is eternally driven by profit making opportunities and thus, given prior technological progress, is more attracted to speculation than tangible investment in making things. This gold mine has been augmented by the investment of pension funds and state sovereign wealth funds.

Heterodox economist Harry Shutt, for example, argues that there has been a drastic decline in the West in the demand for both capital and labour. This has resulted in a “chronic surplus of capital”. In 2012 private equity firm Bain Capital (co-founded by Mitt Romney) estimated that the volume of “global capital” had tripled over the previous two decades to stand at $600 trillion, nearly ten times the value of all the goods and services in the world.  They projected that by 2020, this “capital superabundance” would grow by another third to $900 trillion.

According to Brett Christophers, author of the private equity exposé Our Lives in Their Portfolios, “the simple reason why [asset managers] are so important today … is that they have so much capital at their disposal. In recent decades, the amount of surplus capital in the world has increased dramatically.” And, it might be added, the amount of surplus capital in the world will go on multiplying.

The figures are stupendous. For instance, leading asset manager Black Rock has over $9 trillion under management. Among its partners in crime, Vanguard boasts nearly $8 trillion, Blackstone around $1 trillion, and Macquarie (the former owner of Thames Water) $590 billion. This unimaginable wealth has been acquired at the same time as what in economics-speak is called  “fixed capital” investment – i.e. investment to expand businesses as opposed to simply making money – has fallen dramatically in Western countries, especially in the US.

The nature of capital, as opposed to mere money you might spend on buying groceries, is that it is on an eternal search for investment opportunities. What this means is that, with fewer outlets in things like new factories or offices, the rapidly growing mass of capital has inevitably migrated into making money from privatised assets, from speculation in bank ‘products’ or from pressuring corporations to buy back their shares rather than expand their businesses.

And this is not a process that is ever satiated. There is no golden mean of capital. As shown by the Bain Capital estimates, the amount of capital in the world is destined to increase exponentially. The one thing that could arrest this process is an economic downturn that is allowed to take its natural course but this has never actually happened since the Great Depression of the 1930s.

Feed me Seymour

Looked at another way, under this economic system, society is forced to accommodate the appetites of the monster of capital. But the more it is fed, the hungrier the monster gets.

According to Shutt, capital is now objectively “redundant”. The conditions which precipitated, and justified, the rise of the system in the 19^th century – innovations demanding “large concentrations of capital which could only be raised under a capitalist economic structure” – no longer exist. However, the compulsion to seek profit, buttressed by legal abetments like limited liability and a eulogisation of wealth creation, is, if anything, stronger than ever. Hence society seems destined to celebrate the very process that undermines its basic habitability without ever realising what the root problem is.

It follows that blaming private equity for the ills of society is like blaming clouds for rainfall. Capital will do what it is born to do. And doubtless it’s possible to interest venture capital groups in funding your nifty new business idea (though I would read the small print carefully first). But to label that process “pure genius” and misconstrue it for what capital-ism is today is just to knit yet more wool to pull over people’s eyes.

Manchester United and the malaise of our time?

 

What do Manchester United and English water companies have in common? Not a great deal you might say beyond being not very successful at what they do. Once a football titan, Man U is now a has-been. Twice a recent winner of the Champions League and regular semi-finalist, the club now struggles to get out of the competition’s group stage. The winner of 13 Premier League titles since 1992, it now cannot compete with its rivals across the city of Manchester, not to mention numerous other clubs.

English water companies, meanwhile, are notorious for not doing their basic job of ensuring clean water in rivers and seas. Despite it being a legal requirement, they have not invested in infrastructure, preferring to pay out enormous dividends to their investors. And the real level of the pollution may be much higher than the firms admit.

But delve a bit deeper and there is something else that unites these two apparently disparate ‘businesses’*. They are both creatures of private equity (PE). Private equity is where a firm is taken off the stock market by a takeover. The new owners borrow the money to acquire the target company in what is called a ‘leveraged buyout’, in the process loading it down with massive debt. Once acquired, along with interest payments on the debt, large dividends are prioritised, either solely for the owners or for their investors/clients.

A family club

Manchester United, for example, had been a public limited firm (i.e. anyone could buy shares in it) from 1991 until 2005 when it was taken private by the Glazer family in a £790m leveraged buyout. Virtually debt-free since 1931, the club’s net debt now stands at £500m and has been much higher. Man U pays over £18m in annual interest on that debt and, unusually for a football club, £32m in yearly dividend payments to the Glazers.

Private Equity ownership is now more common for football clubs (think of Chelsea) but Manchester United provides an opportunity to observe the effect of PE ownership over time – and the picture is not a good one. This is not a financial crisis, which football clubs are especially susceptible to, but the mature consequence of a particular type of financial regime. No wonder fans are desperate for the Glazers to sell up.

Now consider the ten English water companies, all but three of whom have been taken off the stock market by their private equity owners. The commonalities with Manchester United are striking. When Thatcher privatised the ‘industry’ in 1989, it had its existing £5bn debt written off. Since then the debt pile has mushroomed to £60bn. The debt of the largest water company, Thames Water, rose from £3.4bn to £10.8 billion after it was acquired by Australian investment bank, Macquarie, in 2007 and now the firm is in danger of bankruptcy. Since privatisation, over £70bn in dividends has been paid out while bills have increased by 40%, while increases of a similar scale are forecast to deal with the sewage spills that have been allowed to happen.

In either case, what you might think of as the primary function – winning trophies or ensuring clean water – has taken a back seat in favour of maximising returns to the owners.

‘Public’ versus Private capitalism

Maximising returns, you might say, is simply what capitalism does and you’re not wrong as Walter from The Big Lebowski would doubtless attest. However, as English academic Carolyn Sissoko argues, the ‘old fashioned’ way of maximising returns through ‘public’ corporations at least sometimes had a collateral benefit in the shape of capital investment leading to products that people wanted to buy. What happens under private equity capitalism is an entirely valueless process in which the only beneficiaries are extremely rich people becoming even richer. Actually it’s worse than that. Private Equity destroys value for everyone else – consumers, workers, supporters, target companies – apart from the owners who make out like bandits.  As Sissoko puts it:

Whereas the corporate form is a win-win for the economy when it is used to facilitate the raising of funds for large projects that could not otherwise by completed such as railroads or trans-oceanic cables, the corporate form is transformed into a win-lose for the economy when it is used to impose huge debt burdens on otherwise successful corporations.

And this particular form of capitalism is on the march. According to Sissoko, private equity now controls more than 10% of the US stock market, up from 0% 40 years ago. And she says it is “positioned to continue displacing the public corporate form at a rapid pace”.

Where America leads, Britain dutifully follows and PE on these shores is, in the description of advertising sultan Martin Sorrell, “rampant”. Supermarkets such as Morrisons and Asda are PE-owned as was Debenhams before its demise. And in addition to water companies, many care homes have been taken over by private equity firms.

It is important to stress here that the critics of PE are not merely saying the practice is perverting organisations that have – or should have – a social purpose at their heart. It is doing that obviously but by loading down for-profit companies with huge debt – procured in order to take them over – PE is, in a supreme effort of self-destruction, warping capitalism itself. The frighteningly large level of global corporate debt, which has increased by double the rate of personal and financial debt since 2007 (which have also risen exponentially) can be attributed, at least in part, to the modus operandi of private equity. And while this debt mountain may have been manageable in the context of rock-bottom interest rates, as rates have risen, the debt-ridden concoctions of PE are – as shown by the travails of Thames Water – becoming more and more exposed.

No paradox

This is not a new problem though one that hasn’t been around for a while. In the 19^th century, Karl Marx bemoaned the existence of ‘usury capital’ – money lent purely to maximise the interest paid to the lender. This was in contrast to ‘industrial capital’ which had a social purpose in that it purchased shares in – and thus financed – enterprises which made new products or changed the way they were produced. The former, he said, “does not alter the mode of production, but attaches itself as a parasite and makes it miserable. It sucks its blood, kills its nerve, and compels reproduction to proceed under even more disheartening conditions.”

For usury capital in the Victorian age, read Private Equity today.

Brett Christophers, the Sweden-based academic and author of the exposé of PE, Our Lives in their Portfolios, has previously noted the interesting fact that Adam Smith – the darling of the Right and father of market economics and Marx – the pre-eminent left-wing critic of capitalism – shared “the belief that it was entirely possible for an activity to be revenue- and profit-generative without actually contributing to the creation of value. There was no paradox.”

And we are now in an era where value, once again, is not being created. As contemporary economist Michael Hudson has documented, PE is just one of several ways that ‘activist shareholders’, hedge funds and banks have, since the 1980s, increased looked upon public listed companies as cash cows to be looted regardless of the long-term consequences. Illegal until the Thatcher and Reagan eras, share buy-backs are now commonplace for corporations. In the US, Apple, IBM, Exxon Mobil, and Proctor & Gamble are some of the most famous exponents. In the UK, recent practitioners include BP, Shell, Diageo (Guinness, Smirnoff etc.), HSBC, and Unilever.

Share buy-backs are often undertaken under pressure from large shareholders and the company will, not infrequently, swallow a “poison pill” (in Hudson’s words), placing itself in severe debt to purchase its own stock. The effect of a share buy-back is to reduce the overall number of a company’s shares, thereby increasing capital gains and dividend pay outs to its existing shareholders. But its side-effect is to shrink the amount of capital the company has to invest in research and development and growing its own business.

But some companies, says Hudson, have stubbornly resisted the trend and concentrated on building up their business. He cites the example of Google, which, at least in its early days, aimed to use “corporate profits to expand the business rather than giving quick hit-and-run returns to the wealthiest One Percent.”**

Capitalism will eat itself

But this highlights a fatal flaw in the arguments of those who criticise private equity – and kindred financial innovations – for subverting capitalism. Google may have defied the financial bloodsuckers and concentrated on R&D but the effect of this, although good for Google’s health as a business (it’s worth over $1 trillion now apparently), cannot be classed as beneficial for society as a whole. Its innovations have consisted in myriad ways to beguile the attention-spans of billions of people so that they can be exposed to more advertising. If this is a “win-win”, in Sissoko’s description, I think we need to re-define what we mean by winning.

Google is also an intimate part of the whole Big Tech social media revolution which, because it is founded on getting people to compare themselves to others, is having a corroding effect on mental health. From 2018 to 2023, Norway, for example, fell from 3^rd place in the world happiness league table to seventh because of a decline among its young people. And – an assiduously cultivated – addiction to social media also certainly lies behind that.

Likewise, if oil companies want to buy back their own shares rather than putting all available resources into drilling for oil and gas deposits, thereby intensifying global warming, why should we try to talk them out of it?

Why, this time around, should we be the ones – in erstwhile Keynesian fashion – to ‘save capitalism from itself’?

It is a good question.

To be continued

* H/T to a friend who pointed out the link

** Quote from Hudson’s Killing the Host which is well worth reading