24 April 2007

Out of sight but not out of mind

Just as most economic activity is now negative rather than positive, so most of the economic value of the economy is debt rather than credit. The whole economic system is being extracted and replaced with debt.

The most obvious example of this is the takeover of major companies by 'private equity' firms, misnamed because they really have no equity but fund these takeovers from debt. If they can persuade the banks to lend them enough money they can, like Archimedes with his unfeasibly long lever, move the world.

Concern has been raised about the loss of accountability when firms move from public, quoted status to private status--and you thought accountability was poor amongst stock-market corporations! Once removed from any scrutiny who knows what may befall the employees and suppliers of these firms? Ruthless maximisation of profit behind closed doors is to be expected.
The most concerning aspect of the activity of private equity firms is the way they allow the expansion of debt and delay the need for adjustment in the world economy, which will consequently be even more painful when it does occur. This was exactly the process that preceded the 1929 Crash, as more and more wheezes were found to deal with the problem that there was no more debt to be had and the pyramid-selling scam had come to the end of the road. This explains the willingness of banks to lend vast sums to 'private-equity' chancers.
Since debt is the commodity banks trade in, the move towards debt-based capitalism can only lead to their owning an ever greater share of the economy. Most people aged under 40 belong to the bank, as a consequence of vast mortgage and student-loan related debt. Companies facing hard times are likely to find banks eager to swap their equity for debt, a way in which the bank can come to own something of real value (a functioning company) by creating something with no value (bank debt).
As the economy becomes hollowed out only those with a risk-averse attitude and a willingness to take on frightening levels of debt are able to thrive.

22 April 2007

Tough on the causes of violence?

News of the shooting at Virginia Tech drowned out the booming death toll from Iraq this week. The common thread is not hard to find: US society seems doomed to generate ever-widening circles of violence. Michael Moore's arguments about the link between the production of death through the sale of arms and military vehicles for profit and the violent psyche were well made but ignored.

US citizens are easy pickings and the horrific nature of life on the other side of the Atlantic can console us when we consider our own tawdry stories of violent beahaviour. Particularly distressing this week were the women who forced their children to engage in a staged dog-fight for their sordid amusement. More considered commentators noted that the children's father is a soldier who has recently been fighting in Iraq. The grandmother suffered in a string of violent relationships. The circles of violence in evidence again.

We are left wondering where this violence comes from. In many societies the beating of children is legal, with parents of both sides of the Atlantic using biblical justifications such as 'spare the rod and spoil the child'. Children are raised to learn that violence solves problems and that using superior physical strength is an acceptable means of winning an argument.

So what does all this have to do with economics? The first and obvious point is to call for an end to the trade in arms. We have recently celebrated the ending of the trade in slaves, which now seems so clearly immoral. One day the sale of arms will be similarly unacceptable and it should be a priority to hasten that day. Like human flesh, weapons of death should not be bought and sold in a market.

We should also acknowledge that inequality and expropriation inevitably generate social violence. Cho Seung-hui's vindictive hatred of the rich kids on campus has been dismissed as the ravings of a madman, which conveniently removes the need to raise questions about the corrosive effect of the growing inequality in US society.

In the UK context the rage of young black men, whose creativity is generating the dominant styles in speech, music and fashion and yet whose economic prospects remain bleak is equally palpable and comprehensible. It is no surprise that when their creativity is expropriated, branded and then priced beyond their reach they react with violent anger. Without economic justice we will never have social justice, and while we have inequality of power and resources we will always be generating more cycles of violence.

18 April 2007

Tracing our roots in space and time

A recent article in the Guardian noted that Britons' two favourite leisure pursuits are genealogy and gardening. This encouraged me greatly, since I had previously thought that the no. 1 was shopping. Thinking more deeply I wondered about the link between these two and what they tell us about contemporary society. The common thread seemed to be roots. Globalisation has led to a loss of identity and our response is to re-embed ourselves in space and time. The huge number of people using online databases of family records and the record-beating queues for allotments are both evidence of the same impulse.

Of the four dimensions recognised by conventional science, time is by far the most interesting. During a recent spell of car-free living I noticed that, quite contrary to my expectation, moving more slowly actually caused time to expand. By rushing less I was doing things more slowly but my experience was of having more time to spend rather than less. It appears that the modern lifestyle actually compresses time, reducing our sense of lived experience. This seems to go beyond the concern of the slow movement with the quality of time and actually have more to do with the perceived quantity of time.

What implications does this have for the organisation of the economy? David Harvey wrote long ago about the way in which culture, whether of the 'high' or 'low' variety (opera or fishing) is a substitute for what capitalist work structures deny people in the workplace. When time is pressured and measured and outside your control you are not really living at all. Your time has been stolen by your employer. Harvey was in fact only expanding on a point made by Marx that the factory system represents the annihilation of space by time.

Stealing time is far more subtle and effective than stealing space. From the Norman Conquest through the Enclosure Movement we have witnessed and protested against our exclusion from the 'common treasury' of land and resisted the domination of castles and corporations. The stealing of time is effected through the creation of money as debt. When a bank creates a debt in this period to generate cash it is buying people's labour in the future to pay back that debt. It is this system of money creation and the vast quantities of debt it generates that has turned us all into wage slaves.

The escape route lies in re-embedding ourselves and our work in our own space and time which is why localisation is philosophically as well as environmentally important. The more you can work at your own pace and exchange things with people you know the more you will be taking back control over your own time and space and emancipating yourself and your community.

13 April 2007

The Assumptions of Perfect Competition: Lesson 2

Assumption 2. There are so many firms in the industry that each one . . . has no power whatsoever to affect the price of the product

The second first assumption is intended to guarantee that neither individual buyers nor individual sellers can have undue power within any market. This is because, with so many sellers, it would be impossible to operate an effective cartel, since the cost of finding information from so many sources would preclude such an arrangement. Again, because there are so many sellers, none can individually influence the price of the good s/he is selling. Large buyers might also come to have too much power in a market, so the assumption applies also to the demand side of the market.

Is this a realistic view of how modern markets operate? In reality, it flies in the face of the consolidation that has typified capitalism at least since it was critiqued by Marx (what a fantastic beard!). Perhaps in this Information Age we should be most concerned about the heavy consolidation in the world of media, as demonstrated by the merger of AOL and Time-Warner, two of the largest global media corporations, in 2001. Since the merger the group has gone from strength to strength, now out-competing other providers of high-speed internet connections and seeing profits increase by 76% in the last quarter of 2004.

Let us carry out that manoeuvre so detested by economists and test out this assumption against the reality of the market for food in the UK at the beginning of the 21st century. The reality is that the market is dominated by a small number of very powerful players—the supermarkets. As middlemen, standing between producers and consumers, they both buy and sell food, and ensure that what economic theory might consider the ‘buyers’ and ‘sellers’ have to meet their in needs in terms not only of price, but also in terms of quality. According to Corporate Watch research, in 2000 the major supermarket chains controlled 88 per cent of the UK food market, a concentration of retail power far greater than in continental EU countries or the USA. Later that year analysts predicted that the number of major players would be down from the existing five—Tesco, Sainsburys, Safeway, Asda, and Somerfield—to just two.

So much for competition: without a large number of potential entrants to the market, what mechanism does the market offer to constrain their behaviour? This assumption relies on a separate sub-theory focused around the concept of ‘barriers to entry’. In order to ensure that there are plenty of buyers and sellers in the market, there must be nothing to stop the potential market players from entering the market, no ‘barriers’. Competition only works when there are large numbers of suppliers who cannot unduly influence our purchasing decisions or preventing other producers from entering the market and improving on their offer to us as consumers.

This view may have made sense why you consider the 18th-century market that Adam Smith visited, where he might have bought meat, potatoes and shoes, but it has little relevance in a complex, modern economy where purchasing decisions are based on advertising and goods do not reach the market without many years of development and massive R&D investment. Or to a market where a new item cannot reach the consumer's attention without massive investment in branding and advertising.

Parkin and King deal with advertising as follows: ‘To the extent that advertising provides consumers with information about the precise nature of the differentiation of products, it serves a valuable purpose, enabling consumers to make a better product choice’. Sloman deals with advertising as follows: ‘There is no point in advertising under perfect competition, since all firms produce a homogeneous product (unless, of course, the firm believes that by advertising it can differentiate its product from its rivals’ and thereby establish some market power; but then, by definition, the firm would cease to be perfectly competition’ (p. 156). Trying to imagine what kind of advertising might conform to this the world of the perfectly competitive theory Mr. Cholmondley-Warner sprung into my head, kindly pointing out in his received pronunciation that Mr. McVitie is now producing his digestive biscuits with chocolate on top. If this was all advertising were about why would companies spend millions on it every year? Why would there by whole journals dedicated to informing company executives of the most effective ways to manipulate the minds of potential buyers?

In reality, the business of a corporation in the global economy focuses on holding its market share and defending it against all-comers. The business of corporate capitalism is not about perfect competition but about obstructing competition. This is done not only through creating and defending the corporation’s unique identity through its brand, but also through investing in advertising and PR to support its brand and litigation to attack those who transgress it, and through concealing virtually everything about its operations, from the details of how its products are made (remember the Coca Cola secret recipe?) to how it spends its profits.

6 April 2007

The Assumptions of Perfect Competition: Lesson 1

At the heart of the justification of the supremacy of the market system within academic economics lies the theory of perfect competition, so it is high time to carry out a reality check on this theory, which is itself based on a series of assumptions. In this section we will explore and test these assumptions and find that, unsurprisingly, they are as far from reality in the global marketplace as the model of Camelot in the Monty Python film. Others have produced similar critiques, so we may conclude, as do Gaffney and Harrison, that it remains for ideological rather than rational reasons.

It is an old joke in the economics profession that if there is some fact about the real world that makes modelling difficult you deal with this by assuming it away. This technique is used with gay abandon in the case of the theory of perfect competition which is based on a series of fundamental assumptions without which it is assumed not to be valid. The list of assumptions of perfect competition that I critique in this and a few following posts is taken from a book published in 1974, the 2003 edition of a standard economics text (I refer to it from here on simply as ‘Sloman’); but similar ones could be found in any introductory economics text. In fact, a rapid search of the internet will find plenty of examples of university courses teaching approximately the same theory as is critiqued below.

The paucity of change over the past 30 years or so, during which economic conditions have changed beyond all recognition, is evidence of the theory as catechism rather than science. The last time I taught this theory to undergraduates I was issued with a US text. It explained the theory of perfect competition by reference to suppliers of two competitive products: ice cream and frozen yoghurt. This seems to epitomise some of the problems with the theory and with economics in general. First, it clearly originates in a foreign, US culture: how many UK kids have ever tried frozen yoghurt? Secondly, the example is trivialising. I felt embarrassed explaining these issues which influence so many lives (and deaths, in the developing world) in terms of an irrelevant, self-indulgent good such as ice-cream. For many of those who are the victims of the market ideology, ice-cream is a luxury which, although far better suited to their climate than ours, they will never have the pleasure of enjoying.

Assumption 1: Producers aims to maximise their profits . . . and consumers are interested in maximising their utility

At first sight there seems little to take issue with in this first assumption. We might quibble with the use of the word ‘producers’ since, as I discuss in Chapter 7, very few producers are actually able to take their own goods to the market in the capitalist as presently structured. We might also question the idea of ‘utility’. The consumer’s interest in the market transaction is often reduced to that of gaining the maximum amount of the good in question for the minimum amount of money: as the later fourth assumption makes clear, according to economic theory, consumers cannot choose between goods on the basis of quality, since goods are taken to be homogeneous.

Should we be satisfied with this thin description of the market relationship? In reality, our purchasing involves significant psychological and cultural content, and our production and exchange of goods plays a far deeper and more significant part in our human lives that this assumption suggests. Our decisions about purchasing may be based on strong moral or religious commitments, as the growth in the fair trade movement has made clear. Economists may theoretically absorb these concerns by extending their concept of ‘utility’, but frequently they do not, and even if they wish to they are unlikely to succeed in summing up such complex social processes within their desired economic calculus.

3 April 2007

House price boom: who benefits?

As with the public debt, private debts also enable those who lend money for interest to extract money from those who are forced to borrow it because they control an unfairly small amount of material wealth. The mania with ever-increasing house prices conceals the fact that, since most of this value will end up being paid for out of mortgage-based debt, it will increase costs for those buying homes in the future. Unto those who have shall be given, and from those who have not shall be taken even that little that they do have. This is the real message of the boom in house prices that is drowned out by the voices raised in celebration of the nominally inflated value of housing stock. If you have already bought your home then what you own is still a home, and unless you are prepared to trade down its financial value is of little interest to you. However, if you are either intending to buy or seeking to meet your need for housing through renting, the house price boom is a disaster.

It is the lenders who benefit from the increasing value of houses, since the increased level of loans allow them to create ever greater amounts of money and then to charge interest when they lend that money to struggling home-‘owners’. The banks incur no cost on creating this money but receive its full value as well as vast sums in interest, hence record bank profits. HSBC reported a 37% rise in pre-tax profit in 2004 to £9.6bn ($17.6bn) for 2004, the biggest ever profit for a UK bank. This followed on from Barclays profit of £4.6bn. (up 20%) for the same year, and that of the Royal Bank of Scotland, which was £7bn. (up 14%).

The focus on the house-price boom has also deflected attention from the most vulnerable in the housing ‘market’, those who rent their homes. For economists ‘rent’ is always a dirty word, since it means gaining value for nothing and in the case of housing the landlord always appears to be using his excess of assets to exploit another’s need for a home. But the rush by those on middle incomes to move their money from the unreliable stock-market and into property has made their situation much worse. The concept of a buy-to-let mortgage automatically implies that the mortgagee of an extra property will set the rent at a level high enough to cover his or her mortgage and other expenses, which means charging a higher rent than a genuine owner would need to. This, combined with the annihilation via government fiat of the public housing sector and the abolition of rent controls, has caused a massive increase in the cost of rented accommodation. Again the most vulnerable are paying for the increasing wealth of the rich.