A level Economics: UK's inflation is due to rise in corporate profit-taking

Figures give fuel to claims that profiteering has played a big part in the UK’s high levels of inflation writes Phillip Inman in The Guardian 


British companies have boosted their profitability, according to the latest official figures, insulating themselves against cost pressures and fuelling claims that profiteering has played a big part in the UK’s inflation story.

In a week when Joe Biden said he was only winning the war against inflation in the US because corporate profits were declining, figures released on Thursday by the Office for National Statistics showed UK business profits increased in the first quarter of 2023.

Manufacturing firms increased their net rate of return to 8.8% in the first quarter, from 8.4% in the fourth quarter of 2022. Services companies, which account for about three-quarters of economic activity, increased their net rate of return to 16.1%, an increase of 0.4 percentage points from the last three months of 2022.

The rate of return is a measure of profitability that shows the margin between operating profits and the cost of assets used to generate those profits. Unions have accused firms of putting up prices by more than the rise in their costs, a trend nicknamed greedflation.

It is a hot topic because the Bank of England has consistently said the small ups and downs registered by the ONS in its calculations of corporate profitability show little evidence of profiteering. It has repeatedly urged workers to restrain wage demands and played down the need to tell companies to restrain price rises.

On the other side of the argument stand a growing number of academics, thinktanks and unions.

The TUC general secretary, Paul Novak, said he was shocked by the ONS figures, which he claimed showed “a culture of entitlement is alive and well” among the large corporations that he said were mostly to blame for higher prices.

Sharon Graham, the head of the Unite union, arguably credited with doing more than anyone in the UK to promote research into corporate profits, said companies were exploiting a crisis.

Philip King, a former government adviser and small business commissioner until 2021, said many small and medium-sized companies would wonder what the fuss was about. He said it was clear from the figures that “companies are maintaining their profitability despite the difficult trading conditions they have faced”, and it was large businesses that would be to blame. These “typically have more flexibility when it comes to increasing prices and cutting costs”, he said.

The International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD) and many leading academics say steady profit margins show businesses are doing better than any other participants in the economy, in particular workers.

An OECD report last month found average profit margins in the UK increased by almost a quarter between the end of 2019 and early 2023. Stefano Scarpetta, a director of the OECD, said it was “somewhat unusual that in a period of slowdown in economic activity we see profit picking up”.

George Dibb, an economist at the IPPR thinktank, said the Bank of England was “plain wrong” to consider steady profit margins a non-story.

On closer inspection the headline average is if anything worse than it first appears. Overall, the net rate of return for all non-financial businesses – a measure that excludes banks and insurance companies but includes North Sea oil and gas firms – increased from 9.8% in the last quarter of 2022 to 9.9% in the first quarter. That shows margins remained consistent through one of the worst winters for cost of living rises and cuts in disposable incomes for several generations.

However, excluding North Sea oil and gas firms, which showed a slump in profitability in the first quarter as energy prices fell from their peaks, dragging down the average, the level of profitability for most firms jumped from 9.6% in the last quarter of 2022 to 10.6% in the first quarter of 2023.

Richard Murphy, a professor of accounting at the University of Sheffield, said low wage rises in most sectors outside financial services meant large companies were probably doing much better than smaller ones.

Murphy said half of all UK company profits were generated by small and medium-sized companies and the other half by a few thousand larger firms.

Another interest rate rise is expected next month and the main reason given by the Bank will be that wages are rising too quickly, not that profits are rising too quickly. It is a stance that is going to become increasingly contentious.

How to treat the Fraud Epidemic!

Kelly Richmond Pope in The Economist

It marks a spectacular fall from grace for a one-time Silicon Valley star. This week a court in California ruled that, Hail Mary appeals notwithstanding, Elizabeth Holmes must report to prison on May 30th to begin serving an 11-year sentence for fraud. Theranos, the startup Ms Holmes had founded in 2003, was worth $9bn at its peak but crashed after its much-vaunted blood-testing technology was shown not to work, and she ended up in the dock for deceiving investors.

Theranos is one of a long list of financial scandals that have made headlines in recent years. Also among these are the frauds at Wirecard, a German payments processor, and Abraaj, a Dubai-based private-equity firm, various crypto-heists, and a bonanza of misappropriation of government handouts to businesses during the covid-19 pandemic. So many frauds are there, and so big are the biggest, that pilfering a billion dollars does not guarantee a global headline. Chances are you haven’t heard of Outcome Health, a Chicago-based health-tech firm whose former ceo and president were recently convicted of defrauding clients, lenders and investors of roughly that amount of money.

Beneath the blockbuster frauds in the billions of dollars is an alarmingly long tail of smaller financial scams. Taken together, these add up to a huge global problem. Research by Crowe, a financial-advisory firm, and the University of Portsmouth, in England, suggests that fraud costs businesses and individuals across the world more than $5trn each year. That is nearly 60% of what the world spends annually on health care.

The drivers of fraud are many and complex. Sometimes it is down to pure greed. Sometimes it begins with a relatively innocuous attempt to paper over a small financial crack but spirals when that initial effort fails; some believe that’s how it started with Bernie Madoff’s giant Ponzi scheme. Market pressure and a desire to exceed analysts’ expectations can also play a part: after the global financial crisis of 2007-09, ge was fined $50m for artificially smoothing its profits to keep investors sweet. Accounting ruses like this, which fall in a grey area, are more common than outright fraud. Among tech startups there is even an established term for manipulating the numbers to buy you time to navigate the rocky road to financial respectability: “fake it till you make it.”

Fraud is an all-weather pursuit. Economic booms help fraudsters conceal creative accounting, such as exaggerated revenues. Recessions expose some of this wrongdoing, but they also spawn fresh shenanigans. As funding dries up, some owners and managers cook the books to stay in business. When survival is at stake, the line between what is acceptable and unacceptable when disclosing information or booking sales can become blurred.

World events can stoke fraud, too. At the height of the pandemic, an estimated $80bn of American taxpayer money handed out under the Paycheck Protection Programme, set up to assist struggling businesses, was stolen by fraudsters. The covid-induced increase in remote working has created new opportunities for miscreants. The 2022 kpmg Fraud Outlook concludes that the surge in working from home has reduced businesses’ ability to monitor employees’ behaviour. Geopolitics affects fraud, too. nato countries experienced four times as many email-phishing attacks from Russia in 2022 as they did in 2020. Cybercrimes such as ransomware attacks have already transferred a staggering amount of wealth to illicit actors. The costs to businesses range from the theft of data, intellectual property and money to post-attack disruption, lost productivity and systems upgrades.

It is panglossian to think fraud can be eliminated, but more can be done to reduce it. Corporate boards and investors need to ask more questions. Investors are often too quick to take comfort from the presence of big names on the list of owners and directors. Some were clearly wowed by Theranos’s star-studded board, whose members included two former us secretaries of state and the ex-boss of Wells Fargo, a big bank.

Regulators need to be more sceptical, too. America’s Securities and Exchange Commission brushed aside a detailed and devastating analysis of Madoff’s business provided by a concerned fund manager, Harry Markopolos. Germany’s financial-markets regulator was similarly dismissive of the short-sellers and journalists who called out Wirecard.

The most effective change would be to do more to encourage whistleblowers. Falsified financial statements must start with someone who notices fraudulent acts. When fraud happens, many people ask “Where were the auditors?”. But the question should be “Where were the whistleblowers?”

As important as sceptical investors, regulators and journalists can be, much fraud would be undetectable without someone on the inside willing to spill the beans. Research shows that more than 40% of frauds are discovered by a whistleblower. The Wirecard scandal came to light largely because of the bravery of Pav Gill, one of the company’s lawyers, who went to the press with his concerns. The Theranos fraud was brought to the attention of the authorities and the Wall Street Journal by whistleblowing employees (one of whom was the grandson of a former political bigwig on the board).

Too often, companies seek to silence whistleblowers, or portray them as mad, bad or both: Wirecard, for instance, fought back ferociously against Mr Gill’s allegations and the journalists who investigated them. Organisations need to create safe spaces where employees can voice their concerns about wrongdoing. Internal reporting channels need to be robust, and employees educated on how to use them. Creating an environment where whistleblowers are celebrated, not vilified, is critical. Companies should worry more about anyone who can circumvent the controls, such as senior leaders or star employees, than about those inclined to raise concerns.

Governments, too, could do more. Protections for whistleblowers have been recognised as part of international law since 2003 when the United Nations adopted the Convention Against Corruption, and this has since been ratified by 137 countries. In reality, legal protections are patchy. They are strongest in America, which offers bounties to whistleblowers who provide information that leads to fines or imprisonment. In much of Europe, and elsewhere, the law is still too soft on those who muzzle or retaliate against alarm-ringers.

Fraud can be reduced. But first we must better understand who commits it, educate people on how to report it, and then ensure that policies protect those who choose to come forward. Until we do, financial crime will remain a multi-trillion-dollar scourge.

How economics became a religion

John Rapley in The Guardian



Although Britain has an established church, few of us today pay it much mind. We follow an even more powerful religion, around which we have oriented our lives: economics. Think about it. Economics offers a comprehensive doctrine with a moral code promising adherents salvation in this world; an ideology so compelling that the faithful remake whole societies to conform to its demands. It has its gnostics, mystics and magicians who conjure money out of thin air, using spells such as “derivative” or “structured investment vehicle”. And, like the old religions it has displaced, it has its prophets, reformists, moralists and above all, its high priests who uphold orthodoxy in the face of heresy.

Over time, successive economists slid into the role we had removed from the churchmen: giving us guidance on how to reach a promised land of material abundance and endless contentment. For a long time, they seemed to deliver on that promise, succeeding in a way few other religions had ever done, our incomes rising thousands of times over and delivering a cornucopia bursting with new inventions, cures and delights.

This was our heaven, and richly did we reward the economic priesthood, with status, wealth and power to shape our societies according to their vision. At the end of the 20th century, amid an economic boom that saw the western economies become richer than humanity had ever known, economics seemed to have conquered the globe. With nearly every country on the planet adhering to the same free-market playbook, and with university students flocking to do degrees in the subject, economics seemed to be attaining the goal that had eluded every other religious doctrine in history: converting the entire planet to its creed.

Yet if history teaches anything, it’s that whenever economists feel certain that they have found the holy grail of endless peace and prosperity, the end of the present regime is nigh. On the eve of the 1929 Wall Street crash, the American economist Irving Fisher advised people to go out and buy shares; in the 1960s, Keynesian economists said there would never be another recession because they had perfected the tools of demand management.

The 2008 crash was no different. Five years earlier, on 4 January 2003, the Nobel laureate Robert Lucas had delivered a triumphal presidential address to the American Economics Association. Reminding his colleagues that macroeconomics had been born in the depression precisely to try to prevent another such disaster ever recurring, he declared that he and his colleagues had reached their own end of history: “Macroeconomics in this original sense has succeeded,” he instructed the conclave. “Its central problem of depression prevention has been solved.”

No sooner do we persuade ourselves that the economic priesthood has finally broken the old curse than it comes back to haunt us all: pride always goes before a fall. Since the crash of 2008, most of us have watched our living standards decline. Meanwhile, the priesthood seemed to withdraw to the cloisters, bickering over who got it wrong. Not surprisingly, our faith in the “experts” has dissipated.

Hubris, never a particularly good thing, can be especially dangerous in economics, because its scholars don’t just observe the laws of nature; they help make them. If the government, guided by its priesthood, changes the incentive-structure of society to align with the assumption that people behave selfishly, for instance, then lo and behold, people will start to do just that. They are rewarded for doing so and penalised for doing otherwise. If you are educated to believe greed is good, then you will be more likely to live accordingly.

The hubris in economics came not from a moral failing among economists, but from a false conviction: the belief that theirs was a science. It neither is nor can be one, and has always operated more like a church. You just have to look at its history to realise that.

The American Economic Association, to which Robert Lucas gave his address, was created in 1885, just when economics was starting to define itself as a distinct discipline. At its first meeting, the association’s founders proposed a platform that declared: “The conflict of labour and capital has brought to the front a vast number of social problems whose solution is impossible without the united efforts of church, state and science.” It would be a long path from that beginning to the market evangelism of recent decades.

Yet even at that time, such social activism provoked controversy. One of the AEA’s founders, Henry Carter Adams, subsequently delivered an address at Cornell University in which he defended free speech for radicals and accused industrialists of stoking xenophobia to distract workers from their mistreatment. Unknown to him, the New York lumber king and Cornell benefactor Henry Sage was in the audience. As soon as the lecture was done, Sage stormed into the university president’s office and insisted: “This man must go; he is sapping the foundations of our society.” When Adams’s tenure was subsequently blocked, he agreed to moderate his views. Accordingly, the final draft of the AEA platform expunged the reference to laissez-faire economics as being “unsafe in politics and unsound in morals”.

 

‘Economics has always operated more like a church’ … Trinity Church seen from Wall Street. Photograph: Alamy Stock Photo

So was set a pattern that has persisted to this day. Powerful political interests – which historically have included not only rich industrialists, but electorates as well – helped to shape the canon of economics, which was then enforced by its scholarly community.

Once a principle is established as orthodox, its observance is enforced in much the same way that a religious doctrine maintains its integrity: by repressing or simply eschewing heresies. In Purity and Danger, the anthropologist Mary Douglas observed the way taboos functioned to help humans impose order on a seemingly disordered, chaotic world. The premises of conventional economics haven’t functioned all that differently. Robert Lucas once noted approvingly that by the late 20th century, economics had so effectively purged itself of Keynesianism that “the audience start(ed) to whisper and giggle to one another” when anyone expressed a Keynesian idea at a seminar. Such responses served to remind practitioners of the taboos of economics: a gentle nudge to a young academic that such shibboleths might not sound so good before a tenure committee. This preoccupation with order and coherence may be less a function of the method than of its practitioners. Studies of personality traits common to various disciplines have discovered that economics, like engineering, tends to attract people with an unusually strong preference for order, and a distaste for ambiguity.

The irony is that, in its determination to make itself a science that can reach hard and fast conclusions, economics has had to dispense with scientific method at times. For starters, it rests on a set of premises about the world not as it is, but as economists would like it to be. Just as any religious service includes a profession of faith, membership in the priesthood of economics entails certain core convictions about human nature. Among other things, most economists believe that we humans are self-interested, rational, essentially individualistic, and prefer more money to less. These articles of faith are taken as self-evident. Back in the 1930s, the great economist Lionel Robbins described his profession in a way that has stood ever since as a cardinal rule for millions of economists. The field’s basic premises came from “deduction from simple assumptions reflecting very elementary facts of general experience” and as such were “as universal as the laws of mathematics or mechanics, and as little capable of ‘suspension’”.

Deducing laws from premises deemed eternal and beyond question is a time-honoured method. For thousands of years, monks in medieval monasteries built a vast corpus of scholarship doing just that, using a method perfected by Thomas Aquinas known as scholasticism. However, this is not the method used by scientists, who tend to require assumptions to be tested empirically before a theory can be built out of them.
But, economists will maintain, this is precisely what they themselves do – what sets them apart from the monks is that they must still test their hypotheses against the evidence. Well, yes, but this statement is actually more problematic than many mainstream economists may realise. Physicists resolve their debates by looking at the data, upon which they by and large agree. The data used by economists, however, is much more disputed. When, for example, Robert Lucas insisted that Eugene Fama’s efficient-markets hypothesis – which maintains that since a free market collates all available information to traders, the prices it yields can never be wrong – held true despite “a flood of criticism”, he did so with as much conviction and supporting evidence as his fellow economist Robert Shiller had mustered in rejecting the hypothesis. When the Swedish central bank had to decide who would win the 2013 Nobel prize in economics, it was torn between Shiller’s claim that markets frequently got the price wrong and Fama’s insistence that markets always got the price right. Thus it opted to split the difference and gave both men the medal – a bit of Solomonic wisdom that would have elicited howls of laughter had it been a science prize. In economic theory, very often, you believe what you want to believe – and as with any act of faith, your choice of heads or tails will as likely reflect sentimental predisposition as scientific assessment.

It’s no mystery why the data used by economists and other social scientists so rarely throws up incontestable answers: it is human data. Unlike people, subatomic particles don’t lie on opinion surveys or change their minds about things. Mindful of that difference, at his own presidential address to the American Economic Association nearly a half-century ago, another Nobel laureate, Wassily Leontief, struck a modest tone. He reminded his audience that the data used by economists differed greatly from that used by physicists or biologists. For the latter, he cautioned, “the magnitude of most parameters is practically constant”, whereas the observations in economics were constantly changing. Data sets had to be regularly updated to remain useful. Some data was just simply bad. Collecting and analysing the data requires civil servants with a high degree of skill and a good deal of time, which less economically developed countries may not have in abundance. So, for example, in 2010 alone, Ghana’s government – which probably has one of the better data-gathering capacities in Africa – recalculated its economic output by 60%. Testing your hypothesis before and after that kind of revision would lead to entirely different results.

 

‘The data used by economists rarely throws up incontestable answers’ … traders at the New York Stock Exchange in October 2008. Photograph: Spencer Platt/Getty Images

Leontief wanted economists to spend more time getting to know their data, and less time in mathematical modelling. However, as he ruefully admitted, the trend was already going in the opposite direction. Today, the economist who wanders into a village to get a deeper sense of what the data reveals is a rare creature. Once an economic model is ready to be tested, number-crunching ends up being done largely at computers plugged into large databases. It’s not a method that fully satisfies a sceptic. For, just as you can find a quotation in the Bible that will justify almost any behaviour, you can find human data to support almost any statement you want to make about the way the world works.

That’s why ideas in economics can go in and out of fashion. The progress of science is generally linear. As new research confirms or replaces existing theories, one generation builds upon the next. Economics, however, moves in cycles. A given doctrine can rise, fall and then later rise again. That’s because economists don’t confirm their theories in quite the same way physicists do, by just looking at the evidence. Instead, much as happens with preachers who gather a congregation, a school rises by building a following – among both politicians and the wider public.

For example, Milton Friedman was one of the most influential economists of the late 20th century. But he had been around for decades before he got much of a hearing. He might well have remained a marginal figure had it not been that politicians such as Margaret Thatcher and Ronald Reagan were sold on his belief in the virtue of a free market. They sold that idea to the public, got elected, then remade society according to those designs. An economist who gets a following gets a pulpit. Although scientists, in contrast, might appeal to public opinion to boost their careers or attract research funds, outside of pseudo-sciences, they don’t win support for their theories in this way.
However, if you think describing economics as a religion debunks it, you’re wrong. We need economics. It can be – it has been – a force for tremendous good. But only if we keep its purpose in mind, and always remember what it can and can’t do.

The Irish have been known to describe their notionally Catholic land as one where a thin Christian veneer was painted over an ancient paganism. The same might be said of our own adherence to today’s neoliberal orthodoxy, which stresses individual liberty, limited government and the free market. Despite outward observance of a well-entrenched doctrine, we haven’t fully transformed into the economic animals we are meant to be. Like the Christian who attends church but doesn’t always keep the commandments, we behave as economic theory predicts only when it suits us. Contrary to the tenets of orthodox economists, contemporary research suggests that, rather than seeking always to maximise our personal gain, humans still remain reasonably altruistic and selfless. Nor is it clear that the endless accumulation of wealth always makes us happier. And when we do make decisions, especially those to do with matters of principle, we seem not to engage in the sort of rational “utility-maximizing” calculus that orthodox economic models take as a given. The truth is, in much of our daily life we don’t fit the model all that well.


Economists work best when they take the stories we have given them, and advise us on how we can help them to come true

For decades, neoliberal evangelists replied to such objections by saying it was incumbent on us all to adapt to the model, which was held to be immutable – one recalls Bill Clinton’s depiction of neoliberal globalisation, for instance, as a “force of nature”. And yet, in the wake of the 2008 financial crisis and the consequent recession, there has been a turn against globalisation across much of the west. More broadly, there has been a wide repudiation of the “experts”, most notably in the 2016 US election and Brexit referendum.

It would be tempting for anyone who belongs to the “expert” class, and to the priesthood of economics, to dismiss such behaviour as a clash between faith and facts, in which the facts are bound to win in the end. In truth, the clash was between two rival faiths – in effect, two distinct moral tales. So enamoured had the so-called experts become with their scientific authority that they blinded themselves to the fact that their own narrative of scientific progress was embedded in a moral tale. It happened to be a narrative that had a happy ending for those who told it, for it perpetuated the story of their own relatively comfortable position as the reward of life in a meritocratic society that blessed people for their skills and flexibility. That narrative made no room for the losers of this order, whose resentments were derided as being a reflection of their boorish and retrograde character – which is to say, their fundamental vice. The best this moral tale could offer everyone else was incremental adaptation to an order whose caste system had become calcified. For an audience yearning for a happy ending, this was bound to be a tale of woe.

The failure of this grand narrative is not, however, a reason for students of economics to dispense with narratives altogether. Narratives will remain an inescapable part of the human sciences for the simple reason that they are inescapable for humans. It’s funny that so few economists get this, because businesses do. As the Nobel laureates George Akerlof and Robert Shiller write in their recent book, Phishing for Phools, marketers use them all the time, weaving stories in the hopes that we will place ourselves in them and be persuaded to buy what they are selling. Akerlof and Shiller contend that the idea that free markets work perfectly, and the idea that big government is the cause of so many of our problems, are part of a story that is actually misleading people into adjusting their behaviour in order to fit the plot. They thus believe storytelling is a “new variable” for economics, since “the mental frames that underlie people’s decisions” are shaped by the stories they tell themselves.

Economists arguably do their best work when they take the stories we have given them, and advise us on how we can help them to come true. Such agnosticism demands a humility that was lacking in economic orthodoxy in recent years. Nevertheless, economists don’t have to abandon their traditions if they are to overcome the failings of a narrative that has been rejected. Rather they can look within their own history to find a method that avoids the evangelical certainty of orthodoxy.

In his 1971 presidential address to the American Economic Association, Wassily Leontief counselled against the dangers of self-satisfaction. He noted that although economics was starting to ride “the crest of intellectual respectability … an uneasy feeling about the present state of our discipline has been growing in some of us who have watched its unprecedented development over the last three decades”.

Noting that pure theory was making economics more remote from day-to-day reality, he said the problem lay in “the palpable inadequacy of the scientific means” of using mathematical approaches to address mundane concerns. So much time went into model-construction that the assumptions on which the models were based became an afterthought. “But,” he warned – a warning that the sub-prime boom’s fascination with mathematical models, and the bust’s subsequent revelation of their flaws, now reveals to have been prophetic – “it is precisely the empirical validity of these assumptions on which the usefulness of the entire exercise depends.”

Leontief thought that economics departments were increasingly hiring and promoting young economists who wanted to build pure models with little empirical relevance. Even when they did empirical analysis, Leontief said economists seldom took any interest in the meaning or value of their data. He thus called for economists to explore their assumptions and data by conducting social, demographic and anthropological work, and said economics needed to work more closely with other disciplines.

Leontief’s call for humility some 40 years ago stands as a reminder that the same religions that can speak up for human freedom and dignity when in opposition, can become obsessed with their rightness and the need to purge others of their wickedness once they attain power. When the church retains its distance from power, and a modest expectation about what it can achieve, it can stir our minds to envision new possibilities and even new worlds. Once economists apply this kind of sceptical scientific method to a human realm in which ultimate reality may never be fully discernible, they will probably find themselves retreating from dogmatism in their claims.

Paradoxically, therefore, as economics becomes more truly scientific, it will become less of a science. Acknowledging these limitations will free it to serve us once more.

More freeloaders than free market. How Britain bails out the business chiefs

 

‘In an age of untrammelled greed, company executives are rewarded for cannibalising their businesses and bilking their staff.’ Illustration by Andrzej Krauze

 Aditya Chakrabortty in The Guardian


On Wednesday, two very different men will have to explain themselves. Both appear in London, to a room full of authority figures – but their finances and their status place them at opposite ends of our power structure. Yet put them together and a picture emerges of the skewedness of today’s Britain.

For the Rev Paul Nicolson, the venue will be a magistrate’s court in London. His “crime” is refusing to pay his council tax, in protest against David Cameron’s effective scrapping of council tax benefit, part of his swingeing cuts to social security. In order to pay for a financial crisis they didn’t cause, millions of families already on low incomes are sinking deeper into poverty. In order to pay bills they can’t afford, neighbours of the retired vicar are going without food. The 84-year-old faces jail this week, for the sake of £2,831.

Meanwhile, a chauffeur will drive Philip Green to parliament, where he’ll be quizzed by MPs over his part in the collapse of BHS. A business nearly as old as the Queen will die within a few weeks, leaving 11,000 workers out of a job and 22,000 members of its pension scheme facing a poorer retirement.

There the similarities peter out. Nicolson was summoned to court; Green wasn’t going to bother showing up at Westminster. When the multibillionaire was invited by Frank Field to make up BHS’s £600m pension black hole, he demanded the MP resign as chair of the work and pensions select committee.

But then, Green is used to cherry-picking which rules he plays by. Take this example: he buys Arcadia, the company that owns Topshop, then arranges for it to give his wife a dividend of £1.2bn. Since Tina Green is, conveniently, a resident of Monaco, the tax savings on that one payment alone are worth an estimated £300m. That would fund the building of 10 large secondary schools – or two-thirds of the annual cut to council tax benefits.

Just as Green underinvests in society, so he underinvests in his companies. The man to whom he sold BHS last year, Dominic Chappell, told MPs last week that “for the past 10 or 12 years there had been little or no inward investment in the stores”. A staple of the high street had been run down.

Then again, what incentive has he had to do otherwise? Green bought BHS with just £20m of family money and borrowed the rest. Within four years, he had pulled £400m of dividends out of the firm – 20 times his initial outlay.

He used the same tactic to buy Arcadia – stumping up £9.2m in equity and taking out £1.2bn three years later. This isn’t retailing as you might think of it, it’s balance-sheet shazam – the kind of financial engineering that posed as real business in Britain’s bubble years. And it’s enabled Green to turn major retailers into what Robert Peston, in Who Runs Britain?, calls “giant gushers of cash”.

But in today’s Britain, the poor are forced to pay the unaffordable, while the tax-avoider is honoured for his contribution to society. Green was knighted by Tony Blair, while David Cameron appointed him a government adviser.

Just as Green pretends to be a cheeky chappy even though he went to boarding school, so any charlatan in pinstripes can claim to be a businessperson – and be handsomely rewarded. The barons who run our rail services tout themselves as “investors”, but for every quid they put into their trains, they take out £2.47. That level of underinvestment ensures commuters are never sure of getting in on time and having a seat – but shareholders and managers can make a fortune.

From Margaret Thatcher through Tony Blair to David Cameron, successive prime ministers have preached the virtues of free enterprise. We’ve ended up with an economy comprised of what parliament’s public accounts committee calls “quasi-monopolies” – from water to banks to electricity to public outsourcing – and big businesses being treated as money-sponges to be wrung dry by their owners and managers.

In the 1970s, £10 of every £100 in corporate profits was paid to shareholders. Now between £60 and £70 of every £100 is handed out. Workers, companies and the economy are thus starved of investment and growth opportunities so that, as Andy Haldane at the Bank of England warns, firms are “eating themselves”.

In an age of untrammelled greed, company executives are rewarded for cannibalising their businesses and bilking their staff. The typical FTSE-100 boss is now on a total pay of around £5m, the High Pay Centre calculates, even while the average employee is still earning less in real terms than in 2008.

This is less about the free market than freeloading. The banks collapse and are bailed out. The Sports Direct billionaire Mike Ashley walks away from a collapsed business, giving hundreds of workers 15-minutes notice of redundancy – and handing taxpayers the £700,000 bill to clean up the mess. Tax-avoider Amazon receives tens of millions of public money to build warehouses, and even has a road in Swansea built for it. Richard Branson takes £28m to open a call centre in Wales.

The public pay for apprenticeships, so that companies get readymade workers. We shell out for upgrading the railways. Most of all, we top up poverty pay. Official figures show that 37% of working-age households in this country now take more from the public purse than they pay in. Not because they’re lazy or unemployed – employment has never been so high – but because their bosses can rely on the rest of us to pay their way.

Survival of the fittest? This is a deformed capitalism, barely worthy of the name – and it won’t improve by slinging a few rotten tomatoes in parliament. We need a working capitalism, where the public no longer give away their protections and subsidies for free – but instead make businesses take their responsibilities seriously.

If rail operators rely on taxpayer billions, they should train staff and pay them a living wage. Why shouldn’t big supermarkets that need public planning permission and licensing to trade be required to stock some locally sourced goods? And why shouldn’t local and central government, which allocate billions in procurement and tendering, foster a diversity of business models – from not-for-profit to mutually owned.

Some of you may think such measures impossible, others may see them as baby steps. They should be the first heaves on the pendulum, turning our economy away from the interests of the wealthy to the rest of us.

Last week Nicolson promised: “I shall start paying my tax again when they stop taxing benefits.” Good for him. The rest of us taxpayers should do the opposite: asking businesspeople what they’ll do to deserve our corporate welfare. That question should not just be put to Green and Ashley, but to those who run all our major corporations. Otherwise, we’re merely chasing out a few big names and hanging up a sign over Britain that reads: “Under new owners, business as usual.”

Freedom from the Known - Jiddu Krishnamurthi

An audio book courtesy the Krishnamurthi Foundation


The book is available in PDF form here

Change the law on limited liability to control boardroom greed

Boardroom greed: how to bring an errant multinational to heel

Changing the law on limited liability is the nuclear option, but it could force errant firms to repent

• 
• • Larry Elliott
  • The Guardian, Friday 12 December 2014

'The banks, the ­multinational tech companies and the giants of the energy sector are even more powerful than the unions were four decades ago.' Photograph: Matthew Lloyd/Getty Images

Roll the clock back 36 years. It is December 1978 and the so-called winter of discontent is in its early stages. Over the next couple of months the papers will be full of stories about rubbish piling up in the streets and of cancer patients failing to receive treatment. Britain is gripped by widespread industrial action, but public support for strikes is crumbling.

A few months later, in May 1979, a new government arrives in power. Despite failed attempts in the recent past, it decides that something must be done to curb the power of organised labour. Self-regulation has failed, the administration of Margaret Thatcher decides. It is time to use the power of the state to end abuses.

Bit by bit over the next decade the trade unions are systematically weakened. When it comes to the crunch they are not nearly as powerful as they think they are.

So what is the difference between the trade unions in the 1970s and the big corporations today? If anything, the banks, the multinational tech companies and the giants of the energy sector are even more powerful than the unions were four decades ago. And like the unions of yesteryear, business has had opportunities to put its own house in order – and spurned them. For the union general secretary telling Harold Wilson or Jim Callaghan what his members will and will not wear, read the chief executive thumbing his nose at David Cameron or George Osborne.

Meanwhile, the list of corporate scandals is getting longer. We’ve had horsemeat passed off as beef; the rigging of the foreign exchange market; the mis-selling of payment protection insurance; aggressive tax avoidance through webs of offshore shell companies; sweetheart deals between multinationals and Luxembourg. Only yesterday, the Financial Conduct Authority said some pension companies were screwing pensioners by failing to provide them with the best deals on offer.

Meanwhile, the Federation of Small Businesses said a fifth of its member companies had been subject to the bullying demands of big corporations, with many pushed to breaking pointas a result.

Make no mistake, the scandals are damaging. After a parliament marked by times of austerity and falling living standards, trust in executives to do anything but look after their own selfish interests is at a low ebb. Energy companies and banks are as popular with the public as the trade unions were during the winter of discontent. A government that decided to curb corporate power would not lack support from the voters. Osborne’s “Google tax” on the diverted profits of multinationals was the single most popular policy in last week’s autumn statement.

There are, though, differences between now and 1979. One is that the big multinational companies are more powerful than the trade unions were. Another is that Thatcher had a clear idea about what she wanted, whereas today there is no real blueprint for reform.

All this week the Guardian has been trying to fill that vacuum. Our series on taming corporate power is designed to explode the myth that there is nothing that could be done to affect boardroom behaviour. It’s not the ideas that are lacking, it’s the political will to persevere with a process that will be long and difficult.

Step number one should be to use the existing powers of the state, which even in this era of globalisation and footloose capital are considerable. Ministers can break up monopolies, insist that the investment arms of banks are severed from their retail operations and force companies to pay a living wage when they receive public contracts. They should use these powers and add to them. Pharmaceutical companies have to prove that any new drugs they market will not harm the public; the same test should be applied to new products developed by the financial sector.

Step number two involves redressing the imbalance of power between capital and labour. Those troubled by the growing gap between rich and poor, or by the relentless squeeze on wages since the recession, need look no further for an explanation than the decline in trade union power. Evidence shows that those workers still covered by collective agreements earn higher wages, so one possible reform would be to set up new tripartite bodies for wage bargaining in certain sectors, such as contract cleaning.

A future Labour government could also do worse than to dust down the Bullock report from 1977, which called for greater employee participation in the running of companies, for the need to build trust within organisations and for the desirability of Britain learning from the industrial models of other European countries, Germany in particular. This might be done voluntarily, with companies offered the incentive of lower corporation tax for each worker representative on the board, or by statute.

Lower corporation tax is, of course, hardly an incentive for those companies that are paying virtually no corporation tax in the first place. Osborne is rightly frustrated that some multinationals do billions of pounds of business in the UK but still declare nugatory profits, despite the steady reduction in corporation tax. So, step number three involves ensuring that companies pay what is due. The key here is for governments to insist on country-by-country reporting by the Googles and Amazons of this world, because this would ensure that all multinationals would have to declare the countries in which they operated, what the company is called in each location, its financial performance in each country it does business (including inter-company trade), and how much tax it pays to each government. Companies would have to abide by an international financial reporting standard and provide information for all tax jurisdictions. Shining a light on the murkier activities of multinational companies is vital.

Finally, there’s the nuclear option: stripping companies of the protection provided by limited liability. The owners, the shareholders and those running companies wield enormous power but don’t bear full responsibility for their actions because their liability is limited to the size of their investment in a company or partnership. But limited liability is a privilege not a right, and in return for granting it society should get something back in return. The argument the Thatcher government used when it said employers could sue unions for damages caused by strikes was that there was no such thing as a something-for-nothing world, and the same argument applies to companies.

The deal should be that companies get the protection limited liability provides in return for looking after all their stakeholders: the workers they employ, the customers they serve, the companies that form their supply chains, the taxpayers who pay for the transport infrastructure and the education system that businesses require. The deal should not be limited liability in return for boardroom greed, running rings round the taxman and breaking the law.

As Prem Sikka said in this series, any change to limited liability would be fiercely resisted. But even the suggestion of change would concentrate minds. Imagine, for example, that a future government set up a royal commission to look into the issue. Would this lead to companies treating their staff better and paying more tax? You bet it would.

The British government is leading a gunpowder plot against democracy

This bill of corporate rights threatens to blow the sovereignty of parliament unless it can be stopped

• 
• • George Monbiot
  • The Guardian, Tuesday 4 November 2014 20.16 GMT

Illustration by Sébastien Thibault

On this day a year ago, I was in despair. A dark cloud was rising over the Atlantic, threatening to blot out some of the freedoms our ancestors lost their lives to secure. The ability of parliaments on both sides of the ocean to legislate on behalf of their people was at risk from an astonishing treaty that would grant corporations special powers to sue governments. I could not see a way of stopping it.

Almost no one had heard of the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US, except those who were quietly negotiating it. And I suspected that almost no one ever would. Even the name seemed perfectly designed to repel public interest. I wrote about it for one reason: to be able to tell my children that I had not done nothing.

To my amazement, the article went viral. As a result of the public reaction and the involvement of remarkable campaigners, the European commission and the British government responded. The Stop TTIP petition now carries more than 750,000 signatures; the 38 Degrees petition has 910,000. Last month there were 450 protest actions across 24 member states. The commission was forced to hold a public consultation about the most controversial aspect, and 150,000 people responded. Never let it be said that people cannot engage with complex issues.

Nothing has yet been won. Corporations and governments – led by the UK – are mobilising to thwart this uprising. But their position slips a little every month. When the British minister responsible at the time, Ken Clarke, responded to my first articles, he insisted that “nothing could be more foolish” than making the European negotiating position public, as I’d proposed. But last month the commission was obliged to do just this. It’s beginning to look as if the fight against TTIP could become a historic victory for people against corporate power.

The central problem is what the negotiators call investor-state dispute settlement (ISDS). The treaty would allow corporations to sue governments before an arbitration panel composed of corporate lawyers, at which other people have no representation, and which is not subject to judicial review.

Already, thanks to the insertion of ISDS into much smaller trade treaties, big business is engaged in an orgy of litigation, whose purpose is to strike down any law that might impinge on its anticipated future profits. The tobacco firm Philip Morris is suing governments in Uruguay and Australia for trying to discourage people from smoking. The oil firm Occidental was awarded $2.3bn in compensation from Ecuador, which terminated the company’s drilling concession in the Amazon after finding that Occidental had broken Ecuadorean law. The Swedish company Vattenfall is suing the German government for shutting down nuclear power. An Australian firm is suing El Salvador’s government for $300m for refusing permission for a goldmine over concerns it would poison the drinking water.

The same mechanism, under TTIP, could be used to prevent UK governments from reversing the privatisation of the railways and the NHS, or from defending public health and the natural world against corporate greed. The corporate lawyers who sit on these panels are beholden only to the companies whose cases they adjudicate, who at other times are their employers.

As one of these people commented: “When I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all … Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.”

So outrageous is this arrangement that even the Economist, usually the champion of corporate power and trade treaties, has now come out against it. It calls investor-state dispute settlement “a way to let multinational companies get rich at the expense of ordinary people”.

When David Cameron and the corporate press launched their campaign against the candidacy of Jean-Claude Juncker for president of the European commission, they claimed that he threatened British sovereignty. It was a perfect inversion of reality. Juncker, seeing the way the public debate was going, promised in his manifesto that “I will not sacrifice Europe’s safety, health, social and data protection standards … on the altar of free trade … Nor will I accept that the jurisdiction of courts in the EU member states is limited by special regimes for investor disputes.” Juncker’s crime was that he had pledged not to give away as much of our sovereignty to corporate lawyers as Cameron and the media barons demanded.

Juncker is now coming under extreme pressure. Last month 14 states wrote to him, privately and without consulting their parliaments, demanding the inclusion of ISDS (the letter was leaked a few days ago). And who is leading this campaign? The British government. It’s hard to get your head around the duplicity involved. While claiming to be so exercised about our sovereignty that it is prepared to leave the EU, our government is secretly insisting that the European commission slaughter our sovereignty on behalf of corporate profits. Cameron is leading a gunpowder plot against democracy.

He and his ministers have failed to answer the howlingly obvious question: what’s wrong with the courts? If corporations want to sue governments, they already have a right to do so, through the courts, like anyone else. It’s not as if, with their vast budgets, they are disadvantaged in this arena. Why should they be allowed to use a separate legal system, to which the rest of us have no access? What happened to the principle of equality before the law?

If our courts are fit to deprive citizens of their liberty, why are they unfit to deprive corporations of anticipated future profits? Let’s not hear another word from the defenders of TTIP until they have answered this question.

It cannot be ducked for much longer. Unlike previous treaties, this one is being dragged by campaigners into the open, where its justifications shrivel on exposure to the light. There’s a tough struggle to come, and the outcome is by no means certain, but my sense is that we will win.

The difference between Gordon Brown and Tony Blair

Gordon Brown is back, and may be the man to save the union

He was reviled after he lost the 2010 election, but the former PM is now reframing the Scottish independence debate

• 
• • Jonathan Freedland
  • Follow @Freedland Follow @guardian
  • The Guardian, Friday 27 June 2014 19.23 BST

‘Gordon Brown retains a standing in Scotland which he never really had in England. He is seen as a national heavyweight.' Photograph: David Moir/Reuters

Tony Blair was on the front page of the Financial Times this week, as the paper brought word of the former prime minister's plan to open an office in "the increasingly assertive oil-rich emirate" of Abu Dhabi. The FT explained that Blair is expanding his portfolio of business and other interests in the Middle East, which already includes a contract to advise Mubadala, one of Abu Dhabi's mighty sovereign wealth funds.

A few hours later, Blair's successor, Gordon Brown, came to London to advance some business of his own. Brown was in the capital to attend a series of unpaid meetings in cramped rooms, pressing the case for Scotland to remain part of the UK. He was rewarded with a cup of canteen coffee.

The contrast between Britain's last two prime ministers could hardly be sharper. They were always unalike, but now they inhabit different worlds. Blair has morphed into Adam Lang, the permatanned, globetrotting ex-statesman-for-hire at the centre of Robert Harris's novel The Ghost. Brown refuses the pension owed to him as a former prime minister. The jacket of his latest book, My Scotland, Our Britain, discloses that any profits will be given to charity. When he wrote recently for the Guardian, he declined the (admittedly modest) fee. As far as anyone can tell, he lives with his family at home in North Queensferry on his MP's salary. By his actions, he declares himself the unBlair – a man determined not to profit from his public position.

So while Blair has the sleek glow of the expensively dressed elite, Brown pitches up in a suit whose years of heavy-duty service are visible: there's a tiny hole in his sleeve. But the difference goes deeper. While Blair is unembarrassed, eager to sound off about the future of the Middle East – when others might have held back, given how things turned out in Iraq – Brown has proved more reticent. After his defeat in 2010, he allowed the coalition and its allies to trash his reputation, to pretend it was Brown's profligacy, rather than a global financial crash, that had ballooned the deficit. Privately, he told friends there was no point trying to defend himself, as people were in no mood to listen. Defeated leaders like him have to "go through a period when they're reviled, that's just the way it is".

He still holds to that vow of silence, more or less, on UK-wide politics, letting Labour's new generation have the battlefield to themselves. But in recent months he has broken his own golden rule and stormed back into the public square, to play his part in a contest he says differs from normal politics because its outcome could be irreversible. His fellow Scots are about to vote on independence, and he wants them to say no.

He is campaigning vigorously, speaking in Aberdeen today on the contested question of North Sea oil, packing out halls and addressing rallies day after day. "He's now a key part of the conversation," reports the Guardian's Scotland correspondent Severin Carrell. So omnipresent has Brown become that observers describe him as the most prominent, commanding Labour figure in the campaign, stirring the faithful in a way that Alistair Darling – who leads the cross-party Better Together group – cannot.

Much of this is down to the well-worn observation that Brown retains a standing in Scotland he never really had in England. North of the border he is seen as a national heavyweight, the last of a leadership class that included the late Donald Dewar, John Smith and Robin Cook, and is therefore automatically granted a hearing. But there's more to it than that.

Whatever Brown's flaws – and even his closest friends cannot pretend he was temperamentally suited to the top job – few doubt his analytical gifts. The reason he remained in command of Labour strategy for so long was his knack for understanding and framing a political argument. With the Chinese military strategist Sun Tzu, he understands that every battle is won before it's fought. It's won by choosing the ground on which it will be fought. And this is the key contribution Brown is making to the no campaign.

He diagnosed a key error in the way the argument had been framed. It had become Scotland v Britain, with Alex Salmond and the Scottish National party arguing for Scotland and everyone else championing Britain. That, says Brown, might be fine if the entire UK electorate had a vote on 18 September. But they don't. Only Scots vote in this referendum, which means this has to be framed as a choice for Scots: which Scotland will flourish, one that retains its political ties to the other three nations of these islands or one that severs those links?

It's such a simple point, it seems extraordinary anyone had to make it. But Brown is right. When David Cameron delivered his big speech on the topic in February, not only did he do it in London, he rested his case on why the union had been good for Britain. That answered the wrong question. Given the electorate involved, the only question that matters is: is the union good for Scotland? Framed like this, every issue looks different. Take the vexed business of currency. Brown reckons George Osborne walked straight into a nationalist trap when he declared that an independent Scotland would not be allowed to keep the pound: it was London at war with Edinburgh, Britain bullying Scotland.

The right way to argue it, says Brown, is to ask what's best for Scotland: to use the currency of a country you've just left and whose rules you no longer have any say over or to retain your seat at the table, with some control over your own money. The former would be a "semi-colonial relationship", says Brown, Scotland using a currency shaped by officials in faraway London. Framed like that, it's suddenly Brown who's putting Scottish interests first and, oddly, Salmond who's left defending a supine relationship to London.

The way Brown describes it, the union is no longer an imperial hangover that represses Scotland but a neat set-up for distinct and proud nations to club together, sharing resources and pooling risks. That arrangement has served Scotland rather well: why on earth would you throw it all away?

The nationalists have an answer, of course they do. But Brown's version makes it a much harder question. Now other no campaigners are following his lead, adopting the frame he constructed. On the ground, among Labour's core vote, it seems to be working; some detect a stalling in momentum for Yes. They all laughed when Brown accidentally claimed to have saved the world. But, who knows, he might just save the union.