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.

Other People's Money – The Degeneration of Thatcherism, part two

 And so we move on to part two of the chronicle of the Conservatives’ remarkably profligate attitude towards other people’s money, despite what Margaret Thatcher may have led you to believe in 1978. Here is part one. 

This revisionism is not solely directed at Conservative hypocrisy – tempting as that may be – it also exposes the barren hulk of the current Labour party, which promises to transport us back to the halcyon days of early David Cameron. Another of Margaret Thatcher’s famous lines was to describe New Labour as her greatest achievement. “We forced our opponents to change their minds,” she said. And we haven’t stopped paying for it since.

Housing

If any part of British society bears the unmistakable imprint of Thatcherism – and almost all do in some way – it is the housing sector. The policy of the ‘Right to Buy’ – allowing council house tenants to buy their homes at discounted rates – undoubtedly came to embody the Thatcherite promise of creating a ‘property-owning democracy’. In awarding her the Presidential Medal of Freedom, the elder George Bush commended Thatcher for putting “private roofs over British heads”. But the policy, because it also involved preventing councils from replacing the stock they had to sell, had one consequence that was the polar opposite of owning your own property – having to rent it.

The number of private renters has more than doubled since the turn of the century and that doesn’t include those renting from housing associations. This change was enabled by classic Thatcher-era legislation, the 1988 Housing Act, a deregulatory bonfire which introduced short-term tenancies, allowed landlords to charge whatever rent they liked, and got rid of any security of tenure for tenants, permitting them to be evicted with only two months’ notice. It presaged a huge change from the post-war social democratic settlement which was characterised by a mix of owner occupation and council housing. “The private landlord, increasingly associated with the rack-renting of slums was nearly eliminated”, wrote historian David Edgerton of that period.

But this brave new (old) world which saw the triumphant return of the private landlord and the phasing out of council housing had consequences: the number of private tenants who couldn’t afford the rent, and thus became reliant on financial assistance from the state, shot up. The amount spent on housing benefit increased from less than £2 billion to £24 billion in 2015/6 and now stands at over £30 billion a year. This is a public subsidy to landlords to make up for the fact that the level of rent they are charging is beyond the capacity of their tenants to pay. True Thatcherite Conservatives like to present the enormous housing benefit bill as indicative of out-of-control welfare spending that needs to be pruned back but, in fact, it is a direct result of their deliberate gutting of the post-war social order.

Speaking of which, the Cameron/Osborne administration did successfully, although temporarily, reduce the size of the housing benefit subsidy. Naturally, this was through eliminating tenants’ entitlement to it – through denying it to under-21 year olds and introducing a benefit cap – rather than reducing the need for it by cutting rents. Curiously though, a little publicised feature of the Conservatives’ 2016 Welfare Reform Act did indicate the financially sensible nature of the latter approach. ‘Social’ Landlords – i.e. local councils and housing associations – were required to reduce rents by 1% a year for four years. According to a House of Commons Research Briefing, “of all the measures implemented to date, the requirement on social landlords to reduce rents …. has achieved the highest level of saving.”

Innocently, you might think therefore that such a policy of rent capping should be applied to the private sector, where rents, the number of renters and the housing benefit subsidy have all mushroomed over the last 30 years. But such an idea doesn’t factor in how the Conservatives are the party of asset owners, whose interests – even if reliant on a huge state subsidy – must be protected at all costs. Rent control, if applied to the private sector, seems to cause an irrationally vituperative reaction among Conservatives. Friedrich Hayek, Margaret Thatcher’s favourite philosopher, described the policy as “deadly”. More recent adepts have condemned it as almost as devastating to a city as bombing it.

At the other end of the scale, the Conservatives have subsidised the deposits and mortgage repayments of first time home (usually flat) buyers through the Help to Buy scheme launched in 2013 which has so far cost £21 billion. Aside from artificially raising house prices, and thus benefiting housebuilders like Taylor Wimpey, the scheme has left recipients high and dry after the huge rise in interest rates, and thus mortgage interest payments, following the Truss debacle. But such is the Conservatives’ obsession with home ownership, seen as such an indelible part of Thatcher’s remodelling of British society, they are prepared to move heaven and earth –  including their own allegedly free market ideology – to massage the optics.

The Economy

The Conservatives did not, it should be said, instigate the huge state bail out of the banks that the British government felt it had no choice but to pay following the 2008 financial crisis. That was the prerogative of the last Labour government. But market fundamentalist Thatcherite ideology – convinced of the inherent wisdom of allowing those at the top of society maximum leeway – was certainly in attendance in spirit.  And the Sunak administration is pursuing the very sensible policy of removing the regulations that Cameron introduced as a sop to the prevailing zeitgeist that something had to be done to prevent 2008 from playing out again. I’m sure it’ll end well.

What can be laid at the door of Thatcher’s children, however, is subsequently using the exclusive money generating power of the state to massively augment the wealth of the richest in society. This was through the capital creating policy of Quantitative Easing (QE). Since 2008, QE has been deployed three times – immediately in response to the financial crisis (Labour), after the Brexit vote (Tory) and then again in the economic panic that ensued post-Covid (Tory) – totalling £895 billion in Britain alone.

QE works by creating a huge mass of money (so-called fiat money), that naturally seeks investment opportunities. The stock market is one of those investment outlets, although the booms engineered are decoupled from traditional market reasoning – the backing of companies because they are thought likely to be successful in the future. The resultant “explosion in billionaire wealth” – the cumulative wealth of the UK’s top 10 billionaires has increased by 281% since 2009 – therefore cannot be explained solely, or even mainly, by the natural workings of the market. During the pandemic for example, economic activity and growth plummeted but the number of UK billionaires rose by a fifth. This huge wealth – a billion is a thousand million – has been given a stupendous boost by positively Stalinist state intervention, carried out by, among others, devoted Thatcherites.

It should also be pointed out that Quantitative Easing directly contradicts one of the core tenets of original Thatcherism, that of monetarism. Developed by the American ‘free market’ economist, Milton Friedman, monetarism held that, to combat inflation, the supply of money should be strictly controlled. Doubtless the theory was honoured in the breach by ’80s Conservatives, but from the 2010s government policy around the world has simply laughed at it. Whether the inflation we are now experiencing has something to do with massive increases in the money supply – á la Friedman – is a moot point. In the last decade, notwithstanding regular doses of QE, the main threat was deflation, not inflation, suggesting that the capital boost of QE had stayed within the financial system. Possibly the last tranche of it – the creation of $834 million dollars an hour worldwide for 18 months – was so huge that some of it, in line with the official narrative, leaked out. Or maybe support for a largely mothballed ‘real’ economy – i.e. increasing the amount of money in circulation but reducing the amount of goods – produced the classic ingredients for inflation. Who knows?

Certainly now, we are seeing the opposite of QE, so-called Quantitative Tightening (QT), on the part of the world’s central banks, along with increases in interest rates. Whether this presages a new financial crisis, which may be unfolding as we speak, is an interesting question. But to even make a dent in the massive inequality caused by the economic intervention of adoring Thatcherites it would have to go on for decades.

Possibly Conservatives would retort that their post-Thatcher predilection for economic intervention does not just help those at the summit of the society but also the many millions at the bottom end. This is through working tax credits which ‘top up’ low or moderate incomes. Tax credits were introduced in America in the 1970s and expanded massively by Bill Clinton. Naturally, this country followed suit, and working tax credits became a core part of New Labour’s welfare philosophy (with emphasis on the working).

Their origin among parties theoretically antithetical to Thatcherism and Reaganism is deceptive, however. In reality, tax credits are another form of state subsidy to vested interests, enabling employers to pay low wages and institute more part-time or zero hours contracts with the assurance that the state will meet the shortfall. They are an essential part of our Thatcherite economic landscape. In 2015, the charity Citizens UK revealed that large retailers, such as Next and Tesco, were costing taxpayers £11 billion annually so that their staff could enjoy “a basic standard of living”. The situation has only become more acute in the interim.

Perfunctory, if high profile, attempts to wean on employers off tax credits, such as Osborne’s higher minimum wage, have not worked partly because they have been accompanied by a never-ending war on trade unions, the one force in society capable of making tax credits unnecessary through compelling employers to pay higher wages. Rishi Sunak’s anti-strike legislation, which permits employers to seek damages for the effect of strikes, will hit what’s left of trade union power, already hobbled, as we know, by archetypal Thatcherism. Tax credits in themselves are hostile to trade unions because if wages rise because of trade union influence, the tax credit level will fall as a result. It is no accident that a country such as Norway, which regards trade unions as social partners, not ‘the enemy within’, and which has a system of sectoral collective bargaining to determine wages, has not introduced tax credits. It doesn’t even have a minimum wage because strong trade unions mean it isn’t necessary. Norway, incidentally, also has a much higher standard of living.

It’s clear that the Thatcherites in Britain didn’t vanquish ‘socialism’ as they claimed they had. They merely changed the beneficiary group.

Covid and Corruption

There is something viscerally enraging about the Conservatives’ fiscal incontinence during the Covid pandemic.  It came after years of justifying taking money away from poor people – through policies like the benefit cap, sanctions and reducing the amount received by sickness claimants by £30 a week – on the grounds that it was only fair to the hard-pressed taxpayer.

But the interests of the taxpayer, allegedly so close to Conservative hearts, were strangely downgraded during the Covid lockdown when corruption and the raiding of the public purse by friendly businesses were rife. Virtually no prosecutions concerning the £5.8 million lost through fraud have taken place despite 30,000 allegations of fraud being reported to HMRC. The same is true of Rishi Sunak’s month-long Eat Out to Help Out scheme, which attracted an estimated £21 million in fraudulent claims from the hospitality sector. This dawdling contrasts with the alacrity that the Conservatives look upon alleged fraud in the benefits system. Permanently staffed hot-lines for the public to report fraud, regular tests for sick and disabled people, and the dispensing of thousands of sanctions to claimants for not upholding their “contract with the state”, have been features of this parallel universe in the UK for years.

In total £4.3 billion lost in fraud during Covid has been written off by the Treasury, prompting one minister in the House of the Lords to resign and accuse the government of “having little interest in the consequences of fraud to our society”.

But far from having little interest in it, Conservatives seem positively in favour of subverting free market ethics when it involves their friends. Michelle Mone, accused of secretly receiving some of the profits of a PPE firm that won large government contracts after she recommended it ministers, became a Conservative life peer in 2015. Altogether, nearly £1 billion in Covid contracts were awarded to 15 companies linked to donations to the Conservative party. It certainly pays to network.

The Conservatives’ alleged concern with getting value for money for the taxpayer is for the birds. The overriding aim is that 1) A narrow elite circle benefit and 2) The cash – otherwise known as other people’s money – finds its way through labyrinthine sub-contracting to the “good hands” of the private sector. Dido Harding, appointed as chair of “NHS Test and Trace” in 2020 is an example. Her lack of medical experience was no obstacle. Known as “an accomplished networker” according to The Times, she went to Oxford with David Cameron, married a future Conservative minister, and rose to become the chief executive of a mobile phone company and a Tory peer. Despite being given an astronomical £37 billion in funding, Test and Trace, reliant on sub-contracting by firms like Serco and consultants paid up to £6,000 a day, was a monumental failure, with more than 60% of those with Covid symptoms not being contacted. By contrast, the in-house teams of the doomed Public Health England and local authorities reached nearly 98% of their contacts. Go figure.

Ubi omnes errabis?

As alluded to earlier, this is not about simple hypocrisy. Arguably most political movements are hypocritical in that they don’t do what they say they are going to. The historical reputation of the Britain and America is that they compelled the rest of the world to accept the virtues of free trade, whereas in reality they were arch protectionists, and in Britain’s case, actually destroyed the industries of competitors through imperialism.

But Thatcherism started out with free market intentions. In its early days it preached the tenets of monetarism and controlling the money supply, sold off loss making industries to the private sector, declared war on trade unions as impediments to ‘free’ employment relations and hiked interest rates (causing a huge recession and remaining unmoved while thousands of businesses who couldn’t survive in the new unforgiving environment went to the wall). Only gradually – through for example contracting out essential public services and bailing out ‘too big to fail’ banks – did it morph into something else. Now the Thatcherites, notwithstanding their free market sheen, are presiding contentedly over a system of socialism for the rich.

Partly this is to do with misunderstanding what conservatism is. Friedrich Hayek, the major intellectual influence on the modern Conservative party, succeeded in reconnecting it to its classical liberal, or ‘old Whig’, philosophical inheritance. According to him, this conservative-liberalism, in contrast to idealistic socialism, had a “low” view of human nature. Hayek famously said that everything would turn out well if everyone behaved selfishly. But this selfishness was meant to exist within the law and the rules of the free market.

But nobody, besides intellectuals, believes in the sanctity of the free market. Many wealthy people will go where they can make even more money and the state, which rakes in and distributes hundreds of billions of pounds, offers that opportunity. The corruption around Covid illustrates the temptations and modern privatisation more broadly relies on the existence of a well-endowed state which can re-distribute taxpayer funds to the private sector. The Conservatives have, for years, been resolutely unforgiving about a ‘something for nothing’ attitude on the part of the multitude. Benefit sanctions, already at an all-time high, are being multiplied still further by Jeremy Hunt. But for the rich this sternness melts like ice left out in the sun. This is because the Conservatives are, and always were, a class-based party and exponents of class solidarity. When Tony Blair declared in 1999 that the class war was over, only one side was listening.

But the degeneration of Thatcherism has deeper causes than just the class bias of the Conservative party. Thatcher tapped into a profound conviction among Conservatives that if burdensome regulations and socialistic rates of taxation were lifted, the result would be prosperity for all and runaway economic growth. This certitude can be traced back to Adam Smith who thought the “natural effort of every individual to better his condition” was so powerful a principle it would carry society to “wealth and prosperity” and surmount ignorant obstacles placed in the way by “the folly of human laws”.

Coincidentally, the UK did – in common with the rest of the world – experience an economic boom in the mid-1980s. Naturally, Thatcherites took this as confirmation of the economic wisdom of their policies, which despite the temporary pain involved, had to be persevered with (actually the pain was probably connected to the ensuing boom, capitalism had always relied on a shake-down of capital value to lay the ground for subsequent growth). In fact, the economic boom of the mid-1980s became lodged in the public mind as the consequence of tough Thatcherite medicine and has endured despite the boom being revealed as a unique event.  Economic growth has declined in every decade since the 1980s, culminating in the present torpor. Real wages are not predicted to return to their 2008 level until 2026 and are experiencing a 3.9% annual decline, productivity is terrible when compared to before the Financial Crisis (0.5% compared to 2.3%), and business investment is anaemic.

But rather than face up to these issues, Thatcher’s children are umbilically attached to the idea that the only solution is more deregulation and tax reductions for the investors. These policies – known as supply-side reforms because they concentrate on those ‘supplying’ investment and employment (or not) – are religiously propagated by many conservatives despite the fact that they have already been implemented, with the results we see before us, for nigh on four decades (the corporation tax rate was 52% in 1981, it is now 19%). Liz Truss, for example, convinced herself that a bias towards redistribution over economic growth lay at the root of poor economic performance despite the evidence pointing in exactly the opposite direction.

One very obvious reason why these questions are not honestly examined, is that it would move into the crosshairs numerous Thatcherite shibboleths, most notably the idée fixe that underperforming economic growth can be palliated by reducing tax rates and irksome regulations on the wealthy. This ‘fix’ seems to be impervious to empirical evidence, though the Sunak administration is finally increasing corporation tax after decades of reductions, hoping no-one will notice that this contradicts a basic tenet of conservative economic philosophy.

As the South Korean economist Ha-Joon Chang pointed out a few years ago, the level of regulation is not a disincentive if there is a prospect of profit to be made. “…. strange as it may seem to most people without business experience,” he wrote in 2010  “businesspeople will get 299 permits … if there is enough money to be made at the end of the process. “In contrast, if there is little money to be made at the end of the process, even 29 permits may look too onerous.”

Why there is in the UK “little money to be made” – with the notable exception of finance and property – is not a question many are eager to ask, especially if it indicts their whole economic strategy which supposedly rests upon the inherent virtue of making money.

Herein lays the explanation as to why Thatcherism has degenerated into a system of socialism for the rich. It’s quite possible – indeed common – to remain ideologically blinkered in the face of evidence showing the hollowness of your ideology. It’s even possible to implement policies, such as corporate tax cuts, that do not have the beneficial effect you say they will. But it’s not possible to ignore the real world consequences of the failure of your economic philosophy. That is why free market Thatcherism has degraded into a swirl of subsidies, bail-outs, phoney privatisations, landlord patronage and plain corruption. They’ve been necessary because the free market hasn’t been able to prosper under its own devices and if you, as a party, represent the interests of asset-holders at the end of the day, they aren’t especially difficult choices to make. And in those circumstances, delving into the ready pile of “other people’s money” becomes irresistibly tempting.

But the remains – what lies at the root of economic failure?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other People's Money – The Degeneration of Thatcherism

 “The problem with socialism,” Margaret Thatcher famously said (or perhaps nearly said), “is you always run out of other people’s money”.

Subjecting everything to a merciless cost-benefit analysis was the core Thatcherite credo. ‘Lame Duck’ nationalised industries were privatised and left to sink or swim in the unforgiving waters of private sector, ‘uneconomic’ coal pits were shut down no matter what the cost to the communities dependent on them, and internal markets, pledged to scythe through waste and bureaucracy, introduced into national institutions like the NHS and the BBC.

Therefore, it’s one of history’s great ironies that in the 21^st century her party – the Conservatives – are, under the guise of ‘free market’ policies, more profligate with “other people’s money” than any socialist government ever was, or, if one wants to be optimistic, ever could be.

“Socialism”, Thatcher’s mortal enemy, by regulating the private sector, as opposed to throwing money at it, would be immeasurably cheaper.

Let me count the ways.

Energy

The enormity of Liz Truss’s energy price guarantee  a huge “state handout” of between £100 billion and £170 billion may have been scaled back by Jeremy Hunt but the principle remains: using taxpayer money to subsidise the profits of energy retail and supply companies because the prospect of public ownership – ‘socialism!!’ – is so horrifying it can never be countenanced.

And the huge cost of heating their homes to the public – the price cap is now at an annual level of £4,279 – has only been exacerbated by the Conservatives’ attempts to head off the idea of public ownership by introducing phony competition into a plainly monopolistic market. The £6.5 billion state bailout of the energy retail company Bulb – one of nearly a hundred new suppliers introduced to give the appearance of competition to the electricity supply system – will cost each household £230.

Despite the fact that, due to sharp falls in the price of wholesale energy, gas and electricity are cheaper than they have been since 2010, the market price will not be reflected in bills for a long time. “The cost of rescuing failed energy firms,” says Rupert Hargreaves of Money Week magazine, “will add hundreds to each bill, offsetting some of the declines in wholesale energy prices.” And of course the shaky finances of the still existing energy firms need to be secured.

It is reassuring to know that the opposition ‘Labour’ party, now safely back in Blairite hands, will continue this prudent use of taxpayer funds. Its stated approach of a six month price cap freeze, now judiciously mirroring Hunt’s policy, will give £29 billion to the energy firms, the mad Corbynite relish to “nationalise everything” at exorbitant cost having been thrown in the dustbin of history where it belongs.

It’s not surprising therefore that there is a singular lack of curiosity in Westminster as to why wholesale energy prices have been on such a rollercoaster in the first place, spiralling skywards and then crashing. It can’t have been solely down to Vladimir Putin , or the gods of supply and demand, because the falls continued, even sped up, after the Nord Stream pipeline, which syphoned gas to Europe, stopped operating and was then sabotaged.

All that Rishi Sunak will say is that it’s impossible to artificially hold energy prices down. But there is nothing natural about the ‘wall of money’ that drives speculation in commodities such as oil and natural gas. “Prices for food, oil and gas are determined independently of both wholesalers and costs,” noted economist Ann Pettifor in the Financial Times last September. “Wall Street and Chicago Mercantile Exchange investors deploy vast sums in speculation on movements in the price of both food and energy prices. It’s a profitable game.”

But rather than cracking down on speculation, the government, unfailingly loyal to a bastardised market fundamentalist ideology,  wants to encourage it. The Financial Services and Markets bill, currently being scrutinized by the House of Lords, will give the Prudential Regulation Authority and the Financial Conduct Authority additional objectives of encouraging “economic growth and competitiveness.”

The idea that you should limit speculation in commodities, which drives up wholesale prices thus inflating everyone’s heating bills by thousands of pounds, is beyond the bounds of the thinkable. This is despite the fact that it has been done in the past by an American President who would have bristled with indignation at being called a ‘socialist’.

In 1934, Franklin Roosevelt passed a law that limited speculation in commodities to 20% of the market. Stability reigned until ‘New Democrat’ Bill Clinton – channelling the deregulatory spirit of Reagan and Thatcher – legalised credit default swaps in housing (paving the way for the 2008 financial crisis) and in the same law gave the green light to unlimited speculation in other commodities, such as oil and gas – the root of our current troubles.

But the notion that we might shun this 21^st century liberation and return to the benighted ‘socialist’ practices of the past – which kept energy bills low thus obviating the need for huge public subsidies – is clearly just puerile. Like King Canute ordering the tide to stop coming in.

Public Services in general

You might think that no-one in their right mind would want to copy our dog’s breakfast of an energy supply system in other public services. But then again you (probably) don’t live in the mind of a Thatcher-besotted British Conservative.

The roll out of broadband installation in the UK is (prepare for a shock) heavily subsidised by the public purse. Under the £5 billion “Project Gigabit” programme, the government is gifting most of this money to BT and BT Openreach, its broadband division. However, stung by the lack of progress, it has augmented this with the fake competition model pioneered in the energy distribution system, encouraging other suppliers, so-called “altnets”, to start laying fibre-optic cable. Unfortunately, reports the Times, these paragons of efficiency are – much like private medical firms cherry-picking the simplest procedures – concentrating on the easiest areas. So “we’ve ended up with hundreds of fibre companies all building in the same areas.”

There is also the clear and present danger in the current climate that some of these “altnets” could go bust. So, as with the energy supply ‘market’, the government is setting up a Supplier of Last Resort system, naturally at the public’s expense. Unavoidable bail-outs, in the manner of Bulb, are on the cards. According to investigative journalist Solomon Hughes:

Customers of failed broadband firms will be shunted back to the old monopolistic firm, BT. The cost of these bailouts will be borne by the customer or the government. Just as in energy, trying to break [up] monopolistic firms by encouraging new entrants might end in costly failure.

The ‘socialist’ alternative, outlined by Corbyn at the 2019 General Election, would have been far more effective and cheaper. He wanted to entrust broadband rollout to a new public firm, called British Broadband, created partly by nationalising BT Openreach, and funded by taxing trillion dollar tech monsters like Facebook and Google. But this “crazed communist scheme”, to quote Boris Johnson, was too much for freedom-loving Brits so we’re back to gifting private firms public money to dig up the same stretch of road.

It has dawned on some right-wingers that the privatisation pioneered by Margaret Thatcher at the start of the 1980s has morphed into something else without many people noticing. Initially the Conservatives did simply divest themselves of state-owned companies (that had often been nationalised in the 1970s because they were at risk of bankruptcy). Firms like Cable & Wireless, British Steel, Rolls-Royce, British Airways, Jaguar and even Thomas Cook, were sold and had to make their own way in the private sector. Sometimes they survived and often, as in the case of Jaguar, British Steel and Thomas Cook for example, they didn’t.

But from the Tell Sid era of the break-up of British Gas in the mid-1980s, so-called ‘privatisation’ changed its nature. It became synonymous with contracting out monopoly services from the state to the private sector on the dubious grounds that this would be more efficient. This process is now so ubiquitous, encompassing services like water, gas and electricity, the railways, academy schools, NHS services, air traffic control, and care homes, that its uniqueness, and crucial difference with authentic privatisation, is often overlooked. These services were funded – and continued to be funded – by the government and, most importantly, could not be allowed to cease to exist.

After British Rail ‘privatisation’ in 1996, for example, the operation of lines was subject to a franchise system companies could bid to run. At the same time, the public subsidy awarded to this allegedly privatised system has increased by over 200%. And when the train operating companies are faced with a strike by their employees, they are reimbursed by the government for lost revenue.

In the words of a journalist for the right-wing Spectator magazine:

The rail industry hasn’t really been privatised at all. It remains underwritten by the taxpayer. Nor is there much in the way of competition: local monopolies are guaranteed by the franchising system.  The only difference is that the system is rigged so as to allow the private companies owning the franchises to make a profit, even if their underlying operation is making a thumping loss.

Predictably, faced with this “rigged” system, the writer wants to return to the original spirit of Thatcherism and genuinely privatise the railways, abolishing state subsidies and forcing “the industry” to stand on its own two feet. But this solution would simply result in a system of free market anarchy that laid the ground for Thatcher’s bête noire of ‘socialism’ in the first place. Fares would be hiked into the stratosphere and ‘uneconomic’ lines shut down. What is socially necessary is not always profitable – in fact the two are often in conflict – and the fear of this realisation is why this country lives under the sway of bastardized Thatcherism.

Where did it all go wrong?

In part two, I will continue to list the myriad ways that 21^st century conservatism props up the ‘free market’ system with public funds, in addition to asking why.

The answer, in my opinion, lies in both a putatively realistic but flawed vision of human nature and the unacknowledged economic failure of Thatcherism. She told herself, and everyone else, that releasing the forces of enterprise and beating back trade unions and socialism would result in a future of unending prosperity for all.

However, it hasn’t turned out that way and all they can do, to tweak a well-known phrase, is ‘throw [other people’s] money at the problem”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

.