Tag: amazon

Britain’s high-debt, low-productivity economy spells long-term disaster

By Daniel Margrain

The collapse of the Berlin Wall which was the trigger that brought the totalitarian dictatorships of the former Soviet Union and those of its satellite states to their knees, came to symbolize for many the triumph of capitalist free market democracy over tyranny and oppression. An adviser to the US State Department, Francis Fukuyama, received international acclaim in 1989 when he reiterated this message by declaring, no less, that the collapse of communism was ‘the end of history‘. Great social conflicts and great ideological struggles were said to have been a thing of the past. Numerous newspaper editors and television presenters agreed.

A little over a decade after Fukuyama made his famous declaration, Islamist terrorists attacked the Twin Towers in New York. The attack was, in part, the result of Wahhabism’s ideological opposition to Western imperialist hegemony. Numerous imperial wars have been launched against Muslim countries since. Thus, Fukuyama’s thesis was trounced on a single day back in September 11, 2001. Anthony Giddens, the former director of the London School of Economics and court sociologist to Britain’s then New Labour Prime Minister, Tony Blair, repeated a similar message to that outlined by Fukuyama in his 1998 book, The Third Way.

Giddens  said“We live in a world where there are no alternatives to capitalism.” He was accepting and repeating a widespread but unsustainable assumption. The earliest merchant-form of capitalism began to emerge in the 17th century and industrial forms of capitalist production developed from the late 18th century. The organizing of the whole production of a country by capitalist means is barely three centuries old. It only began to become a dominant feature in terms of the universal dependence on markets some 60 or 70 years ago. Yet modern humans evolved about 200,000 years ago. In other words, what Giddens argued is that a capitalist economic system which represents a tiny fraction of our species’ life-span is set to last for the remainder of it.

Leaving aside the possibility of global catastrophe resulting from climate change or nuclear war, the notion that capitalism will continue to exist indefinitely into the future, is highly improbable. As the saying goes, ‘forever is a long time in history’. In just under two decades following the publication of The Third Way, capitalism has transformed into a finance-based neoliberal variant predicated on a form of systemic corruption underpinned by booms that zap productivity. The reason why financial booms impact on productivity in this way is in part the result of too much capital being mis-allocated to low productivity sectors which crowds out real economic growth.

Company buybacks illustrate this practice. Take Viacom as an example. The company issued debts of £10 billion and then bought back the shares which had subsequently reduced in value by 55 per cent. Similarly, Amazon issued £5 billion of debt prior to announcing they would also engage in this highly unethical practice. Issuing debt in order to buy-back stock implies an inability to grow companies organically. Rather, increasingly, the approach seems to be to boost the stock price artificially by a process of financial engineering. The problem is that levels of industrial production, the latest figures of which indicate a 0.3 per cent fall from the previous month, are not sufficient to support these kinds of debts.

Another illustration of the mis-allocation of capital to a low productivity sector, is in the realm of housing. Essentially, the UK economy is based on speculative-based property booms that are sustained through zero interest rates. This means that banks have access to almost unlimited credit which enables them to finance enterprises risk-free, underwritten by the tax-payer. The Conservative government under PM David Cameron is not investing in the productive parts of the economy but in financial ‘bubbles’ of which housing plays a significant part.

UK Chancellor, Gideon Osborne’s ‘help to buy scheme’ in which the UK tax-payer provides 40 per cent of the deposit for first-time house buyers, is clearly a policy aimed at the potential Tory voter in London. Many of the properties purchased will be used for the rental market as speculative investments thus boosting the housing bubble. Meanwhile, people who are part of the productive economy and make London tick, are steadily being priced-out and socially cleansed from the city. This is contributing to the decline in UK industrial output which has seen its biggest fall since August 2013. More importantly, this has impacted negatively on the UK’s trade deficit figures which are one of the highest, as a percentage of GDP, of any country within the OECD.

To emphasize this point, the UK’s trade gap with the European Union increased to a record high of £8.6 billion. The government’s suppose aim of re-balancing the economy by allegedly supporting its productive parts, is contradicted by its creation of risk-free speculative property bubbles of the kind described. The concept of free-market capitalism is supposed to be predicated on incentives, not state sanctioned socialism for the wealthy as the means to prop-up unsustainable economic bubbles. Yet the corporate controlled media, with their lurid headlines, continuously promote the latter.

The government’s subsidizing of house purchases is unhealthy for the medium to long-term economic well-being of the country as a whole. The subsidized property speculation bubble outlined is part of a centrally-planned Tory policy, no different in principle, to the socialist planned economies of the former Soviet Union and its satellite states that ‘the end of history’ allegedly supplanted. Low productive sectors within the UK have a knock-on effect in terms of the broader economy which is destined to decline as a result. This is because more needs to be produced for the pound sterling in order to counteract the affects of subsidized speculation which adds no value to the economy.

This principle also applies under conditions in which global investors pour money into government bonds which currently result in negative yields to the tune of some $6 trillion and growing. The infusion of greater amounts of subsidized money into the London economy runs counter to the government’s stated argument that they intend to diversify the wider economy by spreading investment throughout the UK as a whole. As a consequence of the Tory policy of socialism for property speculators, house prices in London are the most over-valued of any major city in the world.

Nevertheless, as long as potential property buyers and those already on the ladder in London have a perception that their homes are worth more than is actually the case, they will more likely be inclined to vote for the kinds of politicians who will perpetuate the bubble by continuing to offer some first-time buyers an injection of a huge cash-free gift as part of their deposit. If this was indeed the Tory plan prior to the London Mayoral election in order to assist the Tory candidate, Zac Goldsmith, then the strategy failed miserably. Whether Labour’s newly elected Mayor, Sadiq Khan, will attempt to scupper any moves by Jeremy Corbyn to put a break on the Tory’s high debt-low productivity economy policy, in order to further his broader opportunistic political ambitions, remains to be seen.

The Rich Need To Be Forced To Pay Their Way For The Benefit Of All

Leading American venture capitalist Nick Hanauer has argued that the actions of capitalists’ need to be reined in through a system of planned and coordinated regulation in order for the capitalist system to be sustainable. This is what he said in a BBC TV interview in front of a live audience:

Capitalists have the idea that THEIR things will be bought by everybody else as a result of higher wages paid by OTHER capitalists. But this logic of paying higher wages to staff to help improve business activity more generally, doesn’t seem to apply equally to them since they will insist on paying THEIR OWN workers next to nothing thereby not absorbing the costs themselves resulting in them gaining a competitive advantage over their rivals. The simple truth is, if a higher minimum wage was introduced universally, not only would it be affordable, but something like 40% of American’s would be able to buy more products from everybody thus benefiting all capitalists across the board. Business is challenged today because fewer and fewer people are able to buy things [1].

The implication, in other words, is that the capitalist system needs to be regulated by governments’ in order to save it from the rapacious actions of competing capitalists driven by their insatiable need for profit maximization. This rationale was long ago grasped by Karl Marx who understood that the essence of the capitalist system is, in his phrase, “accumulation for accumulations sake.”

So why don’t capitalists insist on using free labour and make their workers work all the hours under the sun? After all, wouldn’t that lead to higher profits? And one might also ask why their representatives within the elite political establishment would bother to spend any money at all on welfare? The simple but correct answer is that where they have a choice, they don’t. Where labour supply is low, the state is in effect forced to intervene on behalf of capitalists by introducing welfare as the means of preserving and reproducing labour.

But where labour is plentiful, the state rarely feels compelled to introduce health and safety, minimum wage laws and welfare.The rationale for this is that if a worker dies of malnutrition or has an accident at work, he or she can be easily replaced by another worker. Under such circumstances, the state regards these kinds of misfortunes as a price worth paying. Consider this account of the conditions of child labour in the lace industry in Nottingham in 1861 by a local magistrate:

Children of nine or ten years are dragged from their squalid beds at two, three, four o’clock in the morning and compelled to work for a bare subsistence until ten, eleven or twelve at night, their limbs wearing away, their frames dwindling, their faces whitening, and their humanity absolutely sinking into a stone-like torpor, utterly horrible to contemplate [2].

Compare and contrast that to a recent study of the conditions of life for rural migrants in contemporary China:

The trafficked children] came from faraway Liangshan in Sichuan and most of them are not yet 16. The overseers sought and recruited them from families mired in poverty, promising them high wages; some were even abducted and sent off in batches to Dongguan and from there distributed by the truckload to factories across the Pearl River Delta. On unfamiliar soil these children are often scolded and beaten and have only one proper meal every few days. Some little girls are even raped. Day after day they undertake arduous labour. Some children think about escape, but the road is blocked. The overseers threaten them and warn them that if they try to run away, there will be a price to pay [3].

What the above illustrates, is that the plentiful supply of labour power was as pertinent during the early days of the industrial revolution in Britain as it is to present day China. In both cases the introduction of welfare as the means of preserving and reproducing labour was not a concern for capitalists or the state. Consequently, welfare provision is as scant in China today as it was in 19th century Britain.

Similarly, while the deaths of more than 1,100 garment workers in a factory building collapse in Dhaka,Bangladesh, in April 2013 [4], most of them women on subsistence wages, is an unspeakable tragedy for their families and friends, it is of much less significance, other than concerns about negative publicity, for companies such as Primark for whom they were producing cheap clothes, simply because there are plenty more desperate workers who will take their place [5].

Where, however, the supply of labour is less plentiful or where labour becomes more skilled and consequently more expensive, losing workers through injury or disablement, or through working them to death doesn’t really make economic sense. But that doesn’t mean that capitalists in Britain or America wouldn’t insist that their workers work all the hours under the sun in the short term for peanuts if they thought they could get away with it.

One of the contradictions inherent to capitalism is that the system as a whole needs to spend money to make profits, yet every individual capitalist wants to spend as little as possible. The lengths to which giant companies like Amazon, Google and Starbucks will go in order to avoid paying tax shows how that dilemma is played out.

In the longer term, having workers working 14 or 16 hours a day for peanuts is very wasteful. It’s like over-exploiting the soil. However, given that individual capitalists themselves won’t do anything about it for fear of losing their competitive advantage over their rivals, the state as the representative of the capitalist class as a whole is forced to step in.

This brings me back to the wisdom implicit in the Nick Hanauer quote at the beginning of this article. Hanaeur’s argument about the necessity of the United States government to substantially increase the legal minimum wage across the board in order to save capitalism from itself, is in principle, no different from the minority of capitalists in 19th century Britain who argued in favour of the introduction of the Factory Acts of the 1830s and 1840s which set down a maximum length for the working day.

An advanced low wage and minimal welfare provision capitalist state like Britain is the modern equivalent of its counterpart during the industrial revolution prior to the introduction of the Factory Acts. What is required is a radical re-think with regards to our current direction of travel.away from the failed neoliberal economic model of austerity which economist Paul Krugman describes as:

A con that does nothing but harm to the wealth of this nation. It has been discredited everywhere else: only in Britain do we cling to the myth.[6].

It’s in Britain where the redistribution of wealth from the bottom to the top continues at apace, much of it as a result of huge subsidies paid to the richest landowners [7]. As inequality continues to rise so does the potential for public disorder. At present, the richest tenth pay 35% of their income in tax, while the poorest tenth pay 43% [8]. Is it too much to ask that those with the deepest pockets pay their way, thus creating the potential for the kind of equitable society in which everybody wins?

This is not pie in the sky stuff but a pragmatic solution to the problems we face. Individuals as politically and ideologically as far apart like Jeremy Corbyn, Caroline Lucas, Nick Hanauer, Joseph Stiglitz, and other top economists and capitalists, understand what’s required to get us out of the mess we’re in. It’s a pity that people like Duncan Smith, Cameron and Osborne prefer to put ideology before pragmatism.