The Consequences of Slow Growth, part one

 Echoes of the global financial crisis of 2007-9 are in the air. Both the US Nasdaq and the tech-heavy South Korean stock market have fallen heavily recently, prompted by threats by the US Federal Reserve to raise interest rates. Back in February 2007, stocks in the US and Asia also nose-dived, presaging ‘Debtonation Day’ in August of that year.

And the proximate cause of the credit crunch, which many very knowledgeable people assured us could never happen, was an incremental rise in interest rates.

But whether an almighty bubble is about to burst, as it has threatened to many times before, there is one thing we in the West can be sure of. We are living in a society defined by slow economic growth, which qualitatively distinguishes it from economies in most of the second half of the 20^th century.

Statistics can lie but not here because they are so stark. In the decade to 2025, UK GDP grew by just 14%, an annual growth rate of just over 1 per cent. In the decade to 1965, growth was 37%, and economic growth per capita (growth adjusted for population growth) in the last 10 years has actually been negative.

The European Union has seen average growth of 1.3% over the last 19 years and 1.1% in the Eurozone.  This is a decline from nearly 5% in the 1960s, 2.1% from 1973-83, and 1.6% in the 1990s.

The US, the world’s largest economy, has performed slightly better but the trends are still unmistakable. In the 1950s and ‘60s, the growth rate was above 4% before decreasing to around 3% in the 1970s and ‘80s. Over the last ten years, the average has been below 2%.

These are not figures relative to other economies. Other parts of the world, like China, have clearly been catching up over the last few decades. But the West’s growth decline is palpable without comparisons to other countries.

Nor, as an aside, is this what was meant to happen. Thatcher and Reagan’s ‘free market’ economic medicine was sold on the basis on reviving the economy, ushering in an era of prosperity. But as these supply-side prescriptions have bedded down into conventional wisdom, they have had precisely the opposite effect.

 And slow growth has definite consequences. One of these is that ‘democratic’ government (to the extent that our government can ever really be called democratic’) gets absorbed by private economic power. Back in the 1930s, US President Franklin Roosevelt called this “the essence of Fascism”.

I was reading recently a book about “deaths of despair” in the US. These are deaths by suicide, drug overdose, or alcoholism, which the authors contend have shot up among white people without a degree since the turn of the century. There are many possible reasons, which I can’t go into here, but one factor is slowing economic growth.

“What may seem like small differences in growth rates have effects over long periods of time”, the authors, Anne Case and Angus Deaton (not that one), say.

One of these effects is increasingly bitter fights over distribution. “With lower growth, there is more pressure to shut out less successful groups”, they write.  This “poisons politics”.

Such a poisoning can be seen in British politics in the demonisation of immigrants and refugees. Or in the intense concentration on attacking the very limited, and very conditional, benefits of sick and disabled people; an issue which simply didn’t exist prior to the 1990s, in an era marked by higher economic growth. The ‘problem’ of excessive benefits paid to vulnerable people has become an obsession of British politics in the age of austerity.

Case and Deaton also say that with slower growth, the “positive-sum game of innovation” gets usurped by “Rent-seeking”. This turns into a “vicious circle that impoverishes everyone”.

Rent-seeking does not just mean seeking housing rents from tenants, but the appropriation by powerful corporations of the existing income of government and society, rather than attempting to create new sources of wealth.

Based on these insights, the basic features of slow growth society, in Britain and elsewhere, can be identified.

In a slow growth society, living standards decline or stagnate

Wage rates in the US have been stagnating for half a century. In Britain, the process has been more telescoped but no less pronounced. According to the Resolution Foundation, if wages had continued to grow as they had been before the 2008 financial crisis, they would be 37% higher than they actually are.

This has taken place in the context of a decline in real GDP – GDP that takes account of a rise in population. “It is extremely difficult for living standards to rise in such circumstances” says socialist economist Michael Burke. Likewise, Case and Deaton say that in an economy growing at 2.5%, living standards double in 28 years but at 1.5% it takes 47 years.

Of course, in a strongly growing economy, there is no guarantee that income will be shared out. While global GDP has increased by 65% since 1990, for example, the number of people living on less than $5 a day has increased by 370 million.

But in a stagnant economy, there is even less chance of living standards increasing. Why should this be so? Partly this is because living standards are dependent on labour productivity which is in turn dependent on business investment. And both of these metrics have been falling over the last few decades. As Case and Deaton say, “investment is a prerequisite for growth, it embodies the latest knowledge and techniques and it raises productivity.”

In the absence of investment, business tends to concentrate on low-cost labour, possibly overseas, or cheap AI transformations. Neither of which raise living standards.

There is easy money to be made – for some people

But in these circumstances, capital is irresistibly attracted to something else – rent-seeking. This involves making money, not from consumer spending on new products, but from government revenues or unavoidable spending by consumers (on housing or heating costs, for example). Something that is already there and merely has to be tapped or exploited. The deal negotiated by pharmaceutical companies with the Starmer government to double NHS spending on new drugs over the next decade – the cost of which has been variously placed at £64 billion or £44.7 billion, causing hundreds of thousands of excess deaths – is a prime example of rent-seeking.

The “VIP Lane” created by ‘Boris’ Johnson’s Conservative government, to enable firms with political connections to the Tories to get PPE contracts under Covid, is another.

More generally, Britain’s ‘privatised’ utilities – in truth not genuinely privatised but contracted out – are a haven of rent-seeking. They provide both a monopoly ensured by the government and a captive market of consumers who have no choice but to buy the ‘product’ being sold. Unsurprisingly, charges have increased way beyond the rate of inflation.

But rent-seeking can occur in purely private sector settings. When a private equity consortium buys a company, in the process loading it down with debt, and then prepares it for re-sale by asset stripping it and increasing the charges to customers, that is rent-seeking. It is destructive to the viability of the firms that are acquired, but the ‘investors’ acquire massive profits.

These processes come to dominate entire economies. The Tories’ PPE scandal has been described as “the rule of contemporary British capitalism, rather than the exception”, while a recent report by UCL professor Mariana Mazzucato has characterised the European economy as a “capitalism of rent”, where income is captured not by producing anything but by achieving market power, and owning assets and charging for access to them.

It is no accident that this degradation has occurred in an era of slow GDP growth, where the levying of rent becomes a far more lucrative and risk-free strategy than actually creating anything.

In a slow growth economy, everything costs more – for a reason

As the Mazzucato report asserts, the crux of corporate strategies is the achievement of market power, which enables income to flow from charging people or other companies to access what you possess. This brings into focus another aspect of slow growth economies – an increase in price mark-ups.

A price mark-up is overcharging for products. According to orthodox economic theory, the price of goods is determined by the cost of the labour and raw materials it takes to produce them, plus a ‘normal’ rate of profit (as we are talking about a profit-based system).

But under a regime of price mark-ups, this normal level of profit becomes ever more elastic. According to one recent book on the cost-of-living crisis, the largest UK firms have massively raised their mark-ups over the last two decades, from 58% in 2002 to 82% in 2020.

This ability to profiteer, and impose what is essentially a private tax on consumers, is intimately related to size and market power. Research by the anti-monopoly group The Balanced Economy Project, reveals that for the world’s top 20 companies, in the five years to 2022, the average mark-up rose to around 50%. For the bottom half of firms (around 34,000 companies were studied), however, the average mark-up was just 25%.

And for some sectors of the economy – pharma or Big Tech for example – mark-ups can be huge, many hundreds of per cent.

The economist Isabella Weber coined the term “sellers’ inflation”, to account for the inflation that took hold after Covid-19 that, she said, was based on “the ability of firms with market power to hike prices”. In truth this process was happening before the Covid epidemic, but as inflation was so low few noticed.

A decade ago, the Economist magazine found that corporations in the US were raking in “exceptional profits” of $300 billion a year, equivalent to a third of taxed operating profits. Some sectors of the US economy were seeing price rises of double the rate of inflation. This, at a time when inflation was negligible (indeed there was a pervasive fear of deflation). Of course, GDP growth was tiny as well, lower than it had been since before World War Two.

What is interesting is that these price mark-ups were occurring in the most concentrated parts of the American economy. In the same article, the Economist analysed 900 sectors of the US economy and found that 2/3rds had become more concentrated between 1997 and 2012.

Not only do high mark-ups contribute high profits and high market value, they are enabled by it. When it comes to charging much more for your products than it takes to produce them, the bigger you are the better.

Which leads to another insight.

Bigness is a curse

In the late 1930s, Franklin Roosevelt called attention to a “concentration of private power without equal in history”.

0.1% of corporations in America, he told the US Congress in 1938, owned 52% of the assets of all of them. Now that figure has risen to 90%.

Roosevelt said something else in his speech, delivered in the midst of the Great Depression. That the history of modern times “proves that in times of depression concentration of business speeds up. Bigger business then has a larger opportunity to grow still bigger at the expense of smaller competitors who are weakened by financial adversity.”

We are undoubtedly now faced with, and have been for some time, conditions of “financial adversity”.

A slow growth economy means generalized financial adversity — not just among people struggling to make ends meet but among small businesses who are dependent on consumer spending or may be the suppliers of corporate behemoths like Amazon.

One group, though, palpably not suffering from financial adversity are large corporations. Corporate profits are at all-time highs, eclipsing previous all-time highs achieved a few months before.

And the large are getting larger. According to Goldman Sachs, “despite uncertainty in the global economy” mergers and acquisitions – which by definition involve the creation of ever larger economic and financial entities – could hit $3.8 trillion in 2026, surpassing the previous peak in the Covid-year of 2021.

Received wisdom has it that the threat of Fascism is nurtured by conditions of inequality, poverty, anxiety, and a lack of social mobility. Conditions that will call out for scapegoats to be found which temporarily soothe the anxiety.

But if we listen to Roosevelt who was speaking when Nazism was approaching its zenith, that isn’t the whole story. Fascism also has an economic corollary, what he called “a cluster of private collectivisms” … “masking itself as a system of free enterprise” that seeks to control democratic government.

Fascism doesn’t just base itself on the exploitation of popular discontent among its mass base. It also has an elite element, which finds nourishment, as it did in the 1930s, in the conditions of a slow growth society.

What Roosevelt termed the “essence of Fascism” is what I want to consider in the second half of this article.

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