What if Britain left the EU?

Eurosceptics want a vote on the ultimate question – and the PM does not seem entirely opposed. Ben Chu in The Independent examines the consequences of saying bye bye to Brussels

Exports

The European Union is easily Britain's biggest single export market, with 53 per cent of our goods purchased by our fellow European nations in 2011. This sector of our economy, directly and indirectly, supports three million jobs, according to Sir Iain Begg, a professorial research fellow at the European Institute of the London School of Economics. Without export growth last year, we would have fallen back into recession much earlier. If we were to leave the EU, we would almost certainly still be allowed to sell goods into the single market. Norway, Iceland and Switzerland already do so through a free-trade agreement. The difference would be that the UK would not be able to set the rules that govern the European single market. It would, of course, have to implement those rules to keep selling into those markets though. The argument sometimes deployed by those who want out of the EU is that leaving would, somehow, encourage British manufacturers to concentrate on exporting to the likes of China, Brazil and India.

Imports

Britain also imports a great deal from other nations in the EU – more than it exports, in fact. In 2011, we exported £159bn of goods to the EU and imported goods worth £202bn – an annual trade deficit of £42bn. Some argue that this deficit gives us leverage to demand more opt-outs and budget rebates from our European partners. The argument is: "They need us more than we need them." The problem is that we import a lot of European goods, not because we are doing the Europeans a favour, but because our people want to buy things that cannot be produced at home – think of all those German cars and French luxury goods. If Britain were to leave the EU, the Government might decide to impose large tariffs on European imports, but this probably wouldn't prove very popular. The likelihood is we would still run a trade deficit with the EU, but, as with imports, we would have no say over the rules governing the single market.

Growth

Would foreign capital still want to invest in the UK if it were not part of the EU bloc? Some economists say overseas investors would be put off. The National Institute of Economic and Social Research, for example, estimates that foreign direct investment would fall. And, mainly for this reason, it argues that our GDP would permanently be 2.25 per cent lower if we left the EU. However, Capital Economics argued last month that, because of the eurozone crisis, levels of foreign investment in the UK could actually go up if we left the EU, because we would seem like a safe haven.

Immigration

If Britain left the EU, the Government would not be required to permit the free movement of all citizens of the 27 nations of the union into Britain, nor their right to work here. About EU 165,000 citizens migrated to the UK in the year to September 2011, after 182,000 arrived in the 12 months to September 2010. Proponents of withdrawal argue that stopping such flows would improve quality of life because there would be less strain on public services and infrastructure. Opponents argue that immigrants are an economic benefit for Britain, filling holes in our labour market and boosting overall productivity. But the free movement of people is two-way. An estimated 748,010 Britons live or work in the European Union. Many have holiday homes in France and Spain. If we decided to restrict inflows of EU citizens to Britain, the European Union would be likely to respond in kind.

Budget

The UK makes an annual gross contribution to the EU budget of £15bn and it gets a rebate of €6bn in various subsidies – mainly agricultural. This makes an annual net contribution of €9bn. Ending those payments by leaving the EU would help to reduce the UK deficit, but these are not transformative sums. Our EU contributions are equivalent to 0.6 cent of GDP. We presently have a deficit of 8.3 per cent of GDP. Plus, one has to consider the benefits of those contributions. Structural funds – as payments into the common EU budget are known – are used to develop post-Soviet bloc countries in Europe, building up their infrastructure and making them bigger potential markets for British goods and services.

Business

A study by the British Chambers of Commerce has estimated that the annual cost to the UK of EU regulation is £7.4bn, but costs must be set against benefits. The EU has forced the mobile phone networks to stop ripping of customers when they use their handsets abroad. It has tackled Microsoft and airlines about over-charging. Britain outside the EU would have to rely on British competition authorities alone to protect customers from the malfeasance of corporations.

Banking

This is a complex relationship. The UK actually wants to impose higher capital requirements on its domestic banks than the rest of Europe does. Yet Britain is also fighting a Financial Taxation Tax, something that much of the rest of Europe

supports. British bankers, for their part, are generally in favour of staying in the EU. They fear that their access to lucrative European capital markets could be impeded if Britain left the bloc. And both banks and businesses calculate that Britain's EU membership is in their interests because the EU can help to open foreign markets such as China up to them more effectively than the UK acting alone.

Agriculture

The EU's Common Agricultural Policy is almost universally considered a wasteful mechanism that encourages over-production and undermines African farmers. Between 2007 and 2013, the UK will contribute £33.7bn to the Common Agricultural Policy (CAP) and get back £26.6bn, according to the Open Europe think-tank. That works out as a net contribution of £7.1bn. If the UK left the EU, our Government could scrap these subsidies at home and save the money. But it already has discretion at home about what to do with the payments – enabling ministers to channel the money to conservation, rather than production. And, within the EU, it can push for badly-needed reform of the CAP. Outside the EU, it would have no influence.

Politics

Europe is more social democratic than the UK. Even countries with centre-right governments tend to tax more, spend more on welfare and are less laissez-faire when it comes to markets. Those on the left in Britain tend to be in favour of the UK's continued membership because they feel it will help to move the country in this direction. Those on the right tend to be opposed for similar reasons; they feel Europe is helping to undermine Britain's social and economic freedoms. Yet there are global politics to consider, too. The right wants to rely on Britain's "special relationship" with the US, but Washington prefers Britain to work in closer partnership with the EU. Rising Asian giants such as India and China also seem to regard Britain's membership of the EU as a good reason to build economic and diplomatic ties with us.

We were wrong on peak oil. There's enough to fry us all

A boom in oil production has made a mockery of our predictions. Good news for capitalists – but a disaster for humanity

• 
• • George Monbiot
  • guardian.co.uk, Monday 2 July 2012 20.30 BST

'The great profusion of life in the past – fossilised in the form of flammable carbon – now jeopardises the great profusion of life in the present.' Illustration by Daniel Pudles

The facts have changed, now we must change too. For the past 10 years an unlikely coalition of geologists, oil drillers, bankers, military strategists and environmentalists has been warning that peak oil – the decline of global supplies – is just around the corner. We had some strong reasons for doing so: production had slowed, the price had risen sharply, depletion was widespread and appeared to be escalating. The first of the great resource crunches seemed about to strike.

Among environmentalists it was never clear, even to ourselves, whether or not we wanted it to happen. It had the potential both to shock the world into economic transformation, averting future catastrophes, and to generate catastrophes of its own, including a shift into even more damaging technologies, such as biofuels and petrol made from coal. Even so, peak oil was a powerful lever. Governments, businesses and voters who seemed impervious to the moral case for cutting the use of fossil fuels might, we hoped, respond to the economic case.

Some of us made vague predictions, others were more specific. In all cases we were wrong. In 1975 MK Hubbert, a geoscientist working for Shell who had correctly predicted the decline in US oil production, suggested that global supplies could peak in 1995. In 1997 the petroleum geologist Colin Campbell estimated that it would happen before 2010. In 2003 the geophysicist Kenneth Deffeyes said he was "99% confident" that peak oil would occur in 2004. In 2004, the Texas tycoon T Boone Pickens predicted that "never again will we pump more than 82m barrels" per day of liquid fuels. (Average daily supply in May 2012 was 91m.) In 2005 the investment banker Matthew Simmons maintained that "Saudi Arabia … cannot materially grow its oil production". (Since then its output has risen from 9m barrels a day to 10m, and it has another 1.5m in spare capacity.)

Peak oil hasn't happened, and it's unlikely to happen for a very long time.

A report by the oil executive Leonardo Maugeri, published by Harvard University, provides compelling evidence that a new oil boom has begun. The constraints on oil supply over the past 10 years appear to have had more to do with money than geology. The low prices before 2003 had discouraged investors from developing difficult fields. The high prices of the past few years have changed that.

Maugeri's analysis of projects in 23 countries suggests that global oil supplies are likely to rise by a net 17m barrels per day (to 110m) by 2020. This, he says, is "the largest potential addition to the world's oil supply capacity since the 1980s". The investments required to make this boom happen depend on a long-term price of $70 a barrel – the current cost of Brent crude is $95. Money is now flooding into new oil: a trillion dollars has been spent in the past two years; a record $600bn is lined up for 2012.

The country in which production is likely to rise most is Iraq, into which multinational companies are now sinking their money, and their claws. But the bigger surprise is that the other great boom is likely to happen in the US. Hubbert's peak, the famous bell-shaped graph depicting the rise and fall of American oil, is set to become Hubbert's Rollercoaster.

Investment there will concentrate on unconventional oil, especially shale oil (which, confusingly, is not the same as oil shale). Shale oil is high-quality crude trapped in rocks through which it doesn't flow naturally.

There are, we now know, monstrous deposits in the United States: one estimate suggests that the Bakken shales in North Dakota contain almost as much oil as Saudi Arabia (though less of it is extractable). And this is one of 20 such formations in the US. Extracting shale oil requires horizontal drilling and fracking: a combination of high prices and technological refinements has made them economically viable. Already production in North Dakota has risen from 100,000 barrels a day in 2005 to 550,000 in January.

So this is where we are. The automatic correction – resource depletion destroying the machine that was driving it – that many environmentalists foresaw is not going to happen. The problem we face is not that there is too little oil, but that there is too much.

We have confused threats to the living planet with threats to industrial civilisation. They are not, in the first instance, the same thing. Industry and consumer capitalism, powered by abundant oil supplies, are more resilient than many of the natural systems they threaten. The great profusion of life in the past – fossilised in the form of flammable carbon – now jeopardises the great profusion of life in the present.

There is enough oil in the ground to deep-fry the lot of us, and no obvious means to prevail upon governments and industry to leave it in the ground. Twenty years of efforts to prevent climate breakdown through moral persuasion have failed, with the collapse of the multilateral process at Rio de Janeiro last month. The world's most powerful nation is again becoming an oil state, and if the political transformation of its northern neighbour is anything to go by, the results will not be pretty.

Humanity seems to be like the girl in Guillermo del Toro's masterpiece Pan's Labyrinth: she knows that if she eats the exquisite feast laid out in front of her, she too will be consumed, but she cannot help herself. I don't like raising problems when I cannot see a solution. But right now I'm not sure how I can look my children in the eyes.

Stiglitz - Bankers must go to jail

Joseph Stiglitz tells Ben Chu that rogue financiers have proven that regulation must get
tougher

Ben Chu
Monday, 2 July 2012

The Barclays Libor scandal may have shocked the British public, but Joseph Stiglitz saw it
coming decades ago. And he's convinced that jailing bankers is the best way to curb market
abuses. A towering genius of economics, Stiglitz wrote a series of papers in the 1970s and
1980s explaining how when some individuals have access to privileged knowledge that others
don't, free markets yield bad outcomes for wider society. That insight (known as the theory
of "asymmetric information") won Stiglitz the Nobel Prize for economics in 2001.

And he has leveraged those credentials relentlessly ever since to batter at the walls of "free
market fundamentalism".

It is a crusade that has taken Stiglitz from Massachusetts Institute of Technology, to the
Clinton White House, to the World Bank, to the Occupy Wall Street camp and now, to
London, to promote his new book The Price of Inequality.

And kind fortune has engineered it so that Stiglitz's UK trip has coincided with a perfect
example of the repellent consequences of asymmetric information.

When traders working for Barclays rigged the Libor interest rate and flogged toxic financial
derivatives – using their privileged position in the financial system to make profits at the
expense of their customers – they were unwittingly proving Stiglitz right.

"It's a textbook illustration," Stiglitz said. "Where there are these asymmetries a lot of these
activities are directed at rent seeking [appropriating resources from someone else rather than
creating new wealth]. That was one of my original points. It wasn't about productivity, it
was taking advantage."

Yet Stiglitz's interest in the abuses of banks extends beyond the academic. He argues that
breaking the economic and political power that has been amassed by the financial sector in
recent decades, especially in the US and the UK, is essential if we are to build a more just
and prosperous society. The first step, he says, is sending some bankers to jail. " That ought
to change. That means legislation. Banks and others have engaged in rent seeking, creating
inequality, ripping off other people, and none of them have gone to jail."

Next, politicians need to stop spending so much time listening to the financial lobby, which,
according to Stiglitz, demonstrates its spectacular economic ignorance whenever it claims
that curbs on banks' activities will damage the broader economy.

This talk of economic ignorance brings us to the eurozone crisis and the extreme austerity
policies being pursued. Stiglitz is depressed. In 2000 he resigned from the World Bank and
launched an excoriating attack on the way it and its sister institution, the International Monetary Fund, handled the Asian financial crisis of the late 1990s. He condemned the IMF
for imposing brutal and inappropriate adjustment policies on bailed out nations – medicine
which, he argued, merely pushed nations further into crisis. "For me there's some nostalgia
here," he says.

Does he see any hope for the eurozone, I ask, or is it now heading, inevitably, for a breakup?
"It is a train that can still be stopped" he says. "But the relevant question is the politics in
Germany. Have they created in their rhetoric a dynamic that makes it difficult to stop? In
particular [German Chancellor] Angela Merkel's rhetoric that the crisis was caused by
profligacy. She's framed the issue as profligacy, rather than framing it as 'the European
system is fundamentally flawed' ".

The central argument of his latest oeuvre is that the huge inequalities of income and wealth
that have developed in the US and elsewhere in the West over recent decades are not only
unjust in themselves but are retarding growth.

"Every economy needs lots of public investments – roads, technology, education," he says.
"In a democracy you're going to get more of those investments if you have more equity.
Because as societies get divided, the rich worry that you will use the power of the state to
redistribute. They therefore want to restrict the power of the state so you wind up with
weaker states, weaker public investments and weaker growth."

It's an elegantly simple proposition. And one that logically points to a radical manifesto of
redistribution and higher taxation in the name of the general public good. Time will tell
whether this comes to be regarded as another manifestation of towering economic genius.
But, for now, crusading Stiglitz has one more weapon in his hands with which to batter down
those walls of folly

Libor scandal: How I manipulated the bank borrowing rate

An anonymous insider from one of Britain's biggest lenders – aside from Barclays – explains how he and his colleagues helped manipulate the UK's bank borrowing rate. Neither the insider nor the bank can be identified for legal reasons.

It was during a weekly economic briefing at the bank in early 2008 that I first heard the phrase. A sterling swaps trader told the assembled economists and managers that "Libor was dislocated with itself". It sounded so nonsensical that, at first, it just confused everyone, and provoked a little laughter.

Before long, though, I was drawing up presentations to explain the "dislocation of Libor from itself" for corporate relationship managers. I was deciphering the subject in emails, internally and externally. And I was using the phrase myself openly with customers of the bank.

What I was explaining was that the bank was manipulating Libor. Only I didn't see it like that at the time.

What the trader told us was that the bank could not be seen to be borrowing at high rates, so we were putting in low Libor submissions, the same as everyone. How could we do that? Easy. The British Bankers' Association, which compiled Libor, asked for a rate submission but there were no checks. The trader said there was a general acceptance that you lowered the price a few basis points each day.

According to the trader, "everyone knew" and "everyone was doing it". There was no implication of illegality. After all, there were 20 to 30 people in the room – from management to economists, structuring teams to salespeople – and more on the teleconference dial-in from across the country.

The discussion was so open the behaviour seemed above board. In no sense was this a clandestine gathering.

The main business of the day was to deal with the deepening crisis. And questions were raised about what we, in one of the bank's sales teams, could be doing to earn our wages.

The answer was fire-fighting. Helping the corporate bank with clients – predominantly explaining why the customer's loan was being moved from base rate to Libor and why their interest margin was increasing sharply. It wasn't easy for the corporate bankers. They were under orders from the credit committee, and powers at the top, to change a client's borrowing rate to Libor and increase the margin if any covenant was breached, no matter how small.

We accompanied the relationship managers to meetings to explain what was happening in the economy – why base rate lending could not be sustained, why margins had to increase, and of course to explain the general economic backdrop.

As part of that, we had to explain the "dislocation of Libor from itself". As the trader put it, everyone knew that we couldn't borrow at Libor, you only needed to look at the price of our credit default swaps – effectively survival insurance for the bank – to see that.

What that meant was that even though Libor may have been, for example 2pc, the real Libor rate the bank was paying was more like 5pc or 6pc. So in fact, we needed to be lending money at Libor plus 3pc or 4pc just to break even. That is what we were telling clients.

Looking back, I now feel ashamed by my naivety. Had I realised what was going on, I would have blown the whistle. But the openness alone suggested no collusion or secrecy. Management had been in the meeting, and so many areas of the Treasury division of the bank represented, that this was clearly no surprise or secret.

Libor had dislocated with itself for a very good reason – to hide the true issues within the bank.

Investment Banking - An organised Scam masquerading as a Business

Let's end this rotten culture that only rewards rogues

The Barclays rate-rigging scandal has once again exposed a world where men and women with little skill and no moral compass can become very rich very fast

• 
• • Will Hutton
  • guardian.co.uk, Saturday 30 June 2012 21.00 BST

Barclays boss Bob Diamond. Photograph: Dylan Martinez/Reuters

 

Investment banking is an organised scam masquerading as a business. It is defined by endemic conflicts of interest, systemic amoral behaviour and extreme avarice. Many of its senior figures should be serving prison sentences or disgraced – and would have been if British regulators had been weaned off the doctrine of " light touch" regulation earlier and if the Serious Fraud Office's budget had not been emasculated by Mr Osborne. It is a tax on wealth generation and an enemy of honest endeavour – the beast that is devouring British capitalism.

The £290m fine on Barclays for rigging the interest rates in the inter-bank market is a defining moment. Not just for Barclays but for every bank with which it colluded. Barclays had the wit to come clean first – the first of many banks to suffer political and moral opprobrium for illicitly inflating its profits. It was also trying to protect itself from "reputational damage" – not wanting other banks' assessment of its creditworthiness to become public .

In the light of what we now know, that seems laughable. But between autumn 2007 and spring 2009, Barclays was fighting for its life as an independent bank. Had the news surfaced that other banks harboured such doubts about its credit standing, Barclays might have ended up being owned by the British taxpayer like RBS and Lloyds.

As the FSA reports, senior treasurers and the corporate affairs department were both keenly aware of those risks and anxious they should be averted. It beggars belief that the top of Barclays did not know what measures it had to take to pull through. It had to lie about the rates it was paying to borrow money.

This came easily because the practice had become habitual. The London interbank offer rate is set each day at 11am in all the key currencies lent and borrowed in London. Each major bank submits the interest rate it is paying to the British Bankers' Association and the average becomes the benchmark rate for most of the world's loans and financial contracts. For example, there are some $554tn worth of so-called interest rate derivative contracts whose price is linked to Libor – manufactured products whose alleged purpose is to hedge the risk of unexpected interest rate changes in a world of floating exchange rates and free capital movements.

In fact, there is no way that these instruments can insure against system-wide movements. Some bank has to lose by being the sucker paying out, then becoming the weak link in the system which, in an extreme case, has to be bailed out by the taxpayer. Derivatives should rather be seen as economically purposeless constructs whose ease of manipulation in opaque markets makes the investment banks rich – while the rest of us take our chances.

Over the past few years, more and more light has been thrown on how banks profit by trading on their own account in so-called "proprietary trading" – dealing in derivatives, while another part of the bank makes a market for buyers and sellers in those self-same products. First of all, they can take positions on a vast scale because they are enormous banks with their deposits effectively guaranteed by the taxpayer. Next, they rig the benchmark interest rate on which the price of many derivatives are based, made easier still because so many derivatives are custom-made. This means that deep non-manipulable markets are hard to construct; it's also easier for derivatives to aid and abet tax avoidance. And lastly, as Goldman Sachs' "Fabulous" Fabrice Tourre revealed, the banks actively manage both the buyers and sellers. Thus they know which way the prices are likely to move from hour to hour.

Managements have little incentive to manage such a business because their own extravagant bonuses depend on its success. Even if they were minded to insist on proper behaviour, so much of the action takes place over hours and even minutes – hence they have to give phenomenal discretion to the teams running the trading desks. Managers cannot possibly monitor their real-time positions or second guess why they have been taken – the reason why rogue traders can lose banks billions, as one recently did at JP Morgan in London.

Much has been said about the rotten culture in investment banking – now from both the prime minister and the governor of the Bank of England. But the regulators, the British government and bank managements – all genuflecting to the wisdom of the age that free markets make no mistakes – allowed a business model to be created in which men and women with very little skill and no moral compass could make themselves millionaires in a very short time. They contributed zero wider economic value but created immense systemic risk for the rest of the economy.

A rotten culture does not emerge from thin air. It emerges from structures that encourage rotten behaviour – and Britain, following the false gods that free markets and financial services were its economic future, created such structures big time, cheered along by a cross-party alliance that extended from Boris Johnson to Gordon Brown. Now is a decisive moment for both the City and the economy. The City's reputation is at rock bottom. Meanwhile the economy acutely needs a financial system that backs wealth-generating innovation. We need a determined root and branch reform of British finance to restore international trust, develop the national economy and to bring an end to the mis-selling scandals. In RBS's case, the bank was even unable to discharge for a week its basic function – allowing its customers to transact financial business.

A start has been made with the promised implementation of the Vickers commission's recommendations to ringfence investment banking from commercial banking. The ringfence, weakened by George Osborne under intense pressure from the banks, should be strengthened to produce a de facto separation. In particular, "prop" trading desks should operate as fully separate units with their own boards, balance sheets and capital. The measures should be rolled out as soon as they become law rather than delayed until 2019.

That is only a start. The banks and the British Bankers' Association can no longer be allowed to set Libor: this task must now be done by the Financial Conduct Authority that is to succeed the FSA. London must also fall into line with international practice and require all derivative trades in the over-the-counter market to post appropriate collateral. London can no longer be the wild west of international finance where American and European law can be flouted. I would go further and require all financial instruments to be traded in organised exchanges.

There is also the question of ownership: shareholders exercised far too little influence over bank managements. Worse, their short-termist behaviour encouraged banks to look for sky-high fast returns to keep them happy. The Ownership Commission ( which I chaired) argued for the creation of new ownership mutuals that pooled the voting rights of institutional shareholders. This would both anchor ownership to set more reasonable profit expectations, and give owners real muscle in a dialogue with managements.

Banks need such better, engaged ownership – and fast. The British government, owning RBS and Lloyds, should give a lead in what it expects from banks. In particular, it should take a lead on remuneration.

In my fair pay review for the government, I argued that private sector executives should put a proportion of their pay at risk to be earned back by doing their job properly; only then should they be eligible for an equivalent bonus. There would be no question of Bob Diamond trying to win brownie points by giving up his bonus. Under earnback it would be automatically forfeited.

The Financial Services Authority has begun to show how regulation could work: five years ago it would never have launched such a bold and revealing inquiry. George Osborne is breaking it up just when it should be backed and reinforced.

The £14m cut in the Serious Fraud Office's budget since 2008 should be restored in full. There should be arrests, trials and imprisonment. And there should be an independent Leveson-style inquiry into investment banking and the causes of the financial crisis.

So far, there has only been the whitewash report in 2009, co-chaired by Sir Win Bischoff and Alistair Darling, arguing that as little as possible should be done to regulate the City. It was a disgrace.
As far as possible, the underlying causes of the over-inflated size of finance should be addressed. If there were less exchange and interest rate volatility, there would be less underlying demand for instruments to protect against it. This is, of course, the case for a system of managed exchange rates and a European single currency.

Instead of deifying floating exchange rates as the magic bullet for all economic ills – the default position of the British economic establishment across the political spectrum — floating rates should be seen as another driver of our over-inflated financial sector.

Britain needs to rebalance and develop its economy – and it needs to start by reforming finance. This could be the moment the process begins, laying the basis for a remoralisation of our economy and a new industrial revolution. But it means confronting the biggest lobby of them all – big finance. Any takers?

Be angry at bankers, be angrier at economists

Orthodox economists stand aloof from a crisis of their own making. Time for a public inquiry where they can be interrogated

• 
• • Ann Pettifor
  • guardian.co.uk, Friday 29 June 2012 17.28 BST

The Libor scandal 'is just a symptom of a much bigger dysfunctional banking system, one that is staunchly upheld by the British establishment'. Photograph: Andy Rain/EPA

Like millions of others I am outraged by the Libor scandal, by the wrongdoings of the "submitters" and other traders at Barclays Bank under Bob Diamond, and their fellow travellers at the British Bankers' Association. That is why I and my colleagues at Prime have launched a government e-petition calling for a judicial public inquiry into the wrongdoings of banks, and for the inquiry to have powers to summon witnesses and question them under oath.

But this scandal is just a symptom of a much bigger dysfunctional banking system, one that is staunchly upheld by the British establishment – many of whom have their heads firmly below the parapet. And it is a direct result of the flawed, mainstream economic theories on which the global, so-called free market in money has been built.

So, while I do of course regard the speculative and often fraudulent activities of our bankers with disdain, I reserve my real anger for the economics profession, both professional and academic.
For it is mainstream, orthodox economics that has effectively given private bankers the cover they need to engage in reckless, greedy, fraudulent and immensely enriching activity. It is orthodox economists who have built the platform on which today stand the young traders at 16 banks involved in the Libor scandal. Above all, it is mainstream economists who are directly responsible for the financial crisis and who have brought our global financial system to this pass.

Yet economists (with some notable exceptions) stand aloof from a crisis of their own making. And when they do deign to engage with it, it is to adopt an attitude of defeatism. We are constantly enjoined to simply accept the destructive fate of austerity, financial failure, bankruptcy and unemployment, for, they argue: "There is nothing to be done." Only "creative destruction" will do the trick.

But that is a lie. There is much that can be done to alleviate the suffering and destruction of value that we witness daily. All it requires is to remove orthodox economic blinkers. Furthermore, we have the precedent of the 1930s, when Keynes and Roosevelt took on the bankers, began to resolve the crisis, and built sustained recovery in the US.

To understand the root of the Barclays scandal, and what must be done now, we – and, most emphatically, orthodox economists – must first understand a foundational element of the economy: money.

As Geoffrey Ingham has argued in The Nature of Money, orthodox economists believe in the "commodity theory of money". While they no longer maintain that money consists of a material with an intrinsic exchange value, they argue that it is a commodity in the sense that it can be understood like any other commodity – hence the belief that money is subject to the forces of supply and demand, marginal utility and so on.

On this stands the belief that the "price" of money – the rate of interest – is not constructed socially, but is a result of market forces.

Most economists still hold to the naive belief that money equals deposits and savings. They take this further. They believe firmly that, in order to lend, banks must have a stash of savings in the vault. They do not understand that bankers can create credit by entering numbers into a computer. No, they believe that banks simply act as intermediaries and can be relied up on, for example, to come between Mrs Jones and her carefully accumulated savings and Mr Smith's demand for a loan.

But John Maynard Keynes (as well as Adam Smith, Schumpeter, Galbraith and others) knew otherwise. And Keynes explained money and how it works most clearly: in brief, money, in all instances, starts life as credit. It is created in the first instance by central banks – which, with the stroke of a computer keyboard, can deposit billions of pounds into the bank accounts of commercial banks – think of quantitative easing. In return, the central bank demands collateral.

Private commercial banks are then licensed to do the same. So private bankers create credit out of thin air – by entering numbers into a computer and then requiring, first, collateral and, second, repayment. This credit then enters bank accounts as deposits. We invest or spend this money, and that generates income – wages, salaries, profits and taxes. Income is then used to repay the credit or debt.

In other words, we as a society bestow great power on central and commercial bankers, which is why economic prosperity has depended on the public accountability, regulation and management of finance. Orthodox economists do not understand money as credit. They see it as subject to the forces of supply and demand and regard these forces as a good thing – for they can determine the "price" of money, ie, the rate of interest.

But money is not like oil or diamonds. It can be created out of thin air. It is a public good, like clean air or water. But, unlike clean water, there is no limit to its creation. That's why it must be regulated and managed, not left to the invisible hand of market forces.

Barclays' bankers were granted huge powers. Let us not be surprised that they abused those powers. While, of course, they must be punished, it is time to interrogate those who gave away this great public good, this great power to create and price credit. Let us begin with the profession of economists.

New-tech moguls: the modern robber barons?

Are today's captains of industry – the wealthy and powerful figures who control the digital universe – any different from the ruthless corporate figures of the past?

• 
• • John Naughton
  • The Observer, Sunday 1 July 2012

From left: Co-founders of Google Larry Page and Sergey Brin, Chairman and CEO of Dell Michael Dell, Co-founder of Microsoft Bill Gates, and Chairman and CEO of Facebook Mark Zuckerberg Photographs: AP; Getty

Here's an interesting fact: 10 of the people on Forbes magazine's tally of the world's 100 richest billionaires made their money from computer and/or network technology. At the top (second on the list) is Bill Gates, co-founder of Microsoft, whose net worth is estimated by Forbes at $61bn, despite the fact that he continues to try to give it away. Gates is followed by Larry Ellison, boss of Oracle, with $36bn, and Michael Bloombergwith $22bn. Larry Page and Sergey Brin – co-founders of Google – occupy joint 24th place with $18.7bn each. Jeff Bezos of Amazon is No 26 with $18.4bn while the newly enriched Mark Zuckerberg of Facebook sits at No 35 with £17.5bn. Michael Dell, founder of the eponymous computer manufacturer, is at No 41 with $15.9bn while Steve Ballmer, Microsoft's CEO, is three places lower on $15.7bn and Paul Allen – co-founder of Microsoft – brings up the rear at No 48 with a mere $14.2bn. Steve Jobs, who was worth about $9bn when he died, doesn't even figure.

What's striking about this is not just the staggering wealth that these people have managed to squeeze out of what are, after all, just binary digits (ones and zeros), but how recent are the origins of their good fortunes. Mark Zuckerberg, for example, went from zero to $17.5bn in less than eight years. Microsoft – the company that has propelled Gates, Ballmer and Allen into the Forbes pantheon – dates only from 1975. Oracle was founded in 1977. Bloomberg turned a $10m redundancy cheque from Salomon Brothers into his personal money-pump in 1982. Dell started making computers in his university dorm in 1984. Bezos launched Amazon with his own savings in 1995. Brin and Page turned their PhD research into a company called Google in 1998. And Zuckerberg launched Facebook in 2004.

For some of these people, great wealth is correlated with significant power. Once Microsoft captured the market for PC operating systems and office software, Bill Gates and co ruthlessly leveraged their monopoly to eliminate rivals (remember Netscape?) and dictate pricing. So we got a world where you could have any kind of computer you wanted, provided it ran Microsoft Windows. In the era when the PC was the computer, Bill Gates was king because he controlled the PC.

But although Microsoft remains a significant force, its power waned as computing moved from the PC to the network – and therefore to the people and companies who dominate that. Step forward the Google boys, who have the power to render any website virtually invisible, because if their algorithms decide not to index a site then effectively it ceases to exist – at least in cyberspace. Their computers also read our mail and store our documents. Google dominates the online advertising business. The company's founders say grandly that their mission is "to organise the world's information" – and they mean it. They have already digitised a significant amount of the world's printed books – although they are not yet authorised to make many of them available online. And Google's cars have photographed every street in the industrialised world.

Meanwhile, in another part of the jungle, Amazon's Bezos is not just vaporising bricks-and-mortar bookstores; he's also on his way to becoming the world's biggest publisher. And he's already the world's largest online retailer – the Walmart of the web. In social networking Mark Zuckerberg has cunningly inserted himself (via his hardware and software) into every online communication that passes between his 900 million subscribers, to the point where Facebook probably knows that two people are about to have an affair before they do. And because of the nature of networks, if we're not careful we could wind up with a series of winners who took all: one global bookstore; one social network; one search engine; one online multimedia store and so on.

There was a time when the power exercised by computer and internet companies seemed a matter of relatively esoteric concern. But as digital technology began to pervade our daily lives, the boundary between the "real" world ("meatspace", as geeks used to call it) and cyberspace began to blur. What happened in the latter suddenly mattered in the former – and not just in Tunisia and Egypt either. Think of the way Steve Jobs's creation – Apple – exercises such dominance over online music, smartphones and tablet computers. Or ponder what Google and Facebook now know about our lives, loves and obsessions. Or what Amazon knows about our consumption patterns. The implication is that cyberpower has correlates in the real world, which means that it's time we had a really good look at those who wield it. What are these masters of the digital universe really like? What are their values and their politics? And are they any different from the corporate moguls of the past?

Given their prominence, we know surprisingly little about our modern moguls – for various reasons. One is that we are remarkably incurious about what makes them tick. We focus instead on the fact that one of them (Zuckerberg) wears a hoodie even when being interviewed by investment bankers; or that Larry Page, co-founder of Google, refused to stop using his laptop when a big media mogul came to talk to him; or that Bill Gates used to rock furiously backwards and forwards in a rocking chair when being interviewed for an anti-trust case; or that Steve Jobs drove a comparatively modest sports car and lived in a small, old-fashioned house rather than the postmodern minimalist palace that many people would have predicted.

But this is all superficial stuff, the journalistic fluff of celebrity profiles and gossip columns. What's much more significant about these moguls is that they share a mindset that renders them blind to the untidiness and contradictions of life, not to mention the fears and anxieties of lesser beings. They are technocrats who cleave to a worldview that holds that if something is technically possible then it should be done. How about digitising all the books in the world? No problem: you just throw resources and technology at the task. And if publishers protest about infringement of copyright andauthors moan about their moral rights, well, that just shows how antediluvian they are. Or how about photographing every street in Europe, or even the world? Again, no problem: it's technically feasible, after all. And if Germans object to the resulting intrusion on their privacy, well let them complain and we'll pixelate the sods. Oh – and when we discover that those same cars have been hoovering up the details of our home Wi-Fi networks, their bosses say "Oops! Sorry: it was a mistake." Same story with the high-resolution satellite imagery beloved of Google and – now – Apple. Same story with Mark Zuckerberg's fanatical, almost sociopathic, belief that the default setting for life should be "public" rather than "private". The prevailing technocratic motto is: if something can be done, then it ought to be done. It's all about progress, stoopid.

Actually, it's all about values. And money. The trouble is that technocrats don't do values. They just do rationality. They love good design, efficiency, elegance – and profits. That's why one of the poster children of the industry is Apple's creative genius, Jonathan Ive, who designs beautiful kit in California which is then assembled in Chinese factories. And when the execrable working conditions prevalent in such places are exposed, the company's senior executives profess themselves surprised and appalled and resolve to do everything they can to ameliorate things. And we believe them – and continue eagerly to purchase the gizmos manufactured in such oppressive plants.

Why are we so credulous, so forgiving? It's partly because wealth – like political power – is a powerful aphrodisiac. But it's mainly because we accept these people at their own valuation. We've bought into their narrative. They see themselves as progressives, as folks who want to make the world a better, more efficient, more rational place. We're charmed by their corporate mantras – for example "Don't be evil" (Google) or "Move fast and break things" (Facebook). In their black turtlenecks and faded jeans they don't seem to have anything in common with Rupert Murdoch or the grim-faced, silk-hatted capitalist bosses of old. Instead of grinding the faces of the poor, our modern technology magnates move effortlessly from tech forums to TED to All Things D to Davos, reclining on spotlit sofas discussing APIs and cloud computing with respectful or admiring moderators. And in recent times, they are even invited to lunch with President Obamaor as guests at political summits where they are fawned upon by presidents and prime ministers who hope that some of the magic dust will rub off on them.

What gets lost in the reality distortion field that surrounds these technology moguls is that, in the end, they are fanatically ambitious, competitive capitalists. They may look cool and have soothing bedside manners, but in the end these guys are in business not just to make money, but to establish sprawling, quasi-monopolistic commercial empires. And they will do whatever it takes to achieve those ambitions.

The strongest link that binds them is that they are all pioneers in the exploitation of virgin territory, and that rings some historical bells. When the internet first exploded into public consciousness in the 1990s as a result of the web, many observers were reminded of what happened in the United States after the end of the civil war in 1865. Then, there was an exciting sense of a continent to be explored, gold and mineral resources to be discovered and exploited, land for anyone who was prepared to work it, industries to be founded, opportunities galore. What then followed was an explosion of speculative investment, led by railway companies which – as Anthony Trollope shrewdly observed on a visit to the US – "were in fact companies combined for the purchase of land… looking to increase the value of it fivefold by the opening of the railroad."

Thus began the era satirised by Mark Twain and Charles Dudley Warner in their novelThe Gilded Age: A Tale of Today, which was published in 1873. Twain and Warner were struck by the rampant greed and speculative frenzy of the times – not to mention its pervasive political corruption. But in that febrile milieu a smallish group of ingenious, ruthless and visionary entrepreneurs created a modern industrial state. Leland Stanford, EH Harriman, Jay Gould, Charles Crocker, Henry Plant, Henry Flagler, Cornelius Vanderbilt and Charles Yerkes built railways; John D Rockefeller created Standard Oil and brought his distinctive brand of oligopolistic order to the oil business, eventually controlling 90% of the industry; Andrew Carnegie, Henry Frick and Charles Schwab created a vast steel industry; and bankers such as JP Morgan, Joseph Seligman, Andrew Mellon and Jay Cooke organised the finance that funded these huge ventures.

In addition to building a modern industrial state, these gents amassed huge fortunes for themselves using a raft of dubious techniques, including fraud, stock-dilution, the bribing of corrupt politicians, the creation of secret cartels (ironically called "trusts") and the ruthless exploitation of poorly paid, non-unionised workers – which is why Matthew Josephson dubbed them "robber barons" in his book of the same title. In the end, their abuses and excesses led to a legislative backlash in the form of the 1890 Sherman Anti-Trust Act, the first federal statute to limit cartels and monopolies, and to a more general public revulsion ushered in by Theodore Roosevelt's presidency in 1901. In the twilight of their lives, some of the barons (for example Carnegie, Mellon and Frick) sought to acquire public respectability – or perhaps bargaining chips for negotiating with the Almighty – by endowing charitable foundations and eponymous museums, and engaging in other public-spirited enterprises.

In comparison with these monsters of the gilded age, our contemporary moguls – Gates, Page, Brin, Ellison, Bezos et al – may look rather tame. They appear, for example, to be much more law-abiding than their 19th-century counterparts; or at any rate they have had much less success in bending lawmakers to their will. In fact, compared with the skills of the entertainment industry in suborning members of the US Congress, the technology magnates are the merest amateurs – which is why the legislators were so astonished by the industry's vigorous reaction to Sopa, the Stop Online Piracy Act. The thought that the technology industry might actually have teeth had never previously occurred to the denizens of Capitol Hill.

We should also remember that the world in which Microsoft, Oracle, Google and Amazon operate is radically different in one important respect. The stage on which Rockefeller, Carnegie, Vanderbilt and their contemporaries strutted was predominately a national one: most of their enterprises and ambitions spanned only the continental United States, whereas the big technology companies of our day are transnational corporations that operate in a variety of different cultures and legal jurisdictions. John D Rockefeller just had to worry about fixing American officials and politicians; Larry Page, Google's CEO, has to deal not only with the US Department of Justice, but also with the European Commission, the Chinese government and Vladimir Putin's goons.

There are also radical differences in the kinds of industrial empires that the two classes of magnate have created. The 19th-century entrepreneurs built huge companies, conglomerates and cartels. They employed millions of people, operated huge plants and equipment (railways, shipping, iron and steel mills, oil refineries) and made an indelible imprint on the landscape. To use a contemporary cliche, they "shipped atoms" – physical objects. With the exception of Amazon and Apple, their modern counterparts, in contrast, are mainly in the business of shipping bits – in the form of software and online services. Despite the bleating of their PR departments, they are not huge primary employers. Google, for example, has only about 33,000 employees worldwide. And often the only tangible, physical sign of their presence and scale is the huge server farms that power their operations and which do have a significant impact on the environment – not to mention the landscape in the places where they are located.

But just because our contemporary moguls don't gouge minerals from the earth, run blast furnaces or operate oil refineries doesn't mean that their growing empires aren't real. To the physical economy created by Carnegie and co, digital technology has added a whole new economy based on information goods – nowadays embodied as ones and zeros – which may turn out to be at least as pervasive and valuable. We still make cars using steel, rubber and plastics, for example, but the value of the electronics in their engine management units and braking-control systems already exceeds the value of the vehicles' physical components. And this pattern will increasingly be replicated in other areas of economic life.

So the fact that one cannot see the information goods that Google and co gather, store, disseminate and control doesn't mean that those goods aren't real and valuable. To take just one example, Facebook now owns and controls a virtual space that will soon contain more people than the entire Indian subcontinent. Those merry throngs may delude themselves that they are cavorting in a public place. But in reality they are gathering in Master Zuckerberg's shopping mall – a fact that potentially gives him a reach and power that would make any robber baron green with envy.

Sceptics will point out that when one puts our masters of the digital universe in a historical context they aren't as rich or as important as we currently imagine. Last year, for example, Forbes commissioned an economist to come up with an inflation-adjusted list of the richest Americans of all time, and the website Business Insider published the results. The list is headed by those grizzled old robber barons, John D Rockefeller, Andrew Carnegie and Cornelius Vanderbilt, with $336bn, $309bn and $185bn respectively. The only contemporary figure who makes it on to the list is Bill Gates, whose net worth at its peak was estimated at $136bn – which (says the sceptic) rather puts Larry Ellison, the Google boys and Jeff Bezos into perspective.

Bubble punctured, then? Not quite. It could be that the reason Bill Gates makes it on to the inflation-adjusted list is simply that he's been around the longest. Microsoft, remember, dates from 1975 – 37 years ago. Facebook has only been going since 2004. Who knows where Zuckerberg and the Google boys will be in 2041? The digital economy has a lot more growth left in it. As Churchill might have said, we haven't yet reached even the end of the beginning.

But perhaps the most intriguing question about these two different groups of industrial magnates concerns their legacies. The industries and enterprises founded by the robber barons of the 19th century still endure – though in some cases (steel, for example) the action has moved to Asia and parts of the developing world. What, one wonders, will endure of Google, Facebook, Oracle and Amazon? And what will be their founders' legacies? And here we get a clue from the robber barons of the 19th century. Many years after their deaths we still recognise the names of John D Rockefeller and Andrew Carnegie. Will Zuckerberg and Page enjoy the same level of name-recognition among our great-great-grandchildren?

The answer may well depend not on how much money they make, but how much they give away. After all, the way their 19th-century counterparts live on is in the charitable foundations they established – the Rockefeller Foundation, set up in 1913, and theCarnegie Corporation of New York, founded in 1911. And here at least we do have a contemporary mogul who is way ahead of the pack. The Bill and Melinda Gates Foundation, with assets of $37.4bn, is the world's largest charitable trust.