‘Quarterly capitalism’ is short-term, myopic, greedy and dysfunctional

Will Hutton in The Guardian


It has been obvious for years that British capitalism is profoundly dysfunctional. In 1970, £10 of every £100 of profit was distributed to shareholders: today, under intense pressure from short-term owners, companies pay out £70. Investment, innovation and productivity have slumped. Few new companies grow to any significant size before they are taken over.

Exports have stagnated. The current account deficit is at record proportions. The purpose of companies now is not to do great things, solve great problems or scale up great solutions –why capitalism is potentially the best economic system – it is to become payolas for their disengaged owners and pawns in the next big deal or takeover. Not only the British economy suffers – this process has become the major driver of rising inequality, low pay and insecurity in the workplace as management teams are forced to treat workers as costly commodities rather than allies in business building.
Regular readers of this column will be familiar with the refrain, and the stubborn resistance from the British mainstream. There is absolutely nothing wrong at all with the British private sector, runs the Conservative argument: to the extent the British economy does have problems they are rooted entirely in taxation, regulation, unions and government. But in a week when the Financial Times – a great British asset and embodiment of the best of our journalism – has been sold to Nikkei for no better reason than to support Pearson’s short-term share price, powerful and public criticism of the way British capitalism operates has come from an unexpected quarter.

Last year, the governor of the Bank of England, Mark Carney, called on firms to have a greater “sense of their responsibilities for the system”, in particular the social contract on which market capitalism’s long-term dynamism depends. On Friday’s Newsnight, the chief economist of the Bank of England, Andy Haldane, built on the governor’s concerns. He began with the seven-fold increase in the proportion of profit distributed to shareholders in dividends and bought-back shares over the last 45 years, which he said necessarily “leaves less for investment”. The explanation was simple: British (and indeed American) company law “puts the shareholder at front and centre. It puts the short-term interest of shareholders in a position of primacy when it comes to running the firm.” He thought company law that placed shareholders on a more equal footing with other stakeholders – workers, customers, clients – would work better. Dare I say it – stakeholder capitalism?

He damned the way the public limited company has developed. “The public limited company model has served the world well from a growth perspective. But you can always have too much of a good thing. The nature of shareholding today is fundamentally different than what it was a generation ago. The average share was held by the average shareholder, just after the war, for around six years. Today, that average share is held by the average shareholder for less than six months. Of course, many shareholders these days are holding shares for less than a second.”

In New York, at almost exactly the same time Newsnight was transmitting its interview with Andrew Haldane, Hillary Clinton was speaking from the same script, attacking what she called “quarterly capitalism”. “American business needs to break free from the tyranny of today’s earning report so they can do what they do best: innovate, invest and build tomorrow’s prosperity,” the Democratic presidential front runner declared. “It’s time to start measuring value in terms of years – or the next decade – not just next quarter.” She does not want to reinvent the public limited company, but she proposed the most far-reaching tax reforms of any Democrat presidential nominee to change the incentives for shareholders and executives alike. In American terms this is a revolution.

It is long overdue and the argument is beginning to get traction in the US. Free-market apologists insist that the more cash is handed back to shareholders, then the more they have to invest in innovation. The stock market is doing its job: promoting efficiency. The trouble is that everyone can see it’s 100% wrong. The market is hopelessly inefficient, greedy and myopic. When Larry Page and Sergey Brin floated Google, they took care to insulate the company from “quarterly capitalism”: they accorded their shares as Google’s founders 10 times the voting rights in order to protect their capacity to innovate from the stock market – what they considered Google’s real business purpose.

From robots to self-driving cars, from virtual reality glasses to investigating artificial intelligence, Google is now one of the most innovative firms on Earth. Meanwhile the typical US Plc, like its counterpart in Britain, is hunkering down, investing and innovating ever less and distributing more cash to shareholders for the reasons Haldane explains. Far from market efficiency, the whole system is undermining the legitimacy of capitalism.

But bit by bit influential voices such as Haldane’s are having the nerve to declare the Anglo-American system does not work. A rich collection of reflections and commentary edited by Diane Carney (Mark Carney’s wife) was published after London’s Inclusive Capitalism conference last month. Yet, except for former business secretary Vince Cable, no leading British politician has entered the lists. It will be intriguing how George Osborne reacts: one instinct will be to sack Carney and Haldane, as he has done Martin Wheatley, the head of the Financial Conduct Authority, for being too tough on the City. Another will be to co-opt the argument for the one nation Tory cause before the Labour party does.

He needn’t worry too much. One of the reasons that Tony Blair dropped his advocacy for stakeholder capitalism back in 1996 after the publication of The State We’re In was because too many leftwing Labour MPs took the Jeremy Corbyn line that the party’s mission was to socialise capitalism rather than reform it, while too many rightwing Labour MPs such as Peter Mandelson and Alistair Darling were terrified of upsetting business, as today, it seems, is Liz Kendall. He had zero internal political support, business was distrustful and the Tories were accusing him of returning to 1970s corporatism. Today the Bank of England and the likely next US president are supporters. Will one of the contenders for the Labour leadership have the courage to make the case? So far, they have all been mute. If Andy Haldane has done nothing else, he will have dramatised the poverty of today’s thinking about capitalism – in both main political parties.

Osborne economics is not an invincible force of nature

Although many appear resigned to life under this dysfunctional capitalism, there is a way to make the system less inhuman

• 
• • John Harris
  • The Guardian, Friday 16 August 2013 20.30 BST

'As the followers of Thatcher and Reagan intended, everything has become individualised.' Photograph: AP

Britain is on the move, says George Osborne, from "rescue to recovery". But not if you're young: this week's unemployment figures showed joblessness among the 16-24s rising to 973,000. Not if you're the north-east, the north-west or Wales, where the out-of-work numbers have also risen. And if you've been on the dole for more than two years, heaven help you: despite the millions blown on the work programme and Osborne's alleged green shoots, the numbers of people suffering long-term unemployment jumped by 10,000 to 474,000, the highest figure in 16 years.

Some recovery, then. At the same time there are even more signs of the ongoing pinch affecting those people once thought to be safe, in the aspirational middle. In the Economist this week there is a very incisive graph plotting median real earnings and the retail price index. It shows the former keeping pace with the latter until 2005, when they began to split. From 2009, moreover, the earnings line began to drop, while prices carried on rising: the UK, we now know, has one of the worst recent records on real wages of any country in Europe (worse even than Spain, which is saying something).

"The plate tectonics of the labour market offer the best explanation for this," said the accompanying text. "With a declining industrial base, the British economy needs fewer mid-level skilled workers. Most new posts are low- or high-paying ones … Many in the middle lack the skills to move up and are pushed towards the low-wage end of the economy. Machinists and tradesmen become cashiers and call-centre workers." They do, and when that happens, they are ushered into that fragile part of the labour force we now know as the Precariat, where zero-hours contracts are becoming the norm, and a return visit to the jobcentre is never far away.

Meanwhile, the cost of living continues to soar, not least in the parts of the country held up to be the recovery's heartlands. In the last year, food prices have risen four times as fast as average pay. There are now plans to make water meters compulsory for people served by nine of the UK's water companies, which could lead to some family bills doubling. This week also brought news of more increases to train fares, some of which could go up by as much as 9%.

And who will that hit? Among others, commuters who have often fled from London's impossible house prices – which, according to this week's headlines, have lately risen by 8.1%, the biggest jump in two-and-a-half years. Entirely unsurprisingly, the share of Londoners renting on the private market is up from 18% in 2011 to 25% today. And an increase in demand colliding with flatlining supply means only one thing: the average share of income devoted to rental costs is now a jaw-dropping 27%, up from 21% a decade ago.

This is what a completely dysfunctional version of capitalism looks like. The crudest, most stupid, completely self-destructive formula for maximising profits – cutting wages while pushing up prices – is extended over the entire economy. An ever-increasing dependence on the service sector drives out skilled jobs in the middle, and offers no hope to those places which are still a byword for the end of heavy industry and manufacturing. The nation's capital becomes the playground of the people at the very top, serviced by young people who can live cheaply(ish), and people from overseas who are just about able to cope, on the basis that they might eventually go home. Housing, surely any worker's most basic need, is in permanent crisis. And for a lot of people trying to keep pace with forces that are out of anyone's control, there is only one option: residence in what the economist Ann Pettifor this week called Wongaland, where people borrow unsustainably while saving absolutely nothing (see right).

And so to an interesting question: what are the politics of all this? On my office shelves, there are two books whose titles – both of which include the word "great"– neatly encapsulate the most important developments of the last 30 years. One, titled The Great Divestiture, is by Italian economist Massimo Florio. It chronicles the revolution that took industries and services once delivered by the state into the private sector, and thereby relieved politicians of accountability for their machinations, not least when the monopoly capitalists in charge started to endlessly push up prices. The other is The Great Risk Shift, by US academic Jacob S Hacker, a very prescient look at how employers, with the complicity of governments, have spent the past few decades shoveling responsibilities on to the narrow shoulders of their workers.

From the perspective of the individual the consequences look bleak. The government cannot much help people; and the companies and corporations that depend on their employees' labour offer increasingly little in return. As the followers of Thatcher and Reagan intended, everything has become individualised, to the point that even the pump-priming of a dormant economy is now a matter of debt-driven consumption, as the summer's unexpected surge in spending suggests. Political discourse has inevitably shrunk: we mostly hear politicians talking about "welfare" and immigration not just because of the political dividends they are said to produce, but because they represent some of the only things related to economic wellbeing that they think they can actually affect (and in the case of immigration, that's a fantasy anyway). Talk to the young people who are at the sharp end of the modern economy, and where we might be headed becomes clear: to a lot of them, the most basic features of the economy are like the weather: thoroughly depoliticised, and to be fatalistically accepted.

Yet perhaps something is stirring. This week's big thing has been the carpeting – and egging – of Ed Miliband. Certainly, Labour should be doing much better. But its people have been talking for quite a while about a cost of living crisis. Their proposed solutions still look flimsy, but that is perhaps down to the fact that when faced with a hegemonic economic model – one, moreover, in which they have long acquiesced – most Labour people understandably do not even know where to start. Not that long ago, it looked like their leader might: he was at least talking about the squeezed middle, responsible capitalism and Hacker's ideas about "pre-distribution". If it's not too late, they are themes worth reprising – though whether people might be perplexed by the spectacle of a politician taking issue with things they see as invincible forces of nature is a very interesting question.

As we move into the succession of zombie jamborees that is conference season, one other thought occurs. Humankind long ago invented things that could at least retilt the balance between capital and labour, and ease some of modern life's most inhuman aspects. We called them trade unions. Most Tories would rather they did not exist: now, even people in the Labour party want to push them even further to the margins. If they do, they will be adding to the problem, when the increasingly poor, huddled masses they represent could really do with some solutions. To turn Osborne on his head, recovery alone is not the issue: rescue is what people need.

Ignore the hype: Britain's 'recovery' is a fantasy that hides our weakness

A tiny rise in GDP is nothing to celebrate while the UK economy is as dysfunctional as ever

• 
• • Will Hutton
  • The Observer, Sunday 21 July 2013

A rise in GDP will be celebrated as proof of George Osborne's wisdom – but the dysfunctions of the UK economy are still firmly in place. Photograph: Rex Features

Next Thursday we will get a further taste of what it is like living in an one-party state. The estimate for GDP growth in the second quarter will be published – predicted to rise between 0.2% and 0.3%, confirmation that a triple dip recession has been avoided and the economy is on the mend. Expect an over-the-top reaction from our centre-right media.

George Osborne's sagacity will be lauded to the skies, and scorn poured on all those who have criticised economic policy or worried about Britain's economic structures. It will be another chance to swing opinion behind the Conservative party – all the more effective because the coverage will reproduce the co-ordination of a government propaganda machine without any formal instruction being given.

Economies are like corks. They have inbuilt upward momentum driven by productivity and population growth. That momentum can be reversed for 18 months or two years in a typical recession when investment and consumption have run ahead of themselves, and of necessity fall back. But like a cork the economy will eventually bounce back to the surface – where it would have been had the recession not happened.

What we are witnessing is that natural bounce – but very weak, extraordinarily slow and no prospect of any substantive follow-through once the economy returns to 2008 levels of output some time next year. What usually takes no more than two years will have taken six – the slowest recovery for more than a century. Exports are effectively unchanged, even to faster growing non-EU countries, despite a 25% devaluation. Company investment has collapsed by 34%. Real wages are 9% below their peak – they rose in every other postwar recession – and are set to fall further. The profound dysfunctions of the British economy, despite wild claims otherwise, remain firmly in place.

What is so dismaying is that hopes that investment and exports would lead recovery have been completely dashed. Instead the British are returning to what they are best at – running down their savings and borrowing enormous mortgages, partially guaranteed by the state under the Help to Buy scheme, to force up house prices.

I did not join the chorus of criticism of Help to Buy when it was launched: it was a clever, time-limited Keynesian use of the public balance sheet to support a distressed part of the economy, and no recovery is conceivable without some rise in house prices rekindling animal spirits and lifting confidence. What was wrong was: to superimpose it upon a market that privileges buyers who want to let rather than own; the Treasury vetoing an extension to lending to business in general; and not recognising that the same Keynesian thinking is needed across the board.

What takes me aback is the determined way the national conversation is skewed towards the inadequacies of the public sector, however concerning – avoidable deaths in the NHS or extravagant pay-offs for BBC executives – without any parallel focus on the inadequacies of the private. The Coronation festival for the Queen was meant to be a celebration of British innovation. Yet there were only three large company pavilions in the Palace gardens – GSK, Bentley and Jaguar Land Rover (owned by the Indian Tata) – and a host of tiny companies dealing in niche luxury goods. The contrast with the industrial and innovative power that could have been mobilised when she began her reign 60 years ago is painful.

Moreover, back then, economic power would have been drawn more equally across the country. There were certainly regional imbalances in the 1950s but compared with today they were trivial. Outside London and the south-east there was no private sector job creation in the decade to 2008. Today these regions possess little more than what Karel Williams of the Centre for Research on Socio-Cultural Change calls a "foundation economy" – the structures that deliver the likes of electricity, food and hospital care but with virtually no private sector entrepreneurial activity. The average size of a British-owned manufacturing company in the regions, he says, is 14 – subcontracting workshops and downmarket complements to those niche luxury companies.

The problem is too few of either develop into companies of any scale. Their owners are too transactional, unsupported or plain greedy, and the financial system that supports them too fickle, disengaged and commission-hungry. Almost no new major British companies have emerged over the past 20 years while dozens that have taken decades to grow have been assimilated into global multinationals, their strategies dictated outside Britain. Some, of course, make a vital contribution to our economy. But this is no basis on which to launch anything but a fitful recovery and weak investment. Yet no fundamental questions are asked.

Instead the Conservative party, and the commentators who support it, live in Fantasy UK, in which the problem is regulation and the EU. The first initiative of David Cameron's new business team in Downing Street has been to ask British businesses to identify those EU regulations most hindering British growth. I conducted my own straw poll in London's Tech City. Brussels and the EU were simply not on the radar. Instead the list included the financial system's aversion to risk, immigration controls keeping out talented foreigners, and BT's inability to provide high-speed broadband.

The debate has to change. Companies in Britain – domestic or foreign-owned – need the prospect of a sustained growth of demand. The governor of the Bank of England, Mark Carney, hinted at establishing a target for growth and inflation combined – nominal GDP – but was beaten back by the austerity defenders. He should stick to his guns. We have to create ownership and financing structures – scaling up the proposed Business Bank fast — that permit companies to grow and stay owned, as far as possible, in Britain. We have to get fundamentally serious about infrastructure. The LSE growth commission's proposal for an interlocking system of infrastructure strategy board, infrastructure bank and independent planning commission is a good starting point. The housing market needs root and branch reform. Above all, there has to be a sense of mobilisation.

But instead we have nonsense babble about the EU being all that is holding us back; huge prizes for essays on EU exit as a focus for intellectual effort (courtesy of the Institution of Economic Affairs); and endless nostalgic festivals and celebrations about world wars one and two. Welcome to Fantasy UK.