But now, how distant that era seems: the US and China are locked in an apparently existential race for technological supremacy, and instead of becoming liberals, the Communist Party has become even stronger under President Xi. Yet ironically, that may be what it needs to engineer a capitalist transformation to rival the West.

A recondite Marxist debate makes today’s events make curiously relevant. In The Communist Manifesto, Marx argued that the state, in a capitalist society, was merely the executive committee of the bourgeoisie. Many years later, in the Seventies, Left-wing intellectuals argued over whether capitalist states amounted to government by or for the capitalist class. On one side were the instrumentalists, among whom the most famous was Ralph Miliband (father of the Labour politicians David and Ed). On the other were the structuralists. The instrumentalists said that the capitalist state was controlled by a business elite who used it to advance their interests, whereas the structuralists said that if the state was to manage the capitalist economy, it needed “relative autonomy” from the owning class to discipline it and manage its evolution.

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America will pay for its spending binge

By John Rapley

Today, you could hardly ask for a better representation of the instrumental state than the second Trump presidency: run by a real estate magnate, surrounded by oligarchs, staffed by businesspeople — a banker as Treasury Secretary, a fund manager as commerce secretary, an oilman as energy secretary. This has given rise to a curious type of state interventionism. If industrial policy is about picking winners, then the leitmotif of the second Trump administration is that a cabinet of proven winners meddles directly to reward those they see as best placed to win the future.

Yet the paradox of capitalists is that they don’t necessarily like capitalism. Rather than a free market, what is resulting is a form of oligarchic capitalism in which wealth is becoming highly concentrated. America’s richest and most powerful players are able to use the penetrability of the democratic state to capture and shape power, using it to limit competition and secure their position. So, while the US has many more AI startups than China, capital is flowing heavily towards a handful of tech titans.

In contrast to this strategy of maximization, in which the ultimate goal is to secure an uncontested position at the vanguard of a new technology, China seems to prefer an optimization strategy. In its approach, the government first nurtures the development of a large set of players, something facilitated by the structure of the Chinese state. Using open-source technology, China’s provincial governments, competing with each other to meet national growth targets, steer resources to local firms. Then they are cut loose on a fiercely competitive playing field, in which a Darwinian struggle is allowed to rip.

This relentless competition drives a breakneck speed of development. So, for instance, while the US auto industry is dominated by the “three big” firms, along with a number of national champions operating US branches like Toyota and Hyundai, China’s auto sector has over 100 auto firms struggling against one another. It is this fierce competition to survive that has driven the industry’s development to the point that China is now the world’s largest carmaker.

But while the winners of these competitions become national champions of sorts, there is little patience for them trying to manipulate state power to their advantage. On the contrary, whenever oligarchs show signs of becoming too powerful, the Communist regime doesn’t hesitate to cut them down to size. In effect, China enjoys the relative autonomy needed to discipline the market and keep it competitive. China’s ruling class can’t be called capitalist, but it may just be doing a better job than America’s in creating an environment in which competitive capitalism can thrive.

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Peter Thiel’s visions of Apocalypse

By Jacob Howland

China’s aim is not primarily the creation of a tech titan at the very frontier of technology, but rather to move quickly to embody existing technology in products and services, achieving a sort of fungibility. Put differently, China is developing AI with an eye to producing usable products at a reasonable cost, dispersing them widely throughout the economy. In contrast, the US is placing a huge bet that it will develop a radical technology that will so transform the economy that the country will own the future.

But how is that future shaping up? If we consider the release of ChatGPT three years ago as the launch of the AI era in America, that revolution seems a little underwhelming. While there are signs that AI has marginally raised productivity in sectors that have adopted it, the increase has so far been well short of the dramatic rise the tech firms say would justify the massive increase in investment going into their companies. Meanwhile, AI is sucking all the oxygen out of the market. While the headlines speak of trillion-dollar investment plans in this emergent industry, in the rest of the economy, capital expenditure remains flat as other sectors are comparatively starved of capital. After peaking early this year, capital expenditure in the US has fallen in the course of 2025, which means that in non-tech sectors, things are going backwards.

Compounding this is the Trump administration’s energy policy which appears to be building a wall beyond which it will be difficult for AI to continue scaling at its current rate. Reflecting both Trump’s biases and the role of oligarchs in shaping policy in the US, the administration is blocking the rise of renewable energy to strengthen the powerful oil and gas industry, going all-in on a strategy of “energy dominance” based on fossil fuels. But one effect of this has been to slow the installation of new electrical capacity to a rate much lower than China’s. Thus, as demand to power energy-hungry data centers surges, electricity prices are rising — up 40% in the past five years and nearly 7% since just the start of this year. Good for the bottom lines of energy companies, perhaps, but not for the economy.

Nor, apparently, for society. One of the impacts of the AI boom in America is that it is stirring a groundswell of opposition, not only because it is helping drive up prices, but also because its benefits seem to flow into the hands of oligarchs alone. In previous technological revolutions, new technology not only seemed to confer broad-based benefits but also lifted wages. Amid the dot-com bubble of the late Nineties, American incomes rose strongly for a few years and everyone was able to do exciting new things on the internet. In contrast, tech oligarchs keep on insisting that AI will destroy millions of jobs — how else to justify the sky-high valuations of their companies’ shares except with a pledge to save loads of money in labor costs? The public is turning against the technology, with very large margins of both Republicans and Democrats more anxious than excited about AI.

China seems like it will avoid this fate, in part because its system enables the government to produce joined-up policy. For instance, the country’s education ministry is encouraging AI use in universities so as to create a ready market for AI products whilst encouraging their more effective use. Moreover, ordinary Chinese people already see the applications of AI in their everyday lives in ways that make things simpler, like biometric turnstiles at train stations, creating a more receptive environment for the technology.

America’s AI revolution may now be running out of time. Investors are growing antsy: they note that the much-promised breakthrough that will turbocharge productivity still remains notional, and there are signs that they are running out of cash. (This shortfall of cash explains why the big tech companies are starting to issue a lot of debt to fund their further expansions). Meanwhile, the public is warming to populist politicians who will campaign against the tech oligarchs. 2026 is likely to deliver a Congress more willing to question Trump’s economic strategy.

If the result is that the AI bubble gets punctured in the US, that wouldn’t be all bad. All the startups doing inventive things by optimizing existing AI innovations, rather like what the Chinese are doing, would have more space to thrive. Nevertheless, a market crash could tip the US economy into recession, just as China’s economy is slowing as it reorients away from investment to consumption.

In short, the euphoria of 2025 may well give way to a global slowdown in 2026. China may emerge in a comparatively favorable position, but any “victory” may prove Pyrrhic. Meanwhile, the rest of us will feel the fallout.

Now two more English clubs have made the other big European club final, one even winning on penalties. And we still have Liverpool and Manchester City’s nerve-jangling fight to the wire this weekend for the Premier League title, followed by the exciting young lions of England contesting the inaugural Nations League finals next month.

English football at both national and club level is in strong shape after an extraordinary season – one of the most thrilling that I can recall in half a century of following the sport.

But one of my favourite moments was rather more mundane: when Neil Warnock, manager of struggling Cardiff City, delivered a rant against the Government’s inept handling of Brexit. “I can’t wait to get out of it,” he said, referring to the European Union. “I think we’ll be far better out of the bloody thing. In every aspect. Football-wise as well, absolutely. To hell with the rest of the world.”

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The beautiful game has become the hyper-capitalists' game

By Chris Deerin

This was a surreal pleasure. A perfect metaphor. Here was this Yorkshireman of pensionable age, struggling with failure to compete, lashing out against globalisation – while standing in front of his club’s ‘Visit Malaysia’ banner.

Vincent Tan, their wealthy foreign owner, even changed the colour of their shirts to attract more Asian fans. Their club chairman was born in Cyprus. The players come from Denmark, Iceland, Ireland and Spain in Europe, along with others from Africa, Asia and north America.

Even though relegated, this club shows how top-flight football has thrived as teams have evolved into international coalitions. The sport is now a commercial powerhouse with billions of worldwide fans. The Bluebirds may not be good enough for premiership survival. But their standard of play is far higher today than many more successful clubs in the recent past and their brand has global allure. This is how Cardiff City can pay players two million pounds a year to play in its fine ten-year-old stadium – and even hand fringe players a seven-figure annual wage.

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Why citizens of nowhere will never get the World Cup

By Giles Fraser

Both on and off the field the game bears little comparison to when I started attending matches in the 1970s and 1980s, going to grim grounds to watch the ball lumped around pockmarked pitches and hoping to avoid fights between rival factions when heading to the station afterwards. Football was struggling to make ends meet, rife with violence and disasters such as Hillsborough symbolised its woes.

Then came the Premier League, in 1992, alongside a flood of Rupert Murdoch’s money – and our national game emerged like a butterfly from a cocoon into a lucrative global behemoth and crucial part of British soft power strength. Now the matches are watched by five billion people from around the world and the teams are valuable international brands which contribute an estimated billion pounds in tax alone to the British economy.

But looming Brexit sparked talk again that domestic talent is getting squeezed out by foreign mercenaries, with the Football Association seeing it as another chance to force teams to increase the number of English players.

This is a tired argument, divorced from economic and sporting reality. Yes, there are justified concerns over some owners of clubs, including those buying into a couple of the most prestigious brands such as Chelsea and Manchester City.

There is still too much corruption, the traditional bundles of ten pound notes in brown bags replaced by far bigger sums shifted in shady electronic transfers. And the sport seems increasingly divorced from its roots when players are so rich, tickets so costly and commercial focus on China and the United States. (Although my own club of Everton shows they can still remain part of their local community, despite a foreign-born owner, East African sponsor and Brazilian stars, with scores of initiatives from teams for people with disabilities through to assisting young offenders, older folks with dementia and funding a free school.)

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More than a beautiful game

By Michael Dalton

But on the field, almost everything has been transformed for the better. On the first day of the Premier League, there were just 13 foreigners performing; today, you would be fortunate to find 13 British players at one game. Then came not only the likes of Eric Cantona and Dennis Bergkamp with their delightful skills, but also innovative managers and backroom staff.

So, at Arsenal, a professorial Frenchman arrived and terminated the drinking culture, transformed diet, improved training techniques and freshened up tactics. In his debut season, Arsene Wenger became the first non-British manager to win the league title.

Critics point to the paucity of home-grown players in top-flight English football; a study last month found that more than two-thirds of goals scored in the Premier League were by foreigners, while another has found less than one in eight players now graduate from their team’s academies (and even here, many are young imports).

Greg Dyke, one of the driving forces behind the Premier League who later became FA chairman, has been very vocal on this issue. He has complained about “an awful lot of bog-standard” foreign players, said it was “depressing” Manchester City could win the title with so few Brits in the team, and promoted moves to limit the number of overseas stars now being speeded up with Brexit.

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But one of those Manchester City players was James Milner, the English warhorse who later joined Liverpool and played a key, disruptive role this week in their incredible defeat of Barcelona. Although not the most skilful individual, he has played the seventh most games of anyone in the Premier League due to his determination and professionalism.

And he has admitted that, while it can be frustrating to compete for a place against some of the world’s most talented stars, it improved his performance. “Playing and training with the quality we have at this club, how can you not be a better player? You’re constantly fighting for your place. You’re under pressure every time you step out on to the pitch,” he said while at Manchester City.

His words, echoed by others, such as the thoughtful former Chelsea star Frank Lampard, underline again how competition drives up standards in any sector and can improve services for consumers. For while there are fewer British players in the Premier League, those that break through must be of far higher standard – and this boost in skill, increased athleticism and improved attitude benefits the national team as well.

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Let's drop the sports mic

By Simon O'Hagan

It is impossible to argue that English football is in decline when you look at the way a striker such as Raheem Sterling at Manchester City grows sharper – or enjoy the emergence of a young fullback such as Trent Alexander-Arnold, whose vision and intelligence played a crucial role in Liverpool’s semi-final fightback. Jadon Sancho, another young England star, simply moved to Germany to get first team football when frozen out at Manchester City.

Typically, Theresa May misread the significance of this match when answering questions in parliament this week, insisting the lesson of Liverpool’s victory was that even when “your European opposition have got you beat; the clock is ticking down; it’s time to concede defeat — actually we can still secure success if everyone comes together”.

She missed the key point that this miraculous success was forged by a German manager with goals from Dutch and Belgian players – and that it means they stay in Europe, of course, rather than leave.

Despite the dwindling number of domestic players in the Premier League, there were still six who took part in that Liverpool game, and another four turned out for Spurs the following night, while the north London club’s star striker – Harry Kane, the England captain – was injured.

This underlines why, for all the fears, the national team has actually performed better since inception of the Premier League. In the years since England’s 1966 glory, through to the year of the league’s launch, England played 32 games in international finals and won 12, drew 9 and lost 11. Since then, they have played 39 and won 19, drawn 11 and lost 10.

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The England manager, Gareth Southgate, has also bemoaned the fact that the pool of players he can pick from is shrinking, with scarcely 50 Englishmen on the field some weekends. Yet not only are these players being pushed hard to win those places, most nations can only dream of having so many people performing weekly in the world’s most challenging football environment.

Leicester’s title triumph three years ago – driven by a Thai owner, Italian manager and English striker – highlighted again the depth of competition in this country and how globalisation has strengthened the game at all levels, despite fears of too much concentration at the top. Indeed, the stumbling giant of Manchester United shows that money cannot always buy success.

Football remains an important source of civic and national pride, inserting our disparate cities and tarnished nation into the international conversation while also offering an increasingly rare occasion when the country comes together in shared experience.

Clearly there are costs to progress. Yet ultimately we should give thanks to the power of globalisation in transforming our national game, which has been revived by the free movement of labour and capital – and bear in mind the wider lessons for other parts of the economy as we cheer on these teams.

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Will Brexit bother the Six Nations?

By Robin Aitken

On the 16 September 1992, the Chancellor of the Exchequer, Norman Lamont, put up interest rates from 10% to 12%. The aim was to stop currency dealers from selling the Pound and forcing the UK out of the EU Exchange Rate mechanism (or ERM – a precursor to the single currency). It didn’t work. Markets continued to ‘short’ the Pound – and so Lamont announced that he would raise interest rates to 15%. (Let me assure younger readers that I haven’t missed out a decimal point – rates really were that high back then).

But while borrowers looked on in absolute dread, the wheeler-dealers were unmoved. The Pound was forced out of the ERM and fell sharply in value, just as the short sellers had intended. Interest rates fell back down, the economy picked up, but the credibility of John Major’s government never recovered – and nor, among a large part of electorate, did trust in the EU.

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It's time to overhaul economic policy

By Peter Franklin

So much flowed from that fateful day – ‘Black Wednesday’; 13 years of New Labour; the rise of British Euroscepticism; and a lingering horror of high interest rates.

That last one might just prove the most significant. Along with other economic crises, it laid the groundwork for the so-called ‘great moderation’ – an era in which monetary policy was delegated to central bankers who used their control to squeeze inflation out of the economy. A long-term decline in interest rates was thus enabled. It all came to grief in the 2008 financial crisis, of course; but the after-effect was that interest rates fell even lower – in many cases right down to zero or thereabouts.

Still, what’s bad for savers is good for the economy, right? If it’s cheap to borrow then that means more spending and more investment at a time when there’s not enough of either (especially the latter).

But what if low interest rates are the reason why investment and, therefore, productivity and wage growth are all so anaemic?

Evidence that this is the case is presented in a working paper by the economists Ernest Liu, Atif Mian and Amir Sufi. They suggest that the standard economic models have overlooked an entire dimension of economic reality:

“Traditionally, a lower interest rate is viewed as expansionary for the production side of the economy…

“However, these models do not take strategic competition and market structure into account. Is it reasonable to assume that a significant reduction in the long-term interest rate would have no impact on the competitiveness of an industry?”

Liu and his colleagues propose an alternative model based on the assumption that low interest rates are more advantageous to the leading companies in each sector of the economy than for their competitors. We’ll come back as to why that might be case, but assuming it is, what are the implications?

The argument is that the market leaders respond to the advantageous environment by investing more than their rivals, thus extending their lead – so much so, in fact, that their competitors see there’s no point in trying to catch-up and therefore invest even less. That’s the first blow to investment and productivity. The second blow is that the market leaders notice that their position is unassailable and therefore also ease up on investment. Obviously, that’s bad news for the economy – investment dries up, productivity growth decelerates and markets become less competitive.

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So, why would low interest rates give the market leaders a strategic advantage in the first place? The authors make the point that when money is cheap, investment can be patient – i.e. it doesn’t need to unlock some game-changing innovation; all that’s required is the slow but certain extension of the company’s market dominance.

Strategies include buying out the competition; acquiring the rights to potentially disruptive technology; mopping up untapped markets; establishing effective control over an industry’s supply chains; or splashing out on lobbyists to rewrite regulation to the company’s advantage. These things won’t make the company better than the competition, just bigger – indeed big enough to establish an effective monopoly.

Because the leading company in any sector is by definition the one already closest to sewing up the market, it is also the one most likely to benefit from, and therefore attract, the cheap money. Its lesser rivals, meanwhile, retreat into niches, put themselves up for sale or go bust.

The rewards of dominance include the favour of the stock market. In a low interest rate environment, investors are desperate for half-way decent returns – and so an unchallenged industry leader, with reliable earnings, provides the ideal cash cow. Share values therefore go up; and if the company uses its capital to buy back its shares, their value goes up even faster.

If you ever wondered why stock markets boom and the corporate elite gets rich despite the general slow down in growth and productivity improvements, there’s your explanation.

This isn’t just a theory, by the way. Liu and colleagues find plenty of real world evidence:

“The empirical analysis tests this hypothesis using CRSP-Compustat merged data from 1962 onward. A ‘leader portfolio’ is constructed that goes long industry leaders and shorts industry followers, and the analysis examines the portfolio’s performance in response to changes in the ten year Treasury rate. The model’s prediction is confirmed in the data. The leader portfolio exhibits higher returns in response to a decline in interest rates, and this response becomes stronger at a lower initial level of interest rates.”

The authors aren’t saying that this effect explains the whole of the great growth slowdown (or ‘secular stagnation’ as economists call it), but it does help explain why we see productivity problems and market concentration across such a wide range of sectors and economies. Interest rates are at historically low levels across the western world and beyond – helping big companies to eat the competition just about everywhere.

How could those in charge of monetary policy not have noticed this disastrous side effect? I suspect the answer lies with the standard economic models I mentioned at the beginning of this article, on which basis monetary policy is based. All models simplify, but if they over-simplify what they bring is blindness not clarity.

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By Peter Franklin

I was in a queue at a train station ticket window. I didn’t have to be: these days you can buy train tickets online and collect them from a ticket machine. But not on this day. IT problems meant the machines weren’t working properly.

So when a man tried to collect his ticket, he couldn’t. Explaining this to the attendant at the ticket barrier, he was refused entry. He didn’t have a ticket, so he couldn’t come through, he was told. Mr. Exasperated displayed proof of his online purchase on his mobile phone. The attendant was not impressed: “I can’t let you through without a ticket and that’s not a ticket.” And so instead of joining his train, Mr. Exasperated had to join a queue.

And that’s what made by blood boil. Not the ‘sorry, not sorry’ attitude of the train company, but the fact that nineteen years into the 21st century, a mobile phone can’t be a train ticket. Well, it could be – we’re not talking about technology so advanced as to be “indistinguishable from magic” here. It’s the sort of user-friendly system that train companies could easily put in place if they wanted to. But when your customers can’t go anywhere else, why bother?

And that, in a microcosm, is why competition is good.

Or is it?

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Is there anything Amazon can’t dominate?

By Peter Franklin

In his book about entrepreneurship, Zero to One: Notes on Startups, or How to Build the Future, Peter Thiel argues that new enterprises should aim to become monopolies and that competition isn’t always healthy.

The book was published in 2014, but its influence has grown – especially in Thiel’s stamping ground, Silicon Valley. Indeed, it can be read as a justification of the monopolistic tendencies of big tech companies.

In that respect, Zero to One is among the most important books of our age. If you don’t have time to read it, there’s an in-depth review by Scott Alexander on the brilliant Slate Star Codex.

Let’s start with the kernel of Thiel’s argument:

“The title comes from Thiel’s metaphor that ordinary businessmen like restaurant owners take a product ‘from 1 to n’ (shouldn’t this be from n to n+1?) – they build more of something that already exists. But the greatest entrepreneurs bring something ‘from 0 to 1’ – they invent something that has never been seen before.”

What’s wrong with the ‘1 to n’ approach to business? New entrants to established markets provide more choice and more competition, which is good for us, isn’t?

That’s debatable:

“This was the promise of the classical economists: capitalism will optimize for consumer convenience, while keeping businesses themselves lean and hungry. And it was Marx’s warning: businesses will compete so viciously that nobody will get any money, and eventually even the capitalists themselves will long for something better.”

Those are the rival theories, but in practice competition isn’t always of the cut-throat variety. Even when they’re not forming actual cartels, most suppliers in the same market will try to avoid ultimately self-destructive tactics like full-on price wars.

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Thiel’s focus, however, is on escaping competition altogether by developing a product that can’t be copied by others. Instead of merely adding another version of something that already exists (i.e. going from 1 to n), Thiel’s advice is to create something that didn’t exist before (i.e. going from 0 to 1).

There are many ways of establishing monopoly. For instance, you can secure the rights to a ‘natural monopoly’ such as those enjoyed by train operating companies. Another is cartelisation – which one might regard as a shared monopoly.

Thiel’s interest is in creating markets not fixing them. And, according to Alexander, he mention four particular paths from zero to one: “proprietary technology”, “network effects”, “economies of scale,” and “branding”.

But whether a monopoly is created by fair means or foul, what’s to stop the monopolist from using that power against the public interest? Arguably that’s a question stemming from a glass half-empty view of the world, so here’s the glass half-full:

“Since it doesn’t have to worry about competing with anyone, it [the monopolist] has wider latitude to care about its workers, its products, and its impact on the wider world. Google’s motto — ‘Don’t be evil’ — is in part a branding ploy, but it’s also characteristic of a kind of business that’s successful enough to take ethics seriously without jeopardizing its own existence.”

In other words, the optimistic question is this: ‘free from the pressures of competition, why wouldn’t the monopolist use its power for the common good?’

Unfortunately, there’s a long list of answers to that one, but let’s stick to the most obvious: greed. Landlords hold the most natural monopoly of them all – and they use their position to extract as much money from the economy as the market will bear. The landlords of Silicon Valley are no exception – something lamented by a certain Peter Thiel.

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Admittedly, landlords did not create the product they monopolise, God did; and Thiel’s Zero to One argument concerns the monopolies created by genuine innovators.

However, that still leaves a number of counter-arguments. Here are three:

Firstly, the fact is that ‘1 to n’ – i.e. copying existing innovations – is an engine of global progress. Hundreds of millions of people have been lifted out of poverty across the developing world by local enterprises imitating, adapting and, on occasion, stealing innovations from more developed countries. If what you care about is achieving basic standards of nutrition, health, literacy and income, then the lesson of the last thirty years is that copying works.

Secondly, zero to one isn’t the whole story. Look a bit closer and you see that the starting point is often rather more than zero. The tech giants wouldn’t be where they are now without the internet and other key technologies – whose creators (including government agencies) chose to share. The giants shouldn’t guard their own monopolies so selfishly, not when they owe so much to others.

Thirdly, even if we assume a starting point of ‘zero’, we shouldn’t be so impressed by the achievement of getting to ‘one’ that we ignore the means by which the monopoly is maintained. If the monopolist uses its power and wealth to kill (or merely buy-out) the competition at birth then it is destructive, not creative.

Whatever the downsides of 1 to n, the opposite process – i.e. n to 1 – is much, much worse.

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The traitors and thieves of Silicon Valley

By Jonathan Tepper

This is not hyperbole. There is a mountain of evidence to back it up.

Like its Silicon Valley rivals, Netflix used to keep its subscriber numbers to itself. Now it has become a little more open – and the numbers are big. In January, in a signal to Wall Street about how much more Netflix can grow, Netflix told investors that their shows account for 10% of TV screen time in the United States.

The platform now has close to 140 million subscribers and they are adding eight million every quarter. The recent hit Netflix movie Bird Box has been watched by 80 million people since it was released just before Christmas. Hit shows such as You and Sex Education are also highly popular: 40 million households were expected to see each show in its first four weeks on Netflix. Thanks to the ‘Netflix effect’, the number of cancelled TV licences in the UK spiked for the first time in six years.

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Research published by Ofcom last month showed that children overwhelmingly prefer YouTube and Netflix to any other platforms. The children in the study did occasionally watch platforms such as the BBC’s iPlayer and network television, but they saw them as less relevant. In fact, watching this kind of ‘traditional’ television was associated with those dreaded people: parents.

Disney’s purchase of Fox for $52 billion shows that traditional media corporations know they are fighting for survival. Netflix has recently cancelled the last of its (Disney-owned) Marvel shows in what is easy to see as a “show of force” by the streaming service. Our cash-starved public sector broadcasters are contemplating banding together on a new shared streaming platform in an attempt to fend off Netflix. But it is the lengths Netflix will go to in growing their subscriber base that should horrify us.

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By Mark Piesing

On 1 January a story dropped on FT.com that should be seen as a warning about Netflix’s power. The headline read simply: ‘Netflix pulls episode of comedy show in Saudi Arabia.’ We don’t know the specific lines from Hasan Minhaj’s show that offended the Crown Prince; the American comedian said so much about Saudi Arabia that the thin-skinned autocrat could have found offensive. Perhaps it was his comment that Saudi Arabia was “the boy-band manager of 9/11”. Or it could simply have been the fact that the young American referred to the Saudi ruler by his initials, MBS.

Executives say they received a “valid legal request” from the Saudi authorities to take down episode 2 of Patriot Act from the streaming service in Saudi Arabia. And, in a worrying act of political self-censorship, they did so, even if an edited version remained up on YouTube.

Whatever the specific source of distress for the Crown Prince, executives at Netflix clearly didn’t want to upset him. Interestingly, in the same episode, Minhaj also criticises Silicon Valley for “swimming in Saudi cash” and urges tech companies to stop taking investment from the kingdom. It has been estimated that the Saudis have invested over $6 billion directly into the Valley, and more indirectly through funds such as SoftBank and BlackRock. The New York based fund is one of Netflix’s largest institutional investors. It is known to have close economic ties to Saudi Arabia. Larry Fink, its CEO, has described himself as a friend of Saudi Arabia.

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The robodoctor will see you now

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These behaviours are driven by a desperate need to grow – fast. This is what makes the entertainment platform vulnerable to pressure from authoritarian regimes. It’s not a surprise that Netflix will bend over backwards for ‘MBS’ when roughly two-thirds of the population of the oil rich desert kingdom is under 30 – a source of wealthy new subscribers for the platform – and Silicon Valley is awash with Saudi cash and the soft influence that it buys.

This is not the first time the entertainment giant has bowed to the demands of autocrats. In Singapore the service took down three episodes of different programmes after it received a similar request from authorities who didn’t like drug use being portrayed in a positive way.

In these decisions our favourite streaming service has displayed a cavalier approach to freedom of speech – and to its responsibilities as a major, and potentially dominant, cultural medium.

It’s an approach reminiscent of Facebook at its worst. Netflix’s critics claim that the corporation’s capitulation is fuelling digital authoritarianism by emboldening autocrats across the world in their attempts to control global streaming services as they do their national television.

Netflix shares another similarity with Big Tech gone bad. Mark Zuckerberg’s quote “Move fast and break things” – once exciting, now quite chilling – would fit as well on the wall of Netflix’s HQ as it does on Facebook’s. Netflix must cannibalise or destroy traditional cinema and television in order to achieve the growth it needs.

The giant was happy to release its recent films Bird Box and Roma in the cinema just long enough to qualify for awards such as the Oscars – success in which will drive subscriptions. While consumers can save money by watching a film on a streaming service at home rather than in the cinema – and producers can be ‘bought’ by the big budgets Netflix offers – something is lost when you watch a film on a TV, laptop or mobile. The collective experience and immersive storytelling offered at the cinema is powerful. For the moment, at least, traditional cinema is still attracting audiences.

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Is it all over for the big tech companies?

By Peter Franklin

The sheer amount of video Netflix is producing is turning into a “raging flood” that threatens to sweep away quality control, and our beloved public service broadcasters with it. Screen-testing new shows via pilots may not be a perfect process, but it at least offers a base level of quality. Netflix doesn’t commission pilots. It doesn’t have the time, if it wants to conquer the world. Instead, it commissions whole seasons at a time. Insiders say there are now so many people who can greenlight a show at Netflix that it acts like 10 to 15 different production companies.

This is where consumers lose out. By not piloting shows, Netflix stands accused of cancelling more than would be expected of a traditional broadcaster. The shows Netflix has cancelled include the expensive Sense8, the critically acclaimed Unbreakable Kimmy Schmidt and flops like Girlboss. In fact, lists of all the shows Netflix cancels make the headlines each year. The cost of these cancelled shows is then passed on to consumers through higher subscription charges and – in the future – perhaps even the introduction of advertising.

For big-name showrunners such as Ryan Murphy, the man responsible for American Horror Story, Netflix offers the chance to satisfy their wildest fantasies. But let’s be honest, $300 million for a five-year contract to produce whatever you want is not a recipe for quality. It is a recipe for a great deal of self-indulgent rubbish. “I’m building a team that is orientated to say yes in a town that is built to say no,” said Ted Sarandos, Netflix’s chief content officer. He’s not kidding.

Like the other out-of-control behemoths, the streaming giant even has its own bizarre Darwinian culture that is credited with enabling the company to grow so fast – and which may now be amplifying its mistakes. It’s called “radical transparency”or “the Netflix Way”. Former employees have called it “a culture of fear.”

If you make a mistake, you are asked to “sunshine” the incident in front of your peers. This is Netflix lingo for standing up in front of your colleagues to tell them what you did and even apologise to them. If you are a manager, you are told to apply a “keeper test” to your staff – asking yourself whether you would fight to keep a given employee. If managers don’t fire people, whistleblowers say, they risk being fired themselves. And even if you’ve been fired, you have to go through a merciless post-mortem in front of your former colleagues. It is a brutal recipe to ensure the survival of who the company deems the fittest.

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The truth about the 'techlash'

By Carl Miller

Netflix has to grow fast for a simple reason. The streaming service may be a 20-year-old company, but it has the business plan of a start-up. Like Uber, Netflix has to grow at ever-increasing rates to justify its valuation, while it is making only a small profit and carrying massive debt. This exponential growth depends on a feedback loop: subscriber numbers increase rapidly, which fund the digital “box sets” Netflix needs to keep existing subscribers happy, which attracts new subscribers and increases revenue even more.

Keeping subscribers means that, just like Facebook or YouTube, Netflix has to work out ever better ways to hack our brains. It already personalises recommended shows, and the landing cards for each show. It even selects the shows it suggests to you according to what time you’re on the app. If you log in late at night, you’re more likely to be shown shorter programmes, or those that you haven’t finished watching.

Netflix needs to work out how to manipulate us into staying on the platform even longer, in preparation for the day when subscriber numbers plateau. This would make Netflix even more valuable – and should give it the ability to raise prices as it penetrates our lives more deeply.

It now turns out that, without our knowledge, Netflix has been watching you while you watch-play the interactive show ‘Black Mirror: Bandersnatch’. The choices you make in the show – for example between Frosted Flakes or Sugar Puffs– are being saved by Netflix to improve its shows in the future and, presumably, what it markets to you.

Like the characters in Netflix’s hit show, we may think we are in The Good Place, but it turns out we are in The Bad Place. We love Netflix, the shows it produces, the choice it gives us and – for my children – it is hard to imagine life without it. But we loved Facebook once, before we knew what they were really up to.

What’s less appreciated is that the world’s transport networks have undergone a similar revolution. Thanks to common standards, they’ve become increasingly inter-operable, boosting global trade. The containerisation of shipping and freight has proved especially important – something that Ruth Davidson wrote about in her UnHerd launch essay:

“Before containerisation, loading cargo cost $5.86 per ton and only 1.3 tons could be loaded per hour. Today, cargo can be loaded at a rate of 10,000 tons per hour and at a cost of just $0.16 per ton.

“90% of all purchased goods are now shipped inside a container and 90% of the world’s nations have at least one container port.”

Obviously the parallels between the internet and transport aren’t exact. The internet is pretty much instantaneous, but can only move information, while neither of those things is true of the global transportation system. However, in other ways, the similarities between the two global networks are growing – indeed, they are gradually merging into one another.

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Ctrl + Alt + Del. Conservatives must reboot capitalism

By Ruth Davison

For instance, containerisation didn’t just streamline shipping in a physical sense, it also did it electronically, establishing globally-shared systems for recording and tracking goods as they travel around the planet. The growing automation of both the physical and informational components means that within decades the global transport network will become a robotic extension of the internet, able to see and move physical objects as precisely as the internet currently does with bits of data. Our transport networks and the internet will become one.

Who is best-placed to dominate this emerging super-network?

I’d look to those companies whose operations and expertise already cut across the still distinct spheres of electronic communication and physical transport. One company in particular comes to mind: Amazon.

Writing for Bloomberg, Shira Ovide urges us to keep an eye on the most expansive of the tech giants:

“We shouldn’t lose sight of Amazon’s interest in transportation and logistics — moving physical goods by land, sea and air, organizing that transportation, storing merchandise or delivering it to the right place. PwC has said this is a roughly $5 trillion annual market, which fits with Amazon’s love of attacking massive pools of spending.”

Here are just some of the things that Amazon has been up to lately:

“Amazon and General Motors Co. are discussing an investment in an electric truck company. Amazon was among a group of recent investors in autonomous vehicle startup Aurora Innovation Inc. Last month, Amazon said it would test package deliveries by small robots in a Seattle-area neighborhood.”

For all of the prototyping, it will be years, perhaps decades, before driverless vehicles and delivery drones go mainstream – and there’s no guarantee that Amazon and its partners will win the technological race. So a more immediate test of the company’s ambitions concerns its existing capabilities.

Amazon is a vertically integrated company, with massive investments at almost every stage in the online retail value chain. It has a history of using those strengths as a base from which to expand horizontally to create parallel businesses. Ovide gives the example of Amazon Web Services (AWS):

“The company had already built data centers and servers to support its online store. Turning this into a service for others required different technology and a lot of work, but the initiative let any company rent Amazon-caliber computing horsepower. “

In previous UnPacked columns I’ve looked at another example – Amazon’s plans to expand from online to real world retail via its fully automated Amazon Go stores.

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By James Bloodworth

Given this track record, will Amazon use it mastery of logistics and deliveries to expand into territory currently held by companies like FedEx and UPS?

“The huge volume of existing packages — about 2 billion a year in the U.S., Cowen & Co. estimates — helps Amazon learn the delivery routes that hit the most homes. It’s already paying for those routes. How much harder and more expensive would it be to layer on more deliveries to those routes from other companies?”

Perhaps the question is not how much more expensive would it be for Amazon to deliver other packages, but whether they can do it more cheaply than the established companies. If they can, and if Amazon were willing to act on such an advantage, then governments would be faced with a dilemma: to allow consumers to enjoy the immediate benefits or to prevent this over-mighty giant from becoming even more powerful.

The pattern thus far is of governments giving Amazon what it wants. Take US taxation policy, for instance. It was recently reported that the company made a profit of $11.2 billion, but paid nothing in federal income tax. Indeed, as the saga of Amazon’s new HQ demonstrates, it is often the corporates who benefit from the public purse, not the other way round. 

I don’t know if Amazon has plans to expand into public transport too, but someone’s being taken for a ride.

That, of course, is Adam Smith in the Wealth of Nations, noting the ever-present threat that collusion poses to competition.

Price fixing is not in the public interest, which is why governments intervene to prevent it. But what is a fair price? One yardstick might be that pricing should be consistent – the vendor selling the same item at the same price irrespective of who’s buying it. However, that’s complicated by what you mean by the same item – for instance, is a taxi ride at rush hour or chucking-out time the same as one taken at 11 o’clock in the morning? Arguably, these are different services that justify different prices. If demand exceeds supply at certain times, then rationing is inevitable by one means or another.

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Where's the outrage about online price discrimination?

By Rhiannon Williams

In the first century, Publilius Syrus said that “everything is worth what its purchaser is willing to pay for it”. In supermarkets, you can see how some items, such as premium brands of chocolate and ice cream, regularly cycle between two price points. This doesn’t appear to be about the balance of supply and demand, but about selling to two different types of consumer – those who’ll pay a modest premium for an occasional treat and those who’ll pay what it takes to get what they want when they want it. Then there’s the fact that in some markets people simply expect to pay more for the same item than those in other markets: the point at which consumers make the distinction between a reasonable mark-up and an outrageous rip-off is not consistent and thus neither are prices.

Looking ahead, we can expect a whole extra dimension of complexity – given that prices are increasingly set by computers not humans. E-commerce systems now gather so much relevant information that only a pricing algorithm can process it all. But to what end?

In a somewhat alarming article for VoxEU, Emilio Calvano, Giacomo Calzolari, Vincenzo Denicolò, Sergio Pastorello describe their research into the implications:

“Already in 2015, more than a third of the vendors on Amazon.com had automated pricing… and the share has certainly risen since then – with the growth of a repricing software industry that supplies turnkey pricing systems, even the smallest vendors can now afford algorithmic pricing.”

Moreover, the most advanced programs aren’t like the “the traditional revenue management systems long in use by such businesses as airlines and hotels”, but are much more autonomous and unpredictable – using AI technology to learn the most effective pricing strategies (effective at extracting the most money from the consumer, that is).

So, here’s the big question: if these AI systems are free to discover the most profitable pricing strategies without human supervision, will they collude with one another to fix prices?

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Who's protecting the vulnerable from predatory markets?

By Polly Mackenzie

Today’s AI systems, though impressive, are basically trial-and-error engines, lacking even the slightest shred of consciousness. Surely, then, it would be beyond their capabilities to spontaneously organise themselves into a price-fixing cartel – especially under the conditions of a complex and competitive marketplace.

Calvano and his colleagues decided to put that assumption to the test – and here’s what they discovered:

“…we construct[ed] AI pricing agents and let them interact repeatedly in controlled environments that reproduce economists’ canonical model of collusion, i.e. a repeated pricing game with simultaneous moves and full price flexibility. Our findings suggest that in this framework even relatively simple pricing algorithms systematically learn to play sophisticated collusive strategies.”

Uh-oh. Adam Smith was right – pricing strategies on the part of multiple market players do tend toward cosy collusion not cut-throat competition. If the mental befuddlement of “merriment and diversion” is no obstacle, that’s because consciousness isn’t required at all – mindless calculation is all you need.

That collusion can spontaneously arise without criminal intent makes it all the more of a regulatory nightmare:

“…the algorithms leave no trace of concerted action – they learn to collude purely by trial and error, with no prior knowledge of the environment in which they operate, without communicating with one another, and without being specifically designed or instructed to collude. This poses a real challenge for competition policy.”

The authors conclude that those calling for laws to restrict the use of such algorithms have a point.

I would add that online retailers should also be calling for regulation. In the short-term, most of the the AI firepower may on their side, but how long before ordinary consumers have their own AI agents – algorithms designed to find the ideal price at which to buy rather than sell?

One can easily envisage a digital assistant that could trawl through online retail sites to find the lowest price for a particular item. Various price comparison sites already exist of course, but imagine an AI agent capable of learning from experience and adapting its methods. Now, what if collusion turns out to be the most effective strategy for the AI agents on our side? Instead of the spontaneous organisation of price-fixing cartels, we’d have the spontaneous organisation of consumer boycotts to force prices down.

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No, computers haven't learned how to cheat

By Peter Franklin

Without the help of AI, the coordination costs of collective action and asymmetric access to information tend to put consumers at a disadvantage to the businesses we buy from. Individually, we are small and they are big. We, therefore, depend on unimpeded competition in market place and/or effective regulation to get a fair deal.

Retailers should think very carefully before using price-gouging algorithms to undermine the status quo. Any additional advantage they gain could be lost (and then some) if they end up unleashing the power of consumer AI.

But when Letwin delivered his final report in the autumn, it was a major disappointment to critics of the property sector. There was seemingly no evidence of hoarding after all. “How can anybody come up with the idea that build-out rates are not slow, and that they are not tied to the monetary return to developers?”, one exasperated observer, a Labour councillor in Leeds, demanded to know. 

If critical observers were deflated, they should not have been surprised. Vigorously lobbied and generously funded by the property sector, the Conservative Party has long shied away from meaningful confrontation with this constituency; if it has occasionally talked the talk, it has invariably declined to walk the walk.

Nowhere is this symbiotic, money-mediated relationship between the Conservatives and the property sector clearer than in regard to the ex-public land that today fills out UK developers’ land banks. Since Margaret Thatcher’s accession to power in 1979, the Tories and the property sector have been the core pillars of what the academic Philip Kivell 30 years ago described as a “coalition of interests” ranged against public landownership that also included private landowners, financial institutions, private industrialists and the growing population of homeowners. 

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Home Truths – Part III: The nine drivers of a broken market

By Liam Halligan

This coalition has in recent decades presided over a profoundly significant and undemocratic phenomenon that has been largely hidden from the public eye. On the one hand, the property sector has channelled money the Conservatives’ way, while repeatedly calling for the government to “release” more public land to the private sector. On the other hand, successive Conservative administrations have succeeded in pressuring public-sector bodies across local and central government alike to give vast amounts of their land to those developers – usually in return for monetary compensation, but sometimes literally as a gift. Public land was sold when New Labour were in power, too, but in nothing like the same volumes.

This is land that was owned by the public, but which the public at large has never consented to relinquish; indeed, it has never been asked. 

Plenty has been written and said over the years about the “revolving door” between the property sector and UK local authorities, and about how this local nexus smooths the planning process, facilitating the granting of permission for what are often deeply contentious developments. But the nexus between the property sector and central government has been equally pernicious, if not more important: the impetus (sometimes compulsion) to dispose of public land has consistently come from Whitehall. This nexus has not been properly investigated. Its workings have eluded critical commentary. 

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Ten vested interests the Tories failed to tackle

By Peter Franklin

Is money the only explanation for the zeal with which governments of the past four decades have pursued land privatisation? Almost certainly not. The trailblazers of such privatisation have believed in it, often passionately. Land, they have maintained, is simply better off in private-sector hands, where it will allegedly be managed more efficiently and – through market mechanisms – allocated more productively.  

But it is scarcely credible that money has not played a significant role. It is unlikely to be a coincidence for example that the two sectors that have long been the biggest buyers of disposed public land and that have therefore benefited most from land privatisation – the property sector and financial institutions – have also long numbered among the Conservative Party’s biggest donors, and in fact have been the very biggest two since 2015, during which time the pace of land privatisation has accelerated. ‘Follow the money’ is ever a reliable adage in the world of politics and policy. 

In 2011 it was revealed that property firms had given over £3 million to the Conservative Party over the previous three years, “including large gifts from companies seeking to develop rural land”. Developers were also paying for access to senior Tories through the Conservative Property Forum, “a club of elite donors which sets up ‘breakfast meetings’ to discuss planning and property issues”. In early 2010, the forum had met with Grant Shapps; a year later, Shapps, by this time the housing minister, launched the government’s flagship programme to release to developers by 2015 enough central government land across England to build up to 100,000 new homes.

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May should set her sights on the crony capitalists

By Liam Halligan

Yes, the country has a housing shortage, and yes, the public sector owned plenty of developable land. But by Shapps’s own admission, the private sector – placed under no comparable obligation to release such land to developers – owned much more. And the idea that large swathes of public-sector land were (and are) sitting idle, being wasted, is simply a myth.

Money, it is clear, talks. 

And it carried on talking. In 2014 it was reported that a property developer that boasted of boosting its profits through land banking had donated in the region of £300,000 to the Conservative Party since 2010. Numerous comparable revelations have followed. In 2018 alone, the Conservatives received at least £1.3m in donations from individuals and companies linked to the property sector.

Part of the reason that the property sector’s lobbying of government has been so effective in precipitating the privatisation of public land is that its money has bought it a seat at the decision-making table. It has increasingly been the property sector itself that advises Whitehall on its strategy vis-à-vis public land. 

The most egregious instance of the fox being ushered into the henhouse concerns the so-called Expert Advisory Panel commissioned in February 2012 to advise the government on delivering new homes through the disposal of “surplus” public-sector sites. The person appointed as chairman of this esteemed panel was Tony Pidgley, founder and chairman of Berkeley Group Holdings, one of the UK’s largest property developers, and, needless to say, a personal Tory party donor. 

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By Charlotte Pickles

Fast forward to November of the same year and the publication of the Panel’s final report. The report contained three case study examples of “land that has previously been released from the public sector and which has successfully delivered new housing”; the Panel had “considered what lessons can be learned” from these. One, notably, was the Woodberry Down estate in London. There, in the face of community protest, some 2,000 council houses have been demolished, to be replaced eventually by over 4,000 new homes, some for “affordable” rental and some for private purchase. Crucially, upon completion, the land occupied by the private properties will be retained by the site developer. This developer, it turned out, was none other than Berkeley Group. 

How much had Berkeley paid for this land? Nothing. The local authority provided the land “at nil cost”. Little wonder perhaps that by 2014, Berkeley’s profits had surged sufficiently to pay Pidgley (by now the recipient of a CBE for “services to the housing sector”) £23.2m in cash and shares. In any event, Woodberry Down was one of the three “successful” cases from which the Panel – led by Pidgley – had learned lessons about public land disposal and proceeded to advise the Government. 

None of this should be acceptable in a professedly democratic polity. The government should not be taking advice from those with such obvious vested interests. It should have, and use, its own experts. Nor should the government be receiving donations from the same people who advise them. If money continues to pollute the politics of land in the way it currently does, we can only expect undemocratic outcomes to continue to ensue.

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The Year UnPacked

By Peter Franklin

In an excellent briefing for MIT Technology Review, Martin Chorzempa explains why the Chinese are so far ahead of the West when it comes to ‘fintech’ (i.e. financial technology).

Basically, it’s all about the apps:

“Ant Financial’s Alipay and Tencent’s WeChat have changed the way many people live their financial lives. They are one-stop shops that enable half a billion Chinese to access a dizzying array of services, from payments, loans, investments, and credit scores to taxi rides, travel bookings, and social media.”

Online financial services obviously exist in the West, but there’s nothing to match the scale or scope of the main Chinese apps – and the services thereby enabled:

“Because so much is sold via these apps, Alibaba and Tencent know the health (or lack thereof) of many small businesses across China. As a result, they can lend to companies that banks might consider too risky. Likewise, people with no traditional credit score can get cheap loans because Ant Financial has their payment and purchase history.”

Of course, that raises the question as to why these apps have become so important and powerful compared to their western equivalents. Chorzempa makes it clear that it’s not because China has developed cutting-edge technology not yet available in the West. The key fintech systems were developed elsewhere, it’s just that the Chinese have run further and faster with what’s available than we have. Furthermore, they’ve done it in an astonishingly brief period of time; Chorzempa reminds us that just 15 years ago only 7.3% of Chinese people used the internet compared to 65% of Americans.

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But perhaps what really needs an explanation is not the speed of China’s fintech advance, but the lack of progress in America and other western nations.

Tech giants such as Google, Amazon and Facebook have built up their empires by dominating a particular field of online service provision – such as search, online retail and social media. But missing from that list of digitised and disrupted sectors is finance.

In the West, the online provision of personal financial services is more an extension of the ‘traditional’ industry than a disruption of it. Unlike, say, the high street retailers, the high street banks and building societies do not yet face an Amazonian existential threat.

As for the application of fintech by the established industry, that has been evolutionary not revolutionary – enabling rationalisation and centralisation (bye-bye, bank branches; so long, bank managers) as opposed to Chinese-style disruption.

When you consider the ‘value’ that Facebook has extracted from its access to our holiday snaps and social networks, it’s astonishing how little the banks have done with everything they know about our personal finances. Imagine the money that Silicon Valley could make if it controlled such a commercially-potent source of data – or rather, don’t imagine: just look at China.

As so often, it turns out that necessity was the mother of invention.

“In 2004, when Alipay launched as a simple payment option, Chinese finance was extremely low-tech. Clunky state-owned banks had nearly gone bankrupt from bad loans, and they cared little for average consumers. People had to travel to bank branches and wait in long lines to pay their bills; savings were eroded because the government set the interest rate on deposits below inflation; and barely anyone could get a credit card.”

In the West, however, the established banks are good enough, from a customer-point-of-view, not to drive people towards a disruptive online alternative. Unfortunately, from a taxpayer-point-of-view, we had to bail them out. So why should they bother innovating entirely new sides to their business models when they’re already too big to fail?

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The traitors and thieves of Silicon Valley

By Jonathan Tepper

Perhaps we should be grateful that we haven’t seen the equivalent of an Amazon or a Facebook disrupting the financial sector (or emerge from within it). While the biggest banks may be too big to fail, at least there’s a lot more than one of them. The tech giants, on the other hand, tend towards globalised monopolistic positions in the sectors they operate in.

A near total concentration of market power is unhealthy in any industry, but in finance it could prove fatal.

But all of that is as nothing compared to Amazon’s latest achievement, which is bringing unity to America’s fractured political landscape. Leftwingers like Representative-elect Alexandria Ocasio-Cortez and Rightwingers like Tucker Carlson of Fox News now speak as one… against Amazon.

Indeed, an extraordinary range of American publications from the socialist Jacobin magazine to the centrist Atlantic through to the conservative National Review have published pieces lambasting the company. The focus of this widespread rage is something that might seem relatively innocuous – a decision over where to site the company’s second headquarters (the first is in Seattle). Compared to all the other controversies that Amazon is embroiled in, the acquisition of some extra office space might seem an odd thing to get so exercised about.

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Cheap consumer goods come with a high human price tag

By James Bloodworth

However, there was an awful lot at stake: 50,000 new jobs and a $5 billion investment in new construction: a huge prize for a big city; the promise of complete transformation for a smaller one.

Which is why a grand total of 238 cities (including some in Canada and Mexico) entered the competition to be chosen. This was narrowed down to a shortlist of 20 cities in January, with the final result announced earlier this month (of which, more later). The whole process was distinctly reminiscent of the competition between cities to host the Olympic Games.

Unfortunately, for Amazon, its quest to find a second home has become a symbol of corporate welfare. That’s because the company wasn’t just looking for the best possible location, it was also angling for incentives.

It is estimated that the various levels of American local government (including state governments) spend between $45 and $90 billion every year enticing businesses to invest in their states and communities (or to not move existing investments elsewhere). The sweeteners take many forms from tax breaks to targeted infrastructure investments (though what counts as a special favour and what is something that the state or city would have done anyway is not always clear). The justification is that the locality will receive much more in return once the corporate welfare recipient moves in and starts creating jobs, tax revenues and reasons for other businesses to move in. From a nationwide perspective this amounts to a system of subsidies for businesses big enough to demand them, but from the narrow perspective of the locality, it can look like a good deal.

Therefore, Amazon wasn’t doing anything out of the ordinary… for corporate America. But if they thought that the spectacle of a trillion dollar company touring the country soliciting favours from investment-hungry cities would look good, they were mistaken.

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The traitors and thieves of Silicon Valley

By Jonathan Tepper

The secrecy surrounding the bidding process didn’t help. One could argue that this is just how business is done – with Amazon expecting no more confidentiality from its prospective public sector partners than it would from the private sector. However, government, whether national or local, is not just another client/supplier, it is a democratic institution. While it isn’t necessary to give a running commentary on every twist and turn in a negotiation, the people of a community can’t be frozen out altogether – not when the deal is as consequential as that on offer from Amazon. Citizens need to be treated with at least as much respect as shareholders – in fact, rather more, because they not only ‘own’ but also legimitise the government side of the deal.

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All of these concerns and others were bubbling away during the 14-month competition, but it was the final result that blew the lid on public anger.

It wasn’t that most of the cities making the bid were doomed to be disappointed. After all, with one new HQ there could only be one winner – something the 238 bidding cities will have been aware of going into the process. As it turned out, there were two winners, because Amazon decided to split its second HQ between two locations. But rather than lessening the disappointment the joint award accentuated it. That’s because neither winner was a city that really needed the break; both winners were located along the BosWash corridor – the mighty connurbation that runs from Boston to Washington. Hopes that Amazon might establish an HQ somewhere in heartland America – helping to bridge the divide between the coastal cities and flyover country were dashed.[2. There will, however, be a $230 million “Operations Centre of Excellence” in Nashville, Tennessee]

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What does America want?

By Henry Olsen

One of the winners was New York – always a strong contender given its global profile. But the other winner was, if anything, of greater geographical significance. Arlington County, Virginia cannot be described as heartland America. It’s not even heartland Virginia – but rather in the western suburbs of Washington. It is therefore well within the infamous ‘Beltway‘ – seen by much of America as the home of an out-of-touch political elite (though it’s also home to a great deal of poverty). The specific location is a business district of superblocks called Crystal City. Despite the name, it is not the most sparkling of places – but it is right next door to Reagan National airport. It’s also got metro stations, is just across the bridge from the Capitol and handy for the Pentagon (where Amazon has business). Jeff Bezos also happens to own the Washington Post.

So despite a high profile competition in which cities across and beyond the nation were considered, the winners were America’s biggest city and its capital city. A big-ticket investment decision that might have helped disperse the concentration of economic power in America, has confirmed it instead.

In the light of the outcome, Amazon is open to accusations of having staged the competition as a publicity stunt. Though to be fair, if it had opted for New York and Washington without the competition, it would have been accused of not giving the rest of America a chance.

Other critics see the competition as a clever way of obtaining commercially useful information about the expansion plans of candidate cities – handy when you’re in the business of building a nationwide distribution network (not to mention a chain of automated retail outlets). That said, obtaining such information is what major developers are pretty good at anyway.

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Who will take on the undeserving rich?

By Deborah Hargreaves

The fiercest aspect of the backlash centres on the corporate welfare aspect of the final decision. Despite picking the most ‘Amazon-ready’ locations, the company has nevertheless secured a reported $2.2 billion of additional inducements. Even the most reliable defenders of corporate America have had enough. In an editorial entitled ‘Amazon’s Golden Fleecing’, the Wall Street Journal had this to say:

“We rarely agree with socialist Congresswoman-elect Alexandria Ocasio-Cortez, but she’s right to call billions of dollars in taxpayer subsidies for Amazon “extremely concerning.” These handouts to one of the richest companies in the history of the world, with an essentially zero cost of capital, is crony capitalism at its worst.”

Fox News host, Tucker Carlson also weighed in: “the richest man in the world just got $2 billion in taxpayer subsidies. How does that work?”

And yet, some of the rival locations were offering a lot more than that. Amazon literally turned down billions of dollars so that it could locate in New York and Washington. What clearer proof could there be of the pulling power of a fortunate few locations over everywhere else.

The fact that this involves Amazon only makes it worse. This is a company with a physical footprint of facilities and employees across America. With its expertise in cloud computing services, logistics and distribution, there can be few organisations better positioned to overcome the tyranny of distance. If anyone could have made a non-obvious location work, it was Amazon.

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The ‘Amazon moat‘ is not a water feature planned for either of its new headquarters, but a reference to the company’s well-defended position in the marketplace. Its operational infrastructure from websites to warehouses is so extensive and interconnected as to make it all-but-impossible for a serious competitor to emerge. Without the Amazon’s economics of scale (and accumulated expertise), it’s very hard for rivals to compete on price across such a range of goods and services – and if they can’t do that they can’t grow big enough or last long enough to match Amazon’s heft.

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What does the 'charging elephant' - also known as Amazon - want? Only everything (and beware of getting in its way)

By Peter Franklin

‘Superstar cities’ like New York and Washington also have their metaphorical moats: the connections, attractions, size and diversity that smaller and/or poorer places cannot compete with. Unlike a company, a city is limited in the scope of its geographical expansion. A city cannot grow ever onwards across the world. What it can do, however, is bring the world to the city. Companies are nothing without people and are, therefore, drawn inexorably to the places that have the people it needs, which in turn attracts more people and, of course, their money.

So is that it, then? Are nations like America doomed to a circular process of growing geographical inequality? A favoured few mega-cities monopolising a favoured few mega-corporations?

A country can’t afford to give up on its smaller cities (or to ignore the interests of its smaller businesses). However, changing the dynamics of economic concentration will require concerted action on the part of central and local government. Here are five things they should be getting on with now:

A crackdown on corporate welfare. It should be against the law to offer inducements to one business that aren’t available to all businesses – especially when it comes to their treatment in the tax system.

A transparent city planning system. All information about governmental land-use and infrastructure investment decisions should be open source – with no privileged access for powerful interests. Maximising the involvement of local citizens in key planning decisions requires radical openness anyway.

Giving communities more control over their land. One of the reasons why Crystal City was so attractive to Amazon is that much of the relevant land was owned by one developer – greatly simplifying matters for a major investment. Instead of offering tax breaks and the like, local government would be much better engaged in entrepreneurially obtaining and preparing land for development.

Rethinking the way the state allocates capital spending – which should be counter-geographical as well as counter-cyclical. Investing to maximise returns on the basis of conventional assumptions means that the same places will get most of the public investment as well as the private investment. It would also help not to include rent in GDP calculations, which counts the inflation of land values in overheated property markets as ‘growth’.

Suggested reading

The cost of property may slowly kill Silicon Valley - but a Land Value Tax might give it new life

By Peter Franklin

Introducing a land value tax. The concentration of development in a few favoured locations sends rental values soaring. Not only should this bonanza for landlords not be counted as growth, it should also be properly taxed. In the long-term, this would help shift investment out of economically unproductive, socially useless speculation. In the shorter-term, it would raise revenues that could be invested locally in social housing and community land trusts – and nationally in boosting the potential of smaller cities.

Finally a word of warning: dominant cities don’t stay that way forever – and neither do dominant companies. The tendency towards economic concentration is driven by factors that shift over time. Taking active steps to spread the productive potential of a nation isn’t just a matter of maintaining social cohesion, still less is it an act of ‘charity’. Rather, it is the policy of keeping options open in a world where change is inevitable.

Or, to put it more succinctly, don’t put your eggs all in one basket – Amazon baskets included.

Shockley was as close to a rock star as it got in the science world. Having won the Nobel Prize for co-inventing the transistor, many people thought he had gone mad when he moved to Palo Alto to found the Shockley Semi-Conductor Laboratory. But he had his reasons. He had grown up in the area, and he wanted to return home to help his ailing mother.

Shockley hired an all-star cast to join him – experts in physics, metallurgy and mathematics, they abandoned the East Coast to work on the commercialisation of the transistor. Robert Noyce, one of the hires, said getting the call from Shockley was like picking up the phone and talking to God.

Read the series

When competition ends in conspiracy

By Jonathan Tepper

Shortly after arriving, however, they discovered he was an erratic and difficult boss. He was a genius, but a jerk, and not just your ordinary, run-of-the-mill jerk. He was an epic egomaniac – and had tried to claim sole credit for the invention of the transistor. Later in life, he spent his time espousing a racist eugenics agenda, promoting a high-IQ sperm bank, and losing all contact with his children. He was, by most accounts, a horrible boss.

Within a year of joining Shockley, the new hires decided to leave and found a new company – Fairchild Semiconductor. Later dubbed the ‘Traitorous Eight’, they signed one-dollar bills in place of formal contracts – a symbol of nonconformity.

Many consider this act of employee treachery as the definitive moment of Silicon Valley’s creation. It set a precedent of ‘can-do’ entrepreneurialism and loyalty to lofty ideas, rather than individual firms and egos.

Noyce, only 29 at the time, was the ringleader and the group’s transistors expert. Eventually, Noyce and his colleague Gordon E. Moore outgrew Fairchild, and again poached employees to start Intel. In 1971, only three years after founding Intel, Noyce made history yet again with the invention of the Intel 4004, the world’s first microprocessor. He had invented the beating heart of the modern computer.

Suggested reading

Time to topple the technopoly

By Charlotte Pickles

Silicon Valley owes its success to many things – access to capital, proximity to Stanford (one of the best universities in the world), and access to a vibrant Pacific hub in San Francisco. But what helped make it the innovation capital of the world is rarely discussed: California is one of the few states where non-compete clauses in work contracts are completely non-enforceable. In other words, employees have full rights to leave and work for a competitor.

In many other states, employees may be asked to sign a non-compete agreement as a condition of their employment. The terms vary considerably, but the basic idea is that if you are fired or quit your job, you cannot work for a competitor within the same industry for a certain period of time. These clauses make it difficult for workers to leave jobs and bargain for higher wages elsewhere.

Back in 1872, California made it illegal for employees to be bound to a specific employer. This state law is still in effect nearly 150 years later, and the lack of non-competes has proven a powerful factor in the Valley’s success. To this day, Boston lags Silicon Valley in the commercialisation of new technologies.

Imagine where the Valley would be today if Noyce had been prevented from defecting? What if Wozniak had never left Hewlett Packard to join Steve Jobs? Where we would be if Nikola Tesla were prevented from leaving Thomas Edison?

Suggested reading

Google, Amazon, Facebook: It's time to smash Silicon Valley monopolies

By Nigel Cameron

Silicon Valley’s history demonstrates that respect for worker talent was prized above strict company loyalty. This led to a malleable ecosystem, where good ideas spread quickly from company to company and innovators were free to choose their own fates. Professor AnnaLee Saxenian, author of many books on the tech industry, points out that, “In the early days engineers would say, ‘I work for Silicon Valley.’ And the idea was that they were advancing technology for a region, not any single company’s technology.”

If Noyce thought Shockley was God in the early 1950s, Steve Jobs idolised Noyce in the 1970s. When Apple was starting, Noyce was already a legend with Intel. “Bob Noyce took me under his wing,” Jobs said. “He tried to give me the lay of the land, give me a perspective that I could only partially understand.” Jobs continued, “You can’t really understand what is going on now unless you understand what came before.”

Although Jobs worshipped Noyce, he failed to give his own Apple employees the same freedoms that allowed Noyce’s best innovations to flourish. In 2014, it came to light that Jobs had been preventing employees from moving to other companies. Silicon Valley was founded on freedom of mobility for workers, but the tech giants – Apple, Facebook, Google, Adobe and many others – were caught in “gentlemen’s agreements” to not poach each other’s employees. Staff brought the case forward claiming that these pacts made it difficult to market their skills and that they also suppressed their salaries.

Suggested reading

What government can do about the winner-takes-all economy

By Peter Franklin

As part of the lawsuit, emails came out in court between Steve Jobs and Eric Schmidt, the CEO of Google, “I am told that Google’s new cell phone software group is relentlessly recruiting in our iPod group. If this is indeed true, can you put a stop to it? Thanks, Steve.” In another email, Larry Page from Google sent a distressed message saying Steve Jobs had threatened war if a single one of his staff were hired.

In the end, the agreement not to poach went out across Silicon Valley. Google, Adobe and others developed Do Not Hire lists. This was clear collusion, and the tech firms were forced to pay a $324.5 million fine for their illegal non- compete pact.

Further Reading

Marxist McDonnell has a plan to save capitalism

By Daniel Haynes

The non-compete problem did not end there. These contractual arrangements are now spreading like an epidemic across the entire economy and hurting the poorest the most. Today non-competes cover almost 18% of the entire American workforce and nearly 40% have signed one in previous jobs. Only California and three other states (Montana, North Dakota and Oklahoma) ban non-compete agreements in the US.

Lawyers sometimes argue that these clauses help protect trade secrets, but is there any good reason to ask camp counselors, janitors, and personal care workers to sign them? There are already federal laws dedicated to protecting Intellectual Property and today even those who clearly do not possess trade secrets are made to sign them, including 15% of workers without a four-year college degree and 14% of people earning less than $40,000.

These employment clauses are found in a staggering percentage of America’s largest fast-food chains with minimum wage employees. Chains like Burger King, Carl’s Jr., Pizza Hut and, until recently pressured in 2017 to drop them – McDonald’s. These no-hire rules affect more than 70,000 restaurants – more than a quarter of the fast-food outlets in the US – according to Alan B. Krueger, who is an economist at Princeton University.

Suggested reading

The collapse of unions is corrupting capitalism

By Denise Hearn

If you’re wondering what Pizza Hut has to lose if one of their store workers decides to work for another Pizza Hut across town, the answer is simple: the fewer options workers have, the less freedom they have to find a company that might pay a higher wage. The only function of these rules is to limit worker mobility and diminish their ability to bargain for wage increases. This is modern day feudalism, and workers have become vassals to corporate lords.

The truth is that non-competes only help firms that want tight control over employees. They do little for a given industry at large or for the economy. They harm workers and are disastrous for workers’ wages.

Often employees do not realise they are signing away their right to work somewhere else, as firms are not legally obligated to disclose non-compete clauses in almost all states. According to a study by economists Matt Marx at MIT and Lee Fleming at Harvard University, barely 3 in 10 workers were told about them in their job offer, and in 70% of cases, they were asked to sign them after they had already accepted the offer and turned down any alternatives. Half of the time, non-compete agreements were presented to employees on or after their first day of work.

Further Reading

Could Mill's model mend capitalism?

By Victoria Bateman

Barring workers from moving in search of better opportunities only works in an environment where firms have all the power. Because of industrial concentration, a number of firms now have monopsony power – that is, they are the only buyers of labour. A monopoly means there is one seller, and a monopsony means there is only one buyer.

In a monopsony, workers have little choice in where they work and have little negotiating power for wages with employers. In a healthy economy, many firms would be competing equally for workers and would be incentivized to entice new hires with higher wages, better benefit packages, and few restrictions on their next career moves. But monopsonies make it easier for firms to depress worker wages. The classic example of this is a coal-mining town, where the coal plant is the only employer and only purchaser of labour. Today, in many smaller towns, Walmart is the new coal plant – and is the only retail company hiring.

With burdensome occupational licensing, forced arbitration, and increased industrial concentration thrown into the mix, American workers are now faced with pressure on all sides. Without a strong union movement to provide a countervailing power, American workers are left to fight alone.

This is a toxic cocktail. The hangover from increased corporate power is real, with many struggling to meet basic needs. This is not the free capitalism we need or the hope that drove the ‘traitorous eight’ in Silicon Valley decades ago. Workers deserve better.

This is the second of three extracts from “The Myth of Capitalism: Monopolies and the Death of Competition” a new book co-authored by Jonathan Tepper and Denise Hearn.

Across Europe and the rest of the world, others are watching, wondering which path the UK will take, knowing that the outcome could be of genuinely historic importance. Yet this battle of ideas has nothing to do with the UK leaving the European Union. It’s far more important than that.

The British political and media classes remain obsessed, of course, with every twist and turn of the Brexit process. That’s understandable. Still fractious negotiations over UK-EU “regulatory alignment” and other seemingly arcane concepts may see Theresa May ousted as Prime Minister. Various Parliamentary shenanigans could yet upend the Brexit vote altogether.

Having just endured the party conference season, though, it’s clear to me that, beyond the headlines, an even more profound debate is gaining momentum, with much greater potential impact on the long-term living standards of millions of workers across the UK and beyond. It’s of relevance to the vast majority of countries on earth, in fact, for it’s a debate about the future of capitalism itself.

Further reading

What's killing the Conservatives?

By James Kirkup

“People feel that the old way of running things isn’t working,” declared Jeremy Corbyn during his conference speech, addressing the party faithful in Liverpool. As the Labour leader knows, support for capitalism across the UK is on the wane. Ten years on from the financial collapse, amid countless corporate scandals and spiralling wealth inequality, there is a growing sense among many that ‘the system’ is rigged against them.

A recent YouGov poll suggested around 60% of voters think the railways and Royal Mail should be renationalised. Over half want the water and energy companies back in public sector ownership. A ComRes survey earlier this year showed that young British adults now think capitalism is more dangerous than communism.

No matter that the Soviet Union collapsed under the weight of its economic contradictions. Or that, since the late-80s fall of the Berlin Wall, the spread of capitalism has enriched billions – with the share of the global population in extreme poverty plunging from two-fifths in 1990 to under one tenth today.

The reality for many is that, across the West, stagnant wages and spiralling corporate profits are fuelling a sense that capitalism is now skewed, with the benefits accruing to an elite few at the expense of the many. And that’s allowing Corbyn to present, with some success, his programme of aggressive renationalisation, sweeping trade union powers and highly punitive taxation as “the new common sense of our time”.

Further reading

Could Mill's model mend capitalism?

By Victoria Bateman

At the Tory party conference in Birmingham, during numerous conversations with ministers and other senior Parliamentarians, I came across two distinct groups, separated by how they thought their party should respond to Corbyn.

The first group emphasised the need for a combination of negative campaigning and reminders that capitalism is the best system we have. They argued that the Tories should keep repeating that Labour always runs out of other people’s money, while stressing that Corbyn has, in the past, shown bad judgement in fostering links to various terrorist leaders and crackpot regimes.

Above all, though, this first ‘it ain’t broke’ group of Tories maintain that there is no need to apologise for capitalism, because it works. This was a phrase I heard repeatedly, from a wide variety of senior Conservatives in Birmingham.

The second group of Tories, in contrast, understand there is a serious problem and that Corbyn, for all his clear faults, is asking the right questions. Their response is to acknowledge that ‘the system’ does need serious reform – and such reform is vital to prevent a Corbyn-driven onslaught of far more statist, counter-productive, anti-capitalist policies.

Further reading

From Jeremy Corbyn to Bernie Sanders to Elizabeth Warren; what the Left is getting right

By Liam Halligan

From telecoms to energy, from banking to house building, this ‘let’s fix it’ group of Conservatives argue that UK industries have become increasingly concentrated – and that’s resulting in bad outcomes for consumers, including less choice, poorer service, ‘super-normal’ profits, under-investment and high prices. That capitalism does face a legitimate crisis of confidence.

This is by no means the official Conservative party view. I heard very little along these lines from the platform in the main hall in Birmingham. Yet, at numerous fringe meetings, listening to some of the party’s most interesting thinkers, it was a recurring theme that’s showing signs of punching through.

Perhaps the most prescient fringe speech I heard in Birmingham was from John Penrose, a Conservative MP since 2005 and, before that, a successful businessman. He recently published an interesting paper that deserves attention – ‘A Shining City Upon a Hill: Rebooting Capitalism’.

Penrose opens his argument by asserting that “every so often, capitalism goes wrong”. It’s an obvious, but extremely important point. Delving back into history, Penrose explains how “waves of bank failures in the early days of the Industrial Revolution resulted in the pivotal Bank Charter Act”. He reminds us that “exploitatively-poor working conditions led to progressively more effective Factories Acts, beginning a long process of improving safety and equity for employees which continues to this day”.

Further reading

How to future-proof the economy: tax all income equally

By John Penrose

Referring to a later era when capitalism was in crisis, Penrose recalls that “the Great Depression which followed the [1929] Wall Street Crash gave birth to modern competition laws, to protect customers from being exploited by over-mighty companies who abused their power”.

All these changes took place not because capitalism should be scrapped in favour of a far more dirigiste system of socialism or even communism, but because it was imperative that the system was modified in order to regain the broad public consent on which it is built, and ultimately to ensure its survival.

“Each of these moments happened because capitalism had started to behave in ways which seemed immoral,” argues Penrose. “Creating wealth is wonderful, but not at any cost and the tariff in human health or dignity had become too high”.

“So each time, the system had to change,” Penrose continues. “Society demanded new laws to shape and frame free markets so they still drove vigorous economic growth, but humanely and without exploiting the weak and vulnerable … capitalism was updated, modernised and rebooted”.

The status quo benefits a lot of us, but for many more – perhaps even the majority – capitalism isn’t working as it should. “People are casting around for answers about how it should change,” says Penrose. “But in times of trouble we turn to what we already believe, and the discussion about what those alternatives might be has got stuck in a formulaic and repetitive, backwards-looking debate about the failed and stale options of the past”.

Further reading

Ten vested interests the Tories failed to tackle

By Peter Franklin

I think that’s exactly right. The Tory party is largely run at the moment by the ‘it ain’t broke, don’t apologise’ crowd who say capitalism is fine as it is. They believe Corbyn can be countered by full-bloodied appeals to free enterprise, references to his support for Venezuela and reminders of the 1976 ‘cap in hand’ crisis – when the UK under a Labour government had to be bailed out by the International Monetary Fund.

But many of the voters the Tories need to attract – young couples struggling to make ends meet, graduate professionals with no chance of buying a house – weren’t alive in 1976. To them, assertions from wealthy ministers that ‘capitalism is the key to prosperity’ sound offensive. Talk that ‘Labour always wrecks the economy’ or that Corbyn ‘placated the IRA’ fall on deaf ears.

“To its credit, the political left has realised there’s a problem – yet has retreated into comfortingly-familiar arguments about why capitalism itself is fatally flawed, to which the only solution is socialism, state ownership and renationalisation,” observes Penrose.

“But the political right has followed them, refighting the intellectual battles of the 1970s and 80s by explaining why the left’s answers are wrong, but without offering a modern, attractive and fair alternative vision instead”.

Eschewing ‘it ain’t broke’ for ‘let’s fix it’, Penrose lays out a series of ideas to tackle genuine problems – “housing that is far too expensive … energy firms that rip-off loyal customers … water firms that don’t fix leaky pipes but still impose hosepipe bans … broadband that works slower than it’s supposed to”.

Further reading

How to tackle the poverty premium? Let's start by breaking the oligopolies

By Charlotte Pickles

He observes that the UK’s last Competition Act – a sweeping round of anti-trust legislation to promote customer-friendly competition – was in 1998, before Facebook and Google existed. “We are still using analogue competition rules in a digital age,” he says. “A new Competition Act is urgently needed”.

It’s true, as Penrose says, that “Britain’s economy has become more concentrated, with big companies getting bigger – which gives them more power to charge higher prices, or lower quality, or pay their staff less, or all three at once”.  It’s also true that, despite the UK’s stellar gig economy employment figures, that “for some lower-skilled workers (but not all, and not higher-skilled ones) zero-hours contracts feel like exploitation”.

Free markets don’t amount to the ‘law of the jungle’ as some anti-capitalists like to suggest. They are political and cultural constructs – and, every now and then, the rules need to be overhauled to tip the balance of power away from an over-bearing, all-powerful corporate lobby and back towards such consumers. Penrose believes that now is such a time.

So does Jesse Norman, the Hereford MP who recently wrote a biography of Adam Smith. Rightfully seen as an architect of capitalism, Smith is as misinterpreted by his acolytes on the neo-liberal Right as he is by detractors on the Left. Often associated with untrammelled free markets, the reality is more nuanced.

Further reading

How Corbyn captured the middle class

By James Bloodworth

Writing as the Industrial Revolution dawned, Smith understood that, while capitalism could generate wealth for business owners, it would work only for the broader population, and maintain public support, if certain conditions were met. Some 226 years after Smith died, we need to heed his words – for UK capitalism, in its increasingly cronyist guise, is doing the public a disservice.

Speaking on the fringe at Birmingham, in a packed auditorium, Norman said exactly that. “The best thing you can do in the context of crony capitalism is practice honest government,” he said. “You can’t let government be pulled around by vested interests”.

Norman denounced the ‘it ain’t broke’ group of Tories. “The empty rhetoric of free markets is one thing – what we really need is genuine competition, recognising that many rising profitability and mark ups reflect the reality that some businesses have become too powerful”.

When describing the government’s housing policy, Norman – despite being on the ministerial pay-roll, shows admirable intellectual independence. “It isn’t working because of artificially inflated demand,” he said in Birmingham, calling out “Help to Buy” as counter-productive.

And the day after the government said it would tax wealthy overseas buyers using UK property as an investment bolt-hole, Norman countered that ministers should be focussing their efforts on bringing large UK developers to heal, by tackling building delays designed to retain scarcity and keep prices and profitability artificially high. “The government seems to be going after oligarchic investment in housing,” remarked Norman. “I think it should go after oligarchic supply”.

Further reading

Home Truths – Part III: The nine drivers of a broken market

By Liam Halligan

Brexit will clearly dominate British political discourse for months and even years to come. Yet, the reality is that only 8% of UK firms sell goods and services to the EU, our total exports to the bloc currently account for only a tenth of GDP. If Brexit results in slight changes in our EU trade arrangements, that’s unlikely to have a massive long-term economic impact. I’ve long maintained that any negative fall-out will anyway ultimately be outweighed by rising UK trade with the four-fifths of the world economy beyond the EU – including all the fast-growing emerging giants of the East.

UK capitalism, however, is now on trial and preserving it will take action, not a simple dismissal of the concerns of a new generation with an assertion that “socialism doesn’t work”. Ministers must display the grit needed to face down vested interests, rein-in excess and make sure punters don’t feel constantly ripped off.

I’m generally a business-friendly commentator who believes in low taxes and a small state. Yet I’d credit the Left with some of the best, most courageous and clear-sighted policy analysis right now – such as the recent report of think tank IPPR’s Commission on Economic Justice – even if the proposed solutions sometimes make me balk.

Big companies across the Western world have become far too powerful. Our political, business and media elites are much too intertwined. Such cosy relationships have resulted in an enfeebled competition policy, which is further increasing the might of a small number of corporations, to the detriment of consumers, smaller firms and broader society.

The Tories need to understand such views are increasingly finding favour with a broad swathe of the electorate – invoking the kind of bold anti-trust measures that America reached for in the late nineteenth and early twentieth century.

Such measures are essentially pro-market – because they free up competition and make capitalism work properly. That’s a reality Tory high command needs to grasp.

I have no idea and frankly I’m not really interested. Nor, if they had any sense, would Conservatives at their conference in Birmingham worry much about these things. They have even bigger problems to worry about.

Never mind a plan for Brexit, the Tories are painfully short of ideas for Britain. The failure of Conservatives, Leavers and Remainers alike, to see beyond European questions and think properly about the sort of economy, society and state Britain will have in the next decade is a far greater threat to the party than a botched Brexit or Jeremy Corbyn.

The continued success of the Corbyn Labour project still leaves some Conservatives baffled and scared. Why can’t voters see that the professed socialism on offer in Liverpool this past week would doom the UK economy? Why don’t they understand that a market economy (where goods, services and labour are traded at prices decided by buyers and sellers and the means of production is mostly in private hands, its ownership protected in law) is the best way to deliver more wealth and happiness?

Further reading

Politicians are in hock to big business – and consumers are paying the price

By James Kirkup

If there’s one thing the Conservatives should want to conserve right now, it’s that economic settlement. But they’re failing to do that because they’ve forgotten their history. That history starts with Edmund Burke, who said that a state without the means of some change is without the means of its conservation. Sometimes preserving something means changing it.

That’s certainly the case for the UK’s market economy, which just isn’t working properly for a lot of the people in it. If you want to preserve markets, you have to make them work better. Sermons about the evils of socialism and the glories of capitalism are meaningless to most voters, who are more likely to be worried about how far their wages stretch each month and the persistent sense that the businesses which sell them things are out to rip them off.

A pragmatic Conservative Party would consider those views – and the feelings that led 52% of the electorate to put two fingers up to the entire British political and economic settlement – and conclude that old arguments about free markets and shrinking the state aren’t going to generate or sustain the policies Britain will need in the years after we leave the EU.

Yet instead of remembering their pragmatic heritage, some Conservatives seem intent on (mis)remembering Margaret Thatcher, whose libertarian tendencies were not entirely Conservative, and have in any case been exaggerated by some of her later devotees.

Further reading

Capitalists – not socialists – are killing capitalism

By Victoria Bateman

Devotion to a caricatured Thatcherite doctrine leads to some almost comical misreadings of the contemporary political scene.

More than two years on from the EU referendum vote, there are still Conservatives intent on constructing the Leave vote as a demand for deregulation and the dismantlement of social and economic protections. The disconnect between ‘Singapore’ Brexiteers in London and Sunderland Leavers has always been striking, but has never jarred more than in reports that Sajid Javid is arguing in Cabinet that a no-deal Brexit should be followed by the suspension of employment rights and the auto-enrolment rules that have given three million people their first private pension savings.

Really, Home Secretary? Do you really believe that 17.4 million people voted for a longer working week, voted to make it easier for their boss to fire them and to stop paying into their pension? The fact that such an agenda is (plausibly) seen as part of potential leadership pitch speaks volumes about how far some Conservatives need to travel to start engaging with the interests of the people they aspire to represent.

Further reading

Can we reform our rancid political debate?

By Douglas Murray

Some Conservatives insist that their party must reject the option of offering ‘Corbyn Lite’ positions on the economy. Yet that fails to differentiate between diagnosis and prescription. It’s possible to see merit in the Corbyn analysis of markets without endorsing the remedies he proposes. Indeed, I’d argue that enduring support for the Corbyn Labour Party makes it all the more important for Tories to offer their own answers to the questions he asks.

The Labour leader does have a point about the state of markets in the UK. They don’t work well for everyone in them, because not everyone behaves in the way today’s free marketeers imagine they do.

‘Loyalty penalties’ are a case in point. Customers who stick with their energy firm, their broadband supplier or their mortgage lender are almost certain to be paying more than they should. Many don’t even know it: millions have been paying for mobile phone handsets they already own. Citizens Advice reckon some people are paying almost £1,000 a year too much for their loyalty.

‘Poverty premiums’ also defy free-market orthodoxy and produce unfair outcomes that undermine faith in markets. In a perfect market, low-income consumers would generally pay less for things, as suppliers cut their prices to ensure their products were affordable. But in our imperfect markets for essentials like energy, the poor pay higher prices than the rich – for exactly the same product.

Markets aren’t working. Loyal penalties and poverty premiums prove it. That doesn’t mean that the only or indeed correct response is to do away with those markets and replace them with control by the state or politicians: as regulators have candidly told ministers, fixing prices rarely ends well for anyone. The Conservatives need better answers to these failures.

Further reading

How to tackle the poverty premium? Let's start by breaking the oligopolies

By Charlotte Pickles

Part of a better answer is surely in more assertive regulators; give economic referees the legal, financial and political support they need to ensure fair play and let them take real action on incomprehensible contracts and Byzantine pricing structures.

Empowering consumers is also essential. Giving households proper ownership of the hoards of valuable data companies hold about them and their spending patterns would allow customers to really navigate the market and secure better deals.

The ultimate answer however is simply to deliver more competition in markets, by intervening more if necessary. Reluctance to do so arises from the common Conservative error of confusing support for business with support for markets. Competition makes businesses work harder and erodes profit margins, so why should business want more of it?

Peter Thiel, the billionaire founder of PayPal, argues that the dream for any business is become a monopoly that can exclude potential rivals. “Competition is for losers”, he says.

Warren Buffett has become the world’s richest investor by only putting money into a company if it has a ‘moat’, meaning enough dominance of its market to protect it against competitive challenge by rivals. Lack of competition is good for owners but not for customers or workers.

Firms that don’t have to fight for business can offer poor service and high prices. They can also skimp on the investment that makes their business (and workers) more productive. And driving up productivity is the only real way to drive up wages and start to answer those questions Corbyn asks.

Conservatives, so quick to warn against the problems of state monopoly, should be much keener to tackle the concentration of economic power in private hands: too many British consumer markets are dominated by a handful of big incumbents. Tories should support the challengers who would disrupt that dominance and deliver better for consumers.

Further reading

Corporate fat cats are abusing their power

By Michael Jacobs

The fact that markets aren’t perfect is just one thing Tories have failed to learn from Corbyn and his party. Another is that organisation matters. Ultimately Corbyn doesn’t dominate Labour by philosophy or charisma. He rules by numbers. By bringing in at least 250,000 new members – his own people – he changed his party and remade it in his own image, just as Tony Blair did after 1994. And the 2017 general election campaign proves that even in the digital era, old-fashioned party machinery, built on members, still matters.

Where is the Conservative movement to match the Labour organisation that was on display in Liverpool this week? Birmingham will once again demonstrate that the Tory faithful are a small, old, rich and southern congregation. Anyone opening the CCHQ parcel containing their conference pass was first confronted with a leaflet exhorting them to leave the party money in their will. The Tories know their membership is dying but seem more interested in profiting from that decline than addressing it.

David Cameron’s scorn for the Tory grassroots was almost Freudian, but May’s failure to recruit new ground troops is a curious failure from a party leader who has spent much time among the voluntary party. Even more striking is that none of her would-be successors talks much about building a mass-membership party.

Equally curious is the party’s apparent indifference to new ideas. Many younger Tories keen to make a name for themselves are playing safe by avoiding anything that looks like “the vision thing”. Bolder thinkers – George Freeman, Nick Boles – struggle to find traction among colleagues addled by Brexit.

Meanwhile, Jesse Norman’s recent book about Adam Smith would have provoked a more thoughtful party into a full-scale re-evaluation of its history, purpose and – most of all – its view of markets and the people in them. Norman demonstrates that the idea of Smith (and thus, the market) that many Tories hold is shallow and wrong; far from championing amoral laissez-faire “neoliberalism”, Smith saw people as moral beings, and markets as imperfect and prone to capture. Both require a different, more active role for the state than the one advocated by many Tories today. Norman discreetly avoids saying it explicitly, but it is the Tory failure to accept this reality that makes Corbyn’s job that much easier.

Further reading

Five ways Theresa May could have played things differently

By James Kirkup

A Conservative Party willing to think boldly would put Norman on the main stage in Birmingham and give him a job imagining the political economy of Brexit Britain. Instead he gets to look after bypasses as roads minister, and to discuss his book at fringe events with non-Tories like me. (8.30am on Monday in the Hyatt, if you’re up early.)

Another original Tory thinker is an outcast. Nick Timothy, author of last year’s “consciously Burkean” manifesto, remains exiled, even though many of that document’s ideas – “fair” markets; real corporate governance reform; a proper rebalancing of higher and further education; the progressive taxation of accrued wealth to fund social care – are exactly what the party now needs to answer Corbynism. (It’s worth noting that a manifesto often accused of lacking retail-friendly offers actually raised issues like the mobile handset rip-off more than a year before Citizens Advice produced its recent influential report on the topic.)

Whether jettisoning Timothy himself was the right thing to do is a question for another day, but ditching his ideas simply because they were his looks increasingly like an act of self-harming folly that left the party blinking in the headlights of Corbyn’s low-emission bandwagon.

Nick isn’t right about everything, of course. On some things, he’s dead wrong, and nowhere more so than on immigration. Tory attitudes to immigration have long baffled me. Shouldn’t a party that celebrates hard work and enterprise embrace people who have got on their proverbial bikes and gone looking for opportunities far from their own homes? Shouldn’t a party that celebrates the idea of British nationhood and patriotism offer an idea of a nation big and strong and confident enough to encompass all-comers, wherever they were born or raised?

At a Social Market Foundation fringe meeting in Liverpool this week, Professor Rob Ford of Manchester University pointed out that both sides of British politics had missed a huge strategic opportunity after 2004 when the UK opened its labour market to hundreds of thousands of industrious easterners. They should have overhauled citizenship requirements and made those new EU members into new Brits, and thus new voters.

Previous waves of immigration have been happily absorbed into the shared idea of the nation that Conservatives say they cherish. Britain is more, not less, British for the fact that some Brits are black or Asian, something that sensible Conservatives know is a fundamentally conservative outcome, an embodiment of Burkean acceptance of preserving by changing.

Further reading

The economic rationalists don't get the immigration debate

By Ben Cobley

What if the Conservatives had rejected the nativism conjured up by a defensive Michael Howard in 2005 and instead sought to put blue rosettes on people who came to Britain to work, to earn for their families, and to advance themselves? What if British Tories had learned from their Canadian cousins how to weave immigration and its advantages into their story?

And if they can’t be bothered to look that far, they could just listen to their own Ruth Davidson when she says, rightly, that her party “should have the confidence to recognise that people from other nations wanting to come to our country is a sign of our success as a vibrant, prosperous culture”.

Sooner or later, Conservatives must walk back from nativism and accept that the widespread movement of people and demographic change are inevitable parts of modern life and modern Britain. Until the Conservative idea of Britain better matches the reality of Britain, they will always struggle to capture what Disraeli called the “spirit of conservation and optimism” they need to win decisively in this century.

Executive pay is a good place to start. Thirty years ago, a FTSE 100 chief executive earned on average 20 times the salary of an average worker in his company (and it always was a him). Today the figure is 129 times. (And it’s still almost always a him.) A conventional economist would want to understand this in terms of the marginal productivity of chief executives relative to the marginal productivity of workers, and of the supply and demand of top talent.

But these explanations simply don’t fit the evidence. Measured by profits or share prices, corporate performance on average has not improved by anything like the increase in executive pay, whose rise has had no relationship to the movements of stock markets. And there is no evidence at all that such pay results from a scarcity of talent – many of those who have cleaned up over the last three decades have exhibited mediocre performance (which is why they tend to stay in post such a short time) and there is no let-up in the conveyor belt of directors waiting to replace them.

Further reading

When it comes to corporate pay, who scrutinises the scrutinisers?

By Charlotte Pickles

A much more plausible explanation for the rise in top pay is the structure of corporate governance. The remuneration committees which decide pay packages are made up almost entirely of other directors. This creates a self-serving system in which one group of directors pays another exorbitant salaries, and these then act as the ‘competitive benchmark’ for the next round. In other words, it is the power of directors as a group to set their own salaries that determines their level and growth.

Classical economics had a name for this. It was ‘rent extraction’: the appropriation of value in excess of that required to reward effort. But it was one of the ideas that disappeared when the neoclassical school – focused on marginal analysis and competitive markets in equilibrium – came to dominate the discipline. Which was rather convenient for those who took the rents.

Rent extraction derived from excessive power is most clearly seen today in the financial sector. One of the most extraordinary economic facts of recent decades has been the persistently high costs of financial services. As Thomas Philippon and Guillaume Barzot have shown, the cost of financial intermediation – what the financial sector charges the rest of the economy for its services – has barely changed over the last fifty years. Yet in that same period the productivity of these services has been transformed out of all recognition by new technologies, and the sector has become much larger.

These increased competitive pressures should have led costs to fall, as companies passed on productivity gains to their customers. What has happened instead is that the financial sector has managed to appropriate these gains for itself, resulting in consistently higher profit rates for financial firms than for the economy as a whole.

Further reading

Nomi Prins: The central banking heist has put the world at risk

By Liam Halligan

This is hard to explain in conventional economic terms, but easy in terms of power. One need only look at the money spent on political lobbying by the financial sector, and the weak regulation which has been applied to it by governments, to understand why it has been able to reward itself so handsomely.

In the digital sector too, it is power that we should be focusing on. Because while the orthodox concept of monopoly seems to apply – Google has approximately 70% of the global search engine market, Amazon has a market share across some product categories in excess of 80%, Facebook has over two billion active users globally – the term is not actually helpful.

In conventional economic analysis, monopoly should lead to higher prices. But that is not what has happened in the digital field at all – on the contrary, many of their services are offered for free, and where they do charge (such as for advertising) their prices have not risen as their monopoly position has been consolidated.

Further reading

It's time to rein in the reckless monopolies

By Ann Pettifor

Yet we should still be worried, because while the business strategy of these companies is not to maximise profits, it is to dominate markets. And not just their own markets, but the markets which will determine the shape of the future economy: digital infrastructure on the one hand, and artificial intelligence on the other. As a recent IPPR report argued, it is scale that gives these companies access to the key resource of the modern economy, data, and the ability to extract from that data the maximum value.

And just as there are serious economic implications from a financial sector chasing ever larger profits – not least the lost productivity, profits and earnings of the non-financial economy – there are serious economic implications from this extreme market power. Firstly, we need technological innovation to be as widely spread as possible, in markets that are as competitive as possible, in order to maximise its value to the economy and society.

Second, this concentration of market power is also concentrating wealth. The tech titans behind these behemoths have become fantastically wealthy as a result of their dominance. This is one of the reasons for widening wealth inequality over the last decade, and likely to be a critical cause of it over the next. Jeff Bezos, for example, is now the world’s richest man. Meanwhile the workers in Amazon warehouses are paid the minimum wage and monitored on their toilet breaks.

Further reading

Could trade unions rescue capitalism?

By Joe Dromey

Which takes us to another power relationship at work in the economy. One of the puzzles of the UK economy of the last decade is how we have managed to achieve near-full-employment at the same time as average wages have stagnated. Economists have been scratching their heads: scarcity of labour should have bid up wages. But understanding the labour market in terms of power makes it entirely explicable. The reason that average wages have been held down is that workers no longer have enough bargaining power to force them upwards.

Once upon a time, wages were determined principally by collective bargaining, in which trade unions in major companies set wage levels in negotiation with employers, and these then set the benchmark for wages in the rest of the economy. Trade unions had the power to do this because the major companies had large workforces in which it was easy to organise, and easy to threaten industrial action.

Today most of this has disappeared. As manufacturing has declined, large companies with unionised workforces have become rare. Companies have fragmented their operations into smaller sub-contracting units, making collective bargaining more difficult. In turn firms have increasingly fragmented their workforces, employing a smaller core of higher paid workers and a larger periphery of ‘self-employed’ and gig workers.

Unsurprisingly, trade union membership in the private sector has fallen precipitously, and collective bargaining with it. Few workers now feel secure enough to bargain for higher wages. The balance of power, in other words, has decisively shifted in favour of management and against workers.

Further reading

Without new foundations, capitalism will collapse

By Charlotte Pickles

Analysing the economy in terms of power – in these and other fields – does not mean abandoning conventional economic analysis. But as the recent report of the IPPR Commission on Economic Justice argues, it does mean thinking about how power can be rebalanced.

Reining in executive pay will best be achieved by changing the structure of remuneration committees – including by putting workers on them, as Labour have pledged to do – and outlawing bogus ‘incentive’ schemes which tie pay to short-term share prices. Tackling rent extraction in financial markets means resisting the lobbying power of the financial sector and regulating its profits down to reduce the costs of finance to the rest of the economy.

Curbing the market power of the digital companies will require regulatory oversight similar to that of other utilities, and preventing them from further vertical and horizontal expansion. And recoupling wage growth to economic growth means giving trade unions greater access to workforces, making it easier for workers to join unions (for example through auto-enrolment, on the model of opt-out workplace pensions), and restoring collective bargaining in low-wage sectors.

With people losing faith in capitalism and polls consistently showing public support for tackling the excesses of big business, this power-focused agenda should be of interest to both Left and Right. And encouragingly, while those on the Right have historically been like economists, uncomfortable with talking about power, that is changing. For many on both sides of the political divide, it is now impossible to imagine a competitive economy, a wider distribution of wealth and a meritocratic society without thinking about how power can be rebalanced. A consensus is forming, and it might just lead to an economy that combines justice with prosperity.

Though they provide different functions and services, this immense power resides in a shared business model: the extraction and analysis of data and the control of digital infrastructure – from mapping to cloud computing – that underpins all digital technology. And as a result of this control, they are also poised to dominate artificial intelligence markets, extending their power far into the future.

Further reading

How the tech lords privatised the public square

By Jamie Bartlett

Profiting from data generates a circular, expansive dynamic: the more data that is captured, the greater the potential for revenue. As such, the impulse to accumulate more and more dominates the strategies of the tech giants, and dictates how they develop and deploy their technology. By instinct, they seek to move into more markets, buying out more competitors, driven by their voracious appetite for more data and infrastructure. Amazon, for example, has filed for 5,860 patents, while Alphabet has acquired over 190 businesses since its foundation.

These companies will counter, accurately, that in the process they provide many benefits. Consumers get useful services at low to no immediate cost, with greater convenience through coordination, and with more personalisation. Businesses get access to new markets and experience lower transaction costs. At a societal level, their platforms increase access to information, and enable social connections and greater efficiency.

But this business model is driving platforms to behave in ways that create serious economic, social and political problems. By acquiring innovative start-ups and limiting access to their large datasets, platforms are almost certainly limiting the innovation potential of the economy.

Further reading

The inhuman politics of artificial intelligence

By Jon Cruddas

As the digital giants increasingly dominate their markets, their profits are soaring, and with relatively low levels of employment these labour-light digital firms are helping drive inequality. Their dominance in advertising markets has already eroded news media, while social network platforms have potentially been used to manipulate democratic proceedings. And as the power of the tech monopolies grows, these problems will grow with them.

In the face of such concentration, defenders of open and inclusive innovation must have a strategy for reining in the digital giants. So far, the development of the modern digital economy has largely been determined by powerful market actors, with little proactive response from government. Without action, the boundless ambition of the universal platforms threatens to undermine democracy, accelerate inequality and concentrate economic power.

The goal must be to move from conditions of ‘enclosure’, where data and infrastructure are dominated by a few tech giants, to an open and innovative digital ‘commons’, where they are organised as a collective resource. In the process, this can unlock a wave of more inclusive innovation and enterprise, supporting the revival of democracy.

Further reading

How technology sidelines the citizen

By Carl Miller

There are, of course, limits to what the UK can achieve with domestic levers ­– the digital economy is international. Nonetheless, we are not powerless. Much more can be done with bolder policymaking, and IPPR’s new report, The Digital Commonwealth, sets out an ambitious reform strategy to build a ‘digital commonwealth’.

First, we should strengthen competition law to foster innovation. The Competition and Markets Authority should be reformed so that it is better able to regulate tech companies. This should include a new requirement for major digital companies to open up their data upon entry to new markets in which they have a major advantage as a result of their existing data.

Second, where platform giants provide vital infrastructure services such as searching, matching, or communicating, under monopolistic conditions, we should regulate those activities and companies as public utilities. This should be done through a new Office for Digital Platforms, which should include powers to open up the data of the digital giants in cases and markets that are deemed to be in the public interest.

Further reading

To save democracy, we must disrupt it

By Carl Miller

Third, to better drive the curation and productive use of public data, a new public service corporation, Digital UK, should be created. This would establish a Digital Citizen Account and ‘public data stores’ through which useful insights from pooled, anonymised data could be shared. It could also oversee the creation of a national data portal, which would provide a single site linking to private- and public-sector data. Under appropriate privacy and security conditions this could provide an immense and shared resource for civil society, enterprise, and local communities to build better products and services.

Finally, we should learn from the cities at the cutting edge of digital governance, such as Barcelona, and get local authorities to set up Local Digital Commonwealth Strategies. These would aim to support the development and adoption of local platform services – from community decision-making apps to innovative businesses – leveraging public sector data sources and personal data from the opening-up of private sector data. This would ensure that value is retained and circulated among communities where the data is generated, to provide economic, social and environmental value.

Taken together, this is an ambitious agenda to rein in the power of the tech giants and foster inclusive innovation. The alternative – a status quo that will enable widening inequality and the growing concentration of economic and technological power – is the route to deepening democratic and social crisis. It is time we acted with an ambition fit for the machine age.

Auditing is under scrutiny as perhaps never before. The January 2018 collapse of Carillion, the UK’s second-largest construction company, is just the latest in a long line of corporate failures raising very serious concerns about this most vital of professions.

Carillion boasted almost 500 government contracts – from building hospitals, roads and bridges to the provision of school meals and rubbish collection. In April 2017, the outsourcing giant unveiled accounts showing annual profits of £178 million, which drove a bumper shareholder dividend and executive bonuses.

Further reading

The real culprits behind Carillion's collapse

By Liam Halligan

In July, only a few months later, Carillion’s rosy financial outlook had been utterly transformed. The company issued an £845 million profits warning, the largest the City had seen in a generation, wiping out combined profits since 2012. And by the turn of the year, despite another £1.9 billion of government contracts, Carillion had imploded – forced into compulsory liquidation.

The Official Receiver found Carillion had a staggering £6.9 billion of gross liabilities. Some 30,000 suppliers and sub-contractors, many of them small and medium-sized firms, are now shouldering £1.2 billion in unpaid bills. Carillion’s £800 million-plus pension deficit is the largest ever to be absorbed by the Pension Protection Fund, to be subsidised by levies on other workplace pension schemes.

The accounts published in April 2017 that unravelled so quickly were overseen by KPMG – Carillion’s external auditor for the entire 19 years of the construction firm’s existence.

Suggested reading

Politicians are in hock to big business – and consumers are paying the price

By James Kirkup

The Carillion meltdown follows recent audit controversies involving Tesco and the software company Quindell, among others, similarly relating to profit over-statement and “aggressive accounting”. It’s not just a UK phenomenon. The International Forum of Independent Audit Regulators found that no less than 40% of the audits it inspected last year around the world were sub-standard. All those with serious deficiencies were by KPMG, PwC, EY or Deloitte. These ‘Big Four’ auditors generated combined global revenues of $134 billion last year, directly employing 945,000 people.

They are now under fire in many countries – having been involved in tawdry episodes from the Petrobras scandal in Brazil to the Gupta affair in South Africa. Auditing is in crisis and must be reformed. And the UK, as the world’s financial services superpower, needs to take the lead.

Previous changes to accounting standards, following earlier scandals, mean big auditors are now just box-tickers, able to avoid nuanced judgement. Conflicts of interest remain endemic, between firms, their clients and regulators. Even in advanced country jurisdictions, regulatory oversight is weak and feebly enforced. That’s because the Big Four have been allowed to establish themselves as a hugely powerful, practically untouchable oligopoly – auditing an astonishing 97% of FTSE 350 UK-listed companies and 99% of S&P-500 in the US.

The auditing profession – with its too-big-to-fail and increasingly too-big-to-regulate structure – is at the heart of our crony capitalist crisis. Reforming audit sounds obscure, but is a vital part of re-building public confidence in Western liberal capitalism.

Further reading

Nomi Prins: The central banking heist has put the world at risk

By Liam Halligan

Listed companies must employ auditors by law. With four companies so overwhelmingly dominant, the resulting lack of competition promotes malpractice. Since the Enron scandal, and the demise of Arthur Andersen – the fifth member of what was, until 2002, the Big Five – the authorities have been petrified of heavily sanctioning the rest, fearing an even more dominant Big Three. This explains the regulators’ light touch approach – and why, after the systemic misreporting ahead of the 2008 financial crisis, the Big Four faced so little sanction.

The current audit industry structure seriously undermines the public interest. The Big Four are too profit-driven and compliant towards the managers of client firms, resulting in low-quality reporting – a disservice to investors, tax authorities and the broader public. “It is crazy there are just four top-bracket auditors,” Sir John Bourn, the UK’s longest ever serving Auditor General, told me. “The system simply doesn’t work and hasn’t for a very long time”.

During the decade before Carillion collapsed, the Big Four received a combined £51 million to advise and assist the company. They all deny wrongdoing and say they acted in good faith. Yet after a Parliamentary report said the Big Four were a “cosy club incapable of providing the required degree of independent challenge”, the Financial Reporting Council, the UK’s main official corporate government watchdog, is now investigating KPMG’s work at Carillion.

Suggested reading

When it comes to corporate pay, who scrutinises the scrutinisers?

By Charlotte Pickles

Carillion has become a byword for financial misreporting, and public anger towards the profession has been further fuelled by revelations that Big Four firms working at Carillion got their bills paid before the company went bust, in contrast to thousands of regular contractors. And, of course, with the Official Receiver now overseeing Carillion, some of the very large audit firms are being paid large amounts of public money to dismantle the debt-soaked mess.

A complete overhaul is needed – here are five reforms to fix the industry.

1. Tackling Market Structure

An investigation by the UK Competition Commission resulted in the introduction of a nominally stricter audit industry regime in 2013. But the proposals were piecemeal and, after extensive auditor lobbying, heavily diluted. They have almost entirely failed – and in some cases been counter-productive.

Mandatory auditor rotation was recently introduced – but only every 20 years. Since then, the industry has become even more concentrated. In 2013, the Big Four audited all but 16 of of the UK’s 350 largest listed companies. Last year, it was all but nine.

In March, Britain’s fifth-biggest auditor, Grant Thornton, announced it would no longer tender for audits of FTSE-350 companies, complaining the grip of the top players remained so strong with its network of alumni in the Finance Departments of listed firms, that retendered contracts were all kept within the Big Four.

The time for tinkering is over. The Competition and Markets Authority – the successor to the Competition Commission – must urgently re-investigate the audit industry, with a view to breaking up the leading players. Only a wholesale, forced restructuring will spread highly experienced and influential individuals across a larger number of firms, so generating more competition.

2. A Cap on Market Share

The Financial Reporting Council (FRC) has singularly failed to tackle lax auditing. But rather than being disbanded, it should be strengthened, with its mandate extended to implementing a cap on market share. The Big Four should be required to reduce its combined coverage from 97% to 60% of FTSE-350 firms over the next five years, then 40% over ten.

‘Shared audits’ would count towards that reduction in market share, but only for a five-year period at each listed company, and only as long as Big Four companies gave smaller rivals access to their technology platforms.

Rotation is also crucial – not just re-tendering, but a change of auditor. This should happen every five years, rather than every 20 years as at present.

3. Separate Audit and Consulting

As well as market share, it is vital to address conflicts of interest. The Big Four provide extensive and highly lucrative consulting services to the same group of companies they audit – generating two-thirds to three-quarters of their fees from consulting. After Enron collapsed, under US regulatory pressure, three of the Big Four split from their consulting arms, but they have since rebuilt that part of their business.

There are widespread fears independent audit work is compromised by the prospect of securing large consulting contracts from the same clients. And with senior staff at the Big Four increasingly focused on consulting, ever more complex audit work is pushed onto junior, less-experienced staff.

Auditors should be forced to divest their consulting arms, with regulators being granted powers to insist on ‘audit-only’ firms. The FRC previously opposed this idea. Since the Carillion collapse, the watchdog has said such a move should “be considered”.

4. More Active Investors and Listing Authorities

Investors must be more demanding of audits. There are signs this is happening. Standard Life Aberdeen, one of the UK’s largest institutional investors, recently publicly stated that the “Big Four let profits affect audit views”. The company has held meetings with the boards of FTSE-100 and FTSE-250 companies, trying to convince them to appoint auditors outside the Big Four.

Should it be listed companies that choose who audits them, or shareholders and other investors? If auditors were hired by shareholders they could be robust, judging governance and even management quality without fear of losing clients.

The idea of auditors working for stock exchanges and other listing authorities should also be explored. Any companies wanting to list its shares on an exchange would be scrutinised by that exchange’s appointed auditor, with audit costs included in the price of listing. The exchange could employ a range of auditors, rotating them at will. It could even offer lower audit fees to companies found to have the best internal controls and standards, incentivising good behaviour and recognising that they will cost less to audit anyway.

5. Less Complex Rules – Back to First Principles

“If you look at the rules for the preparation and auditing of financial statements, you are overwhelmed by their size and complexity,” says Former UK Auditor General Sir John Bourn. “This complexity is really getting in the way of proper audit and genuine transparency – and sometimes, out of that complexity, you get deliberate obfuscation”.

Over recent decades, rather than holding themselves and clients to the highest standards, the Big Four have introduced overly complicated disclosures and procedures. As such, ‘tick box’ formulas have been used, rather than principled rules, to help large clients get away with ‘aggressive accounting’ to mutual benefit, with leading auditors using their enormous influence to avoid liability.

They’ve been helped not only by ever more complex rules, but also a gradual move away from historical cost accounting and towards the notion that accounts should present information that is “useful to users”. As such, company managers have been able to bring forward anticipated profits and unrealised gains, presenting them as current surpluses. Such practices are widely seen to have taken place at Carillion – where ever increasing reported profits drove a rising share price, along with dividends and executive bonuses, even amidst negative net cash. That’s why Sir John Bourn later described Carillion as “a Ponzi scheme”.

UK company law says accounts must present a “true and fair value” of the underlying business. It strikes me there is a tension between such company law based on “factual verification” and rules introduced stealthily over many years, relating to “useful to users” principles, that rely instead on “faithful representation”. This gradual rule change has been deeply damaging – a gateway to abuse. It should be entirely reversed.

–––

The Big Four constitute a formidable lobby. Across the UK, Europe and the world, many audit professionals are doing very well for themselves and want things to stay as there are. I’m often told I don’t know what I’m talking about and the situation is too complex for me to understand.

Well, as an economist, who also covers politics for living, what I do know is that the auditing profession, as it is currently conducting itself, is helping to provoke rising popular discontent with capitalism. This is an extremely dangerous trend and must urgently be reversed.

The Big Four deny wrongdoing, insist they acted in good faith and, are appalled by the idea they could be broken up. They claim auditing is a unique market requiring companies of huge scale due to global demands and say that forced restructuring would be unduly disruptive.

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Could a Land Value Tax tame unscrupulous landowners?

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But there are plenty of international law firms, competing vigorously for business. And, while the break-up of Standard Oil, AT&T and other highly dominant companies throughout history has been disruptive, this restructuring sparked more competition, encouraging broader innovation and investment and ultimately adding to national wealth and the public good.

The reform of audit should begin in the UK. London is the hub for the world’s largest firms, the policy debate here has been on-going over many years. Catalysed by Carillion, there is now a growing clamour for change among politicians, regulators, and the industry itself – albeit largely outside the Big Four.

So the threat of a major restructuring should now be placed on the table. And if the Big Four want to avoid that outcome, they must accept market caps, compulsory rotation and other new measures, demonstrating a very clear and immediate determination to reform – in the interests of themselves and the broader public.

And he has the rare luxury of investors committed to the long term, so he’s free to build market share, cut costs and prices, and diversify into fresh sectors. He’s already building rockets, selling high-end groceries, and publishing the Washington Post newspaper; and Amazon Web Services is the world’s largest supplier of cloud computing storage to governments.

It’s no surprise then that his latest move, a jump into the highly profitable market in prescription drugs, has everyone’s attention. By snapping up start-up PillPack he wiped $11 billion off the shares of Walgreens, CVS, and RiteAid, the three major US prescription retailers.

Suggested reading

Jeff Bezos eats Whole Foods. What’s he up to?

By Nigel Cameron

It’s a huge industry: Americans, particularly older Americans, take a lot of pills. According to a recent report by Sandra Boodman in the Washington Post “Researchers estimate that 25 percent of people ages 65 to 69 take at least five prescription drugs to treat chronic conditions, a figure that jumps to nearly 46 percent for those between 70 and 79.”

Hence PillPack’s product. Once a month they send people who take drugs long-term a batch of “pillpacks” – little envelopes printed with the time and day for every pill or batch of pills you need to take.

Handy though it is, it’s hard to believe that’s why Bezos paid a rumoured $1 billion for the company.

As with the Whole Foods purchase, Amazon is jumping into a completely new market by buying a going concern ­– which is especially useful in this instance given the high regulatory barriers to entry in the pharmacy world. In its five short years PillPack has done the heavy lifting – it’s already licensed to operate in 49 of the 50 states.

Amazon’s enormous retail market – a staggering 64% of US households have signed up for Prime – gives them a big advantage. As with Whole Foods, we should expect discounts for Prime members who sign on to PillPack and vice versa. And given that Amazon’s users tend to be younger, while PillPack’s are older, the acquisition brings big new demographic opportunities.

This will soon go well beyond the traditional mail-order drug market, and that’s why it’s scaring the big retailers. Amazon has been pioneering same-day delivery – and now offers it in two-hours in many locations. Expect a whole new market for urgent, one-off, prescriptions – where the mail-order providers have never been able to compete. No need to drive to Walgreens and hang around for an hour to get your migraine painkiller or your kid’s antibiotics. When the doctor hits send with the prescription, Amazon gets to work and your pills could beat you home.

Yet it’s likely Bezos has his sights set even higher. The US drug market itself is enormous: $580 billion in 2017 and notorious for bloated prices. One reason? The industry has consistently used its political punch in Washington to avoid competition. President Obama submitted to their trade group PhRMA’s demand that the “Obamacare” reforms leave their prices alone (there would have been government buying power to pull them down).

Suggested reading

Time to topple the technopoly

By Charlotte Pickles

President Trump is the latest leader to curry public favour by asking them to lower their prices while doing nothing about it (a new report in Politico notes that hundreds of drug prices have actually just been increased).

It’s worth remembering how Bezos began his empire: by selling books online and using cut-throat tactics to force publishers to go along with him. In the book trade he operated what economists call a monopsony; a monopoly buyer who can dictate prices to suppliers just as a standard monopolist dictates them to consumers. Book publishers, mostly small companies with few political friends, had little choice but to give in.

So here’s the big question: is his plan to go after the drug companies next? And if he does – with his enormous market base, two-thirds of all American households – will he succeed?

It will be a much more equal fight than that against the book sellers. At a market value of $800 billion, Amazon is worth around the same as the four largest pharmaceutical companies together. If his market clout can arm-wrestle them into more competitive pricing then that’s a good thing.

But one thing is clear, PhRMA is not the book trade. Any anti-competitive antics from Amazon won’t just be met in the market place but in the corridors of power where pharmaceutical lobbying is constant. It will be a battle royale, and the winner will be consumers.

Watch Sainsbury's CEO sing "we're in the money" while waiting to talk about the £12 billion merger with Asda – he's since apologised for his "unguarded moment" https://t.co/Kuaowz0q1u pic.twitter.com/jYMngcahS2

— ITV News (@itvnews) April 30, 2018

Coupe certainly is in the money. The planned £12 billion merger between Sainsbury’s and Asda would place the him at the head of a retail behemoth, their combined market share of 31% catapulting them past Tesco’s 27%. Reflecting an expectation of big profits, Sainsbury’s share price closed 15% up after the announcement, giving Coupe’s own shareholdings a nice £600,000 boost.

Good news for shareholders then. But what about consumers? Sainsbury’s and Asda have promised cheaper goods – a 10% cut to the price of everyday items – which is encouraging news for families struggling with low wages but a rising cost of living. The merger also ups the ante for the other big players, such as Tesco, Morrisons and Waitrose who are already in stiff competition with relative newcomers Aldi and Lidl, discount chains from Germany.

That sounds good for consumers too, then – cheaper goods driven by another episode of supermarket price wars. But while, in the short-term, that’s money in our pockets, in the longer-term it’s a narrowing of consumer choice. And a narrowing of choice reflects less competition, or, to put it another way, a more captive market; producers are able to take advantage of consumers unable to take their business elsewhere. That’s not how free markets should work.

Suggested reading

It's time to rein in the reckless monopolies

By Ann Pettifor

Scott Corfe, Chief Economist at the Westminster-based think tank the Social Market Foundation, and an expert on market concentration, is unequivocal. The proposed merger, “risks undermining competition”, he told me. Citing emerging evidence from the US, he advises policymakers to be cautious: “Mergers in concentrated consumer markets risk undermining investment and innovation in the economy, as well as leading to higher levels of inequality.” For sustainably low prices producers need to be in constant competition, racing to develop the best products and offers to entice people to their brand. Increased market concentration undermines that.

It’s a point Elizabeth Warren, outspoken consumer protection advocate and Democrat Senator from Massachusetts, has made repeatedly about the oligopolistic consumer markets in America. In an interview with The Nation earlier this year she described the effect of a few big players controlling an entire industry as “devastating for both the economy and political system”. The solution? “Block anticompetitive mergers; stop anticompetitive conduct; and prioritise protecting competition.”

You might expect Warren, doyenne of the American Left, to be critical of market economics. But the truth is quite the opposite. Warren used to vote Republican because of what she saw as their “principled…conservative approach to economics and to markets”. She broke ties with the GOP when she felt it had moved away from free markets towards crony capitalism: politicians in hoc with big business, whose vast wealth and lobbying prowess enable them to tilt the scales in their favour.

This is what risks happening with supermarkets here. If Sainsbury’s combined with Asda, that would leave almost 60% of the entire market in the hands of a “Big Two” – them and Tesco. Then who benefits? The more concentrated markets are allowed to get, the more they serve the producer at the expense of the consumer. The bigger the businesses dominating markets, the harder it is for new entrants to break through. And the weaker the political and regulatory response, the more daring the corporate behaviour. Just look at the consumer problems which bedevil other concentrated retail markets, such as energy and banking.

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Politicians are in hock to big business – and consumers are paying the price

By James Kirkup

Just as the Republicans in America look to be on the side of big business and the wealthy executives running those corporations, the Conservative party in Britain risks the same fate. Being pro-free markets is not the same as being pro-big business, in fact sitting on the side lines as consumer choice decreases is what is undermining people’s faith in capitalism.

Competition is key to prosperity. Scott Corfe told me that denying the supermarket merger could be the best option, it would “force Sainsbury’s and Asda to try harder – innovating, rather than merging, their way out of their current trouble”. That way, we might all be in the money, not just Mike Coupe and his fellow executives and shareholders.

“The vast majority of people have aspirations to own their home. It is only by rethinking how the housing market works that those aspirations will be achieved”.[1. Sir Edward Lister, Chairman of the Homes and Communities Agency. Foreword to ‘Disrupting the housing market: A policy program to save the home-owning democracy’, Localis, October 2017]

The Government’s white paper of February 2017 was right to describe the UK’s housing market as “broken”. Over many years, the industry has failed to respond to higher prices by significantly raising output. The resulting housing shortfall, pushing price growth increasingly ahead of earnings, has sparked a now chronic affordability crisis – that is causing widespread economic and social damage. This is a market failure with very significant societal implications, given the importance of housing not only as a place to live and raise children, but as a traditional generator and store of long-term wealth and security for the majority of British families.

Part III of Home Truths identifies and outlines nine inter-related characteristics of the UK housing market that are now preventing it from working adequately for all but several groups of entrenched vested interests. These features, taken together, have helped create our shortage of homes – which has grown far more acute over the decade since the financial crisis, as the housing industry has become ever more dominated by large “volume” house-builders (those producing over 2,000 homes a year).

1. Big players too dominant

In 1960, the ten biggest UK house builders accounted for 9% of all new homes. By 2015, there had been very considerable consolidation, with the top ten developers accounting for 47% of all new-builds.[3. Fred Wellings, ‘British House-builders: History and Analysis’, Oxford: Blackwell, 2006] That consolidation continued into 2016, by which time a quarter of all new homes were built by the top three providers, with over half by the biggest eight.

A recent inquiry by the House of Lords said the sector displays “all the characteristics of an oligopoly”.[4. ‘Building More Homes’, House of Lords Economic Affairs Select Committee, HL Paper 20, July 2016] A former housing minister has told the author that the UK’s house building industry “is now acting like a cartel” – a charge implying illegal restrictive practices, which large developers deny.

2. Too few small firms

During the mid-1980s, when the UK last consistently built 250,000 houses a year, there were over 10,000 small and medium-sized enterprises (SMEs) building homes, accounting for two-thirds of all new-builds. By 2014, just 2,800 SMEs were operating in the sector, between them building only a quarter of all new homes.[5. Michael Lyons, ‘The Lyons Review: Mobilising across the nation to build the homes our children need’, 2014 ] In 2007, before the financial crisis, the smallest local operators, those producing less than 100 units per annum, accounted for 28% of the industry’s output. By 2015, it was just 11%.

Keen to build fast to aid cash flow, SMEs quickly translate planning permissions into marketable homes. The current lack of small, agile operators not only seriously limits industry-wide competition. It also means fewer small plots are developed –as large firms find such land less economically and logistically attractive.

3. Powerful Nimbys[6. Nimby stands for “not in my back yard”]

The claim that “Britain is full”, that there is “no room” to significantly increase house building, is arrant nonsense. Only 11% of land in England is classified as urban, according to the 2011 National Ecosystem Assessment, and only 2% is covered with actual buildings. The ‘green belt’ covers 13% of England’s total acreage. Releasing just 0.3% of the green belt would provide space for almost 200,000 new homes.

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The introduction of the National Planning Policy Framework (NPPF) in 2012 simplified planning guidance, introducing a presumption “in favour of sustainable development”. Reflecting on-going Nimby power, though, the NPPF did not change the green belt or other similar protections – which continues to prevent new housing construction in large parts of high-demand areas. Kate Barker estimates that “up to 25% of England is probably protected in some way” – and political opposition remains widespread, and often decisive, in many of the areas where new housing is needed most.[6. See Kate Barker, ‘Where’s the plan?’, London: Publishing Partnership, 2014]

4. Go-slow house builders

Having said that, the annual rate at which planning permissions are being granted has increased markedly in recent years. Permissions were given for around 150,000 units in 2012, rising to 260,000 in 2016. With housing completions having risen far more slowly, though, the stock of outstanding permissions has ballooned over 40% – from 496,000 residential units across England in December 2012 to 684,000 by July 2016.[7. Internal MHCLG memo, based on Glenigan data, obtained by the author.]

This reflects “slow build-out”, with large developers sitting on viable building land, drip-feeding new homes onto the market to keep prices high and rising. The campaign group Shelter estimates one in three homes granted planning permission between 2012 and 2016 has not been built – 320,000 units. In London, the share of these so-called “phantom homes” is one in two.[8. Marcus McPhillips, ‘Phantom Homes – Planning Permissions, Completions and Profits’, Shelter Research Briefing, July 2017]

5. Super-normal profits

While the rate at which planning permissions were granted increased 70% between 2012 and 2016, annual private sector housing completions rose just 20%. Over this same period, the profits of the UK’s five largest house-builders soared 388%, reaching £3.3 billion.

In what is now a highly consolidated industry, with SMEs lacking access to finance and finding it hard to source land, powerful large operators are able to use “contrived scarcity” to prioritise profitability per unit over volume. In doing so, they have put home-ownership beyond the reach of the majority of the UK’s young adults. 

6. Land banking

In an international context, UK house-builders are unusual in that they combine the acquisition and long-term development of land with actual construction.[8. See Barker, 2004, ibid; and Matt Griffith, ‘We must fix it: Delivering reform of the building sector to meet UK housing challenges’, IPPR, 2011]  It has been officially recognised for some time that the large UK developers are primarily land speculating firms that build houses on the side.[9. The Callcutt Review said “identifying, acquiring, preparing, developing and selling land is the key activity of all UK house building companies”; John Callcutt, ‘The Callcutt Review of House-building Delivery’, Department for Communities and Local Government, 2007. The Office of Fair Trading, a decade ago, was even more blunt in its description: “Rather than thinking of homebuilders as construction firms that have integrated upwards into land development, it may be more realistic to think of land developers who have integrated downwards into home construction”; Office for Fair Trading, ‘Homebuilding in the UK: A market study’, London, 2008] In 2015, the biggest three house builders – Persimmon, Taylor Wimpey and Barratt – completed 44,000 homes between them, but had planning permission to build another 200,000. They also owned combined ‘strategic land holdings’ for well over a quarter of a million more homes.[10. See House of Lords, July 2016, ibid]

Some view land banking as a rational response by developers to planning vagaries and other risks. Others see it as a method used by a cynical building industry to constrain supply and speculate on rising land values. As the large players have become far more dominant in recent years, though, it is clear that the scope to use land banks in a deliberately restrictive and anti-competitive manner has been singularly enhanced. “Land banking, sitting on plots while the value of the land rises, is clearly endemic and compounds the overall supply difficulties we’re facing”, a senior civil servant has told the author.

7. Opaque market for land

The UK housing market is further complicated by the existence of “land promoters” – extremely influential companies that thrive in a dysfunctional and opaque market. Buying up farmland directly or via options agreements, these firms spend years developing potential housing plots, navigating labyrinthine systems of planning applications and appeals, and capturing massive financial gains when permission is granted. While an acre of agricultural land may sell for £5,000 to £10,000, land with residential planning permission is normally worth £1-4 million per acre, depending on location.

Alongside the land banks held by the large house builders, non-building land promoters now own an incredible 55% of all land with full planning permissions across the UK, and no less than 87% with outline planning permission.[11. ‘The role of land pipelines in the UK house-building process’, Chamberlain Walker, September 2017] Such holdings are gradually auctioned off to developers at vast profit, all of which is obviously reflected in the price the homebuyer ultimately pays, the size of the deposit needed to buy the home, and the scale of the mortgage that will be serviced over 25 years or more.

Because the UK’s Land Registry remains extremely patchy – and with no legal requirement to register the widespread options agreements between promoters, developers and land-owners – no-one knows who ultimately controls some of the UK’s prime potential housing acreage. What is clear is that the developers and promoters have every incentive to drive prices higher – and, between them, they exert enormous influence over how many houses get built, where, by whom and when.

8. Political donations 

Gallagher Estates is, according to its own website, “one of the largest strategic land companies in the UK”. In October 2016, the company’s billionaire founder Tony Gallagher hosted a 50th birthday dinner for former Prime Minister David Cameron, at Sarsden House – Gallagher’s 17th-century mansion near Chipping Norton in Oxfordshire. The year before, Gallagher had given over half a million pounds to the Conservative party.

Powerful large developers and land promoters benefit handsomely from the chronic market failure across the UK’s housing market. Highly resistant to potential corrective measures, some leading industry figures may take steps to influence lawmakers in a bid to make sure nothing changes. Britain’s property industry, over many years, has been second only to the financial services industry in terms of political donations.

Industry research suggests the sector accounted for over a third of the Conservatives’ corporate donations between January and May last year.[1. Property Week, Adam Brason, ‘Property provides 37% of Tory corporate donations’, Property Week, 2 June 2017] Electoral Commission data confirmed that the Tories received large donations from property and construction companies ahead of the June 2017 election.[12. ‘Tories boosted by construction donations’, Construction Index,  25 August 2017]

9. Purely speculative inflows

Speculative demand is, to some extent, an in-built feature of the UK housing market. The compelling impulse felt by so many to buy their own home stems in part from the observation over many generations that prices generally rise. As such, property ownership allows ordinary working people to secure a modest, but all-important, degree of financial security.

Problems emerge, though, as now, when house prices race so far ahead of earnings that the majority of young adults are unable to buy and, in turn, benefit, from rising property prices. With the median price approaching eight times the median average wage across Britain, homes have never been less affordable.

The impact of slow building on prices has been exacerbated of late by a marked increase in investor interest in residential property. This partly reflects quantitative easing, which has warped bond markets, flattening returns on savings to such a degree that millions of UK adults have invested in a buy-to-let property rather than a company or personal pension.

A growing and in some areas very significant share of new build properties are now also being bought “off-plan” for rental by non-UK based institutional investors. This trend has extended beyond central London, to the capital’s suburbs and also to parts of Manchester, Birmingham, Oxford, Cambridge, Brighton, Leeds and other areas of acute property shortage.

****

The bad news for young, priced-out adults struggling to buy their own home is that these nine egregious features of the UK housing market work in favour of three enormously powerful coalition-of-interest groups. Between them, they form an “iron triangle of vested interests” that supports the restriction of new housing supply. The powerful firms that now dominate our house building industry are only one of those groups.

The second group are existing property owners themselves. While the Government pays lip service to more house building, the reality is that homeowners vote in large numbers and still, just about, form a majority. Ministers know well that rising house prices garner the support of ‘middle England’ – where elections are won and lost. Contentious planning decisions can also swing elections in key marginal constituencies.

As concern at the UK’s property apartheid grows, though, the political geometry is starting to shift. Young adults are increasingly angry and more and more older voters, having bought a property themselves, are upset and alarmed their children are unable to do the same. But for now, the electoral arithmetic still means the “property-haves” rule – with rising house prices leading to lots of re-mortgaging and related consumer spending by owner-occupiers, in turn bringing buoyant GDP numbers and more likely electoral success. This “feel-good factor”, though, is increasingly at the expense of “generation rent”.

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The third side of the “iron triangle of vested interests” is the banking sector. Following the 2007 financial collapse, the UK’s still rather fragile banking solvency apparently remains closely linked to housing. More than three-quarters of all outstanding UK bank loans are property related and if house-building ramps up significantly, the argument goes, and prices flat-line or even fall, there are fears bank balance sheets could suffer.

It has become a near-orthodoxy among senior HM Treasury officials in recent years that a significantly higher build-out rate of UK residential property will spark another banking collapse. It’s nonsense – and probably has more to do with the fact that senior Treasury officials, often with homes in attractive parts of Surrey, Buckinghamshire and other home counties, have conveniently elided their “judgment” of what is good for the economic stability of the country with their inner NIMBY.

Yet, this is the view that pervades Whitehall’s most powerful ministry and, however often senior ministers issue rallying cries to “get Britain building”, it is a view that has thwarted countless attempts by other departments over recent years, and even No 10, to implement policies designed to make UK housing supply more responsive to price.

While some will dispute that, it is unanswerably true that UK banks, heavily exposed to property as they are, have absolutely no incentive whatsoever to challenge the growing concentration of the housing industry. As such, unless compelled to do otherwise, leading banks will continue to extend little in the way of finance to the SME builders that have, in previous generations, kept UK house building relatively competitive, so contributing to more modest price rises.

This iron triangle of interests, and the nine housing market features within it, form a formidable coalition against change. As such, attempts to “fix” this market will need to be coherent, determined and carried out consistently over a long period of time.

If the UK is to thrive during the decade after Brexit, with a relatively buoyant economy, it is vital that the government puts house building at the heart of its economic strategy. If we fail to build more homes, ordinary working people will find it ever harder to keep a roof over their heads, and the damage to the wider economy, and society, will only get worse.

On top of that, though, a major programme of house building will bring significant benefits in terms of future labour market flexibility and rising productivity – and a more general economic boost. Every UK recovery from recession over the last century has been associated with a sharp rise in house building – with the exception of the post-2008 recovery. It is no coincidence, given the absence of anything approaching a building boom over the last decade, that Britain has just chalked up the longest and slowest economic recovery in our history.

“The problems we face with housing market have serious economic implications and fixing this market is now the government’s number one domestic priority,” says Communities Secretary Sajid Javid. “But, above all, high house prices are the biggest barrier to social progress in the UK today – which is why I’m determined to tackle this crisis.”[12. Interview with the author for UnHerd.com, April 2018]

Part four of this series will examine the government’s response to the crisis. The fifth and final part will present Liam’s manifesto for radical reform.

On a Thursday, in early March, Casey Hopkins decided that it was time to bite the hand that fed him. Hopkins, co-founder and CEO of the design company Elevation Lab, wrote a long, righteously angry blog post describing how Amazon.com had repeatedly allowed counterfeiters, probably based in China, to sell knockoff copies of brand-name Elevation products through the site. A counterfeiter had, most recently, created copies of The Anchor, Elevation’s popular headphone hook, using a poorly-cast mold and photocopied box graphics. For five days, Hopkins wrote, the counterfeiter had stolen “all” Amazon sales of The Anchor by undercutting the price of the genuine article.

Moreover, Hopkins said Amazon was “complicit” in the problem, because it profited from the copycat sales, and wasn’t doing much to stop them. Amazon has sold knockoffs of a plethora of innovative, niche products – from phone cases to bedsheet helpers  and baby clothes. Each product was crafted with thoughtful attention to an unaddressed need, and in each case, an imitator quickly stole the idea, along with as much as 90% of Amazon sales.

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By Nigel Cameron

Of course, these niche products and companies might not exist in the first place if it weren’t for Amazon. The retailer’s ability to connect customers to the precise product they want – whether hipster baby clothes or a hook for headphones – is exemplary of the rise of the data economy.

In his new book, Reinventing Capitalism in the Age of Big Data, Viktor Mayer-Schönberger says data-rich marketplaces, such as Amazon, are making commerce drastically more efficient by using trackers and algorithms that predict consumer desires. But Mayer-Schönberger and his co-author, Thomas Ramge, also warn that the nearly-inevitable concentration of digital marketplaces and advertising channels is making society more vulnerable to market breakdowns.

The logic of algorithmic targeting also drives online media such as Facebook, Twitter, and Google’s YouTube, though they’re selling targeted advertising rather than hawking products directly. That slight distinction is what makes the problems of these social media sites more attention-grabbing than Amazon’s counterfeit epidemic.

In building systems that let them find the perfect customers for a headphone hook, social networks also gained the ability to push the specific rage buttons of narrow, vocal social groups. And just as Amazon isn’t structurally punished for selling counterfeits from China, Facebook doesn’t care much if the content demanding user attention is coming from Russia. Facebook CEO Mark Zuckerberg dragged his feet over any admission of flaws in the platform, moving towards reform only after a massive post-election backlash.

Fraud that exploited data targeting would be a minor annoyance at worst, of course, if the malefactors were tricking one or two online outlets out of 20 that were equally popular. But Amazon, Facebook, and Google overwhelmingly dominate their sectors. Google answers 90% of all search queries. Amazon generates nearly half of all online sales. And for niche products, Amazon can generate up to 90% of sales  – making its tolerance for counterfeiters a systemic menace.

Of course, Amazon was a pioneer of ecommerce, so maybe its market share is just a product of first-mover advantage. By standard economic logic, its early lead should now be slowly eroding under competition from new entrants. After all, anyone can start a website – right?

But no – Amazon gained 5% more market share last year alone. That’s because the pathway to market dominance has changed since the age of railroads and telephones. Those systems benefited from ‘network effects’, with each new node making the whole operation more appealing for new customers, and eventually eliminating healthy competition. Mayer-Schönberger and Ramge argue that the combination of data-gathering and machine learning instead leads to what’s called a ‘feedback effect’ – which is something like a network effect on steroids.

As they collect data and refine their algorithms, those such as Google and Netflix pull ahead in the race to predict consumer desires – which helps them win more customers, and in turn more data, until they can’t be overtaken. Because of the resulting concentration, any flaws in the algorithms used by Amazon and Google have immediate and widespread effects. In another alarming example, an unknown group has successfully gamed YouTube and showed algorithmically-generated, often violent videos to millions of children.

But these problems don’t need to be caused by fraudsters, cheats, and counterfeiters. Alex Jones’  Infowars channel was recently censured by YouTube after nearly a decade of spreading dangerous conspiracy theories there. Jones is an American who seems to at least partly believe what he is selling – and has made millions of dollars not only for himself, but for YouTube too. Systematic harassment on Twitter doesn’t necessarily come from the Russians. Amazon could be misreading consumer preferences in ways that are unseen, but have vast distorting impacts on the market. We don’t know because we don’t have access to its data or algorithms.

The only way to preclude such deep distortions of our social and economic systems is to let companies try to out-predict each other – to create competition at the level of the algorithm itself. Because of the nature of machine-learning feedback effects, though, there are big barriers to new entrants. A startup social network has neither Facebook’s current audience, nor its historical trove of data about how audiences in the abstract behave. Without that data, a Facebook competitor can’t hope to train its own system to be nearly as effective at keeping users’ attention, and selling ads against that attention.

There are a number of policy recommendations on the table to encourage competition among data-driven companies. Some have suggested forcing transparency of algorithms themselves, but that wouldn’t give competitors the training data they really need. Chicago Booth School of Business Professors Luis Zingales and Guy Rolnik have proposed that individuals should have a property right to their own data, creating smooth portability between platforms. That might make switching social networks much easier, perhaps applying pressure on Twitter et al to curb abuse.

But those individual data rights wouldn’t create the critical mass of data to let an Amazon or Google competitor come up with new and better ways to match audiences and buyers with creators and sellers.  For that, Mayer-Schönberger and Ramge say we need what they call a “progressive data-sharing mandate”, which would force companies to share their data with smaller competitors in proportion with their market share.

So, for instance, Amazon might be mandated to share half of its current consumer preference data (anonymised, of course) with smaller competitors. Of course, data isn’t sufficient to build a viable Amazon competitor, but it might very well be necessary. Competing startups might apply different insights to raw data gathered by the giants in their field, or simply structure their offering in a different way, or impose different policies – such as more closely scrutinising low-cost Chinese resellers.

For Casey Hopkins, a viable alternative to the Everything Store can’t come soon enough. Amazon pulled the counterfeiter that had squatted The Anchor’s product page within hours of Hopkins’ blog post going viral – but just three days later, another one had taken its place.

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Easy enough, you might think – but try the following example, from a Bloomberg article by Lionel Laurent:

“[This business] lends $1 billion to small businesses in 12 months, holds $150 billion in corporate bonds, runs the world’s largest money-market fund, offers mobile payments and credit cards, and gives customers cash balances that can be topped up across thousands of homely bricks-and-mortar outlets.”

Surely, that could only be some kind of bank – except that it’s Google.

These days we hear a lot about ‘FinTech’ – i.e. when finance companies use hi-tech to deliver new services. However, we should also keep a watch on what I’m calling ‘TechFin’ i.e. financial services from tech companies:

“Google offers payments; Apple Inc. invests its cash in company securities; Amazon.com Inc. lends money and offers account balances in-store; Alibaba Group Holding Ltd. manages customer funds like an asset manager.”

Predictably, the ‘proper’ banks aren’t happy:

“Finance firms are lobbying heavily against an application by Square Inc., a fintech start-up run by Twitter co-founder Jack Dorsey, to be regulated as an industrial loan corporation, a kind of halfway house between bank and non-bank.”

As Laurent puts it, the established players don’t like the big tech companies “nibbling at the best bits of finance without actually taking on the burden of being a licensed bank.”

Banking may well have its burdens, but also has its privileges – not least the bail-outs that saved the sector after the credit crunch, not to mention less visible forms of corporate welfare like QE and state intervention to prop-up the property market.

If Facebook was facing bankrupcy would the US government bail it out? It seems unlikely – after all there’s no such thing as a ‘run’ on a social media network. If a tech company goes bust it doesn’t threaten the stability of the entire sector – or the economy as a whole. The loss of technical support may be a problem, but if significant numbers of people are relying on the company’s proprietary tech, it’ll probably be acquired by another company. As big as the big tech companies are, they’re not too big to fail.

However, that might change if their sidelines in financial services keep on growing and/or become part of the Jenga-stack that is the financial system.

Lionel Laurent indicates that were not at that point yet:

“One reason why shadow finance is so popular is the wave of rules brought in after the financial crisis designed to shrink the banking industry. If risk is being spread across non-systemic actors who are unlikely to need a government bailout if things go wrong, what’s the problem? Tech firms, along with funds and insurers offering direct lending, are filling a void left by banks – not destabilizing the system, reckons Norm Champ, a partner at law firm Kirkland & Ellis. They’re unlikely to go much further for now.”

The future could look very different though. FinTech has the potential to disrupt the sector – and have a lot more software engineers than the banks do. The likes of Google and Facebook are also sitting on enormous cash piles that they need to find a use for. Put the tech and the cash together (not to mention all the data they have on their customers) and you have the makings of a highly consequential challenge to the established financial institutions.

Perhaps instead of lobbying against new banks, the old banks could lobby against the tax avoidance that allows Silicon Valley to accumulate so much money in first place.

Of course, the bankers might think that too dangerous a thread to be pulling on.

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By Charlotte Pickles

• Around 70% of personal current accounts in Britain are held by the “Big Four” banks (HSBC, Lloyds, Barclays, RBS)
• Only 6% of Britons have changed their day-to-day bank account in the past three years, 9% have switched their savings account and 10% their cash ISA
• 60% of British adults have been with their current account provider for at least a decade

The retail banking market in Britain is highly concentrated, with a Competition and Markets Authority investigation concluding in 2016 that market features, including low levels of customer engagement and incumbency advantages, were leading to “adverse effects on competition”. And a lack of competition is bad news for consumers.

The good news is that the UK’s financial regulators have acted to lower barriers to entry, and a (small) flurry of challenger banks have been established in the past few years. But while the choice in retail banking is increasing, consumers don’t seem to be exercising that choice.

I asked Anthony Thomson – co-founder of the first British app-based bank Atom, and until January its Chairman – why this was the case. Why aren’t consumers switching? Why isn’t competition working? Competition, he said, only really delivers added value if it drives differentiation, and we’re only just seeing that happen (Atom, for example, only opened to all customers in 2016). It’s not, contrary to popular opinion, that switching is seen as too much hassle, it’s that consumers simply don’t see the point. Banks aren’t yet giving customers a compelling enough reason to switch.

Take gyms. The market offers consumers a genuinely diverse choice. I can pay high membership fees and get all sorts of benefits – from the latest fitness classes to luxury shower products – or I can pay comparatively very little and get the basics, no bells and whistles. As for the banks, while traditional ones have tried to entice customers with “rewards” – £100 if you switch, 2% cashback on utility bills, £125 high street gift card – when you look behind the offer, it’s all much of a muchness. The equivalent of putting a glossy front-end on a creaking legacy system.

The corporate culture that puts profit above everything else is partly to blame for the failure of the traditional banks to really compete, according to Thomson:

“The great malaise in UK Plc today in general and in banks in particular is they think they exist to make money, they’ve lost sight of the customer.”

Which isn’t to say that businesses shouldn’t make money; but companies that are more interested in chasing quarterly earnings targets than increasing customer satisfaction are unlikely to invest in innovative, customer-centric products.

This is where the new generation of British challenger banks come in. Entirely-app based ones, such as Atom, Monzo and Starling, are truly disruptive. No bricks and mortar, no call centres, none of the baggage of a traditional bank. With significantly lower overheads, app-based banks can offer better rates for customers, and in an increasingly digital world, a more hassle-free experience.

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But it’s still early days, which helps explain why the challengers (or ‘neobanks’) aren’t yet threatening the market share of traditional banks. Atom doesn’t offer a current account (only savings and mortgages) and Monzo’s current account is not open to all customers. These 100% digital banks are differentiated, but they don’t have scale. And achieving scale requires capital. As Thomson explains, the greatest barrier to greater diversification in retail banking is not obtaining a banking licence but securing that capital. Investors willing to put up risk capital at the start, on the basis of a business plan, and not a tried and tested product, make up a small pool.

Yet there are reasons to be hopeful. People’s financial habits are changing: look at online banking, and the growth of new payment platforms and alternative sources of credit. Traditional banks look archaic to generations brought up online. And with the roll out of open banking, as Thomson enthuses, the potential for transformative disruption in the sector is huge – Google ‘bank’ anyone?

Meanwhile, in America, where digital challenger banks aren’t making much progress, a fully integrated model, which links your finances to the rest of your life, and offers hyper-personalised advice, offers and rewards might just spell the end of ‘the bank’ as we know it.

All this data-driven banking obviously won’t wipe away centuries of incumbency advantage overnight, but it will help crack open the current oligopolistic markets – which is why, as Thomson points out, the ‘big boys’ don’t like it.

Oh, and if you fancy setting up your own bank, listen to find out Thomson’s five ‘easy’ steps to doing so…

***

You can also listen to the full interview as a podcast…

https://soundcloud.com/user-970100804/meet-anthony-thomson-the-man-who-broke-the-bank/s-We7YO

CPAs, also known as “recurring payments”, are different from direct debits because they are linked to your debit or credit card, not your bank account. They are often used for subscription services – like gyms, porn websites, beauty products, telecoms – and payday loans, and a CPA allows companies to take payments whenever they think they are “owed”. More than that, those companies don’t need to give notice of a change in payment date or amount. Which makes life nice and easy for the company but not so much for their customers who often find themselves trapped in subscriptions they can ill afford and never really understood in the first place (more on that opacity later).

Surely, though, you can just cancel the CPA by calling your bank? In theory, yes but like so many theories, the practice falls short.

A 2013 review by the UK’s financial watchdog, the Financial Conduct Authority, found that many banks were not cancelling CPAs when asked to by their customers, despite the law requiring them to.[1. ‘FCA reminds banks of their obligations when cancelling Continuous Payment Authorities’, FCA, 28 June 2013] As a result, suitably chastised, the banks agreed to review all complaints about non-cancellations and repay those monies. And yet, two years on, that Citizens Advice analysis found that in 36% of cases where a consumer had requested a cancellation the bank did not comply.

But cancelling payments, while particularly urgent for families struggling to pay the bills, is just one issue. There’s a reason consumer groups talk about the “subscription trap”. We’re back to that opacity. The information imbalance between producers and consumers alone should be cause for concern – is there really a need for T&Cs to rival War and Peace? – and that’s before we even get to the shady practices, of which there are many. The “free” trials that sign you up to an ongoing paid subscription; the additional charges buried in small print and legalese; the hidden commissions; the automatic renewals.

Recommended reading

Who's protecting the vulnerable from predatory markets?

By Polly Mackenzie

A lengthy report from the European Commission, for example, found that of the 900 websites they screened across Member States, fewer than 3% were free of problematic practices associated with free trials.[2. .Misleading « free » trials and subscription traps for consumers in the EU, European Commission, February 2016] And almost half of consumers involved in a mystery shopping exercise had difficulties finding out how to cancel or unsubscribe from a service after a free trail. Consumers across Europe are being played. Last year the UK’s Consumer Protection Partnership named “subscription traps” as one of the key areas of “consumer detriment”.

Market purists will argue that unless the practices are fraudulent, government and regulators shouldn’t be concerned. Consumers are signing up to the free trials by choice, they’re entering their card details for the CPA subscriptions, it’s their fault if they don’t read the small print.

At best that’s a failure to recognise that yawning gap between theory and practice. It’s also a misunderstanding of Adam Smith, the doyen of free market capitalist theory. As I pointed out in my introduction to this series, the consumer, not the producer, should be king.

As each piece in our series highlights, the balance of power between producer and consumer has swung far too far in favour of the producer – or more specifically the big business producer. Misleading, tricking, or trapping consumers is not simply the by-product of a free market model, it’s evidence, as James Kirkup says, that the model is rigged in favour of producers. Just look at the recent miselling scandals, or the secretive online “dynamic pricing”, or the predatory practices, or the fact that regulators in various markets have had to step in and cap outrageous prices (payday loan interest rates, for example, have been a target in both the UK and America, though, off the back of heavy lobbying, the Trump administration look to be rolling back US consumer protections[3. Alan Rappeport, ‘Payday rules relax on Trump’s watch after lobbying by lenders’, The New York Times, 2 February 2018]). Look at the CPAs.

The UK energy sector in particular is a good example of bad practice. In our energy podcast Henry de Zoete talks about the “Freddy Krueger” model in which the “Big Six” energy companies entice consumers with loss-leading cheap deals before ratcheting up the costs a year later – what is known in the industry as “tease and squeeze”. A 2016 Competition and Markets Authority investigation found that energy customers were paying £1.4 billion a year more than they would be in a fully competitive market.[4. . ‘CMA publishes final energy market reforms’, Competition and Markets Authority, 24 June 2016] The “poverty premium” experienced by low income households – on average £490 – is largely driven by sky-high energy tariffs. That is not Adam Smith’s capitalism.

Politicians, not just regulators, should care about rip off practices and oligopolisation – consumers are, after all, constituents. In Summer 2016, Democrat Senator Elizabeth Warren gave a speech attacking the monopolisation of US consumer markets.[5. Elizabeth Warren, ‘Reigniting Competition in the American Economy’, 29 June 2016] In it she said less competition means less consumer choice; less innovation and economic growth; and more lobbying, concentrated political power and regulatory capture. Our series this week shows that to be true.

Sadly, in America the Trump administration appears to be on the opposite path. In the UK, it is 12 months since the Chancellor promised “a green paper on protecting the interests of consumers”. “Left unchecked” Elizabeth Warren argued, “concentration will pervert our democracy into one more rigged game.” Time to rein in the big business oligopolies and put consumers back in the driving seat.

Podcast

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By Charlotte Pickles

As the year-end comes into view, our thoughts naturally turn to the future. The challenges facing the UK are considerable, of course – not least because of the government’s fragile House of Commons majority and the questions that raises about Brexit, policymaking in general and Theresa May’s day-to-day political survival.

It is important, though, occasionally to escape the 24-hour news cycle. Columnists and political pundits, in particular, must take time to look beyond the latest political rows and their impact on the parliamentary arithmetic.

At the turn of 2017, as the New Year beckons and we pause for breath, such reflection is particularly important. For questions are now frequently being asked, not only about this or that government policy, but about ‘the system’. Doubts are being raised, more widely and loudly than at any time in my adult life, and often by sensible people, about the future of capitalism itself.

Capitalism works, and is sustainable, when it spreads wealth broadly. That, in turn, means that the market economy secures and is bolstered by widespread popular consent. Yet, with British youngsters struggling to attain living standards enjoyed by their parents, and workers more generally enduring extended real terms pay cuts, capitalism is becoming less popular. For far too many, then, and to recall Von Mises, capitalism is failing to ‘deliver the goods’. Swathes of voters now view the UK economy not so much as capitalist, but corporatist or even cronyist – and with some justification.

Throughout history, the rough edges of capitalism have needed to be smoothed. That will always be true – and it can be done with a humane, properly resourced welfare state. While the UK’s benefit system is patchy, and notoriously tough to reform, it for the most part doing a reasonable job.

But capitalism is also about ensuring a degree of fairness and the spreading of opportunities, not least among the aspirational classes – those working hard, and striving to improve the lot of themselves and their families. This is where the current failure lies.

For almost a decade now since the global financial crisis, access to bank finance – to buy a home or to start and then expand a business – has been severely limited. At the same time, social mobility has gone into reverse. A recent government study found that “a stark social mobility postcode lottery exists in Britain today where the chances of someone from a disadvantaged background succeeding in life is bound to where they live”[1.  “Social mobility in Great Britain: fifth state of the nation report”, Social Mobility Commission, 28 November 2017].

Some inequality is inevitable under a capitalist system, and UK income inequality has been much exaggerated. But the inequality of wealth – including property and financial assets – has undoubtedly spiraled upwards over recent years (the subject of last week’s Charlie Pickles column). In June 2017, the Resolution Foundation estimated[2.   ‘Britain’s increasingly unevenly shared property wealth is driving up inequality after a decade-long fall’, Resolution Foundation, June 2017] that the wealthiest 10% of UK adults now own around half of Britain’s wealth, with the richest 1% controlling no less than 14%. Even this shocking number is surely an underestimate, given the difficulties in identifying the assets of the super-rich.

An unfortunate 15%, by contrast, have no or negative wealth. And while wealth inequality fell during the decade from 1995 to 2005, it has since risen steady, not least since the 2008 global financial crisis, and the subsequent fall in home ownership.

The total value of wealth across Britain – not just housing, but also private pensions, shares, land and other physical objects – has fully recovered since the 2008 collapse and continued to grow. From £9,900bn before the crisis, UK wealth rose to £11,100bn in 2014, the Resolution Foundation estimates. Rising inequality, though, means that the wealth of the typical ‘median’ adult, lying exactly in the middle of the wealth distribution, has fallen – from £99,000 just before the financial crisis to £84,000. This fall has been driven, in large part, by reductions in property wealth, linked in turn to the narrow distribution of home ownership.

Living and consuming

This was the year when the UK’s housing crisis finally rose to the top of the political agenda – which is where it should be. Britain’s broken housing market is the principal cause of discontent among those who feel ‘the system’ is against them – not least ‘priced-out’ youngsters who, despite holding down good jobs, are unable to buy.

It is generally accepted that the UK needs around 250,000 new homes each year to meet population growth and household formation. The UK’s chronic shortage of homes has been years in the making, as some of us have highlighted, with successive governments failing to ensure enough homes were built.

During the Thatcher era, as council houses were sold under ‘right to buy’ but not replaced, an average of just 190,900 new homes were constructed each year. This fell to 160,800 while John Major was Prime Minister, before dropping again to 156,000 under Tony Blair. Gordon Brown’s short premiership saw annual house-building fall further to 143,400, in the after­math of the 2008 credit crunch, which wiped out many small and medium-sized builders. There was another sharp drop under the coalition government of 2010–15, as new homes per annum fell to just 123,560 on average, the lowest peacetime level since the 1926 General Strike. Over the last 40 years, then, the UK has built around 2-3 million too few homes.

This fundamental lack of supply, coupled with the Bank of England’s ultra-loose monetary policies since 2009, has seen house prices spiral. That has led to the emergence of ‘generation rent’. A decade ago, almost 60% of 25 to 34 year-olds owned their own home. Now it’s well below 40%.

In response to this housing shortage, rather than taking measures to curb prices by ensuring more homes are built, the Conservatives have instead stoked-up the demand side of the market via their ‘Help to Buy’ initiative. The initial error was made in 2013 by then Chancellor George Osborne. His successor Philip Hammond compounded that mistake this year, by further extending the HTB scheme.

Since taking office in 2010, the Tories have also allowed the UK’s oligopolistic house-building industry to amass vast ‘land banks’, delaying the conversion of planning permissions in actual homes, boosting prices and profits by imposing a deliberate house-building go-slow. The campaign group Shelter estimates that no less than one in three homes granted planning permission between 2012 and 2016 has not been built – amounting to 320,000 units. In London, the share of such ‘phantom homes’ is one in two[3.  ‘Phantom Homes – Planning Permissions, Completions and Profits’, Shelter Research Briefing, July 2017]. Over the same period, the profits of the UK’s five largest house-builders soared by 388%, reaching £3.3bn in 2016. These facts are clear evidence that the UK’s housing market isn’t working.

Average house prices across the UK are now eight times the average wage – a historically high multiple, impossible to finance with a regular mortgage. Even youngsters holding down professional jobs are increasingly ‘priced-out’. That’s why half of first-time buyers depend on ‘the bank of mum and dad’, rising to two thirds in London and the South East – an option available only to some. The UK’s housing market, then, once a source of social mobility and security for those willing to work and save, now generates widespread discontent and anger.

Theresa May’s government has talked tough about ‘fixing the housing market’. But successive announcements throughout 2017 have fallen far short of the radical measures required to address the problem – including genuine sanctions against ‘land-banking’ developers. HTB, in fact, has significantly boosted the profits of large developers – a group of companies that has historically contributed generously to the Conservative Party’s coffers.

While the bulk of the solution to the UK’s housing shortage lies with the private sector, Britain is always going to need a significant and regularly replenished stock of subsidised social housing – another area where successive governments have failed. In response to the Grenfell Towers tragedy, Theresa May announced funding for just 5,000 social units a year for five years – set against a 2m-strong council house waiting list. This was a risible response, as I wrote at the time.

The UK’s broken housing market has been instrumental in convincing a growing number of voters that capitalism is unfair – from low-income workers to high-achieving professionals. Discontent among young and middle-aged adults, linked to their inability to buy a home, largely explains Jeremy Corbyn’s strong showing in the June 2017 election.

The discontent with ‘the system’ goes beyond housing, though, with more and more consumers feeling that businesses in general are ripping them off. Faith in a largely ‘free market’ settlement is increasingly in doubt, according to important research from The Social Market Foundation, published in October 2017. Perceived corporate excesses, such as high profits and prices, are fuelling a growing belief that capitalism is rigged, with the benefits accruing to a small elite at the expense of the ordinary UK households[4.  ‘Concentration not competition: the state of UK consumer markets,’ Social Market Foundation, October 2017.].

Eight out of ten UK consumer markets – including telecoms, banking and gas and electricity – were ‘concentrated’ in 2016, according to SMF research, dominated by a small number of large companies. Concentration in the telecoms market has increased over the past decade with respect to broadband and mobile telephony. Banking is also more concentrated than before 2008, with the market for current accounts still controlled by just a few players. The household utility market is similarly in the grip of a handful of energy companies. All this results in a range of negative outcomes for UK consumers – including a lack of choice, poorer customer service, lower levels of trust, ‘super-normal’ profits, under-investment and high prices.

It is vital that ‘barriers to entry’ are lowered so these vital consumer markets become more competitive. Too often, onerous regulatory and licencing requirements, encouraged by incumbent firms, deter new entrants. Competition policy also has a tendency to be far too influenced by supplier interests, rather than consumer concerns. When industries are challenged, regulatory changes are typically made only to ‘industry standards’ and ‘voluntary codes’ – non-binding stipulations, that are routinely circumvented.

Some consumer markets work relatively well. The SMF report highlighted that the rise of discount supermarkets in the UK such as Aldi and Lidl has driven a decline in the concentration of the UK groceries market in recent years. That has generated better outcomes for consumers, even if some suppliers continue to feel badly treated by the large supermarket chains.

When it comes to housing, though, and large corporations such as telecoms companies and banks, consumers increasingly feel they’re getting a raw deal. If markets fail to work well, and capitalism doesn’t ‘deliver’, confidence in our ‘system’ could become endemic – resulting in draconian state interventions, driven by a loss of faith among voters. That would be the wrong outcome for Britain. At their best, free and functioning markets are a driving force of job creation, innovation and prosperity. They expand consumer choice and keep prices low as companies compete to win and keep customers. New ‘challengers’ who enter markets are able to pressure incumbent businesses, pushing them to offer better prices and invest to improve their services.

Yet big companies in the UK and across much of the Western world have become far too powerful. Our political, business and media elites are much too intertwined. Such cosy relationships enfeeble competition policy, further strengthening the might of a small number of corporations. It strikes me that, at some stage, Britain may need the kind of bold anti-trust measures that America reached for in the late nineteenth and early twentieth century – policies championed by Ida Tarbell, the journalist whose name is the title of this column and the subject of the short film I presented for UnHerd.

Systemic dangers

Historically, faith in capitalism has been dented in the aftermath of serious financial crises. This is what happened at the turn of the last century, when successive market collapses and the related ‘Long Depression’ across the US and Europe, roughly from the mid-1870s to the late 1890s, helped to usher in collectivism and ultimately anti-capitalist revolution in some nations – most famously Russia. The Wall Street crash of 1929, and subsequent ‘Great Depression’, also resulted in far more state involvement and public ownership in countries that remained broadly capitalist – a trend that lasted at least until the 1980s.

While the worst of the 2008 financial crisis is over, the global banking system remains precarious and financial markets extremely bloated. After years of quantitative easing, stock prices look extremely over-valued. The US Dow Jones Industrial Average closed at an all-time high over 70 times during 2017 – more than any other year in history. Government bond prices are also in bubble territory, with yields compressed due to years of QE-driven bond buying by central banks including the Federal Reserve and the Bank of England.

The reality is that systemic dangers continue to loom large in both global equity and bond markets – not least in the UK. It is far too complacent to conclude that ‘too big to fail’ has been ended – with the general public rightly sensing that the problem that caused the 2008 crisis is yet to be solved.

“The one big public narrative in this country is… the need to end too big to fail – because that process is not complete,” said Bank of England Governor Mark Carney in September. “Everywhere I go I am asked when I’m going to end too big to fail and the fundamental unfairness,” the Governor remarked.

The Bank of England has made much of the ‘stress tests’ it has conducted on the UK’s big banks – modeling exercises that estimate the ability of these institutions, given their financial reserves, to survive market squalls. It is important to “shed light” and “show that the core of the (UK financial) system is able to withstand very big shocks” says Carney, who in November announced that Britain’s largest seven lenders had all passed.

These stress tests, though, rely on the ‘book value’ of banks’ assets, rather than their more realistic market value. That overstates lenders’ resilience. The Bank of England itself also suffers from an inherent conflict of interest, given that its remit is to maintain the stability of the financial system. That makes it more likely to declare the banking sector ‘safe’, than to point publicly to problems.

Rather than relying on a financial regulator to provide reassurance, it would make far more sense to force big UK banks to become less complex – implementing a full, institutional separation between risky investment banking and commercial banking, for instance, as this column has often argued.

Britain’s banking sector, moreover, remains extremely opaque, with investors unable to gain complete access to balance sheets, so they can assess what is actually going on. That’s why some of our largest banks still have ‘price-to-book’ ratios of less than 1.0 – implying that the market objectively values the business to be worth less than the declared net value of its financial assets. That reveals lingering suspicions that such institutions are not being transparent, harbouring loss-making investments that continue to smoulder, in some disguised form, somewhere on or off their books. This hardly points to a banking sector that is healthy and durable – suggesting that capitalism could yet be dealt another serious blow, in the form of another banking crisis.

It is also worth noting, should another collapse occur, that the UK and other Western governments are now far more indebted than they were in 2007 ­­– meaning they are less able to support moribund banks and other collapsing financial institutions. With interest rates already at rock bottom, the Bank of England also has little or no scope to lower borrowing costs – which are already negative in real (inflation-adjusted) terms.

While pointing out these harsh truths, though, it would be wrong to be too gloomy. The UK economy – despite the near-constant drumbeat of negativity from much of the business press – is bearing up quite well. Growth remains relatively buoyant and, even though sterling has regained much of the ground it lost since the June 2016 Brexit referendum, manufacturers are benefitting from a boom in orders. Britain has also just been judged by Forbes magazine, despite doubts over our EU negotiations, to be have better business prospects in 2018 than any other country in the world – based on ‘technological readiness’, ‘property rights’, ‘inward investment’ and ‘low unemployment’.

While big businesses and many international observers like how the UK economy operates, though, British voters are more sanguine. Many reasonable, liberal-minded people supported Jeremy Corbyn in June 2017 and – and look determined to do so again.

“The government I lead will put fairness and opportunity at the heart of everything we do,” said Theresa May after this year’s election, in a speech that was widely praised. We’ve seen little, though, in the way of concrete policies that will help the ‘just about managing’ families the Prime Minister so rightly identified as being key to her party’s election success.

For my money, the key to keeping Corbyn out of office, and stopping UK capitalism from taking a seriously wrong turn, is the housing market – and, in particularly, creating the right environment to spark a sharp rise in the construction of new homes. Ministers must bring the large, foot-dragging developers to heel, imposing punitive taxes on land-holdings with planning permission that remain undeveloped.

The government should also create powerful Housing Development Corporations – public sector bodies that acquire land and grant themselves planning permission, before selling on plots to private developers, prioritising access to the small and medium-sized firms that will build quickly. The HDCs would use the ‘planning gain’ from the sharp rise in land values once permissions have been granted to fund new schools, hospitals, roads and so on. If housing development means local public infrastructure and services are significantly enhanced, there would be far fewer local objections to new housing.

Every UK recovery from recession over the last century has been associat­ed with a sharp rise in the construction of residential properties – with the exception of the post-2008 re­covery. It is no coincidence, given the slow pace of UK house building over the last decade, that we’re experiencing the longest and slowest economic recovery in British history.

Channels of Progress

‘Capitalism delivers the goods’, wrote Von Mises, some 70 years ago. Yet increasing numbers of UK voters now think otherwise, which is why a hard-left Labour leader inching close to power.

We should take our cue not from Von Mises, but another Austrian economist, Joseph Schumpeter – who was far less complacent about the survival of capitalism. Writing around the same time as Von Mises, Schumpeter provided a sparkling defence of capitalism, pointing famously to the ‘waves of creative destruction’ that occur as entrepreneurs invent and then innovate, cause old ideas, equipment and methods to become obsolete, bringing progress and improved living standards for all.

Such a system can only work, though, when there’s a safety net to help the needy – a condition which the UK largely fulfills, even though there will always be ways in which our welfare state and public services can be improved.

What’s really hindering UK capitalism, though, and causing this crisis of confidence, is the lack of genuine competition. Too many markets, across too many UK sectors, are failing to operate properly – from house building to banking to the supply of telephony, broadband, gas and electricity. These failures, the result of over-concentration and incumbent advantages, are now so considerable, and having such a negative impact on consumers, that there is a rising clamour to upend capitalism as a whole.

It was the US economist Mancur Olson who put his finger on the problem we now face, in his 1982 masterpiece ‘The Rise and Decline of Nations’. Building on Schumpter’s work, Olson argued that mature industrial economies, as they develop, become hobbled by ‘vested interests, unwilling and uninterested in change’. That’s the greatest long-term danger to capitalism, in my view, what Olson referred to as ‘the silting up of the channels of economic progress’, by established industry players, who are able to lobby governments, and defend and extend their market dominance by preventing meaningful regulation and reform.

Western capitalism in the twenty-first century, in the UK and elsewhere, is functioning rather less well than it should. Yet, too-big-to-fail banks that extort government bailouts are anathema to free markets. Monopoly corporations that restrict competition and exploit consumers are anathema to free markets.

An oligopolistic house-building sector, deliberately restricting the supply of new homes to keep prices and profits high, is anathema to free markets. Plummeting social mobility is anathema to free markets – undermining the social contract upon which capitalism is built. These trends are increasingly apparent in modern Britain. That’s why the UK’s broad cultural and political acceptance of free markets is now being questioned, bolstering Corbyn’s support.

Capitalism need not lead to ever-rising inequality, providing the right checks and balances are in place. But governments of all shades must constantly face down behaviour that causes systemic instability, and/or involves excessive corporate greed. That’s something which UK politicians from all parties, for some time now, have largely failed to do.

Being pro-market does not always mean being pro big business. In fact, it often means precisely the opposite – as this Tarbell column has previously argued. Unless the Conservative party shows it understands that, and soon, the world’s fifth-largest economy could soon be under the control of a rabble of neo-Marxists.

It’s time to change corporate law

A century or so ago, Ida Tarbell and the Progressive movement in America launched a crusade to reform the kind of ‘robber baron’ capitalism that had emerged out of late nineteenth century American industrialisation (Liam Halligan has written about the “crusading journalist” for UnHerd, and you can access his twenty-two minute film about her life below).

Team Tarbell was remarkably successful, partly thanks to ensuring more state intervention. Anti-trust legislation was created to break up the octopus-like monopolies and rules were introduced to protect consumer interests.

Often overlooked, but as important, were also the Progressive-era reforms that ensured that managers of big businesses were made more accountable – not to officialdom – but to those who actually owned the companies. Directors were given greater powers to oversee the CEO, making companies more than the private fiefdom of a ‘robber baron’ boss. In the UK, statutory audits were introduced in 1900. After 1907, public firms were required to file a balance sheet for the first time. From 1928, shareholders could insist on seeing a copy of audited accounts.

Alas, over the intervening century or so, a series of court cases have helped ensure that those running big firms have been able to evade the sort of scrutiny they ought to be subject to.

It is not a coincidence, for example, that six out of ten Fortune 500 firms in America are registered in Maryland – one of the smallest states in the Union. Why? Because corporate case law in Maryland has, since the 1930s, tended to interpret the rights and duties of board members and shareholders in ways that favour the board members – enabling them to act with less oversight.[1. For more on this see The New Few, Ferdinand Mount, Simon and Schuster, 2012]

A century of favourable court cases, coupled with the increasingly depersonalised nature of savings and investments, means we need a new round of reforms to ensure that once again the capitalists have more control over their capital.

“We pretend that the shareholders still possess powers that they effectively lost long ago”, wrote Ferdinand Mount recently, “and we imagine that the behaviour of the corporation is disciplined by an array of checks and balances that are often no more than decorative today”.[2. Ibid] Without change, shareholders cannot have meaningful control over the companies they supposedly own.

Here are some specific changes that a 21st century version of the Progressive movement could implement right away:

• Require the directors of investment trusts and pension funds to be made legally accountable, on a personal basis, for the proper exercise of their votes as shareholders.
• Redefine director responsibilities in law, so that they side unequivocally with the shareholder. The law should not be ambivalent about the fact that directors are there to represent shareholders to the board, not the board to the shareholders. Directors are, after all, supposed to be appointed, as proxies, by those that own the business to oversee it on their behalf.

Tilting back control towards those that own private capital is genuinely capitalist. To deliver this, corporate law should be amended such that:

• Existing board members are no longer able to decide who gets to join them on the board. A mini-industry has grown up to find suitable placemen and women to join the club. For all the talk about boardroom diversity, little has been done to ensure diversity of opinion amongst boardrooms that are, otherwise, full of group-think. Shareholders should have greater power to nominate new non-executive board members, if necessary irrespective of the views of existing board members. This will deliver the kind of unherding in boardroom thinking that this site exists to promote in business – and beyond.
• Shareholders have the power to veto executive pay packages. Successive governments have toyed with changes, but watered them down to meaninglessness (the UK government’s recent proposal for a register of high pay offenders is a classic example). Shareholder votes should be binding.
• Key decisions about executive pay are no longer farmed out to supposedly “independent advisors”. Again, a mini-industry of such advisors has sprung up to give supposedly impartial advice, but one which seems to have a vested interest in recommending what executives want to hear. Those that own the company should determine the pay of those who run it. At the same time, there is a good case to be made for excluding executive members from remuneration committees that determine… yes, executive pay.
• Executives are no longer able to deploy proxy votes at their discretion. The interests of those that own the business and those that run it are different. The latter cannot exercise votes on behalf of the former.

We need to change the way we regulate

When US progressives wanted to reign in ‘robber baron’ corporations, they looked to regulation to end restrictive practices. But, of course, over the intervening years, big business has learnt to use red tape to enable restrictive practices – as discussed in yesterday’s article, for example, with VW, diesel and the European automotive sector.

Ruth Davidson recognised this in her recent UnHerd essay on rebooting capitalism, noting how producer interests often have more muscle than consumer interests when shaping regulations.

What can we do to ensure that we get the sort of regulation we need – which prevents restrictive practices – but not the kind that tilts things in favour of the producer?

How can we have a regulatory system that is effective, yet prevents the big business interests, and their armies of lobbyists, from rigging the system?

Actually, there is a great opportunity to do precisely that.

Ruth and those that voted to Remain in the EU might be little slow to see it, but Britain’s decision to leave the European Union means that we can reboot the way we regulate.

Over the past half century, a system of regulation has grown up within western economies that is supposed to facilitate trade between nations by imposing a single set of uniform standards. Markets that are notionally free, like the European Single Market, have in fact become permission-based markets. Unless a business produces in compliance with specified rules, they are unable to produce and sell.

When Britain leaves the European Single Market, rather than replicate a model of rule-making from Brussels, we could try something different: regulation based on Mutual Standard Recognition.

British trade policy should be to accept EU or US standards for use in Britain – preferably, or though not necessarily, with the EU and US reciprocating. Rather than requiring businesses selling in the UK to conform with a uniform UK standard, producers would be free to produce and sell – provided they complied with EU, US or UK standards.

“But wouldn’t consumers suffer?”, some will ask. “Won’t there be risks?”

When you go on a family holiday to France or Florida, you drive in a hire car from the airport that has been approved by an EU and US regulator. When you eat out on holiday, the food will have been produced in accordance with rules laid down by an EU or US agency. Should you or your family fall ill, the medicine from a pharmacist or drug store has been approved by the European Medicines Agency or the US Food and Drug Administration.

Why should the UK government outlaw you from accessing any of those things when you return home?

“But there will be a race to the bottom!” some will shriek.

Allowing competition between different regulators will not mean an end of regulation but it might tackle excessive regulation – and encourage some regulatory agencies, such as the US’ FDA, which has been notoriously slow to approve new drug treatments, to focus on what is important to the patient.

And a little bit of competition between regulatory systems is just what we need to prevent narrow vested interests from getting control over the rule-making process and running it to stifle competitors. Under a system of Mutual Standard Recognition, the customer interest would come first.

“This sort of trade arrangement would have to be mutual, though” some will say. “And how do you know that even if this system worked, that the EU or US would agree to it?”

I don’t. New trade arrangements based on a system of Mutual Standard Recognition are certainly possible with the EU and the US, and even likely with Australia and others. But this is the beauty of this idea. Even if no other country was prepared to allow products to be sold in their jurisdictions that they had not specifically approved by their regulatory agencies, it would still be in Britain’s interest to go ahead and accept others’ standards unilaterally. Think of it as the UK’s Unilateral Recognition of Standards.

It would mean that big businesses based in the UK would be able to focus on what their customers wanted, rather than using political graft to grow. The power of producers to rig markets would be curtailed – making Britain a more attractive place for capital, and more genuinely free market.

Thirty years ago, Britain led the world with a privatisation programme that redefined what it meant to have a modern market economy. We need to lead the world again by redefining, and rescuing, free market capitalism.

Since the 2007 financial crisis, there’s been a growing sense among Western states that something’s wrong with free market capitalism. But it’s easier to identify what we don’t like about our economy than it is to offer real remedies. Those that talk about the need to reform capitalism are often a little hazy when it comes to the detail. Or else, if they do sound specific, it’s because they become highly prescriptive. So much so that their idea of a reboot can be boiled down to a free market that is less free.

So here’s what has and hasn’t happened. The increasingly “crony” nature of capitalism is not understood by many pundits, so debates about corporate reform have deteriorated into facile discussions of whether one is pro- or anti- business. Faced with public disquiet about executive pay, politicians have handed down elaborate compliance rules while doing nothing to enable those that own the firms to exercise control over those that run them. In response to a shortage of long term capital, the government has created a British Business Bank to dish out state-backed loans, preferring to allocate resources by top down dictat.

Increasingly aware of the serious housing shortage in the UK, the government has also created a system of state-subsidised mortgages, George Osborne’s Help-to-Buy scheme (to be expanded under Theresa May – to Liam Halligan’s dismay). This has been great news for those allocated subsidised mortgages, but it has not of itself built a single additional house. Instead it has pushed up the price of houses yet further, while establishing a system of mortgage-rationing.

One layer of corporatist interference has been laid upon another. And, eventually, the weight of it all will fossilise rather than free the market system. What we need, instead, is to liberate capitalism. But before outlining how we do that, it’s worth revisiting the history of how free market capitalism came to be.

Historic perspective

For most of recorded human history, economic resources have been allocated by force – or at least some sort of top down direction – and people remained poor. In various river valleys around the world – the Nile, Euphrates, Ganges or the Yangtze – there existed hierarchical societies in which a tiny elite presided over a mass of toiling peasants.

Until remarkably recently, self-organising economic systems – and the intensive economic growth they bring – were rare. Where they did exist, they tended to emerge on the margins, beyond the reach of emperors and warlords. In the Middle Ages, Venice flourished on an inaccessible mud bank off the north-east coast of Italy. In the sixteenth century, the Dutch began to prosper in another backwater on the other side of Europe.

Which is not to say that self-organising economic systems emerged from a state of anarchy. In a capitalist system, capital by definition resides in private hands. And in private hands, capital needs to be able to mobilise labour and other resources to produce wealth that generates a return. Yet in order to do that, there needs to exist an underlying legal order that enables the capital, labour and risk to come together – and to be effectively managed.

The Venetians didn’t become “frankly and efficiently capitalistic”[3. Frederic Lane, Venice, A Maritime Republic, Johns Hopkins University Press, 1973] simply because they were beyond the reach of the Holy Roman Emperor. They had also developed the commenda contract system (the idea having been borrowed, some say, from the Islamic world on the other side of the Mediterranean[4. For more on how the Venetians borrowed ideas from the Islamic world see: Benedikt Koehler, Early Islam and the Birth of Capitalism, 2014]). The Dutch prospered not just because they had kicked out the Habsburgs, but because they devised an early version of the Joint Stock Company, enabling them to emerge as traders, processors and middle men.

Something similar emerged in England, initially with charter companies and then Joint Stock Companies after the 1844 Act made incorporation easier. Limited liability, a privilege, was extended to investors, encouraging investment, defining risks – and placing obligations on those granted such privileges.

Commenda contracts. Charter companies. Joint stock companies. Each was, in its own way, an attempt to address the same question: How do you ensure that those who own an enterprise or business by investing in it, control those that run it day-to-day?

Venetian investors who put up the capital for a voyage wanted assurances that the person captaining the expedition would not diddle them. So, the commenda system set out how profits would be shared, and what cargo the captain might carry on his own account. It even created a form of limited liabilities for ship losses, too.

The charter that established the Dutch Vereenigde Oost-Indische Compagnie did something similar.[5. In the early seventeenth century, shareholders in the VOC constantly complained that they were not getting the full proceeds of profit from trade with the East Indies. One notable shareholder revolt in 1622 was rather reminiscent of some of the shareholder revolts we have seen in the City more recently.] When the English followed suit, creating their own East India Company, there was a similar balance between the interests of those that operated on behalf of the company, and those who had invested in it.

The question of how investors can control those that run their businesses is is as old as capitalism itself. It is not, therefore, anti-capitalist for us to ask the question anew today and explore the possibility of a better answer. It is, in fact, essential if our self-organising economic system is to survive.

Crony capitalism today

Capitalism today is in a mess because capitalists are no longer properly in control of their capital.

Many City boardrooms have become self-serving cliques, the directors no longer acting in shareholder interest. They are stuffed full of group-thinkers and able to select their own membership, ensure a herd-like mentality.

The corporate bureaucrats that the directors are supposed to oversee are often of mediocre ability[6. See for example: ‘How poor management is driving your staff away’, Chartered Management Institute, 1 February 2016] – yet are rewarded for taking risks with other people’s capital.

Soaring CEO pay is not a measure of the free market at work; it’s an indication that the system has been corrupted. Those that run firms are not properly overseen by those that own them.

FTSE 100 executive pay has increased far faster than the returns that investors in those businesses have made on their capital.[8. Weijia Li and Steven Young, An analysis of CEO pay arrangements and value creation for FTSE-350 companies, CFA Society United Kingdom, 2 December 2006] The system is hardly favourable to those that own capital – the capitalists. That’s because it’s not really a capitalist system at all, but a form of crony corporatism.

Investments in publicly listed firms are made through a convoluted chain of ownership that goes from investor, through pension pots, Individual Savings Accounts or mutual funds, via fund managers. Fund managers have little incentive to exercise real ownership responsibilities, acting instead as rentier investors. They claim a share of the dividends, yet assume too little oversight over the corporate bureaucrats in the boardroom, who are free to help themselves to an ever-larger share of the firms’ balance sheet.

It’s not only that capitalists don’t properly control their capital. The businesses in which they invest are often able to avoid free market competitive pressures.

Growth through graft, not competition

In a properly free market, business success should depend on providing happy customers with a product they want at a price they are willing to pay. Under our system of crony corporatism, business success often depends on graft: rigging regulations to oblige customers to take what they are offered at a price that suits the producer.

Across many sectors of the economy – from housing, energy and transport to the credit markets – regulatory compliance is almost more essential for a business’ bottom line than customer satisfaction. Wherever one looks, there are cases of producer regulatory capture and businesses lobbying to change the rules to give them an advantage over others. Here’s a standout example: In the early 1990s, the Germany car industry realised that it had an advantage over its US and Japanese rivals in terms of proprietary diesel engine technology. The only problem was that the market in automotive diesel engines was almost dead. They had an advantage in making something that few people wanted.

Their response?

They set about lobbying EU policy makers to make people buy diesel cars – and as UnHerd’s Harriet Maltby has set out, they had the power over German politicians to get what they wanted.

A whole host of pro-diesel policies were drawn up by the European Commission, often on the basis that diesel engines would help in the fight against climate change, since they emitted marginally less CO2 than ordinary petrol engines.

The system of subsidies and sweetheart deals put in place at the behest of the EC worked. EU consumers switched to diesel, buying more German cars in the process. In 1995, about one in ten cars sold in the UK was diesel. By 2012, over half were.[9. Daniel Hannan, Why Vote Leave, March 2016] But there was one slight problem: diesel is dirty fuel, emitting Nitrogen Dioxide (NO2) and particulates – tiny, toxic molecules that penetrate our lungs, bodies and brains. The move to diesel might have meant some reduction in CO2 emissions but, overall, diesel was far worse for the environment. So how did the German car industry get around this inconvenient truth? Having rigged the rules to make people buy diesel, they also rigged the emissions tests.[10. For a more detailed description of the diesel scandal, see Daniel Hannan, Why Vote Leave.]

Crony corporatism didn’t only harm air quality in European cities and the health of millions of Europeans. It hurt European consumers, who paid for products when they would have been better off buying cleaner alternatives.

And, ultimately, it hurt the industry. While regulatory capture allowed European car manufacturers to take a wrong turn, car makers in Japan and the US have led the way with electric and hybrid innovation. Is it any surprise that the really exciting breakthroughs in automotive technology are taking place outside the EU?

Crony corporatism is bad economics. If regulatory capture by producer interests helps explain the relative decline of the European car industry, it also incidentally helps account for the relative economic decline of Venice and Holland in an earlier age.[11. Textile industries in Venice were heavily regulated, for example, which helps explain why Venice lost market share in the eastern Mediterranean. For more details on the way in which producer regulation led to the economic decline in Venice and the Dutch republic see Douglas Carswell, Rebel: how to overturn the emerging oligarchy, March 2017]

Europe’s recent diesel saga might have hurt the EU automotive industry, but producer capture is a problem in Japan, America and elsewhere. However much regulatory capture might harm prospects for overall economic performance, it happens because it suits the interests of individual businesses and industries – which is why they employ armies of lobbyists in the so-called ‘swamps’ of Brussels and Washington to help write the rules to their advantage.

To revive capitalism, we need reforms to give capitalists more control over their capital (their investments). And we need to re-think the way we regulate to ensure that businesses have to compete for customers to grow – rather than, as now, persuade politicians to adopt forms of regulation that advantage them over competitors. I’ll set out my solution to this challenge tomorrow.

In 2014 Mark Zuckerberg argued that “every 10 or 15 years there’s a new major computing platform”. “History” he said:[3.  Ben Parfitt, ‘Oculus will be a platform for many other experiences’, MCV, 26 March 2014]

“suggests that there will be more platforms to come and that whoever builds and defines these, will not only shape all the experiences that our industry builds, but will also benefit financially and strategically.”

Tech entrepreneurs rightly extol the virtues of such disruption – from social to sharing platforms, technology has transformed our lives (and most industries). But the sheer scale of today’s tech giants means that, while the barriers to entry for digital start-ups is low, the promising companies are frequently lured off the road to maturity. Indeed, what Zuckerberg should have said was, ‘every 10 or 15 years there’s a new major platform, and Facebook will use its vast wealth to buy up new companies that threaten to disrupt us’. His actual words were, after all, uttered at Facebook’s announcement that it was purchasing Oculus, a start-up (less than two years old) making virtual-reality goggles, for $2 billion in cash and stock.[4.  Reed Albergotti and Ian Sherr, ‘Facebook to Buy Virtual Reality Firm Oculus for $2 Billion’, The Wall Street Journal, 25 March 2014]

I’ve written about the aggressive acquisition strategies of the tech giants before – comparing their monopolistic behaviour to the robber barons of the ‘gilded age’. This predatory behaviour is restricting the battle for dominance, in both existing and evolving markets, to the giants. Tech titans like Zuckerberg might like us to think there is a long line of Davids, fine-tuning their start-up weapons in their parents’ garage, but the reality is Goliath versus Goliath. Paula Dwyer, writing for Bloomberg, captures it well:[5.  Paula Dwyer, ‘Should America’s Tech Giants Be Broken Up?’, Bloomberg, 20 July 2017]

“Google often says competition is ‘one click away.’ And since consumers prefer their platforms over others’, why punish success? But when a cool innovation pops up, the superstars either acquire it or clone it. According to data compiled by Bloomberg, Alphabet, Amazon, Apple, Facebook, and Microsoft made 436 acquisitions worth $131 billion over the last decade.”

To put it in perspective, in the first half of 2016 alone, according to The Wall Street Journal, while the merger and acquisitions market generally was slowing, tech acquisitions were booming – with $260 billion of deals globally.[6.  Rolfe Winkler and Anne Steele, ‘Technology Busiest Sector in Merger Deals This Year’, The Wall Street Journal, 13 June 2016]

Dwyer goes on to quip that despite the big five’s buying binge, “Antitrust cops made nary a peep.” And therein lies the problem, and one people are increasingly highlighting: by using their huge cash piles to snap up innovative start-ups, the giants are stopping the competition from ever really becoming competition.

Of course start-ups sell up, but where are the competition watchdogs?

You can’t blame start-ups for selling out. It’s not just the purchase price, but the vast resources – cash, data, computing power – available to those working inside a Google or a Facebook. Both the founders of Deepmind (a British artificial intelligence start-up bought for around $500m) and Nest (a smart home company bought for $3.2 billion) have commented on the depth of their purchaser’s, Google’s, pockets.[7.  ‘What Deepmind brings to Alphabet’, The Economist, 15 December 2016; Victor Luckerson, ‘How Google Perfected the Silicon Valley Acquisition’, Time, 15 April 2015]

What is good for individual start-ups, however, may not be in the interest of the sector – and more importantly consumers – overall. Which brings us back to the antitrust question. Professor Daniel Zimmer, Chair of the German Monopolies Commission until March 2016, has argued that the acquisition of start-ups by “the Googles, the Amazons or whatever, which have deep pockets”, is of “particular concern if those acquirers are somehow in the same or neighbouring markets to that of the target, because then they may buy their competition or potential competition from the market.”[8.  ‘Revised transcript of evidence taken before The Select Committee on the European Union: Online Platforms and the EU Digital Single Market’, Witnesses: Professor Daniel Zimmer and Dr Thomas Weck, House of Lords, 10 November 2015] Or, as consultancy and research network e-Conomics puts it:[9.  Olga Batura, Nicolai van Gorp and Pierre Larouche, ‘E-Conomics written evidence (OPL0066), Online Platforms and the EU Digital Single Market’, 23 November 2015]

 “a powerful platform can leverage its own market power…instead of competing on merits and is likely to prevent others from competing on merits.”

The problem is distinguishing between innovative acquisitions and anti-competitive ones, but that’s what competition bodies are there to do. And it means recognising that the dynamic, digital markets they are now dealing with require a new approach. Put simply, it’s time for competition policy to catch up.

Antitrust for the digital world

Competition watchdogs need to shift their thinking: when it comes to digital, a price-centric approach is not sufficient; nor is continuing to assess single market impacts when online platforms serve multiple markets.

Antitrust action has historically focused on price as a proxy for consumer welfare. If a company’s behaviour, as a result of a dominant market position, is likely to lead to increased prices, competition authorities kick in to action. And rightly so. The problem, as a 2015 European Parliament paper points out, is that “when services are offered at a zero price” – think Google and Facebook – “competition authorities often argue that where there is no price, there is no market.”[10.  Nicolai Van Gorp and Dr Olga Batura, ‘Challenges for Competition Policy in a Digitalised Economy’, European Parliament, July 2015] This is an unbelievably naïve position to take.

Just last week, Acting Chairman of the US Federal Trade Commission (FTC), Maureen Ohlhausen, delivered a speech on ‘Antitrust enforcement in the digital age’. She took a swipe at those who “want to rewrite the modern rules of antitrust enforcement” in order to “pursue a wide variety of goals other than consumer welfare.”[11.  Maureen Ohlhausen, ‘Antitrust enforcement in the digital age’, Federal Trade Commission, 12 September 2017] Which is an embarrassingly antiquated perspective given, as Rana Foroohar argues in The Financial Times, “free is not free when you consider that we are not paying for these services in dollars, but in data”, which is being “lavishly monetised by the richest companies on the planet”.[11.  Rana Foroohar, ‘Big Tech makes vast gains at our expense’, The Financial Times, 17 September 2017]

Data hoarding is the new price hike – or at least the new means to monopoly. The more data a tech company has, the better it can target its products, and those of the companies paying to advertise (few of us consumers really understand the data-use we ‘agree’ to in the small print). When Facebook bought Whatsapp in 2014, the messaging service barely made money, but its price tag was $19 billion – that’s the value of data. And it is precisely why the European Commission is reviewing its rules on merger referral, recognising that a turnover-based threshold misses that commercial value.[12.  Evaluation of procedural and jurisdictional aspects of EU merger control, European Commission, 3 August 2016] The EU is, in fact, pushing much harder than America to modernise their antitrust model.[13.  Nitasha Tiku, ‘Digital Privacy is making antirust exciting again’, Wired, 6 April 2014] The European effort is being led (as UnHerd has spotlighted) by EU competition commissioner Margrethe Vestager, who in May fined Facebook almost $122 million for providing ‘misleading’ information during the merger review of their Whatsapp takeover.

That wealth of data also enables the giants to identify trends before anyone else. Dr Thomas Weck, lead analyst at the German Monopolies Commission, has flagged the potential competition risk of a company combining data across multiple markets:[14.  ‘Revised transcript of evidence taken before The Select Committee on the European Union: Online Platforms and the EU Digital Single Market’, Witnesses: Professor Daniel Zimmer and Dr Thomas Weck, House of Lords, 10 November 2015]

“The company may find out, ‘The markets I am in will develop in a certain direction. If I want to block arising competition, I have to expand into this or that market’, just based on the data the company has access to. Then the question really is, what kind of animal is this? Is this just innovative behaviour, because the company is following market developments and creating new products, or is it not really foreclosure, based on data access?”

Each and every one of the big five – Alphabet (Google’s parent company), Facebook, Amazon, Apple and Microsoft – are extending their reach into new markets, from entertainment to health to transport. And yes, in each area their disruption is delivering positive consumer gains, but we need to be confident that the source of those gains is not unequal access to market information – without which the giants’ dominance would be usurped by the very upstarts they are currently gobbling up.

You can’t protect consumers if you don’t understand the market

Which brings us back to the multiple markets issue. As academics at the University of Florence put it, properly defining the market is “the founding stone on which an antitrust case…is built”.[15.  Lapo Filistrucchi, Damian Geradin, Eric Van Damme and Pauline Affeldt, Market Definition in Two-Sided Markets: Theory and Practice, University of Florence, April 2013] However the market complexity of the business model used by digital platforms makes this very difficult. Regulators must understand the market between the user and the platform, and the market between the advertiser and the platform, as well as how the networking effect of platforms connect the two. They must then factor in how data collected from those two sides may also be applied to other markets that the platform provider operates in (for example in entertainment or news). And to complicate it further, many of the market interactions will be non-transactional (i.e. involve no fees). Currently, the authorities seem to be trying to regulate this multi-sided market as if it were a conventional single-sided market.

When Google bought DoubleClick (a web advertising delivery service) in 2007, the FTC cleared the merger, but one commissioner dissented. She did so in part because of “the tremendous additional network effects the transaction will generate”. That is, the combination of data from the two companies would enable Google to improve its targeting algorithms, which drives greater traffic, and thus attracts more advertising – lessening competition. And that richer data picture obtained through the acquisition would enable Google both to improve its search and advertisement offers across its multiple platforms. That may have been a decade ago, but the acting chairman’s speech this week shows the FTC still has some way to go in grasping these challenges. In the meantime, consumers lose out.

Elizabeth Warren understands that: “Concentration threatens our markets, threatens our economy, and threatens our democracy.”[16.  Elizabeth Warren, ‘Reigniting Competition in the American Economy’, Speech, 29 June 2016] And standing tall against anticompetitive mergers, she argues, is core to ensuring more competition. The guardians of competition must ensure their antitrust models are fit for an era of networked platforms, fuelled by ‘free’ data. Would Candidate Zuckerberg be willing to get behind that?

****

FURTHER READING

Jonathan Taplin, ‘Is it time to break up Google?’, The New York Times, 22 April 2017

Nitasha Tiku, ‘Digital Privacy is making antirust exciting again’, Wired, 6 April 2014

Farhad Manjoo, ‘Tech Giants Seem Invincible. That Worries Lawmakers’, The New York Times, 4 January 2017

*

“Housing policy… perhaps nowhere has Tory policy failure been so complete and so damaging to our people,’ boomed Jeremy Corbyn at the Labour conference in October 2016. Corbyn was absolutely right. This is part of a trend of left-wing politicians and writers highlighting the genuinely important problems – even if they often propose heavy-handed, misguided solutions.

For decades, far too few homes have been built in the UK. Under governments of all stripes, house building has fallen woefully short of what is needed to accommodate even the natural expansion of British population, let alone immigration. The result has been spiraling prices and the emergence of ‘generation rent’. A decade ago, almost 60% of 25 to 34 year-olds owned their own home. Now it’s under 40%.

The Conservatives made the disastrous error of stoking up the demand side of the housing market via its ‘Help to Buy’ scheme – rather than taking measures to rein in prices by ensuring more homes are built. Since taking office in 2010, the Tories have allowed the UK’s oligopolistic house-building industry to amass vast landbanks and delay the conversion of planning permissions in actual homes, boosting prices and profits by imposing a deliberate house-building go-slow.

Corbyn, in his October 2016 speech, hit the nail on the head. Tory housing policy has indeed failed –including for voters who should be natural Conservatives. It was the unaffordability of housing, I’d say, more than any other single factor, which explained Corbyn’s appeal among young adults, professionals and non-graduates alike, in the June 2017 general election. Tory policy has not only failed to address the UK’s chronic housing shortage, but has actually made it much worse.

The Corbyn position on housing is a good illustration of ‘what the left gets right’. Another is the stand US Democrat Elizabeth Warren has taken on banking reform. The Senator for Massachusetts has spent years highlighting how some of the US banks that almost brought down the global financial system, and then required multi-billion dollar bailouts, remain ‘too big to fail’.

Warren has campaigned ceaselessly to restore a proper split between US investment and commercial banking. She has identified – correctly – that the Western financial system remains unstable because large banks take in the deposits of ordinary firms and households that enjoy a state-guarantee, but also engage in high-risk trading activities.

The ‘co-mingling’ of these two activities means traders gamble irrationally, knowing their institution will be bailed-out given the need to protect ordinary deposits. Such ‘moral hazard’ continues despite measures brought in since the 2008 financial crisis to separate trading and deposit-taking – measures repeatedly watered-down by the mighty banking lobby. Important elements of the sweeping Dodd-Frank Act have been repealed under both the Obama and Trump administrations – and there are signs of more dilutions to come.

Warren wants to restore the ‘Glass Steagall’ divide between investment and commercial banking, breaking up the large ‘universal banks’. Amen to that. Introduced in 1933, the Glass-Steagall legislation, and its less formal UK equivalent, protected Western banks from major systemic crises for over sixty decades. Since the Depression-era law was repealed in 1997, after President Bill Clinton succumbed to Wall Street lobbying, financial markets everywhere have lurched from crisis to crisis.

“For years, banks have been in a feeding frenzy, swallowing up smaller competitors to become more powerful and, eventually, too big to fail,” said Warren, in a seminal speech in June 2016. “And today, eight years after the financial crisis, three out of the four biggest banks in America are even bigger than they were before”.

Very few Conservative politicians, on either side of the Atlantic, have called out the post-Lehman banking reforms for the inadequate half-measures that they are. Warren, almost alone among senior legislators anywhere, is carrying the flame for necessary root-and-branch changes – even though the Federal Reserve itself has designated America’s five largest banks as ‘too big to fail’.

She has, in fact, launched a broadside against growth of competition-stifling consolidation across a range of US sectors – from airlines to banks and health insurance. Warren was also the first senior politician I know of to point the finger at the overwhelming monopoly power of the tech giants Google, Amazon and Facebook. “They deserve to be highly profitable and successful – but the opportunity to compete must remain open for new entrants and smaller competitors that want their chance to change the world again,” she said in the summer of 2016. “Today in America, competition is dying … concentration threatens our markets, threatens our economy, and threatens our democracy”.

Sometimes the Left’s analysis is good but its answers are dangerous nonsense. Part of Corbyn’s solution to the UK housing crisis is draconian rent controls – which would, of course, simply cut the number of properties available to rent. The Labour leader wants to use ‘people’s QE’ – a turbo-charged version of central bank money printing – to fund the building of hundreds of thousands of state-owned homes. Such ideas are deeply counter-productive. Yes, the UK needs more low-rent social housing but far better to get the incentives right so the private sector builds quality homes on the scale required to address the UK’s chronic home shortage.

In other cases, such as Elizabeth Warren’s analysis of the Western banking complex, the Left gets it right in terms of both the problem and what needs to be done. I personally think that Warren’s manifesto, in the hands of a Democrat who can connect with the US ‘rust-belt’, reestablishing the party’s blue-collar credentials, would go a long way towards winning the White House.

I’m generally a business-friendly commentator who believes in low taxes and a small state. In my view, much of what Americans call ‘liberalism’ – in its modern-day, reactionary form – is unwise. Yet I’d increasingly credit ‘the Left’ with some of the best, most courageous and clear-sighted policy analysis – lots of which I agree with, even if the proposed solutions sometimes make me balk.

Big companies across the Western world have become far too powerful. Our political, business and media elites are much too intertwined. Such cosy relationships have resulted in an enfeebled competition policy, which is further increasing the might of a small number of corporations, to the detriment of consumers, smaller firms and broader society. We’ll soon need the kind of bold anti-trust measures that America reached for in the late nineteenth and early twentieth century – policies championed by Ida Tarbell, the journalist whose name is the title of this column and was the subject of this UnHerd video profile.

These views are increasingly finding favour with a broad swathe of the electorate. Yet such positions, which are essentially pro-market even if they aren’t pro-business, are now more likely to be posited by left-wing commentators and politicians, rather than those on the right.

Part of the reason, of course, is the link between ideas and vested interests. While the Left has traditionally generated party funding from trade unions and small individual donors, the Right relies to a greater extent on corporate cash. That’s not helpful when voters have fallen out of love with the big banks and utility companies and are increasingly sick of ‘big corporations’.

Yet it’s not as simple as that. The Democrats, under both the Clintons and Obama, took corporate dollar on a huge scale, becoming deeply enamored of the tech titans and getting even closer to Wall Street than their Republican rivals. Warren’s financial reforms might make some headway, were lawmakers from her own party not constantly urging her to keep her mouth shut. The UK’s Labour party, too, under Tony Blair, abandoned its traditional loyalty to lower income voters, making up for years of frosty relations with business by becoming far too close. Blair’s ‘New Labour’ tribe was transfixed by the corporate money-men, putty in the hands of corporate lobbyists (as Douglas Murray recognised in his column last Friday).

While the Right’s link to corporate money is umbilical, from the mid-1990s the Left has been determined to get in on that act. The response in the UK has been Jeremy Corbyn, saying things about the political-financial nexus that very much need to be said. And, of course, another left-wing firebrand, Bernie Sanders, has been making the running on campaign finances in the US.

“We now have a political situation where billionaires are literally able to buy elections and candidates,” Sanders says, without apology. “This is not what this country is supposed to be about”.

Whether you come from the Left or the Right, however you vote, Sanders is surely right to shout about this problem and to keep shouting.

“This is not Abraham Lincoln’s vision of a government of the people, by the people, and for the people”. Amen to that, too.

https://soundcloud.com/user-350933778/capitalism-on-a-knife-edge

Here are the big observations that I took from the podcast:

• That ‘end of history’ thing? History is still going: It seems a long time ago that a politician like Tony Blair would proudly say that government cannot protect people from the ups and downs of the global trading system but his words – with which the podcast begins – and his call for all people to be prepared to embrace constant change feel like much more than a decade ago.
• Helping capitalism’s casualties: Ruth Davidson readily acknowledges that capitalism has lifted hundreds of millions of people out of poverty in recent decades but for too many people in advanced nations the chances of owning their own home, of being as well off as their parents or enjoying job security all seem to be in retreat (see YouGov’s transatlantic polling for UnHerd). While inequality is down across the planet as a whole it has worsened in many advanced nations and – argues Victoria Bateman – not enough has been done by governments to help the victims of the ‘two Ts’ (trade and technology) to adjust. More investment, she says, should have been made in retraining and in helping people set up new businesses so that they can be part of the change – rather than be the victims of economic change.
• We need more regulation: According to economist Ann Pettifor, the ‘neoliberal’ era taught us that finance capitalism is a terrible master and that it must be tamed by government regulators – or democracy itself will wither.
• We DON’T need more regulation: Niall Ferguson takes a different position. Arguing that Donald Trump campaigned more against globalisation – including outsourcing, immigration and free trade (see Henry Olsen today on Steve Bannon’s message) – than against capitalism as an economic system, he also worries that we might be learning the wrong lessons from the crisis. The banks who caused so much financial destruction ten years ago were actually heavily-regulated and even more regulation – if it’s of a similar nature – could make matters worse – especially if it distorts behaviour and gives false comfort and security to consumers, investors and other counterparties.
• The stagnant wages problem: Paul Mason, author and former broadcaster, also argues for radical change. Claiming that low wages are a feature rather than a bug of global capitalism he recommends stronger union movements and investment in high skill workforces. Pettifor agrees; pointing to inadequate investment as the key reason why wages and productivity are low. When financial institutions can make more money from investing in property and a new factory, they will continue to “buy flats in London”.
• The rigged housing market: There is strong agreement that the property market – especially in Britain is a huge problem – and probably isn’t a ‘market’ at all. Citing a report by the House of Lords, Liam Halligan likens the development industry to a “cartel” which has every incentive to restrain supply in order to maintain high house prices. When fewer and fewer Britons owning their own homes, don’t be surprised – he says – if people without any capital turn away from capital-ism.
• Cronyism among the elites: Liam then goes to the heart of UnHerd’s critique of western capitalism as currently configured. The political class are simply too close to housing developers, bankers and other commercial interests – meaning that we have crony capitalism rather than a free market capitalism that is adequately open to new businesses and innovators. Future historians will be harsh judges of the cosy relations between political and economic powers during this period in British history, he claims.
• Complacency among the elites: Mason says the elites are not only cronyist but “clearly don’t know what they’re doing”. He says change that is as radical as that which characterised the Thatcher years will be necessary – although, disarmingly adds, he’s not sure if such upheaval will deliver but that it has to be tried. He distinguishes between the 5 to 10 year challenges associated with contemporary market failures and the much greater disruptions over the next 30 to 50 years that will be associated with Artificial Intelligence and mass robotics.
• Not just market failure but State failure, too: For Ferguson there’s also a need to fix the State. Noting how literacy, numeracy and even public health (on some measures) are regressing he says the State is no longer doing its key jobs – which, in her conclusion, Juliet Samuel identifies as (i) ensuring vested interests do not become monopolistic and (ii) investing in a highly educated workforce.
• There might not be an alternative but voters are increasingly open to seek one: Simon Wolfson warns that the alternatives to capitalism, including today’s Exhibit A of Venezuela are no solution. But, concludes Juliet, if friends of capitalism do not address flat wages, declining towns (such as Blackpool in North West England which is featured prominently in the podcast) and unaffordable housing, they’ll hand the keys of power to the system’s enemies. It’s “reform or revolution”.

These few bullet points are only a brief summary of the 40 minute recording – do listen when you can for all of the colour, detail and context that Juliet, Sean and their guests provide. And please do subscribe to our podcast on iTunes or through whatever system you use. We go weekly from next month.

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> And here’s our first podcast – on the cultural impact of our 24/7 breaking news culture

Such gloomy Marxist nostrums are, once again, becoming fashionable. No matter that the Soviet Union itself collapsed under the weight of its economic contradictions. No matter that, during the century since the Russian Revolution, centrally planned economies have never worked well anywhere, at any time.

And seemingly no matter either that deluded collectivist ideologies, by throwing an intellectual gloss over the regimes of countless dictators and despots, have been an accessory to millions of deaths. Marx may have been wrong about communism, today’s goateed bien pensants argue, but when it comes to capitalism, the old boy’s analysis was spot on.

Only a handful of cranks still cling to the central vision of the nineteenth-century economist and philosopher – that state-driven communism will create a society that is productive, humane and just. It takes a pretty concerted effort of self-delusion to ignore completely the economic and political history of Russia and China, but some tenured professors still manage it.

More and more respectable thinkers, though, now say that Marx was onto something when he argued that capitalism is inherently unstable ­– and will eventually collapse as a result of repeated booms and busts. Ten years on from the 2007-08 global financial crisis, only a fool would argue that we’re immune from another serious systemic meltdown. And as inequality spirals across the Western world, even hard-working, well-qualified people face an increasingly precarious financial future.

Just a generation ago, middle-class lives were supposed to unfold in an orderly fashion – a steady job, leading to home-ownership, financial security and a decent retirement. Over the last twenty years, all that has changed: as jobs-for-life have gone, pensions have often evaporated and, for many, the dream of home-ownership has been replaced by the locked door of unaffordability.

As capitalism has advanced, then, are we not reverting to the mid-nineteenth century? Are we not in the early stages of that self-destruction of capitalism the bearded revolutionary predicted almost 170 years ago? Are today’s middle classes not facing the precarious hand-to-mouth existence of Marx’s ‘proletariat’?

The first thing to say is that, while capitalism clearly has its faults, it has been capitalism in various guises that has, since the 1989 fall of the Berlin Wall, lifted billions of people out of poverty. Across the former Soviet economies and much of the developing world, the share of the global population in ‘extreme poverty’ has plunged from 37% in 1990 to less than 10% today. This unalloyed triumph, by far the most important economic phenomenon of the last three decades, has been driven by the spread of property rights, contract law and enterprise – in other words, by capitalism.

The second counter to warnings of an impending dystopia is that while many households across advanced economies like the UK and US are clearly struggling, with today’s young adults often less well off than their parents, we remain a long way from Marx’s vision of penury. The financially insecure have far higher incomes and, to an important degree, are cushioned against shocks by what remains an extremely comprehensive welfare state.

That is by no means to claim that trends across the Western world towards economic marginalisation and unhappiness are welcome, or even remotely acceptable. Because, of course, they are not. Yet the substantive response to reports of capitalism’s demise is that the predicted self-destruction we associate with Marx is far from inevitable. That’s because capitalism is what we make it. It is our servant, not our master.

During the mid-twentieth century, communist and capitalist ideologies vied for supremacy. It was the Russian-born American economist Simon Kuznets who argued, in stark contrast to Marx, that the inequality of capitalism corrects itself, becoming less acute as societies develop and become more sophisticated. Winning a Nobel Prize for his trouble, Kuznets’ work during the 1950s and 1960s underpinned the broad acceptance of capitalism and “the American dream”, helping free markets to prevail in the mid-century clash of ideas.

Since the global financial crisis, such ideas have increasingly been challenged. In 2013, Thomas Piketty’s Capital pointed to a sharp rise in Western inequality and the re-emergence of “patrimonial capitalism”. A dense 696-page door-stopper, it became an unlikely bestseller. Piketty’s book sparked fierce debate in the US about power, money and the grand bargain at the heart of American life – that a hard-driving, commercial culture is tolerable because anyone, if they try hard enough, can get ahead.

That’s no longer true, Piketty argued, because Western societies are reverting to historic type, with low social mobility and resources and opportunities dominated by a well-connected elite who too often came into money by birth. An inherent feature of capitalism, ever-rising inequality can only be tempered, said Piketty, by heavy state intervention – including an income tax rate of up to 80% and an annual 2% tax on wealth. Unless that happens, he concluded, the result will be chronic social and economic instability, leading to a toppling of the democratic order.

Piketty’s warnings should not be dismissed – not least as the descriptive analysis in Capital rests on firm empirical foundations. While there is a debate to be had about the extent to which income inequality is rising across the Western world, the distribution of wealth has undoubtedly become far more unequal.

Yet, when it comes to capitalism, Piketty is far too pessimistic. The 2008 Lehman collapse and its aftermath, for instance, far from highlighting the drawbacks of capitalism, as Piketty and his many admirers maintain, shows what happens when you mess with capitalism so much it mutates into something “cronyist” and destructive.

The financial crisis happened because ‘independent’ central banks, egged on by myopic politicians, pumped up equity and debt markets with cheap money. Bank regulations, designed to keep markets relatively orderly, had meanwhile been severely diluted courtesy of Wall Street’s campaign cash. The ‘financial elite’ was then shielded from the wreckage it had caused, as banks’ vast losses were shoved onto taxpayers.

None of this utterly outrageous behaviour is due to ‘free markets’ as, at every turn in this sorry saga, free markets have been traduced. Rather than too much capitalism, the financial crisis happened because there wasn’t enough.

I also don’t accept Piketty’s assertion that, under capitalism, inequality will inevitably rise. “Widening and deepening inequality isn’t driven by immutable economic laws,” the Nobel prize-winning economist Joseph Stiglitz once told me. “A well-functioning market economy doesn’t only create jobs, but should also generate increases in income that are shared”.

The key part of that argument, of course, is “well-functioning”. And Western capitalism in the twenty-first century is functioning rather less well than it should. Too-big-to-fail banks that extort government bailouts are anathema to free markets. Monopoly corporations using their power to restrict competition and exploit consumers are anathema to free markets.

An oligopolistic house-building sector, deliberately restricting the supply of new homes to keep prices and profits high, is anathema to free markets. Plummeting social mobility is anathema to free markets – undermining the social contract upon which capitalism is built. These trends are increasingly apparent in modern Britain. That’s why the UK’s broad cultural and political acceptance of free markets is now being questioned. That’s why urban trendy types are increasingly quoting Marx.

Capitalism need not lead to ever-rising inequality, provided the right checks and balances are in place. We must face down behaviour that causes systemic instability, or involves excessive corporate greed –  implementing regulations that work. Being pro-market does not always mean being pro-big business. It often means precisely the opposite.

This weekly column is called Tarbell – named after an American journalist of the late-nineteenth and early twentieth century. A writer who believed strongly in capitalism and enterprise, Ida Tarbell also understood the vital importance of reining in capitalism’s excesses. From humble origins, Ida rose to the pinnacle of American journalism, tackling the economic and business issues of her day with skill, determination and courage. It was Tarbell who exposed the criminality of Standard Oil, forcing Teddy Roosevelt to become the ‘trust-busting’ President. But it was also Tarbell who defended mechanisation and technological progress – arguing, correctly, that rising productivity and living standards, ultimately help create a better, more prosperous society for all. And, yesterday, UnHerd published my film about her life and example.

This column will, in the weeks and months to come, look at economic, business and political issues from the same perspective as Tarbell. The author supports capitalism, but is mindful that it must be tempered lest it lose public consent.

As for Marx, the irony is that he never said the quote at the start of this article. It was “the rule of the bourgeois democrats”, he told the Central Committee to the London Communist League in March 1850, not capitalism, that “will carry the seeds of its own destruction”. Under Marxist theory, ‘bourgeois democracy’ is essentially a government that serves only in the interests of the wealthy and well-connected. That’s one warning from Marx I am fully prepared to accept.