The free market reveals its true colours

 

Corporate profits, not workers’ wages, are the largest factor behind the inflation afflicting Europe, it was revealed last month.

This was the conclusion of the International Monetary Fund, a body not noted for its pro-worker outlook. Rather it’s been a bastion of the austerity mania besetting the world over the last few decades.

The IMF conceded that domestic profits were responsible for 45% of the inflation that occurred in Europe over the last year. Rising import prices, by contrast, contributed 40% and labour costs 25%.

This rather contradicts the assertion of conservative commentators that we are in the grip of a ‘wage-price’ spiral. This idea was always fantastical in the context of the longest wage stagnation in Britain since Napoleonic times.  Costs – labour costs – that are going down, or barely rising, in real terms, can’t be responsible for soaring prices (inflation).

Gouge Away

In contrast, the evidence for a ‘profits-price spiral’ is strong. One recent book on the cost of living crisis in Britain found that the biggest companies increased their “mark ups” – prices above the cost of production – from 58% in 2002 to 82% in 2020. The Bank of England has recently found that goods price inflation (prices) is still rising while the cost of inputs is falling. Now we have the IMF – hardly a neutral body – admitting that “firms have passed on more than the nominal cost shock” [of the rise in commodity prices caused by the pandemic, the war in Ukraine etc.] to consumers.

But what is really interesting is that if mainstream economics is remotely trustworthy as a description of reality this profits-price spiral shouldn’t be happening at all.

The core belief of mainstream economics is that we inhabit an innately competitive, self-regulating market economy whose defining characteristic is price competition. As neoclassical economist Milton Friedman asserted, competition exists when there are a large number of firms and none of them can control price levels even though they might want to. “An individual firm is powerless to intervene in ways that change the basic competitive forces it or another firm faces,” he said. “The fate of each business is thus largely determined by market forces beyond its control.”

Fellow ‘free market’ economist, and favourite of Margaret Thatcher, Friedrich Hayek echoed, “the price system will fulfil its function only if competition prevails, that is, if the individual producer has to adapt himself to price changes and cannot control them”.

Essentially, under the system, if one firm raises prices way beyond the cost of production, it will immediately face competition from another firm offering lower prices. Either it relents, or it goes bust.

But this is true only if it is the case that we live in this fabled market system, where impersonal competition is the rule everyone must abide by. But what if we don’t? What if, in fact, we live – whether we like it or not – in a corporate capitalist system where large, dominant firms are able to determine prices and levels of investment?

Marxist truth bomb

This is the conclusion of a variant of Marxist economics, known as monopoly capitalism. A group of large firms, it says, – not just one as the name suggests – rise to dominance and, as a result, are able to collude in raising prices, controlling levels of investment and the introduction of new technologies, and making it difficult for smaller firms to gain a foothold in the market.  This process is enabled by the fact that markets in general are becoming more concentrated – i.e. mergers mean that larger and larger firms dominate markets as opposed to the competitive idyll of a welter of small firms.

A think-tank report last summer in Britain found that, at the close of 2021, the profits of the largest non-financial companies were up 34% compared to pre-pandemic levels, with over 90% of the increase accounted for by just 25 companies. “Some firms could have considerable market power with very few competitors,” the report argued, “and this could be making the cost of living crisis worse by raising prices beyond what would be economically justified.”

What gives credence to the idea that the ‘market economy’ is not as innately competitive as claimed is that a profits price spiral was happening before the current spate of run-away inflation. As I noted in my 2019 book The Disobedient Society:

In 2016 The Economist magazine analysed 900 sectors of the US economy and found that 2/3rds became more concentrated between 1997 and 2012. As a result, corporate America was raking in ‘exceptional profits’ of about $300 billion a year, equivalent to a third of taxed operating profits. And contrary to ‘one of the fundamental principle of economics’—that prices equal marginal costs—these profits were not being passed on to the consumer, with some more concentrated sectors of the economy, according to The Economist’s analysis, seeing prices rises of double the rate of inflation.

Of course, back in 2016, consumer inflation wasn’t an issue, it was negligible. Rather, the fear was deflation and what that would do to the economy. Which does beg the question of what the original cause of the inflation we are now experiencing was? Possibly price gouging, therefore, didn’t spark the jump in inflation, but is helping to prolong it.

Reneging on the Deal

But what this does unquestionably do is undermine the whole justification of the ‘market’ economy.  Essentially, we in the West were presented with a deal. Put up with submission to the will of an employer in the form of wage labour, in addition to skyrocketing inequality, and you will be rewarded with cheap food and other consumer goods. In mainstream economics, labour is the burden for which consumption enabled by wages is the compensation. But this compensation is looking remarkably threadbare, and for many, non-existent. In the process, the whole concept of the market economy – competitive markets allocating scarce resources and ensuring the consumer gets the best possible outcome – is revealed to be something that exists in the pages of a textbook rather than in the real world.

The logical consequence is that if we can’t rely on the putative ‘market’ economy to do what it is supposed to do, then – at the very least – it needs to be properly regulated in the public interest by some body that is genuinely independent of corporate interests. Policies such as an excess profits tax and price caps become ways to correct what the market – because it isn’t a real market – is failing to do.

Meanwhile, we continue to reap the benefit of the ‘free market’. Even though it isn’t free and it doesn’t operate like a market.

The Generosity of the Working Classes

Whenever workers are accused of being greedy for wanting their wages to keep up with inflation – as RMT members, BT workers and train drivers are now, in common with workers generally in the late ’70s – it always puts me in mind of two Austrian economists.

One is the über free-marketeer, and also Margaret Thatcher’s favourite practitioner of the ‘dismal science’, Friedrich Hayek. He was adamant that society would benefit, and become immeasurably wealthier, if everyone was motivated solely by profit. “In fact, by pursuing profit we are as altruistic as we can possibly be,” he said, “because we extend our concern beyond to people beyond our range of personal conception.”

Another Austrian, Karl Polanyi (technically Hungarian but he was born in Vienna and lived there for many years), noted that this admonition to behave as selfishly as possible in economic matters pointedly didn’t apply to workers. In fact if wage earners didn’t act in precisely the opposite way – with admirable restraint and concern for the common good – the whole profit maximising system would rapidly fall apart.

If, Polanyi noted in his most famous book The Great Transformation, what workers are selling – their labour – is just the same as any other commodity produced for sale, like sugar or bottles of vodka, they should seek the highest possible price for it. If, that is, they are motivated solely by maximising profit, which Hayek and his predecessor Ludwig Von Mises thought everyone should be. Polanyi elaborated:

Consistently followed up, this means the chief obligation of labor is to be almost continually on strike … The source of the incongruity and practice is, of course, that labor is not really a commodity and that if labor was withheld in order to ascertain its exact price (just as an increase in supply of all other commodities in similar circumstances) society would very soon dissolve for lack of sustenance.

Naturally workers would not be allowed to continually renegotiate the sale of their labour in this manner. This is where the neoliberal solicitude for freedom crumples like leaves on a bonfire. Margaret Thatcher famously used the power of the state to destroy the influence of organised labour the moment it ceased to be a compliant partner of employers and tried to protect the living standards of its members. And in response to the actions of the RMT and others, Liz Truss, the favourite to be next British Prime Minister, wants a legal requirement to maintain “minimum service levels” even when public sector workers have balloted for a strike. If enacted Truss’s promise would return Britain to the salad days of the liberal utopia (coincidentally the original title of The Great Transformation) before disputes between employers and employees were made civil matters and when workers could be – and were – jailed for breaking their employment contract.

Liberal Fascism

And this, shall we say, fickle relationship with freedom is by no means a new impulse on the part of conservative-liberals. In the 1920s, one of the original economic liberals, Ludwig Von Mises, thought the merit of Italian Fascism would “live on eternally in history” for having “saved European civilisation” by smashing, quite literally, the workers’ movement in Italy.

It is illuminating that wage earners – flesh and blood people with bills to pay and other people to look after – are the only element of the economy expected to exercise restraint in economic matters out of concern for the common welfare. Nobody in power really thinks for one moment profit should not be maximised by corporations. And despite the propaganda that in these enlightened times, corporations ‘do well by doing good’, it certainly is being unashamedly maximised. Both Shell and Centrica (British Gas) recently posted record profits notwithstanding predictions that energy bills will soon triple. According to research by the union Unite, profit margins for the UK’s FTSE 350 companies (big business in other words) were 73% higher in 2021 than they were before the pandemic.  Despite Sir Keir Starmer telling us that “When business profits, we all do”, the bedtime story that high profits produce economic growth and rising wages like parched earth blossoms after a cloudburst just won’t wash anymore. Are we supposed to ignore the experience of last three decades?

Not selfish enough

The conclusion that economic selfishness is in fact a virtue when practised by those legal entities called corporations is defended despite the fact that excessive profits are a more likely inflationary culprit than high wages (which in fact have been stagnating or falling for years). In the words of the father of market economics, Adam Smith, “Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price and lessening the sale of goods. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”

One could argue that workers in Britain – and elsewhere – far from being too selfish, aren’t being selfish enough. The RMT is demanding a pay rise of 7% which when inflation is at 9.1% is obviously a real terms pay cut. And here lies the crucial difference between wage earners and other elements of the economy, or ‘factors’ in production. When employers seek sky high profits or when landlords raise the rent by way above the rate of inflation, they do so because they can and because the practice is socially validated. When workers submit to whatever wage they can negotiate (usually whatever they are offered, even to get a trade union recognised is an immense struggle) they do so because they have to. Because, lacking independent means, they have to procure the means to survive for themselves and their families.

Historically, this unequal ‘deal’ been accepted, partly out of brute power, and partly because it promised benefits – to consumers, to workers receiving rising wages – that seemed to accrue from submission to the demands of capital. But what if, as in happening now in the West, the bounty stops flowing. How long are we going to continue to oppress ourselves?

 

 

 

 

 

 

 

 

 

 

 

 

The Long March of State Neoliberalism

Whenever neoliberalism is defined it is invariably equated with the osmosis of the ‘untrammelled free market’ into ever more areas of life.

One of neoliberalism’s intellectual originators – Friedrich Hayek – made the hugely influential claim that people (and by extension their political representatives) could never know enough to plan or intervene in the economy. A person’s knowledge was limited to “their own small circle” and the things which were important to them, which only they knew. Because knowledge was never available to people “in its totality”, attempting to direct the economy in certain ways or favour some economic entities over others was dangerous and inimical to the limited sphere of freedom people truly possessed.

The consequence of these assumptions was that only the free market could guarantee liberty. The only genuine choices people could make were to do with buying and selling because they concerned matters and desires that only they knew about. If markets were left alone and the price mechanism remained unregulated, the economy would achieve ‘equilibrium’ and people would receive what they wanted and were due.

These ideas have played a massive role in constructing the world in which we now live, in areas as diverse as electricity provision, financial services, corporate mergers and takeovers and the housing rental market (to name a few). The job of government was restricted to setting markets up and getting them running. Beyond that the state should get out of the way. It cannot, according to Hayek, know more than markets do. And while individuals within markets can make mistakes, markets as a whole – because they are an agglomeration of individually optimal choices – cannot be wrong.

Thus democracy – which is, in essence, about the ability of people to understand the world and act on their desires – should be heavily constricted. Indeed, we can be sure that had representative government and a universal franchise not already existed, neoliberals would not have invented them and would have opposed any attempts to create them – as their 19^th century forebears in fact did.

This ‘market fundamentalism, as many have noticed, requires a stronger state than the ‘night-watchman’ state of neoliberal yore. The state must not only enforce private property rights but also banish outside interference with markets. In practice, in the US, Britain and elsewhere, this meant destroying the power of the trade unions. Although voluntary, not statutory, organisations, trade unions distorted markets by intruding on their natural operations – by, for instance, insisting people were paid more than they were worth in ‘market terms’. The Conservative party in Britain, which under Thatcher became a truly Hayekian organisation, dutifully destroyed the power of trade unions.

However, the state as an entity never went away, and as the Covid-19 crisis has shown it has proved more important to neoliberalism than few can have imagined.

How low can you go?

The 2008 financial crisis was a major turning point. Not only did governments use their power to bail out banks and corporations – which under the law of the free market should have vanished – they instituted a regime of ultra-low interest rates. At these historically unprecedented levels – never going above 1% – they have two important effects. Firstly, they preserve insolvent, hugely indebted companies by reducing the amount of interest they have to pay on their debts. This is the polar opposite of the approach of the Hayekian Thatcher to manufacturing industry in the Britain in the early 1980s. She hiked interest rates – up to 15-17% – as a way of driving trade union-heavy manufacturing industry to the wall.

Secondly, they make any recovery of the private sector extremely difficult. Just as they make debts more affordable, ultra-low interest rates discourage investment by ensuring the financial return on advanced money is negligible (the tiny official bank rate was reflected in nominal interest rates in the economy as a whole and Quantitative Easing programmes made sure they stayed low). But in these circumstances, private companies naturally eager to make profits had somewhere to turn – the government.

The two phases of privatisation

In this they took advantage of the historic process of privatisation, which aside from the onslaught on trade unions and deregulating the economy, was the main way neoliberalism was implemented. In Britain, the “great divestiture” of privatisation had two distinct phases. In its early years privatisation was about simply transferring ownership of industries from the state to the private sector. In this way, companies like Jaguar, BP, Cable & Wireless, Rolls Royce, British Steel and even Thomas Cook were denationalised and had to sink or swim in the private sector. While some survived, others were taken over, heavily denuded (British Steel) or went bust – as was the fate of Thomas Cook last year.

But privatisation soon became much more ambitious. From the mid-1980s until now, it has been primarily about contracting out monopoly services from the state to the private sector. The (very long) list includes utilities (water, electricity etc.), railways, academy schools, NHS contracts, air traffic control, the Royal Mail, local authority outsourcing and care homes. Very often these services were funded – and continued to be funded – by the government and, most importantly, could not be allowed to cease to exist.

This very conditional privatisation was actually very welcome to the large companies that won the contracts to provide these services. They were anything but free markets zealots and were very glad for a guaranteed profit stream in the context of private sector torpor. As noted by health campaigner Allyson Pollock some years ago in terms of NHS privatisation, “the private health care industry is not interested in a purely private market. Its interests lie in becoming for-profit providers in a basic health system funded out of taxation.” An insight that could be applied across the board of modern privatisation.

Hence, Britain has seen the grown of private companies – such as Serco or Capita – that specialise in delivering public services. Potentially everything in the public sector – GP services, benefit assessments, prisons, school inspections, speed cameras, nuclear laboratories, early warning systems and even the operation of spy planes – was open to being run by the private sector on a contract basis.

The hollowing out of the state in the name of putative private sector efficiency and ‘sound management’ (ho, ho) has occurred across the world. A 2004 profile of Lockheed Martin in the New York Times noted:

Lockheed Martin doesn’t run the United States. But it does help run a breathtakingly big part of it. Over the last decade, Lockheed, the nation's largest military contractor, has built a formidable information-technology empire that now stretches from the Pentagon to the post office. It sorts your mail and totals your taxes. It cuts Social Security checks and counts the United States census. It runs space flights and monitors air traffic.

In one sense, this was – from the point of view of neoliberals – a welcome development that flowed naturally from the thinking of pioneers like Hayek: the state was creating and protecting markets. But in other ways, it had unforeseen consequences. Large oligopolies hoovered up contracts – far from competition letting a thousand flowers bloom, three or four companies – at most – reigned supreme. Competition, in the idealised vision of Hayek, meant “decentralised planning by separate persons”, but in no sense can the actually existing privatised state be described as decentralised or involving people, as opposed to large corporate entities. Only big companies had the resources to bid for government contracts and public sector monopolies – the object of neoliberals’ enduring enmity – became private sector oligopolies.

Secondly, democracy or government – the very thing neoliberals wanted to restrict and limit in its ambitions – was essential to the whole process of privatisation. Closeness to government was essential to winning contracts and a revolving door between the private sector and elected institutions and the civil service span permanently. This was an open door for corruption and a distortion of democracy but it was of no interest to neoliberals who were unconcerned about the distortion of something they didn’t like in the first place.

They were however concerned about the private sector and this became, thanks for the ultra-low interest rate regime, equally distorted. It is not a widely known fact the Austrian school of free market economics (of which Hayek and fellow neoliberal, Ludwig Mises, were the most prestigious members) was intensely distrustful of low interests rates because it holds them responsible for causing economic slumps (see the musings of former Tory and UKIP MP Douglas Carswell for a 21^st century version).

But although low interest rates potentially increase the amount of money circulating in the economy and make life easier for insolvent companies by reducing the interest of their debt, they make it difficult to make a profit on investments because the returns on offer are so low. The alternative is either to go for riskier private sector investments or to seek the security of government contracts which often offer double digit returns.

Since the financial crisis interest rates in Britain have never gone above a half of one per cent and, since the coronavirus lockdown, have been cut further – to 0.1%. This situation – in conjunction with the Hayekian ideology of successive Conservative governments – goes a long way to explaining the incompetence of the public response to the virus.

Useless and lethal

What was demanded was a smooth and joined up public health response, involving local councils, that prioritised above all else the needs of health workers and patients. What actually happened was a labyrinthine mess of competitive tendering and outsourcing which awarded contracts to large companies, like Deloitte and Serco that had no expertise in what they were supposed to do. The result, apart from “cementing the position of the private sector in the NHS supply chain”, has been a test and trace system that won’t be “fully operational” until September and a “useless” system of delivering PPE to NHS staff. The deaths of hundreds of NHS and care workers from the virus, many of them avoidable with proper PPE, as well as the highest excess death rate in Europe – in part the consequence of inadequate or non-existent PPE allowing the virus to spread in hospitals – cannot be divorced from this farrago.

But this is likely to merely be a trial run for what is in store. Against the backdrop of a huge fall in GDP of over 20%, the worst projected economic downturn of all major economies and mounting unemployment, the government will almost certainly proclaim a jettisoning of ‘ideological presumptions’ and commit to an interventionist, state-driven economic policy. A ‘green industrial revolution’ will be announced, aiming to create jobs and reskill millions of people.

Such a policy might even appear ‘socialist’ – a green industrial revolution was obviously the centrepiece of Labour’s offer at the last election – but the Conservative version will be careful to offer private companies profit-making opportunities at every stage of the process. It will be a like a souped-up version of the Work Programme. This can already be seen in the free school meal voucher scheme – the one extended over the summer holidays after the campaign by Marcus Rashford. A corporation – Edenred – is in charge of the scheme, not local councils. Astonishingly, the same company has been accused of “woeful” preparation and failing to send out vouchers to hundreds of thousands of parents who need them.

Facile comparison

This is why equating the current actions of the Conservatives in Britain with the policies of Corbyn’s Labour at the 2019 election is facile. The superficial resemblances – increased public spending, train nationalisation, a green industrial revolution – betray fundamentally antagonistic philosophies.

This is not a question of one being enthusiastically statist and other reluctantly so. It is matter of the Conservatives being committed to constructing a statist shell underneath which a privatised bevy of oligopolistic corporations running contracted out services are permitted to make a level of profits which the fêted free market can no longer provide. Some ‘Corbynite’ policies, such as a ‘national care service’ and ensuring 100% high speed broadband, would, it is true, have supplied a statist stimulus to the private sector. But others such as renationalising the NHS and utilities like water and electricity would have repealed the decades-long neoliberal hollowing out of the state.

But this, as we know, will not happen. Instead state neoliberalism, its intellectual roots now long forgotten, will continue its long march.

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