Signs of collectivism can be seen all over Europe in top-heavy bureaucratic efforts to regulate innovation, particularly when it comes to tech. This “demotic reallocation of power” — as an eminence grise of tech policy told me privately — has long characterised Europe’s approach to innovation.

The problem is that the phenomenon seems to have spread around the world, including to some of the most important loci of digital innovation, including the UK and the US. Just last month, Adobe called off its $20 billion acquisition of design tool start-up Figma after the UK Competition and Markets Authority blocked its path. In America, Amazon and Alphabet are both facing competition lawsuits brought by branches of the US government. And only two weeks ago, the Federal Trade Commission (FTC) and Department of Justice (DOJ) announced they’re “in deep discussions” concerning Microsoft’s deal with OpenAI.

We are, in other words, witnessing one of the most expansive and significant regulatory efforts in decades. In total, the FTC and DOJ, which together are responsible for upholding US antitrust law, have brought more than 50 enforcement actions over the past two years — the highest, Bloomberg notes, since the US first required pre-merger antitrust reviews in 1976. In the UK, meanwhile, the CMA blocked three deals in the 2021-2022 fiscal year, amounting to 5.5% of all deals proposed, more than tripling its historic average.

The CMA-halted Adobe deal is particularly revealing, due to both its scope and the strange rationale the regulator employed to quash it. Adobe and Figma do not provide the same services and therefore serve different kinds of customers. This was implicitly acknowledged in the decision by CMA, which blocked the deal on grounds that it could negatively affect competition in the future. This is a departure from much regulatory law on competition which sensibly looks at the effect on actual competition — i.e. what’s already taking place in the market. This novel approach to determining the likely, or even possible, outcome of a deal created an impossible hurdle for Adobe and Figma to clear. And maybe that was the point.

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“The only way to solve a future competition issue, that someone might do something, is to not do the deal,” Adobe’s general counsel, Dana Rao, said in a December interview. “That’s essentially what they were telling us.” But why was that the message? Neither company is British, and neither has its largest market in the UK. At a time when the UK is aggressively attempting to court tech, particularly in AI, a highly contentious legal move to torpedo one of the biggest tech deals of the year — and in the process wipe $1 billion in breakup fees off Adobe’s balance sheet — seems like an odd choice, one not likely to endear the country to ambitious tech founders.

Yet the Adobe decision is hardly an outlier. Around the same time that deal fell apart, Microsoft concluded its $69 billion acquisition of leading video game maker Activision. Since it was announced in 2022, the deal, however, was anything but certain. Microsoft similarly attracted attention from anti-trust regulators, notably the CMA. But five months after Microsoft announced the deal, a California regulator called the Civil Rights Department (CRD) announced it was pursuing claims of sexual harassment that Activision had already settled with a federal regulator, and with the express consent of CRD itself.

As the Microsoft deal began to progress in earnest, the CRD began taking an exceptionally aggressive approach to pursuing Activision. At the time, Matt Taibbi detailed the elaborate, almost arcane lengths to which the CRD went in pursuit of Activision, at times appearing to violate its own ethical and legal boundaries as a regulator. In one instance, a CRD official told a reporter over email that the agency’s policy is not to comment on open investigations (as it is legally prohibited from doing). Two days later, the same official wrote to the reporter saying “my director” would be willing to discuss the case by phone — and, presumably, out of the reach of official records. This exchange was only revealed after Activision sued CRD, which had initially provided no documents in the discovery process.

Though CRD did not have regulatory jurisdiction over the acquisition itself, given the timing, it’s hard not to wonder if the agency’s regulators were conscious of the fact that their efforts could have easily become enough of a distraction for Microsoft to walk away. Indeed, within days of the Microsoft deal announcing its final regulatory approvals for the acquisition, the CRD inexplicably dropped its most grievous claim, sexual harassment, and settled with Activision for far lesser claims, saying “no court or any independent investigation has substantiated any allegations,” in what The New York Times called “a stunning reversal”.

While it might seem like a single case in a single jurisdiction, the reality is that, given California’s tech-centricity and deep blue politics, the state is a bellwether for this emerging approach to tech regulation in the US. In this regard, the CRD’s activities should raise flags — and already they have. Recently, the Hindu American Foundation sued the CRD for racial and religious discrimination, after the CRD sued tech giant Cisco, making racially tinged allegations that a “caste” system was operating within the company. And so we find ourselves in a bizarre scenario, whereby California’s civil rights protection agency is being sued for violating the civil rights of an ethnic and religious minority group.

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Have we reached peak ESG?

By Ashley Rindsberg

While this moral paradox could be the punchline of a bad DEI joke, it is in fact the product of a newly aggressive regulatory approach to tech emerging from Democrat California. The FTC’s current suit against Amazon, for instance, includes allegations that the company’s algorithm prioritises its own products over other brands. That might be true, but this is also the case with nearly every supermarket or drugstore on earth.

In the finance industry, on the other hand, regulation looks rather different: what we see is not regulators slowing down or scuttling mega-mergers but, in some cases, forcing them. Last year, the Swiss government all but commanded UBS to acquire the embattled Credit Suisse. In the US, the country’s largest bank, JP Morgan Chase, was made even bigger when it swallowed up regional bank First Republic during a banking crisis, without a peep from regulators.

What explains this apparent double standard? Some in the US see the regulatory push as a step toward a European-style approach to the relationship between tech and state power. “Europeans don’t like the disruptive aspects of tech,” said one long-time tech lawyer with an expertise in policy. “They tend to think of tech as a Frankenstein’s monster that needs to be tightly controlled, exploited for what economic and lifestyle benefits it can afford their citizens, but not something to encourage.”

In the US, both parties seem to be following a similar course. In the days of Barack Obama, the love affair between Big Tech and the Democrats knew no bounds, with the President strolling a SpaceX launch site with Elon Musk and holding campaign events with Mark Zuckerberg. Democrats only became tech-sceptics around the time of the 2016 presidential election, when the Cambridge Analytica scandal was perceived to have swung the election towards the Republicans, Wikileaks damaged Hillary Clinton’s campaign, and Peter Thiel came out in support of Trump. “I think for Democrats it’s a case of, ‘We really liked you guys when you were doing cool stuff with data and outreach and helping us win elections. Now you make teens into body-obsessed depressed vapers while you harvest our data,’” the tech-policy lawyer said.

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Is Obama sabotaging Biden?

By Kat Rosenfield

The idea of mass-scale data harvesting and “surveillance capitalism” explains some of the current political animus and regulatory zealousness towards Big Tech. But it’s also a question of power. Since the end of the Second World War, the only serious contender to the fantastically effective, and highly centralised, American political establishment has been Big Tech. While tech was busy disrupting entire industries, the power elite may have realised that it, too, stood to be disrupted.

But the tech world is adaptable. And it knows it needs to stay in the good graces of those who pull the regulatory strings. This partly explains Twitter’s shameful collaboration with the US government in its effort to censor Americans on Covid-related issues; it is also the reason why the corporate culture at Google is so often described as paralytically concerned with compliance. None of this is surprising, of course, when you note the phalanx of senior Obama Administration officials who fell into the arms of Big Tech, including senior advisor, David Plouffe (Uber), press secretary, Jay Carney (Amazon, Airbnb), and economic advisor, Larry Summers (Square, A16Z). It turns out that tech’s regulatory revolving door turns as fast as any other.

For those who refuse to play ball, meanwhile, there is a price to pay. Elon Musk’s companies, for instance, face a remarkably different climate, and have in recent months been subjected to almost Kafkaesque lawsuits and regulatory efforts, including a joint investigation by the DOJ and the US Securities and Exchange Commission (SEC) into claims that Musk built a single glass house. SpaceX is also being sued by the DOJ for not hiring enough asylum-seeking migrants (“asylees” in DOJ-ese) despite being barred by US law from hiring non-US citizens because of its work in national security. Biden later took time at a rare news conference appearance to clarify that Musk’s business relationships with other countries are “worthy of being looked at”.

Here, the political dimension is hard to ignore. “The Left is always pushing for more control over Big Tech,” says noted tech investor and entrepreneur David Sacks. “They leverage that control — or the threat of control — into campaign contributions and censorship. It’s the protection end of the extortion racket.” It’s not surprising that the FTC, now gearing up for its landmark suit against Amazon, is currently led by Lina Khan, a 34-year-old Yale Law student whose paper on Amazon’s labour practices catapulted her to Democratic establishment stardom.

The problem with a politically inspired regulatory effort, however, is that the courts don’t share the same prerogatives. Losses by regulators in courts are piling up: most notably the FTC’s defeat with the Microsoft acquisition of Activision, and the SEC’s loss of a lawsuit by crypto company Ripple. Yet this hasn’t stopped the agencies from powering forward: after all, even without formally losing their cases, regulators can tie up mergers to the point they are no longer tenable.

None of this, however, means it is good for the public, especially given that it’s taking place in a context of a volatile economy and a marked depression in the tech IPO market. As the Big Tech deals dry up, so will the funds that sustain start-ups. The aftermath isn’t too hard to glean, as innovation stalls and the global economy, already on unstable footing, trips right when we need it to run, and run fast.

Then, with impeccable timing, on Tuesday, 14 May, the National Labor Relations Board released a month-old letter finding that Uber drivers are not legally employed by the company and are therefore ineligible for federal protection for collective bargaining. The company’s fortunes turned on a dime, the share price was in free-fall no more, and as of this writing, its value is above where it began. Tens of billions of dollars hinged on that favourable regulatory decision.

Back in 2012, when Facebook’s IPO started badly, there was an epidemic of hand-wringing about the gullibility of financial markets in valuing big-name tech stocks. But the situation was easily remedied – $1 billion was all it took to shut down the competition from upstart Instagram and seal Facebook’s domination of worldwide social media, to the tune of over $50 billion a year of revenue.

Coming hot on the heels of global euphoria about the liberating power of social media in the Arab Spring, Facebook looked like that rarest of species, the company that does well by doing good. With the floatation the public was offered a piece of the action.

But the value in Facebook turned out not to come from global emancipation but from its opposite – global dominance of the social networking market. It is a service that claims to foster human connection and interaction, but for a price – and that price is one that users, and governments, are increasingly unwilling to pay. There seems to be a disconnect between Facebook’s value to investors and its value to society – they push and pull in different directions. Uber is in a similar place now.

Uber, like Facebook, experienced a long train of popular congratulation as the globally disruptive innovator shaking the dust out of urban taxi markets. It offered to revolutionise local transportation, and investors couldn’t wait to get involved. Uber raised $11.5 billion through nearly 20 funding rounds, ultimately valuing the company at $68 billion.

But a reckoning is coming. As indeed it is for Facebook.

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When you get online – get paranoid

By Carl Miller

The “techlash” is highlighting the degree to which tech’s business models consist of running roughshod over everyone else’s privacy, security, democracy, environment, and livelihoods, and cashing out in spectacular Wall Street fashion before the public truly understands what hit them and how much autonomy they’ve lost.

Uber is no different – though its model has its own peculiar quirks. The platform’s value depends on its ability to charge what it wants to riders, whilst paying as little as possible to its drivers. It classifies the drivers as independent contractors, so as to escape adhering to labour standards, avoid contributing to social insurance, and enabling it to offload the cost of capacity it doesn’t use. It relies on there being as many drivers logged on at peak times as possible – for customer convenience – without having to pay for their availability. The drivers bear the risk of a quiet night.

Uber, and other gig economy ‘platforms’ have been celebrated as creating venues for individual entrepreneurship, a new path for upward mobility. In the case of Uber this seems a stretch. The driver may differentiate the service offered by providing riders with bottles of water, ambient music, good conversation, or no conversation, according to tastes, but the most they can hope for is a higher rating, which does not automatically translate into more rides and revenue. Rather, high ratings are needed to maintain Uber’s strict minimum to stay on the platform. It’s more like the scores of Roman scribes, dutifully copying down set texts, being told that they are the authors of history – Uber drivers control very little of their individual “enterprises”.

Alex Rosenblat’s book Uberland details how Uber’s business model works: bonus-based driver compensation directs drivers to work where and when Uber needs them, whilst penalising them for time spent logged into any other ridesharing platform. The bonus-based pay schedule closes off any other opportunities they might have: if they log-off before they earn the bonus, then the whole shift will turn out not to have been worthwhile. Even with the bonus they just barely break even.

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Uber has, for the most part, escaped regulatory intervention to force re-classification of drivers as its own employees, which would compel them to absorb some of the risks that drivers currently bear. Just recently, both the Department of Labor and the National Labor Relations Board issued opinions highly favourable to gig economy platforms, holding that such platforms don’t exercise sufficient control over drivers to qualify as their employers.

The NLRB’s general counsel stated: “The drivers had… complete control of their cars and work schedules, together with freedom to choose login locations and to work for competitors of Uber.”

As Rosenblat and other scholars’ work has shown, this statement is empirically false – the fact that Uber drivers can operate outside the bounds of what its compensation system incentivises is a dead letter if they can’t make a living by doing so. The UK Court of Appeals also found that the categorisation of drivers as independent contractors engages a “high degree of fiction”.

Meanwhile, the company has also challenged its drivers’ right to collective bargaining even outside federal protection. When Seattle tried to grant Uber workers that power, the city was sued by the Chamber of Commerce at Uber’s behest. It argued that such a union of independent contractors would violate the US antitrust laws.

The federal antitrust agencies weighed in on Uber’s side, and a federal appeals court agreed. As a result, the ordinance was amended to exclude collective bargaining over wages. But Uber continues to claim that the whole concept of driver collective bargaining on any matter violates the federal antitrust laws.

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By Peter Franklin

The irony seems lost on Uber that while it has used antitrust regulation against its drivers, it has managed to avoid any antitrust scrutiny on its own account, even as it fixes prices and wages for these supposedly independent businesses. A private class action against Uber on those grounds was set to go to trial in New York in 2016, but the company successfully sent the case to arbitration, where it hasn’t been heard from since.

No public enforcer has yet alleged that Uber’s non-employment of its drivers constitutes grounds for price-fixing antitrust liability. In fact, if anything, antitrust enforcers have viewed Uber’s business model as introducing much needed competition into urban taxi markets, and have encouraged local officials not to question it. So, between lax labour law and lax antitrust, Uber is able to operate a business model that depends on controlling drivers without being responsible to them as an employer.

In this way, Uber’s profitability hinges on continued regulatory forbearance, as the market response to the NLRB letter showed. Far from being an innovative company challenging comfortable monopolies hiding behind state power, Uber is itself dependent on government regulators for its continued success. The intricacies of labour law and antitrust law, developed in a time before the platform economy, continue to be debated. But at the heart of the controversy is the question of who should have the power to determine drivers’ working conditions – the government, through employment law, drivers themselves, through union participation, or – as now – Uber.

But even with the deferential treatment it receives from regulators, Uber is operating at an enormous loss and has no immediate way of reversing the hemorrhage. Given its cheap ride strategy, it doesn’t generate enough operating revenue to both pay drivers enough to stay on the platform in the long run and generate a return for shareholders. It is already trying to increase the prices its habitual customers are used to, but that has not yet come near to solving its basic cashflow problem.

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The fact that it has enjoyed privileged access to investors and their wealth is also a big part of the company’s success at acquiring market share at the expense of legacy taxi companies. At least so far, these investors have viewed Uber’s aggressive pricing and the trampling of local regulations as likely to pay off in the long run, with a dominant market share and significant pricing power, or through the ability to phase drivers out entirely and move to full automation.

For most of the big-name tech IPOs, the companies aren’t looking primarily to raise cash. That’s because the public equity market has transformed from a source of capital with which to finance investment, expansion, and growth, into a means by which insider shareholders can diversify their risk: an IPO gives founders and early venture capital backers the big exit they have been waiting for, and a way to cash-in before the true costs of the business model catch up with them.

That dynamic is certainly at play in Uber’s case: should regulators go the other way on the employee/contractor categorisation – which the UK Supreme Court may well do if Uber loses its appeal – then it is useful to have already cleared a way out for investors. In the meantime, investors can take advantage of market optimism (and well-timed letters of support from the US regulators). Unusually, Uber also actually needs the money. In the real world, as opposed to in the purely digital realm, the runway to world dominance is a little rougher, though no less assured as long as investors are willing to strap down for the bumpy ride.

But even though it needs the money, Uber has not been willing to cede control, nor has it had to. The typical Silicon Valley IPO retains total control over operations among the insiders through a dual-class share structure: the insiders retain full voting power in their ‘old’ stock, and the ‘new’ stock they sell on the public markets comes with no voting rights. No matter how much of the company is ultimately made available to the public, no outside investors can ever challenge the founders’ control over their company. The company is still run in the interests of shareholders – and often at odds with the interests of society – but it is a sub-set of privileged, insider shareholders, whose interests are even less aligned with the average public-facing pension fund and institutional shareholder.

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By Charles Arthur

For as long as it remains in need of infusions of cash, Uber’s management and core group of founders may not be able to maintain the complete independence enjoyed by other tech behemoths such as Facebook, Amazon, and Google. Otherwise, it would need to raise fares, potentially curtail its geographic coverage, and lower its world-bestriding ambitions for autonomous vehicles. It probably has not yet tested the patience of late-coming partners such as Softbank and the Saudi Arabian Investment Authority, if only because these investors aren’t necessarily seeking the highest return, but rather American companies where they can stash their wealth. Others might not be so forgiving.

Uber’s long-term viability as a going concern will depend on whether the regulatory rope-a-dope it has played to date is permitted to continue. The recent backlash in the form of drivers’ strikes and policy-makers worried about the ability of gig economy platforms to exercise control while evading responsibility may also start to put pressure on the company. Perhaps they will finally constrict the legal grey area where it has been permitted to grow with a great deal of deference and little in the way of limits.

But in the meantime, the IPO has simply confirmed that the real Silicon Valley business model is the concentration of wealth and power at the top. And it reminds us there are few protections for those who rely on the permission of powerful gatekeepers to earn a living.

In December, the National Crime Agency froze a bank account linked to a scheme that laundered billions of pounds out of Azerbaijan, an ex-Soviet republic, having already made the UK property of an Azeri banker’s wife the target of its first ever Unexplained Wealth Order (UWO). That same month, a solicitor was fined £45,000 for trying to help the daughters of Azerbaijan’s president buy luxury property in London, and failing to do the appropriate checks on the origin of their wealth.

By the low standards of law enforcement in the UK, where allegations of laundering the proceeds of grand corruption tend to be greeted with something between a shrug and a grin, this is big. Rumours are rife that other wealthy Azeris are being considered for UWOs of their own, up to and including members of the ruling Aliyev family. If these three steps become the start of a journey into the heart of all Azeri-owned wealth in the UK, it could prove uncomfortable, and not just for lawyers and estate agents.

London and Baku have a close relationship thanks to BP, which opened an office in Azerbaijan within six months of its independence from the Soviet Union. The oil revenue has gradually allowed the Aliyev family – first Heydar, the former head of Azerbaijan’s KGB, and then, following his death in 2003, his son Ilham – to turn the country into a hereditary kleptocracy. Heydar is commemorated by a vast swooping museum in central Baku, designed by Zaha Hadid and set among magnificent fountains. This glorious building houses various bits of ephemera from his life – a train ticket, a school report from the KGB academy, various of his limousines – like the grave goods of a pharaoh.

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Under the rule of the Aliyevs, their friends and relations have become enormously wealthy, and used the global banking system to launder much of their money into the West (as revealed by the “Azerbaijani Laundromat” leak of financial documents). “Azerbaijan’s economy is largely dominated by monopolistic interests,” wrote the US embassy in a 2010 cable released by wikileaks. The cable was part of a series in which American diplomats explained to Washington which families were most powerful in Azerbaijan, and they provide a fascinating insight into a system where bribes, influence, and abuse of power control everything.

This particular cable dealt with the business activities of Emergencies Minister Kamaladdin Heydarov (of “the second most powerful commercial family in Azerbaijan”, according to the State Department officials). The kind of behaviour described in the cable was beginning to get Azerbaijan a bad reputation and it was to improve the country’s image that, in 2008, Heydarov’s two sons Nijat and Tale created a London-based lobby group: The European Azerbaijan Society (TEAS).

TEAS specialised in promoting Azerbaijan, and acted as secretary for the All-Party Parliamentary Group for the country. It flew MPs out to Baku, where it showed them around, and tried to persuade them that the country was a reliable source of energy, the wronged party in its long-running dispute with Armenia, and a generally lovely place for all its citizens.  “Such visits have great effectiveness, because to read about Azerbaijan is one thing, witnessing the development of the country is another thing,” Tale Heydarov boasted at a lobbying conference in Baku in March 2012.

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Jim Sheridan, then the Labour MP for Paisley, accepted a three-day £3,100 trip to Azerbaijan in March 2013, and came back full of praise. “We discovered that the trade unions there enjoyed better relationships and more employment rights than we do here in the UK. Azerbaijan is a young democracy and we are the oldest, yet we are still fighting for employment rights,” he told the House of Commons later that year. (The International Trade Union Confederation is less sanguine, saying that in Azerbaijan many labour rights exist only on paper.)

Over on the Government benches, Mark Field, Tory MP for Westminster and recipient of a five-day £3,500 trip in May 2011, told the Commons in the month after he got back that Azerbaijan “has made tremendous strides forward both politically and economically in recent years. That should be recognised and rewarded.” At the time he was on TEAS’ payroll, as a member of its advisory board.

I asked Heydarov about the source of TEAS’ funding, when I met him on the sidelines of a business forum that TEAS organised in Mayfair. He said the money came from members’ subscriptions, but refused to be drawn on their identities or the amount they contributed. These members have certainly been very generous, whoever they are. TEAS and other Azeri lobbying groups spent more than £70,000 on MPs alone. Most of it went on 23 trips to Azerbaijan, although Slough’s Labour MP Fiona McTaggart received £1,000 of hospitality in Britain, at the Royal Windsor Horse Show, and TEAS even got into publishing.

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By Sam Leith

When Liam Fox wrote a meditation on globalisation called Rising Tides it failed to trouble either the charts or the reviewers on either side of the Atlantic (sales figures show it has sold just over 3,000 copies in English worldwide), but TEAS bought the Azeri translation rights for an astonishing £11,400, paid in two instalments in 2014, and then flew him to Istanbul to promote it at the cost of another £3,579.94.

One book industry source described this as barely believable: “Azeri rights for something like Malala, or Michelle Obama, or Dan Brown might go for £11,000, but it would need to be a big name. This does not look like a wise investment”.

Of course, the nature of an investment depends on the return you are looking for. If TEAS was seeking friends, rather than profits, perhaps the investment was a wise one, particularly since Fox has risen to be the minister in charge of negotiating our post-Brexit trade deals.

“MPs have a history of accepting funding from Azerbaijan’s lobbyists and keeping quiet about gross and systemic human rights violations, including some now in senior governmental positions,” said Rebecca Vincent, a former US diplomat in Baku and now head of the UK Bureau of Reporters without Borders.

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She was particularly critical about the fact that so few British politicians had supported journalists who have revealed the extent of the wealth of Azerbaijan’s ruling family, and been harassed or jailed as a result. “As the source of the largest foreign direct investment in Azerbaijan, the UK has a responsibility to speak out. As long as our politicians turn a blind eye to this repression, courageous individuals like Mehman Huseynov and Khadija Ismayilova will continue to pay the price.”

This is not to say that TEAS was an organisation packed with ruthless and sinister geniuses, since it was at times almost hilariously incompetent. In 2010, it hired the 1980s two–hit-wonder Smiley Culture to produce propaganda music in the mistaken belief he could persuade Lady Gaga to do the singing, which he could not. This and other pratfalls notwithstanding, the budding scandal over Azeri money in London does raise questions over whether MPs should have been quite so willing to accept the organisation’s money.

Goran Lindblad, a Swedish ex-MEP who worked for TEAS in Brussels, told me his pay cheques came from a Marshall Islands company via Danske Bank’s branch in Tallinn, the same branch that is now at the centre of perhaps the biggest money laundering scandal of all time: the movement of €200 billion through non-resident accounts in 2007-15.

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We have become accustomed to hearing stories of kleptocratic cash pouring into UK property, which is what the NCA is (belatedly) beginning to investigate, but perhaps the scandal will turn out to be not how much dirty cash was spent in Knightsbridge, but how much ended up in Westminster. Because Azerbaijan is not the only country that has sought to buy friends in this way.

Ukrainian oligarch Dymtro Firtash ran a similar lobbying group, as did the Bahraini ruling family. Bashar al-Assad’s father-in-law ran the British Syrian Society, which took MPs to Damascus. Even the Russians tried to get into the game, with a group called the Conservative Friends of Russia, though Kremlin money eventually proved too hot even for our MPs to handle.

There are many urgent issues being ignored by politicians thanks to the Brexit gridlock, but perhaps this is the most important: who exactly has been paying their wages? In a democracy, voters have to know who their elected representatives are working for. Once trust in their integrity has been lost, it will be all but impossible to restore.

When Americans think of businessmen getting together to fix prices, they generally think of Matt Damon in The Informant. The movie tells the story of Mark Whiteacre, the highest-level corporate mole in FBI history, who helped break the Archer Daniel Midland (ADM) lysine price fixing scandal. ADM never met a price it didn’t want to fix. Like a Mob family, they met with competitors to restrict Lysine, an essential amino acid, as well as citric acid and high fructose corn syrup. In a document that came to light in court, an ADM executive wrote, “Our competitors are our friends. Our customers are the enemy.”

ADM were no outliers, either – the estimated annual cost of price fixing by cartels is up to $600 billion worldwide. And collusion doesn’t even need to be so explicit. In fact, you don’t need for players to talk to each other at all to get collusion. Many firms that have been caught continue to collude even after they no longer speak to each other. Tacit collusion can lead oligopolistic firms to achieve monopolistic outcomes, leading to reduced output, higher prices, and lower consumer welfare. This is known as the ‘oligopoly problem’. By allowing extreme industry concentration, the government has essentially guaranteed oligopolies can act like monopolies and encouraged outright and tacit collusion.

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By Victoria Bateman

This unusual phenomenon can be explained by an idea known as game theory, which can be applied to almost any interaction. Everyone has seen A Beautiful Mind, in which John Nash, played by Russell Crowe, has an epiphany at a bar with his friends as they are trying to pick up women.

There is a group of women: one blonde and a few brunettes. All the men want the blonde woman, and one of Nash’s friends remarked that Adam Smith would have encouraged competition, and the best strategy would be for them to all go and speak to her. But, Nash points out, this would be a really dumb strategy. If they did that, none of them would get the girl. She would feel pressured and then the others would be offended that they were the second choice. The optimal strategy is for the group to cooperate — no one talks to the blonde and instead they all talk to the less attractive friends.

Nash’s key idea was that among different players, they might all choose tacit cooperation rather than face competition. The solution to the problem of competition is called “Nash Equilibrium”.

Nash didn’t create game theory, but he developed it. His idea was a direct descendant of John von Neumann’s Minimax theory. The idea is that players of a game won’t seek to achieve the highest pay-out but will try to minimize their maximum loss. The easiest way to understand this is the example of a parent who allows their two children to divide a cake. The most equal division will happen if one cuts the cake and the other chooses the first piece. Each kid doesn’t seek a theoretical bigger piece – he tries to minimise the chance he ends up with a really small one. Firms will often collude to avoid competition and minimise their maximum loss. That’s what Nash was describing in the film with the blonde.

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But there is much more to game theory than talking to a blonde or dividing a cake.

The most famous example is The Prisoner’s Dilemma. If two prisoners are caught by the police and interrogated separately, they each have a difficult choice to make: to snitch or not to snitch. If they both stay silent and don’t rat on each other, they will both achieve the optimal outcome. However, if one of them wants to improve his own lot, he might talk to the police and betray his friend. He might walk, and his friend will serve a longer sentence.

There is no right answer to the Prisoner’s Dilemma. If you only play the game once, you are highly motivated to betray your partner. However, completely different solutions begin to emerge if you play the game many times.

In 1984 Robert Axelrod invited mathematicians, economists, and computer scientists to submit strategies for playing Prisoners’ Dilemma. What he found surprised him.

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By Victoria Bateman

Strategies in the competition could either cooperate with each other or try to punish each other, but rather than play once, they had to play repeatedly until a victor emerged. The computer programs could not speak to each other or know each other’s intentions. All they could do was observe what the other program did in the previous games. Most strategies were sneaky and tried to get away with punishing their partners any chance they got. Other strategies economists submitted were very complicated with all sorts of rules for cheating or cooperating.

It was completely counterintuitive, but none of the complicated strategies won. The simplest, least elaborate strategy emerged victorious; the strategy was Tit for Tat. If the opponent cheated, Tit for Tat cheated. If the opponent cooperated, Tit for Tat cooperated. It was that simple. The program generally elicited cooperation, yet if others cheated, it punished the opponents and didn’t let them take advantage of Tit for Tat’s kindness.

If you only play one game, punishing your partner might make sense. You can get away with it once. But if you’re in a repeated game, things work differently. The dominant strategy of any iterated interaction is Tit for Tat, which leads to cooperation.

The lessons from Tit for Tat for industries is that if you’re in a cozy enough industry with very few players, selling to the same customers day in and day out over many years, the optimal strategy is always to cooperate.

Suggested reading

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

By Peter Franklin

Most industries are involved in repeated ‘games’ where they can observe their competitors’ actions, and much like the strategy Tit for Tat they have an incentive to cooperate the greater the number of interactions they have. They know competition can be punished in the future with price wars, and they know that tacit collusion can lead to higher margins.

For decades Anheuser-Busch got its rivals to cooperate by not lowering prices. Generally, everyone else followed, and if they didn’t, Anheuser-Busch played Tit for Tat. They signalled to competitors that if they lowered their prices, they’d start an ugly price war. In 1988 Miller and Coors lowered prices on their main beers. In response Anheuser-Busch slashed prices on their key beers. As August Busch III said, “We don’t want to start a blood bath, but whatever the competition wants to do, we’ll do.” Miller and Coors very quickly dropped their price cuts.

Winning everything through competition sounds great, but it is even better not to lose everything.

Academic research on tacit collusion in oligopolies shows that in highly concentrated markets, firms will often coordinate their behaviour simply by observing and reacting to their competitors’ moves. This often leads parallel price movements, and the results that you would associate with a traditional agreement to set prices, output levels, or other conditions of trade. In the US a wide variety of industries are now oligopolistic, which makes tacit collusion easy.

Suggested reading

The collapse of unions is corrupting capitalism

By Denise Hearn

In the corporate world, this is common knowledge. Hermann Simon is a recognised consultant and has worked for decades with companies on their pricing strategies. He wrote a book titled Confessions of the Pricing Man that explained how firms could increase their pricing and get around antitrust laws and competition policy. Simon recognised the easiest way to fix prices would be to speak to competitors but noted that is illegal. Instead, he suggested following a “price leader” and signalling to the market.

Companies in the US car market practiced exactly such price leadership for decades, with General Motors setting price increases. The largest company in most duopolies and oligopolies functions as the price leader, and other companies tend to follow price increases in lock step. These moves are almost never prosecuted.

Another frequent method that companies use is price signalling where CEOs will indicate to the market their desired price hikes to see what the reaction is from competitors. Before any planned hike, a company sends ‘signals’ to the marketplace. Then the company can listen to whether competitors, investors, or regulators send signals back. Simon helpfully explained that, “Signalling is not illegal per se. As long as companies keep their communication relevant to everyone in the marketplace, including customers and investors, and do not go overboard, they are usually on the safe side.”

Just in case these informal methods of price fixing encountered problems, Simon advised, “Please always discuss any application of these approaches with your legal department or advisors to make sure that your company’s policies comply with the law.”

Despite 15 price increase announcements and numerous supply reductions by paper companies over six and a half years, in August 2017 the courts decided in favour of six containerboard companies: Georgia-Pacific, Westrock, International Paper Company, Temple-Inland Inc, and Weyerhaeuser Company. The court ruled that it was not a violation of antitrust law for a firm to raise its price, hoping its competitors would do the same. The containerboard companies bet on a follow-the-leader strategy and that ‘gamble paid off’.

Proof that in business, tacit collusion is rarely punished.

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

But what if the City does shrink? Would that be a disaster for the UK? Not everyone thinks so – indeed, as ‘Schumpeter’ points out in The Economist, the notion that Britain’s financial sector is too big is “gathering momentum.”

Further reading

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

By Liam Halligan

The article focuses on a book by a “former contributor to The Economist,” Nicholas Shaxson. Despite this connection, the anonymous author of the article mostly disagrees with him.

Of course, there’s little doubt that the sector is an elephant in the room of the UK economy:

“Financial firms from around the world are drawn to the British capital; the assets in the country’s financial system are ten times its GDP.”

However, for the rest of the country, this isn’t always a happy living arrangement:

“Many Britons suspect that the City succeeds at everyone else’s expense. That view is decades old, but the financial crisis of 2007-08 intensified it greatly. The crisis brought the economy to its knees; the state spent £140bn ($220bn) bailing out banks.”

While inner London is disproportionately rich – other parts of the country are disproportionately poor – with 2016 EU figures showing that the UK has six of the poorest ten regions in Northern Europe.

It is suspected that London, and especially London’s financial sector, is sucking talent, investment and opportunity out of the rest of the country:

“Mr Shaxson provocatively compares Britain’s situation to that of Angola, a country where oil makes up over 95% of exports. Oil should bring widespread prosperity to Angola, but it does not. Brainy Angolans flock to the oilfields rather than to the civil service or health care. Floods of foreign capital raise the value of the currency, making non-oil industries uncompetitive.”

Schumpeter disputes the comparison – and clearly there are differences between a dominant sector centred around the extraction of a single natural resource and one that offers deep expertise across of a wide range of specialised services. However, there is a significant concession to Shaxson’s argument:

“…the City does encourage foreign investment in British firms and property. That pushes up both wages and rents in London, and probably the pound too, making it harder for other, price-sensitive export industries to thrive.”

Schumpeter also notes that “relative to its economy, Britain sees 50% more mergers and acquisitions than America”.

As, I’ve written about before, an influx of foreign capital for speculative purposes generates juicy fees for middlemen and money handlers, but little in the way of genuinely productive activity. Furthermore, if it’s a net influx then it will push up the value of the currency and widen the current account deficit.

Further reading

And finally: the good news from flyover county

By Peter Franklin

The new British disease – i.e. a debt-ridden, low-productivity economy prone to asset bubbles and extremes of inequality – is the natural consequence.

But if that’s the problem, what’s the solution? Certainly not one achieved with a blunt instrument. Seeking to shrink the financial sector without distinguishing between speculative and productive investment (and the expertise that enables the latter) would risk doing more harm than good.

The real answer can be seen from the sheet glass windows of the city’s statement architecture. Look down and you can see it: the river Thames.

Had it been left to its own devices, London’s great river would be wide and shallow – spreading out to where it wasn’t wanted or needed. It would also flood on a regular basis, causing catastrophic damage. But over the centuries, the Thames has been tamed. Bridges have been built; the river embanked; and a great barrier put in place to hold back the tidal surges.

As with water, so with money. We needn’t reduce the volume of finance flowing through London, but we must do more to direct it – or at least direct it away from where it does no good. Speculation, especially in land, must be discouraged – with the tax and regulatory framework favouring productive investment instead.

Speculative investment is lazy investment – requiring no great knowledge or expertise. A country does not require a sophisticated financial sector to suffer property booms. asset bubbles and Ponzi schemes. It just needs more money than sense.

Therefore, constraining finance from following its own worst instincts need not sap its energy. A properly regulated financial sector, like an soundly embanked river, would flow faster and deeper than it did before.

Further reading

Ten vested interests the Tories failed to tackle

By Peter Franklin

But then, having snatched control of the global economy from the drunk drivers in Wall Street and the City, international leaders handed it back – without addressing the roots of the crisis. Unsurprisingly, we are once again seeing the same conditions which precipitated the crash the first time around.

Here are four reasons to be worried:

1. The Banks are even bigger

In 2009, former Chair of the Federal Reserve Alan Greenspan pointed out that if banks are “too big to fail, they’re too big” – a lesson that should have been obvious from the massive bail outs. Yet in the years since the crash the sector has grown even more concentrated. Just six banks now manage half of the assets of the entire banking industry. To take just one example, JPMorgan has amassed a huge $2.56 trillion in assets, nearly double what it had at the end of 2006. The ‘moral hazard’ is obvious: banks which are ‘too-big-to-fail’ can seek high-risk, high-return strategies in the knowledge that the government will have to rescue them in times of crises.

2. The regulations are getting weaker

In the wake of the crash, politicians and pundits promised tighter regulation to prevent future crises. Democrats in America pushed through the Dodd-Frank Act in 2010, introducing mandatory stress tests and significant capital requirements for all big banks. In the eight years since, the sector’s formidable lobbying power has been employed to water down these reforms. A record $2 billion was spent by Wall Street on the 2016 US election cycle, and earlier this year, the largest two banking lobby groups – including 48 of the largest banks – combined to create the Bank Policy Institute to lobby the Trump administration for a roll-back of regulations. Just this week the Wall Street Journal revealed that the Federal Reserve was considering redefining the definition of a ‘big bank’ in order to lower regulatory costs for more regional financial institutions.

3. The debt is riskier

A decade of loose monetary policy has seen excessive risk spread outside the banking sector, with the share of corporate bonds with a BBB rating (one above junk) reaching nearly 50% in both US and Euro Areas, significantly higher than the pre-crisis peak. Corporate bonds, debts securities used by companies to raise finance, make attractive investments because of the high-yields they offer; but they do so precisely because they are very risky. One of the major causes of the last crash was the highly rated bonds that turned out to be riskier than advertised. But even if bonds are correctly classified, if low-rated bonds make up too much of the market, the risk of crisis in the event of a slump is heightened.

4. Consumers keep borrowing

Consumers, too, have been making the most of loose credit. Concerns have already been raised about unsustainable borrowing in the auto finance industry, from which UK households borrowed almost £32 billion in 2016. These finance arrangements allow people to acquire a vehicle for a period, paying monthly fees, before handing it back, trading it, or buying it outright. Lenders make these loans on the hope that the resale value of the car will rise against estimates, should consumers decide to return the vehicle. The industry claims that it is secure: sub-prime consumers only account for 3% of the market and data from the second-hand market allows them to calculate the value of depreciation on a car to within a few pounds. Supposedly, this prevents them from under-pricing loans and finding themselves stuck with a fleet of cars worth little more than scrap.

But there is reason to be sceptical. The credit-scoring policies used remain secret in the UK, and let’s not forget, Wall Street and the City – on the back of complex mathematical modelling – assured us of the safety of their new financial products before they imploded. An economic downturn could lower demand for used cars at the same time as reducing the ability of consumers across the country to meet the terms of their deals. Particularly worrying, almost half of Britons who have taken out car finance deals confess that they don’t understand the small print of their own deals.

Suggested reading

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

By Liam Halligan

More generally, household debt in the US is at an all-time high of $13.2 trillion. This may have been sustainable through the long era of low interest rates – 2018 was the first year that rates rose above 0.5% since 2008 – but as rates rise consumers may struggle to meet debt obligations. That could be all the shock required to start another negative spiral.

If Morgan Stanley are to be believed, there’s a recession coming around 2020 – there’s no way of knowing if it will cause damage on the scale of 2008, but as these four risks show, we’re not much less vulnerable. The global response to 2008 was to put the pre-2008 world on life support, rather than deal with the fundamental structural problems that led to the crash. This time around, those short-term fixes might not be available – in 2009, central banks had the headroom to cut interest rates, but today rates are still rock bottom – and with international leaders locking horns over tariffs and Syria, the prospects for global action are even gloomier.

Suggested reading

Ten years after the crash, we should still be terrified

By Peter Franklin

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.

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.

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.

Recommended listening

Meet Anthony Thomson, the man who broke 'the bank'

By Charlotte Pickles

It’s a complex issue, but some of the answers are remarkably simple. Indeed, simplification is the answer – at least when it comes to smoothing the path from secondary to tertiary education.

In a report for Brookings, Susan M Dynarski explains how some parts of the United States have made a big difference at little cost:

“These seemingly minor obstacles put many low-income students off the path to college. A study of high school seniors in Boston found that few low-income youth “decide” against college. Rather, they miss a key deadline, or incorrectly fill out a form, or fail to take a required class, and thereby fall off the path to college.”

Bureaucracy isn’t much fun for any of us, but for students who lack sufficient resources, encouragement and guidance, it can be the final straw:

“Consider the ACT and SAT. These entrance exams are required for admission to virtually all selective colleges in the US. Students have to register and pay for these tests, and then travel to a testing center on a weekend to take them. This is straightforward, if you have internet access, a computer, a credit card, and a car. If you are missing any of these resources, it’s a lot more challenging.”

Fortunately, in some areas, an effort has been made to remove these obstacles:

“…in a dozen states, the ACT or SAT is now given in school, for free, on a school day during school hours. In most cases, the ACT or SAT replaces the standardized test that students would otherwise take in high school, so there is no additional time spent testing… Sitting for the test is also required, which means that students can’t opt out because of low expectations – whether theirs or those of the adults around them.”

How much of a difference does this make? Dynarski cites the example of Michigan, which reformed its testing system in 2007:

“For every 1,000 students who scored high enough to attend a selective college before testing was universal, another 230 high scorers were revealed by the new policy. Among low-income students, the effect was even more dramatic: for every 1,000 low-income students who had taken the test before 2007 and scored well, another 480 college-ready, low-income students were uncovered by the universal test.”

Of course, identifying students who ought to go to college doesn’t guarantee that they will. But, at the very least, universal testing of aptitude leaves educators and policymakers with no excuse when disadvantaged, but talented, students fail to progress.

And there’s a wider lesson, one that applies to regulatory reform in all policy areas: it’s not having rules that’s the problem, but the time and hassle it takes to follow them.

For instance, universal testing of students is a rule and pretty strict one – but that’s fine as long as sitting the test (if not the test itself) is made easy.

As long as we understand the distinction between rules and red tape, we can maintain standards without imposing bureaucratic burdens on those most likely to stumble.

“17 years,” he says. Then: “27 or 28.” And he’s about to add one more address, because he and his fellow tenants have 10 days to move out.

Ali is a middle-aged man whose tone is almost deferential. An Uber delivery driver, his moped is parked out in front of his soon-to-be old home. Originally from Afghanistan, Ali’s family – a wife and two children – are now living in Pakistan. “It’s very hard,” he tells me with simple understatement. He’d like to bring his wife over to the UK. “But I can’t bring her here,” he trails off, gesturing to the single mattress on the floor of his box room.

Ali has only lived here for a few months and found the place via a “friend of a friend.” He has no contract or tenancy agreement. He pays £240 a month – “always cash, by a man that just comes to the door, no receipts.”

The two-storey Victorian terrace house is licensed by the London borough of Newham for renting to a single family of up to six people. There are currently five men, all strangers to each other, living here. There were eight or nine, but some have moved out already. The property has three bedrooms, plus the living room which was being used as a bedroom. The Newham housing officers point out the mould and damp, the wires hanging from the hall ceiling where a fire alarm should be. There are no beds, just mattresses on the floor.

This, I am told by one constable, “is pretty good” – a consensus view among the officers in attendance.

I have joined Newham’s joint housing and police team on a dawn raid of properties suspected of being owned by rogue landlords – operations happen early in the hope of talking to tenants before they head to work. In 2013, the London council introduced a borough-wide licensing scheme for private rental sector (PRS) properties. It has revolutionised the council’s approach to tackling abuses, enabling them to better identify and prosecute landlords operating outside of the law.

But while the scheme has many fans – the Metropolitan Police, the London Fire Brigade, the Mayor of London, local MPs and residents – it is not without its critics. To some, including the Prime Minister’s Chief of Staff and former housing minister Gavin Barwell, such schemes are a “tax on landlords”, heavy-handed regulation that risks putting off landlords to the detriment of tenants. Which seems a logical argument to make. That is, until you realise just how vulnerable some tenants are and just how far bargaining power has shifted to landlords.

The private rental sector is growing and standards need improving

Over the last two decades, the PRS in England has experienced huge growth – adding an additional 2.5 million renters since 2000. In the 1990s one in ten households were renting in the private sector, last year it was 1 in 5 (it’s estimated to rise to one in four by 2021). For those aged 24-35 it’s closer to one in two.[1. .English housing survey: private rented sector 2015-16, Department for Communities and Local Government, July 2017] And in Newham, almost half of the borough’s properties are private rentals, and one in four of those are HMOs (house in multiple occupation).

Conditions in the PRS had been improving, but progress has stalled since 2013 – almost 30% of properties still do not meet the government’s basic ‘Decent Homes Standard’.[2. Ibid] Research by housing charity Shelter found that 61% of PRS tenants had experienced damp, mould, leaking roofs or windows, electrical hazards, animal infestations or gas leaks in the preceding 12 months.[3. .Happier and healthier: improving conditions in the private rented sector, Shelter, September 2017] Which is all the more disturbing when you consider that a third of households in the PRS have children living in them.

Anne, a no-nonsense Newham housing officer whose polite, concerned tone evokes trust in the tenants she speaks to, has seen it all. “Rats, cockroaches, awful overcrowding, children living in HMOs…families living in outbuildings.”

As we wait for her colleague to finish a tenant interview, Anne recounts a recent raid: “We opened a food cupboard…there was a rat the size of a pint glass. We called him Roland. The tenant said ‘yer, he comes in and out’.” She shows me a photo of Roland on her phone, as well as the rat droppings littering the property. I’m shown photos of the swarm of cockroaches in the fridge. These are the conditions too many tenants endure.

Action must not depend on vulnerable tenants

Why do tenants suffer in silence? Part of the reason lies in the fact that, as demand has increased, so too have rents. Between January 2011 and October 2017, rents increased 15.3% (11.4% if you exclude London).[4. .‘Index of Private Housing Rental Prices, Great Britain: October 2017’, ONS,  14 November 2017]

In contrast, real, median wages have fallen around 5% since 2008.[5. Rui Costa and Stephen Machin, Real wages and living standards in the UK, Centre for Economic Performance, May 2017] Add to that cuts to Local Housing Allowance – the benefit received by many low-income families to help cover private rental costs – and it doesn’t take a genius to see landlords have the upper hand. As a Shelter report puts it:[6. Hannah Gousy,  Safe and decent homes: solutions for a better private rented sector, Shelter, December 2014]

“Renters are acutely aware that they are easily replaceable…The lack of bargaining power is most acutely reflected in the practice of retaliatory eviction, where renters are evicted for complaining about poor conditions in their home.”

It’s a point Russell Moffatt, head of Newham’s housing team, makes: if you’re scared you won’t be able to find another property you can afford to rent, that the alternative might be homelessness because your landlord could respond with eviction, are you going to risk saying something?

That is particularly the case if you don’t speak great English, if you’re suffering from a mental health problem, or, as I am told is not uncommon, you also work for your landlord.

Enforcement powers are no use if you don’t know who to use them against

Critics of comprehensive licensing will point out that local authorities have both the duties and powers to tackle rogue landlords, but that’s only partly true (and doesn’t help tenants in areas with lacklustre or cash-strapped councils).

The Housing Health and Safety Rating System (HHSRS), introduced by the Housing Act 2004, enables local authority environmental health officers to inspect properties they suspect of being ‘hazardous’. There are ten hazard bands and only if the property is risk assessed as falling within one of the top three, constituting a ‘category one hazard’, are local authorities duty-bound to act. Anything less than a hazard one and action is discretionary. Only tenants whose complaint has been assessed as a category one violation are protected from retaliatory eviction. And even then, only for six months.

Last year, in the Housing and Planning Act 2016, the Government boosted the enforcement powers available to councils, introducing rent repayment orders and financial penalties of up to £30,000. These are designed to hit rogue landlords where it most hurts – their wallets. Analysis by the Independent newspaper estimates that £2.5 billion in housing benefit is paid to rogue landlords each year.[7. Ben Kentish, ‘Rogue private landlords given £2.5bn a year of public money, new analysis reveals’, Independent, 2 September 2017] It’s a lucrative business.

The Newham housing officers estimate that Ali’s landlord makes in excess of £1,500 a month from that single property, and if the experience of other properties is anything to go by, it’s unlikely the correct tax is being paid (particularly when the arrangement is cash in hand). Just looking at the property tells you little is being spent by way of maintenance.

Being able to claw back rent and dole out hefty fines is welcome, but it’s not enough. That’s where banning orders come in, also a provision in the 2016 Act, which would enable local authorities to ban landlords who commit serious infringements from letting properties indefinitely. But while the repayment orders and fines came into force in April, banning orders, originally expected last month, appear to be in limbo. The Department for Communities and Local Government (DCLG) say they now expect them to come into force in April next year, along with a national register of rogue landlords. Depending on where the bar is set, banning orders could be far more disruptive than fines.

To ban a landlord, however, you still have to know who the landlords are, which, according to Shelter, is a problem: most local authorities lack even “basic information on landlords and private rented stock in their area.”[8. .Safe and decent homes] Instead they rely on tenants to raise the alarm. Which brings us back full circle to a system that relies on vulnerable people to act against the unscrupulous landlord they are reliant on for their shelter – and why licensing can make such a difference.

Newham has the information via a central hub to identify rogue landlords – a combination of data from licensed properties, and multiple sources of information and intelligence from council and partner sources. Think overflowing rubbish bins, social service visits, school records, council tax non-payments. And Newham has the power to ban landlords, by refusing to license or re-license them.

Anne tells me about a landlord who was banned when full-borough licensing was introduced. “He used to go around to night shelters and collect tenants – so they could have drink problems, drug problems, mental health problems.”

“As long as they were eligible for housing benefit,” Russell adds.

The landlord had been prosecuted at least twelve times before licensing was introduced. Within twelve months of the launch of Newham’s licensing scheme in 2013 he had left, no longer preying on the borough’s most vulnerable.

But there’s a twist. Rather than selling his properties he leased them to a local housing association, and the lease runs out the day after Newham’s five year licensing scheme runs out…which, if not renewed, is at the end of this year.

Licensing is a small price to pay to protect the most vulnerable

Full licensing is already mandated for large HMOs – properties of three or more storeys rented to at least five people who form more than one household (i.e. not a single family), and who share facilities such as a bathroom or kitchen. Councils can use their discretion to mandate licensing of smaller HMOs in their area, and, until 2015, could introduce “selective” schemes to cover non-HMO properties – which is what Newham did.

In 2015, however, the government introduced regulations that require local authorities to seek permission from the Secretary of State for schemes which cover more than 20% of their geographical area or more than 20% of their privately rented homes.[9. .Selective licensing in the private rented sector. A guide for local authorities, Department for Communities and Local Government, March 2015]

Newham therefore has to apply to DCLG to continue their scheme, which they did in July. Despite the department’s own guidance stating they aim to make a decision within eight weeks, the London borough only received a decision yesterday, more than four months later. A spokesman for the department told me: “We had to request further detailed information from the council to support their application”, but Newham say they fulfilled the last request over a month ago.

The Secretary of State has not granted permission for Newham to continue its full-cover scheme – the postcode E20, the location of London’s Olympic village, is excluded on the grounds that its not deprived enough. The decision to exclude one, small area feels tokenistic – a fig leaf that allows the government to maintain its deregulatory credentials – but the outcome is nonetheless a relief for the team fighting landlord abuses.

In making decisions on selective licensing schemes, the government should remember that, by definition, rogue landlords are dishonest – as the property I visited shows, they are unlikely to obtain the correct license. If every property needs a license, there’s no confusion about the rules, and housing officers can focus on houses which intel suggests are either incorrectly licensed or rented but not licensed at all.

There are also substantial knock-on benefits from licensing, as Newham has demonstrated. Through the work of the joint housing and police team criminal activity has been identified, including trafficking and prostitution; over £3 million in unpaid council tax has been recovered from landlords; illegal immigration has been detected; and data has been shared with HMRC to pursue unpaid tax on rental income. Newham police have made around 750 arrests during licensing operations.

So yes, full PRS licensing does mean work for landlords in registering their property and a small cost (Newham propose to charge £400 for a five-year lease). We can recognise that the majority of landlords fulfil their duties – 82% of private renters say they are happy with their accommodation[10. .English housing survey] – while also recognising that the abuses of some warrant better regulation. No one is suggesting all HMO landlords are bad, yet we still mandate licensing, and a quick look at local authority schemes suggests fees of around £1,000 are not unusual.[11. See for example Bristol, Waltham Forest, Hastings, Harrow, Birmingham and Oxford] The trick is to ensure schemes are designed to be light-touch for compliant landlords.

At a debate in parliament this month, housing minister Alok Sharma confirmed the government will be undertaking a review of selective licensing.[12. Hansard, ‘Private landlord licensing’, Westminster Hall Debate, 15 November 2017] With so many more people living in private rental accommodation, and with the balance of power having shifted so far in the landlord’s favour, government must remember its primary duty – to stand for those who can’t stand for themselves.

Some experts predict that half a million more people will die over the next decade . Others think it will be closer to 650,000[1. Max Blau, ‘STAT forecast: Opioids could kill nearly 500,000 Americans in the next decade’, STAT, 27 June 2017] – the population of Miami, or Atlanta, or Sacramento. President Trump has rightly declared the crisis a “public health emergency”.

Last week Trump’s commission on ‘Combatting Drug Addiction and the Opioid Crisis’ published its recommendations. The report has had a lukewarm reception, not least as the question of funding remains unanswered. Yet much of what it does say – from cracking down on the illegal importation of opioids to expanding drug courts and removing barriers to treatment – is sensible (we’ll park the report’s proposal for a ‘just say no’ media campaign for now).

The problem with the report lies in what it doesn’t say. Because while it traces the role of big pharma in the development of the opioid epidemic, and it seeks greater oversight of prescribing, it fails to adequately link the two. In reality, the financial relationship between pharmaceutical companies and doctors is killing people.

Like big tobacco before, big pharma is being called to account

The opioid epidemic can be traced back to false advertising by big pharma in the 1990s, who peddled opioid-based painkillers as having lower risk of addiction than existing pain pills.[2. Barry Meier, ‘In Guilty Plea, OxyContin Maker to Pay $600 million’, The New York Times, 10 May 2007] More specifically, Purdue Pharma executives gave false information about their narcotic OxyContin, and doctors duly prescribed it – between 1996 and 2001 annual prescriptions increased almost 20-fold.[3. .‘Purdue Pharma, Execs to Pay $634.5 Million Fine in OxyContin Case’, CNBC, 5 August 2010] Over that period, OxyContin made Purdue Pharma almost $2.8 billion.[4. Barry Meier, ‘In Guilty Plea, OxyContin Maker to Pay $600 million’, The New York Times, 10 May 2007]

In 2007, Purdue Pharma finally agreed to pay $634.5 million in fines for those misleading claims, and three top executives pleaded guilty to criminal charges. 41 states are now suing the producers and distributors of opioid painkillers,[5. Yuki Noguchi, ‘41 States To Investigate Pharmaceutical Companies Over Opioids’, NPR, 19 September 2017] reminiscent of the mass litigation against tobacco companies. If these companies are also found to have made misleading claims, to have behaved negligently in doling out obscene volumes of highly-addictive pills (Vox reports that enough pills were prescribed in 2016 to almost fill a bottle for every US adult), massive settlements will follow.

But as the lawsuits snowball, there’s a danger we’re missing a longer-term opportunity to protect patients.

Financial incentives, even small ones, sway doctors

Three quarters of people whose heroin use began in the 2000s report they started with prescription drugs.[6. Theodore Cicero, The Changing Face of Heroin Use in the United States: A Retrospective Analysis of the Past 50 Years, JAMA, July 2014] Why are prescription drugs such a wide gateway? Because, the researchers find, “many users viewed these drugs as safer to use than other illicit substances”:

“prescription opioids are legal, are prescribed by a physician, and are thus considered trustworthy and predictable (eg, the dose is clearly specified on a distinctive tablet or pill)”.

In short, doctors – those we trust to help us when we’re at our most vulnerable – say prescription drugs are OK. How is a patient to know that, in fact, there is little evidence that opioid drugs are even effective at alleviating pain? Or that one in every 550 patients on opioid medication dies from an opioid-related cause – increasing to as many as one in just 32 for very high doses?[7. Thomas Frieden and Debra Houry, ‘Reducing the Risks of Relief — The CDC Opioid-Prescribing Guideline’, The New England Journal of Medicine, 27 April 2016] The information asymmetry between patient and doctor is vast, while our lives are quite literally in that health professional’s hands.

Which is why the Trump administration should be looking at the benefits, in cash and kind, that doctors receive from pharmaceutical companies aggressively pushing their drugs.

I’m talking about the culture of lunching, speech-giving, and honorariums (not legitimate research). Because research has found even a $20 lunch can influence a doctor’s prescribing habits – and the higher the value of benefits, the higher the rates at which the promoted drug is prescribed.[8. Colette De Jong, et al, ‘Pharmaceutical Industry–Sponsored Meals and Physician Prescribing Patterns for Medicare Beneficiaries’, JAMA Internal Medicine, August 2016] And it’s pervasive: analysis by ProPublica found that in 2014 three quarters of doctors across five common medical specialties received at least one payment (and they too found a correlation between payments and prescriptions).

For some doctors that’s being treated to a burger and fries by a local pharma rep, but for some it’s tens, even hundreds, of thousands of dollars in speaker fees, ‘consultancy’, exclusive dinners in high end restaurants, even golfing junkets. It may be illegal to pay doctors to prescribe a specific drug, but paying them to promote it is a different matter.

Research published in September looked at payments relating to opioid drugs specifically.[9. .‘Opioid makers made payment to one in 12 U.S. doctors’, Brown University, 9 August 2017] It found 375,000 opioid-related payments were made to more than 68,000 doctors in a 29-month period. That’s one in 12 physicians, and one in five family doctors, profiting (the average payment was $15, the median $50) from drugs at the centre of this public health emergency. And while the research is not proving cause and effect, the $46 million spent by pharmaceutical companies should be deep cause for concern.

No, all regulation isn’t bad, it protects consumers

Corporate abuse – in this case, the deliberate misbranding of opioid drugs – is a clear violation of regulatory, even criminal, standards (as shown in the Purdue Pharma case). But enforcing those standards, while vital, is not sufficient to protect patients. Nor is simply letting people look up in a database whether their doctor takes payments from drug companies. Patients have been able to do that through the Sunshine Act (part of the Affordable Care Act), but there’s no evidence of better behaviour.

There’s a read across to banking. In 2012 the then head of the UK Financial Services Authority Martin Wheatley gave a speech on the damaging effect of incentives in retail banking – his analogy works as well for health services:[10. Martin Wheatley, ‘The incentivisation of sales staff – are consumers getting a fair deal?’, FSA, 5 September 2012]

“This is not like when you go to a fast food restaurant and the server asks ‘do you want fries with that?’, or ‘do you want to go large?’. We all know they ask these questions because they are encouraged to make the most of every sale, and when customers are standing at the counter, they are more likely to say yes. But then we also know what to expect – chiefly lots of salt, calories and a bigger waistline. But far fewer of us actually have such a clear understanding of financial services. We also mostly trust those selling or giving advice to be acting in our best interests… The cost of going large may cost us a few pence – the cost of buying the wrong mortgage could see you lose your home.”

Regulators in banking understood that financial incentives skew staff behaviour, and that even if consumers know incentives are being used, the imbalance of knowledge makes further action necessary. They acted and banks changed their behaviour.

The takeaway for the health sector is that transparency is not enough.

Opioid prescriptions have been falling since their 2010 peak, but as the projection of half a million deaths over the next decade shows, it’s not enough to slow the path of destruction. And heroin-related deaths have more than quadrupled since 2010 – a cheaper, more easily accessible opioid for patients who have already become addicts.

The President’s commission’s plans for enforcement, education and treatment will hopefully help. But without addressing the cosy culture between pharma and physicians, greased by millions of dollars in payments and hospitality, patients are going to continue to lose out. That’s about preventing the next scandal.

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.

However we might describe it, America’s opioid epidemic certainly qualifies as a prime example. In a must-read briefing for the New York Times, Josh Katz sets out the latest situation:

“Drug overdoses are the leading cause of death for Americans under 50, and deaths are rising faster than ever, primarily because of opioids.

“Overdoses killed more people last year than guns or car accidents, and are doing so at a pace faster than the HIV epidemic at its peak. In 2015, roughly 2 percent of deaths — one in 50 — in the United States were drug-related.

“Overdoses are merely the most visible and easily counted symptom of the problem. Over two million Americans are estimated to have a problem with opioids. According to the latest survey data, over 97 million people took prescription painkillers in 2015; of these, 12 million did so without being directed by a doctor.”

How did this disaster happen? Ian Birrell, who writes powerfully on this issue for UnHerd, apportions much of the blame to the decades-long massive over-prescription of (legal) opioids. However, he also condemns the failed war on (illegal) drugs and calls for decriminalisation – “as with any market that has potential to cause death, there should be state control and regulation.”

To my mind, there’s a contradiction here. The legal market in opioids that Birrell rightly condemns as “capitalism at its least ethical” is nevertheless a regulated market. Therefore if the war on illegal drugs has “failed” then so has the attempt to regulate a legal supply. Yet we are exhorted to abandon the former, but double-down on the latter.

In theory, it’s better to have the drug supply controlled by licensed professionals than by criminals. This, of course, assumes that a regulated market would displace the illegal trade. However, the American experience with opioids shows that the displacement effect is far from guaranteed – quite the opposite, in fact.

More from the New York Times:

“…Newly decentralized drug distribution networks pushed heroin and counterfeit pharmaceuticals into suburban and rural areas where they had never been. Everywhere the suppliers went, they found a ready and willing customer base, primed for addiction by decades of prescription opiate use.”

It’s almost as if by normalising the use of a harmful product, big business and big government creates a much bigger market for it – one which big crime is all too willing to supply.

Markets encourage innovation and this one is no exception. Opioids don’t just include opiates (i.e. drugs derived from opium); the term also covers substances that are synthesised to have the same effect – often to a greater degree. The most notorious of these synthetic opioids is fentanyl – which is 50 to 100 times more potent than morphine.

With a more concentrated and less traceable product, the illegal trade and its impact has been transformed. The New York Times again:

“In 2000, the most common age for drug deaths, including those not involving opioids, was around 40. This was the generation that first grew addicted to prescription opioids in large numbers — white people especially so. Now there’s evidence that the opioid epidemic is dividing into two waves, with a new group of younger drug users growing addicted to, and dying from, heroin or fentanyl rather than prescription pills.”

So there you have it: the legal, regulated distribution of narcotics creates new opportunities for the criminal trade; and less harmful products are joined or replaced by more harmful products.

This is the practice, not the theory. It wasn’t meant to happen, but it has.

It turns out that making an extremely addictive range of poisons widely available can have unintended consequences.