The European economy has been financialised, rather than ‘Lisbonised’

By 2010, the European Union was supposed to be the world’s ‘most competitive and dynamic knowledge-based economy’ according to Europe’s grand strategy – the Lisbon Agenda.  It was meant to turn Europe into the world’s hub of innovation and technology-driven growth.

This strategy emerged from the European Council’s Lisbon Summit in 2000 – hence the name – and established a series of targets for the European Union to achieve over the next 10 years. These included:

• Increasing Europe’s GDP growth rate to 3% per year
• Increasing Europe’s employment rate to 70%
• Increasing Europe’s R&D spending to 3% of GDP.

It’s now 2014 and Europe is far from the bright, futuristic, techno-wonderland imagined in the Lisbon Agenda.  So, what happened?

Even before the global financial crisis derailed things completely, the Lisbon Agenda had already been found wanting by the mid-term review held in late 2004, known as the Kok Review.  The subsequent re-launch led to a reduction in the number of targets, but still emphasised the need to transform Europe’s economy in order to ‘save’ (or reform) the European Social Model. As before, we know that even the revised Lisbon Agenda failed to turn Europe into a hub of high-technology industries and innovation.

In light of this failure it’s interesting and important to analyse what the Lisbon Agenda has actually done to the European economy. What I present below is one possible answer to that question drawing from a recent co-authored article.

Europe’s economy changed quite significantly between 2000 and 2008 when, of course, the global financial crisis changed everything.  However, these changes, when compared with the specific Lisbon targets, show that Europe didn’t turn into the world’s ‘most competitive and dynamic knowledge-based economy’:

• Europe’s labour productivity didn’t improve; it actually fell further behind so-called competitors like the USA and Japan.
• GDP growth didn’t reach 3% per year, but stayed around 1.8%.
• The employment rate rose to almost 68%, but didn’t hit the 70% target.

• The new jobs that were created, however, were more likely to be part-time and temporary than new jobs created in the USA and Japan.
• Average pay fell further behind the USA.
• There was no increase in high-tech employment, which remained stagnant.
• R&D spending stayed remained at about 2% of GDP.

What’s most surprising, though, in light of the Lisbon Agenda’s purported goal to stimulate and support high-tech, innovative industries and employment were the following two trends:

• Europe’s fastest growing employment sector was finance, insurance and real estate.
• Europe’s best-paid employees worked in finance as well, not in high-tech sectors.

These trends imply that Europe’s economy had actually financialised during the 2000s, rather than Lisbonised.  In order to understand these changes, it’s important to look at how the Lisbon Agenda was tied to the restructuring and transformation of Europe’s financial sector and financial markets.

The Lisbon Agenda was underpinned by a number of assumptions about what made the American economy so dynamic and innovative. In particular, there was considerable emphasis on the role of venture capital and financial markets as the critical driver of innovation, especially in high-tech sectors. This is evident in how the Lisbon Agenda characterised financial markets:

Efficient and transparent financial markets foster growth and employment by better allocation of capital and reducing its cost. They therefore play an essential role in fuelling new ideas, supporting entrepreneurial culture and promoting access to and use of new technologies … Furthermore, efficient risk capital markets play a major role in innovative high-growth SMEs [small and medium-sized enterprises] and the creation of new and sustainable jobs.

These assumptions legitimated and supported ongoing efforts to restructure Europe’s internal financial markets, especially in terms of promoting the liberalisation and integration of them across borders.  As a result, the Lisbon Agenda helped to promote the Financial Services Action Plan (FSAP, 1999-2004) and the Markets in Financial Instruments Directive (2007).  This transformation of European finance was meant to encourage and support high-tech innovation and high-tech sectors, as exemplified by the European Commission’s position in the 2005 Financial Services Policy white paper:

Financial markets are pivotal for the functioning of modern economies. The more they are integrated, the more efficient the allocation of economic resources and long-run economic performance will be. Completing the single market in financial services is thus a crucial part of the Lisbon economic reform process; and essential for the EU’s global competitiveness.

What happened, then, was that the Lisbon Agenda became tied to the expansion and liberalisation of finance as the dominant sector of the European economy. It has in effect helped to embed a finance-driven regime at the heart of Europe’s economy.  Despite the best-laid plans of the visionaries of a post-industrial future, it seems that it’s not the scientists or inventors who have inherited the earth; it is instead the bankers and their ilk.

About the author

Kean Birch is the author of We Have Never Been Neoliberal: A Manifesto for a Doomed Youth from Zer0 Books.

The free market is indeed under attack, but mostly from the self-serving ideology of the Right and its supporters in big business

During the British Conservative Party conference, one pundit argued on BBC radio that the inheritance tax threshold should urgently be raised in order to stimulate ‘enterprise’, a long-held objective of the party.  This followed George Osborne’s exasperated conference speech, in which he claimed that only the Tories are ‘on the side of enterprise’ – and therefore ‘on the side of the British people’ – and are ‘the party of free markets and of fair markets too’.

Osborne restated his case in a subsequent discussion with the Institute of Directors, imploring its members to counter the critique of trade unions and charities and thereby ‘win the argument for an enterprising, business, low-tax economy that delivers prosperity for the people’.  He noted that, ‘for the first time in my adult life’, these principles are ‘up for grabs’.  Britain has to decide, he said, ‘whether we are a country that is for business, for enterprise, for the free market’.  Why? Because leftist politicians have abandoned the idea that ‘free markets create the taxes to fund public services’.

In neither appearance by the British Chancellor of the Exchequer did he pause to reflect on what, exactly, he means by these concepts.

So, let us consider them here, because they embody some very thorny tensions.

At the outset, it is crucial to note that ‘enterprise’, ‘free markets’ and ‘business’ are very different things. Yet in both public discourse and the governing ideology they are usually conflated.  For the Conservatives (and, unfortunately, much of the Labour Party), the interests of (big) business are generally seen to be synonymous with enterprise and free markets.  However, the opposite is often true.

We can see this clearly if we go back to Econ 101.  As every A-Level Economics student knows, the notion of a free market within neoclassical theory is straightforward.  Some of its primary attributes are: numerous buyers and sellers; perfect information so that firms are aware of excess profits being generated; low barriers to entry so that they can participate freely and generate competition, with uncompetitive firms compelled to exit, thereby bringing down prices; a tendency towards equilibrium of demand and supply so that the market clears; and, crucially, in the long run, there is high downward pressure on profits because competition is so fierce.

Obviously, this is a theoretical abstraction, which is something that our politicians would do well to remember.   As such, it may be theoretically useful.  But does it characterise any market in Britain, even remotely?

The answer is clearly no.  Most markets are far from free, and this is why the governing orthodoxy is increasingly under attack.

Take the banks (an easy target, admittedly).  Are there lots of them?  According to The Bank of England, we now have four major banking groups, down from sixteen in 1960.  Can competitors enter freely?  As the entrepreneur David Fishwick discovered in his fascinating documentary series, this is impossible.  What about creative destruction?  Well, the last time the banks were faced with market discipline, the people of Britain wrote a cheque for £1 trillion so they did not have to suffer the consequences.  And, of course, there is the question of bonuses: if we really believe in market principles, astronomical pay should be viewed as evidence of failure, because it is a sign that the market is not working.  If it were, the hundreds of thousands of people queueing up to work in the City would generate downward pressure on the wages earned there (something Paul Ormerod noted many years ago in his masterpiece, The Death of Economics).

Much the same can be said for every other major economic sector in Britain.  We either have oligopolies, where a few dominant firms destroy competition, or we have statutory monopolies (think of water or the trains) that exist, as I have argued previously (here and here), largely to extract rents from a credulous public.  Andrew Gamble made a similar point on these pages when discussing Labour’s proposed freezing of energy prices: ‘the idea that [the energy market] is free, meaning competitive, is a joke’.  So, despite Osborne’s protestations about being on the people’s side, the contemporary economic settlement actually runs counter to the interests of the British public.

What is even worse is this: not only are markets not free because corporate behemoths have cornered them, but they also do not ‘create the taxes to fund public services’ that the Chancellor claims.  As we have seen repeatedly, big business is adept at avoiding paying its dues to society, offshoring wealth and privatising public assets and profits, whilst socialising losses.  Richard Murphy estimates the tax gap today to be £120 billion, higher than the deficit!

Finally, what of enterprise?  Surely raising the inheritance tax threshold from £325,000 will generate the opposite of enterprise.  Most people with such large assets have simply been fortunate, surfing waves of property price inflation (facilitated by decades of loose monetary policy and yet another failed market in housing, both implicit state subsidies).  Allowing them to pass this freely on to their children would institutionalise the ability of some people to remain wealthy without being enterprising, arguably even disadvantaging those who are enterprising and take real risks for a living.

The Conservatives and the vested interests that support them are no more in favour of free markets than trade unions or charities.  It’s the case rather that the former rarely recognise the market failure that provides them with so much of their wealth and power; the latter, by contrast, are acutely aware of it since they are persistently faced with the deleterious consequences.

If Osborne really believes in free markets and the power of enterprise, he should advocate breaking up the cosy cartels that have rigged so many of them in Britain.  He might also consider dramatically increasing taxes on inherited wealth (unlikely, of course, given that so many members of the Conservative political elite are themselves multi-millionaire heirs and heiresses, possessed of fortunes that have generally been recycled into unproductive rentierism).

In any case, going down this road would present the governing elite with other intellectual problems: for correcting market failure requires, first, an interventionist state and, second, some recognition that certain markets should only exist in the public sector because they will always be natural monopolies (another concept we might rediscover from Econ 101).

Coordinated policy actions are needed to tame dominant corporate power and rent-seeking

The Trade and Development Report 2017 by the United Nations Conference on Trade and Development (UNCTAD) highlights the extent of some of the most worrisome structural changes in the global political economy since the crisis, and should be read as a warning for policymakers and citizens alike. For some time now, there appears to be a narrative presenting stagnant or even falling living standards as the ‘new normal’ – referring to ‘increased global competition’ as the main culprit. Economists usually view increased competition as desirable, since it indicates a healthy state of rivalry amongst competing firms. The often idealised notion of ‘perfect competition’ refers to a market in which every firm acts as a price taker, meaning that consumer prices are low and resources allocated efficiently. The European Union (EU) has attempted to institutionalise this belief in the Single Market, putting competition policy above all other objectives.

Yet desirability of competition only holds if firms are competing on productivity performances, meaning a higher output under conditions of identical input prices of labour and capital. Despite the rhetoric of ‘increased global competition’, most recent empirical evidence, however, points to an alarming concentration of capital on a world-wide scale.

In 2011, a study conducted by ETH Zurich illustrated the dramatic concentration of economic power from even before the peak of the 2008-crisis. Analysing data from 2007, which included records of 30 million economic actors and 43,000 transnational firms, the researchers identified an entangled ‘super-entity’ of 147 firms (mostly financial intermediaries) that controlled 40% of total wealth, whilst the top 737 firms in total controlled over 80%. This was an early warning that our world economy has moved away from competitive markets towards some destructive form of rent-seeking.

The UNCTAD report provides further evidence of rent-seeking not only in the financial, but also in the non-financial sector. Rents, usually defined as income derived from mere ownership and control of assets and/or significant market power, exacerbate the problem of inequality, extract profits from the productive economy instead of contributing to it, and stand against any meritocratic understanding of society. Large corporations extract such rents through a variety of means, such as establishing barriers to entry through intellectual property rights (IPRs), reaping benefits of large scale privatisations, intensive regulatory lobbying, or through fraudulent behaviour such as tax evasion or market manipulation. The latter has been particularly destructive for developing countries, where tax practices by international corporations lead to tax revenue losses which are often estimated to be higher than USD 100 billion. Of course, some economists might argue, this can only happen through government interference in the play of free market forces. Yet, economists tend to neglect the deep social, political, and institutional embeddedness of markets. If public authorities leave it to private firms to rewrite the rules of the game, they will do so in their favour. The political power that inevitably comes with large economic power, cannot be assumed away, as many economists conveniently do.

In this regard, the Trade and Development Report provides figures which suggest there is a need to tame corporate power and rent-seeking behaviour. According to UNCTAD calculations, market capitalisation (the total market value of a firms, calculated as the share price multiplied by the number of shares outstanding in the firm) –  of the top 100 firms in 2015, was 7,000 times that of the average for the bottom 2,000 firms. 20 years ago in 1995, this number was just 31 times higher. The extent of surplus profits, defined as the deviation of excess corporate profits from typical annual profit in a given sector, increased for the top 100 firms from 16% of total profits in 1995-2000 to 40% in 2009-2015 on average, whilst overall surplus profits rose from 4% to 23%. Such figures could have been justified somehow, if employment, productivity, and innovation had increased proportionally. Yet, there is no indication of such improvements whatsoever. In fact, the anaemic and fragile recovery since the crisis rather suggests the opposite.

The damaging effects of abusing market power is not a new issues for policymakers, and large actors such as the EU proudly publicise fines against corporations who break their competition law. However, large fines do not change the underlying systemic problems. Even the most recent $2.7 billion fine against Google pails in the face of its parent company’s revenue (which in Q4 of 2016 alone was $26.06 billion). Fines and existing anti-trust regulations (including their insufficient enforcement) will not fix the system, as best illustrated by the experiences from the financial sector.

So, what needs to be done? I see three main areas of actions to be taken, all of which will be challenging, yet not impossible.

Recognising dysfunctional global economic policies

First, acknowledging the current state of affairs has arisen as a result of dysfunctional global economic policies since the 1980s would be a significant improvement. Too often, policymakers and academics still believe that deregulating markets will automatically increase competition. This is naïve. In fact, the attempt to strip down regulations will only exacerbate the problem if remaining barriers in the fight between giants and dwarfs are removed. Without protection, the latter have no chance to prosper in an environment in which the predatory power of capital prevents fair competition from the start (or where large firms simply acquire any successful smaller firm that could threaten its position). Furthermore, in several sectors, such as pharmaceuticals, transport or ICT, large up-front investments (sunk costs), economies of scale, and network effects naturally prevent competitors from entering the market. Hence, efforts to privatise such industries set the perfect ground for corporate rent-seeking.

Apart from above structural implications, it also appears that some firms that acquired monopolistic power in recent decades simply did so because of superior skills. Google’s algorithm would be an obvious example for this (though some might object that viable alternatives such as Ecosia are out there). If complaining about too little competition in some sectors or markets, the question needs to be asked whether breaking up monopolies would inevitably lead to beneficial effects for society. Would there be any positive outcome of breaking up Google or forcing people to use other search engines, just for the sake of “competition”? I do not think so. However, what I do think is that winding down their power in policymaking can and should be addressed. Closing tax loopholes, providing strong data security laws, and taxing excessive rents at rates close to 100% (beyond a certain percentage threshold of excess profits), would effectively address the problem of economic, and hence political power, as well as rent-seeking behaviour. Overall, therefore, a stronger balance is needed between exploiting/restoring innovative potentials of competition in markets, in which competition can and should be treated as a public good, and setting prudent regulations in others, in which oligopolistic structures inevitably emerge. This more pragmatic approach to regulation should be embedded in context of a democratic polity, broadly leading to what Colin Hay and Anthony Payne termed ‘civic capitalism’.

Revising trade agreements

Secondly, a revision to existing trade agreements is needed, most importantly with regards to IPRs and Investor-State Dispute Settlements (ISDS). Especially in trade agreements between developed countries with extensive legal systems, ISDS serve no purpose apart from handing over power to the corporate sector. Also, if trade itself becomes a euphemism for outsourcing production (through so called ‘regime shopping’), the advantages associated with ‘trade’ need to be confronted again. In the case of China, for instance, former UNCTAD chief economist Heiner Flassbeck estimates that between 60-70% of Chinese exports are exports from western firms that outsourced their production. This has nothing to do with trade anymore, but rather resembles some form of perverted self-service for privileged capital. Taking into consideration falling wage shares not only in developed, but also in developing countries (as recently shown by the IMF), it remains questionable, to what extent such foreign direct investment (FDI) contributes to significant improvements in living standards.

Co-ordinated international policy action

Finally, states and international institutions, such as the EU, United Nations (UN), or the Organisation for Economic Co-operation and Development (OECD), should start coordinating their actions to tame corporate power and rent-seeking. As suggested by UNCTAD in its report, this could include a new global competition observatory and financial register to increase transparency and enable a better monitoring at the international level of transfer pricing and tax evasion. Of course, collective action problems so far prevented much progress in this direction, yet with increased consolidation of corporate power and capital concentration at the top, it will become inevitable for states to cooperate. In times of austerity and drained public finances, further deteriorations of living standards will lead to even more radical and outright protests in developed countries, where trends to demagoguery and nationalism have become obvious. Increased levels of migration from the global South are likely to exacerbate the problem, whilst livelihoods of those left behind will deepen in despair and misery. In this current economic and social environment, winding down corporate and financial power should be at the top of the agenda, in order to brighten the dark clouds over western democracies and southern economic development.

The European economy has been financialised, rather than ‘Lisbonised’

By 2010, the European Union was supposed to be the world’s ‘most competitive and dynamic knowledge-based economy’ according to Europe’s grand strategy – the Lisbon Agenda.  It was meant to turn Europe into the world’s hub of innovation and technology-driven growth.

This strategy emerged from the European Council’s Lisbon Summit in 2000 – hence the name – and established a series of targets for the European Union to achieve over the next 10 years. These included:

• Increasing Europe’s GDP growth rate to 3% per year
• Increasing Europe’s employment rate to 70%
• Increasing Europe’s R&D spending to 3% of GDP.

It’s now 2014 and Europe is far from the bright, futuristic, techno-wonderland imagined in the Lisbon Agenda.  So, what happened?

Even before the global financial crisis derailed things completely, the Lisbon Agenda had already been found wanting by the mid-term review held in late 2004, known as the Kok Review.  The subsequent re-launch led to a reduction in the number of targets, but still emphasised the need to transform Europe’s economy in order to ‘save’ (or reform) the European Social Model. As before, we know that even the revised Lisbon Agenda failed to turn Europe into a hub of high-technology industries and innovation.

In light of this failure it’s interesting and important to analyse what the Lisbon Agenda has actually done to the European economy. What I present below is one possible answer to that question drawing from a recent co-authored article.

Europe’s economy changed quite significantly between 2000 and 2008 when, of course, the global financial crisis changed everything.  However, these changes, when compared with the specific Lisbon targets, show that Europe didn’t turn into the world’s ‘most competitive and dynamic knowledge-based economy’:

• Europe’s labour productivity didn’t improve; it actually fell further behind so-called competitors like the USA and Japan.
• GDP growth didn’t reach 3% per year, but stayed around 1.8%.
• The employment rate rose to almost 68%, but didn’t hit the 70% target.

• The new jobs that were created, however, were more likely to be part-time and temporary than new jobs created in the USA and Japan.
• Average pay fell further behind the USA.
• There was no increase in high-tech employment, which remained stagnant.
• R&D spending stayed remained at about 2% of GDP.

What’s most surprising, though, in light of the Lisbon Agenda’s purported goal to stimulate and support high-tech, innovative industries and employment were the following two trends:

• Europe’s fastest growing employment sector was finance, insurance and real estate.
• Europe’s best-paid employees worked in finance as well, not in high-tech sectors.

These trends imply that Europe’s economy had actually financialised during the 2000s, rather than Lisbonised.  In order to understand these changes, it’s important to look at how the Lisbon Agenda was tied to the restructuring and transformation of Europe’s financial sector and financial markets.

The Lisbon Agenda was underpinned by a number of assumptions about what made the American economy so dynamic and innovative. In particular, there was considerable emphasis on the role of venture capital and financial markets as the critical driver of innovation, especially in high-tech sectors. This is evident in how the Lisbon Agenda characterised financial markets:

Efficient and transparent financial markets foster growth and employment by better allocation of capital and reducing its cost. They therefore play an essential role in fuelling new ideas, supporting entrepreneurial culture and promoting access to and use of new technologies … Furthermore, efficient risk capital markets play a major role in innovative high-growth SMEs [small and medium-sized enterprises] and the creation of new and sustainable jobs.

These assumptions legitimated and supported ongoing efforts to restructure Europe’s internal financial markets, especially in terms of promoting the liberalisation and integration of them across borders.  As a result, the Lisbon Agenda helped to promote the Financial Services Action Plan (FSAP, 1999-2004) and the Markets in Financial Instruments Directive (2007).  This transformation of European finance was meant to encourage and support high-tech innovation and high-tech sectors, as exemplified by the European Commission’s position in the 2005 Financial Services Policy white paper:

Financial markets are pivotal for the functioning of modern economies. The more they are integrated, the more efficient the allocation of economic resources and long-run economic performance will be. Completing the single market in financial services is thus a crucial part of the Lisbon economic reform process; and essential for the EU’s global competitiveness.

What happened, then, was that the Lisbon Agenda became tied to the expansion and liberalisation of finance as the dominant sector of the European economy. It has in effect helped to embed a finance-driven regime at the heart of Europe’s economy.  Despite the best-laid plans of the visionaries of a post-industrial future, it seems that it’s not the scientists or inventors who have inherited the earth; it is instead the bankers and their ilk.

About the author

Kean Birch is the author of We Have Never Been Neoliberal: A Manifesto for a Doomed Youth from Zer0 Books.

The post What happened to the Lisbon Agenda? appeared first on SPERI.

The free market is indeed under attack, but mostly from the self-serving ideology of the Right and its supporters in big business

During the British Conservative Party conference, one pundit argued on BBC radio that the inheritance tax threshold should urgently be raised in order to stimulate ‘enterprise’, a long-held objective of the party.  This followed George Osborne’s exasperated conference speech, in which he claimed that only the Tories are ‘on the side of enterprise’ – and therefore ‘on the side of the British people’ – and are ‘the party of free markets and of fair markets too’.

Osborne restated his case in a subsequent discussion with the Institute of Directors, imploring its members to counter the critique of trade unions and charities and thereby ‘win the argument for an enterprising, business, low-tax economy that delivers prosperity for the people’.  He noted that, ‘for the first time in my adult life’, these principles are ‘up for grabs’.  Britain has to decide, he said, ‘whether we are a country that is for business, for enterprise, for the free market’.  Why? Because leftist politicians have abandoned the idea that ‘free markets create the taxes to fund public services’.

In neither appearance by the British Chancellor of the Exchequer did he pause to reflect on what, exactly, he means by these concepts.

So, let us consider them here, because they embody some very thorny tensions.

At the outset, it is crucial to note that ‘enterprise’, ‘free markets’ and ‘business’ are very different things. Yet in both public discourse and the governing ideology they are usually conflated.  For the Conservatives (and, unfortunately, much of the Labour Party), the interests of (big) business are generally seen to be synonymous with enterprise and free markets.  However, the opposite is often true.

We can see this clearly if we go back to Econ 101.  As every A-Level Economics student knows, the notion of a free market within neoclassical theory is straightforward.  Some of its primary attributes are: numerous buyers and sellers; perfect information so that firms are aware of excess profits being generated; low barriers to entry so that they can participate freely and generate competition, with uncompetitive firms compelled to exit, thereby bringing down prices; a tendency towards equilibrium of demand and supply so that the market clears; and, crucially, in the long run, there is high downward pressure on profits because competition is so fierce.

Obviously, this is a theoretical abstraction, which is something that our politicians would do well to remember.   As such, it may be theoretically useful.  But does it characterise any market in Britain, even remotely?

The answer is clearly no.  Most markets are far from free, and this is why the governing orthodoxy is increasingly under attack.

Take the banks (an easy target, admittedly).  Are there lots of them?  According to The Bank of England, we now have four major banking groups, down from sixteen in 1960.  Can competitors enter freely?  As the entrepreneur David Fishwick discovered in his fascinating documentary series, this is impossible.  What about creative destruction?  Well, the last time the banks were faced with market discipline, the people of Britain wrote a cheque for £1 trillion so they did not have to suffer the consequences.  And, of course, there is the question of bonuses: if we really believe in market principles, astronomical pay should be viewed as evidence of failure, because it is a sign that the market is not working.  If it were, the hundreds of thousands of people queueing up to work in the City would generate downward pressure on the wages earned there (something Paul Ormerod noted many years ago in his masterpiece, The Death of Economics).

Much the same can be said for every other major economic sector in Britain.  We either have oligopolies, where a few dominant firms destroy competition, or we have statutory monopolies (think of water or the trains) that exist, as I have argued previously (here and here), largely to extract rents from a credulous public.  Andrew Gamble made a similar point on these pages when discussing Labour’s proposed freezing of energy prices: ‘the idea that [the energy market] is free, meaning competitive, is a joke’.  So, despite Osborne’s protestations about being on the people’s side, the contemporary economic settlement actually runs counter to the interests of the British public.

What is even worse is this: not only are markets not free because corporate behemoths have cornered them, but they also do not ‘create the taxes to fund public services’ that the Chancellor claims.  As we have seen repeatedly, big business is adept at avoiding paying its dues to society, offshoring wealth and privatising public assets and profits, whilst socialising losses.  Richard Murphy estimates the tax gap today to be £120 billion, higher than the deficit!

Finally, what of enterprise?  Surely raising the inheritance tax threshold from £325,000 will generate the opposite of enterprise.  Most people with such large assets have simply been fortunate, surfing waves of property price inflation (facilitated by decades of loose monetary policy and yet another failed market in housing, both implicit state subsidies).  Allowing them to pass this freely on to their children would institutionalise the ability of some people to remain wealthy without being enterprising, arguably even disadvantaging those who are enterprising and take real risks for a living.

The Conservatives and the vested interests that support them are no more in favour of free markets than trade unions or charities.  It’s the case rather that the former rarely recognise the market failure that provides them with so much of their wealth and power; the latter, by contrast, are acutely aware of it since they are persistently faced with the deleterious consequences.

If Osborne really believes in free markets and the power of enterprise, he should advocate breaking up the cosy cartels that have rigged so many of them in Britain.  He might also consider dramatically increasing taxes on inherited wealth (unlikely, of course, given that so many members of the Conservative political elite are themselves multi-millionaire heirs and heiresses, possessed of fortunes that have generally been recycled into unproductive rentierism).

In any case, going down this road would present the governing elite with other intellectual problems: for correcting market failure requires, first, an interventionist state and, second, some recognition that certain markets should only exist in the public sector because they will always be natural monopolies (another concept we might rediscover from Econ 101).

The post Defending the market? appeared first on SPERI.

Coordinated policy actions are needed to tame dominant corporate power and rent-seeking

The Trade and Development Report 2017 by the United Nations Conference on Trade and Development (UNCTAD) highlights the extent of some of the most worrisome structural changes in the global political economy since the crisis, and should be read as a warning for policymakers and citizens alike. For some time now, there appears to be a narrative presenting stagnant or even falling living standards as the ‘new normal’ – referring to ‘increased global competition’ as the main culprit. Economists usually view increased competition as desirable, since it indicates a healthy state of rivalry amongst competing firms. The often idealised notion of ‘perfect competition’ refers to a market in which every firm acts as a price taker, meaning that consumer prices are low and resources allocated efficiently. The European Union (EU) has attempted to institutionalise this belief in the Single Market, putting competition policy above all other objectives.

Yet desirability of competition only holds if firms are competing on productivity performances, meaning a higher output under conditions of identical input prices of labour and capital. Despite the rhetoric of ‘increased global competition’, most recent empirical evidence, however, points to an alarming concentration of capital on a world-wide scale.

In 2011, a study conducted by ETH Zurich illustrated the dramatic concentration of economic power from even before the peak of the 2008-crisis. Analysing data from 2007, which included records of 30 million economic actors and 43,000 transnational firms, the researchers identified an entangled ‘super-entity’ of 147 firms (mostly financial intermediaries) that controlled 40% of total wealth, whilst the top 737 firms in total controlled over 80%. This was an early warning that our world economy has moved away from competitive markets towards some destructive form of rent-seeking.

The UNCTAD report provides further evidence of rent-seeking not only in the financial, but also in the non-financial sector. Rents, usually defined as income derived from mere ownership and control of assets and/or significant market power, exacerbate the problem of inequality, extract profits from the productive economy instead of contributing to it, and stand against any meritocratic understanding of society. Large corporations extract such rents through a variety of means, such as establishing barriers to entry through intellectual property rights (IPRs), reaping benefits of large scale privatisations, intensive regulatory lobbying, or through fraudulent behaviour such as tax evasion or market manipulation. The latter has been particularly destructive for developing countries, where tax practices by international corporations lead to tax revenue losses which are often estimated to be higher than USD 100 billion. Of course, some economists might argue, this can only happen through government interference in the play of free market forces. Yet, economists tend to neglect the deep social, political, and institutional embeddedness of markets. If public authorities leave it to private firms to rewrite the rules of the game, they will do so in their favour. The political power that inevitably comes with large economic power, cannot be assumed away, as many economists conveniently do.

In this regard, the Trade and Development Report provides figures which suggest there is a need to tame corporate power and rent-seeking behaviour. According to UNCTAD calculations, market capitalisation (the total market value of a firms, calculated as the share price multiplied by the number of shares outstanding in the firm) –  of the top 100 firms in 2015, was 7,000 times that of the average for the bottom 2,000 firms. 20 years ago in 1995, this number was just 31 times higher. The extent of surplus profits, defined as the deviation of excess corporate profits from typical annual profit in a given sector, increased for the top 100 firms from 16% of total profits in 1995-2000 to 40% in 2009-2015 on average, whilst overall surplus profits rose from 4% to 23%. Such figures could have been justified somehow, if employment, productivity, and innovation had increased proportionally. Yet, there is no indication of such improvements whatsoever. In fact, the anaemic and fragile recovery since the crisis rather suggests the opposite.

The damaging effects of abusing market power is not a new issues for policymakers, and large actors such as the EU proudly publicise fines against corporations who break their competition law. However, large fines do not change the underlying systemic problems. Even the most recent $2.7 billion fine against Google pails in the face of its parent company’s revenue (which in Q4 of 2016 alone was $26.06 billion). Fines and existing anti-trust regulations (including their insufficient enforcement) will not fix the system, as best illustrated by the experiences from the financial sector.

So, what needs to be done? I see three main areas of actions to be taken, all of which will be challenging, yet not impossible.

Recognising dysfunctional global economic policies

First, acknowledging the current state of affairs has arisen as a result of dysfunctional global economic policies since the 1980s would be a significant improvement. Too often, policymakers and academics still believe that deregulating markets will automatically increase competition. This is naïve. In fact, the attempt to strip down regulations will only exacerbate the problem if remaining barriers in the fight between giants and dwarfs are removed. Without protection, the latter have no chance to prosper in an environment in which the predatory power of capital prevents fair competition from the start (or where large firms simply acquire any successful smaller firm that could threaten its position). Furthermore, in several sectors, such as pharmaceuticals, transport or ICT, large up-front investments (sunk costs), economies of scale, and network effects naturally prevent competitors from entering the market. Hence, efforts to privatise such industries set the perfect ground for corporate rent-seeking.

Apart from above structural implications, it also appears that some firms that acquired monopolistic power in recent decades simply did so because of superior skills. Google’s algorithm would be an obvious example for this (though some might object that viable alternatives such as Ecosia are out there). If complaining about too little competition in some sectors or markets, the question needs to be asked whether breaking up monopolies would inevitably lead to beneficial effects for society. Would there be any positive outcome of breaking up Google or forcing people to use other search engines, just for the sake of “competition”? I do not think so. However, what I do think is that winding down their power in policymaking can and should be addressed. Closing tax loopholes, providing strong data security laws, and taxing excessive rents at rates close to 100% (beyond a certain percentage threshold of excess profits), would effectively address the problem of economic, and hence political power, as well as rent-seeking behaviour. Overall, therefore, a stronger balance is needed between exploiting/restoring innovative potentials of competition in markets, in which competition can and should be treated as a public good, and setting prudent regulations in others, in which oligopolistic structures inevitably emerge. This more pragmatic approach to regulation should be embedded in context of a democratic polity, broadly leading to what Colin Hay and Anthony Payne termed ‘Civic Capitalism’.

Revising trade agreements

Secondly, a revision to existing trade agreements is needed, most importantly with regards to IPRs and Investor-State Dispute Settlements (ISDS). Especially in trade agreements between developed countries with extensive legal systems, ISDS serve no purpose apart from handing over power to the corporate sector. Also, if trade itself becomes a euphemism for outsourcing production (through so called ‘regime shopping’), the advantages associated with ‘trade’ need to be confronted again. In the case of China, for instance, former UNCTAD chief economist Heiner Flassbeck estimates that between 60-70% of Chinese exports are exports from western firms that outsourced their production. This has nothing to do with trade anymore, but rather resembles some form of perverted self-service for privileged capital. Taking into consideration falling wage shares not only in developed, but also in developing countries (as recently shown by the IMF), it remains questionable, to what extent such foreign direct investment (FDI) contributes to significant improvements in living standards.

Co-ordinated international policy action

Finally, states and international institutions, such as the EU, United Nations (UN), or the Organisation for Economic Co-operation and Development (OECD), should start coordinating their actions to tame corporate power and rent-seeking. As suggested by UNCTAD in its report, this could include a new global competition observatory and financial register to increase transparency and enable a better monitoring at the international level of transfer pricing and tax evasion. Of course, collective action problems so far prevented much progress in this direction, yet with increased consolidation of corporate power and capital concentration at the top, it will become inevitable for states to cooperate. In times of austerity and drained public finances, further deteriorations of living standards will lead to even more radical and outright protests in developed countries, where trends to demagoguery and nationalism have become obvious. Increased levels of migration from the global South are likely to exacerbate the problem, whilst livelihoods of those left behind will deepen in despair and misery. In this current economic and social environment, winding down corporate and financial power should be at the top of the agenda, in order to brighten the dark clouds over western democracies and southern economic development.

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