Tag: nick hanauer

In whose hands is the system safer -Corbyn or May? The views of a venture capitalist might surprise you

By Daniel Margrain

hanauer copy

“Inequality and the rise of a super rich elite is undermining the foundations of capitalism. The trappings of capitalism could be swept away by the pitchfork of revolution unless capitalism is fundamentally re-imagined”, so says American venture capitalist Nick Hanauer,

In a BBC interview with journalist Stephen Sakur in front of a live audience as part of the Hard Talk series of programmes (since removed from the BBCs i player service), one of America’s wealthiest individuals argues that capitalism, as currently configured, is not working. The thing that is said to drive Hanauer on is status not money:

“I’m not driven by money but by the need to be king of the hill. If capitalism doesn’t change fundamentally, it will destroy itself. If you allow wealth to concentrate in fewer and fewer hands over time, in the end it cannot be good for anybody, particularly people like me”, he says. “You show me a highly unequal society and I’ll show you a police state or a revolution.”

According to Hanauer, there is truth in the notion that in ‘go get’ societies like the U.S people are able to crawl out of the clutches of poverty. However, there are limits: “Aspiration is a good thing”, he says, “But aspiration in the absence of opportunity creates resentment, anger and violence. The idea that if the disenfranchised are given more incentives, they would magically become software engineers or Wall Street executives isn’t true.”

Fundamental

For Hanauer, the problems are more fundamental: “If we don’t get inequality under control then it’s likely to lead to war – a similar pattern that followed the last period of massive inequality between 1925 and 1940. The most capitalist thing you can do to prevent war is to build up the middle class. From a capitalists perspective, although it may seem a good idea in the short-term to impoverish the typical family, in the long-term it’s a catastrophe.”

Although Hanaeur posits that as an economic system capitalism has been beneficial to millions of people and “is the greatest system ever produced for lifting people out of poverty”, he nevertheless accepts it’s flaws. It fails, for example, to sufficiently “knit together agreements” thereby undermining the potential for a more equitable and sustainable distribution of the wealth that growth brings:

“In my state”, he says, “since 1990, close to 100 per cent of growth has been accrued to just 1 per cent of the top earners. People are beginning to get angry and increasingly less patient with a system that rewards nearly all of the benefits of growth to a tiny minority at the top.”

According to Hanauer, the crisis of capitalism is more acute than ever before and its problems are exacerbated by any lack of purpose which capitalism encourages: “Because we are social creatures, the only thing that gets to define society is our capacity to cooperate. In the absence of a shared purpose, people will not cooperate at which point the society will dissolve”, he says.

Trickle-down

“Trickle down economics – the idea that the money of people who become rich – permeates down to the poor, is nonsense. How can it be anything other than nonsense given the fact that inequality is on the rise and socioeconomic mobility is in reverse? I’m not arguing against capitalism but simply saying that there are ways to optimize it – to make it better for everybody.”

Hanaeur is clear that his argument isn’t intended to be a moral one: “I’m not saying that we capitalists should pay workers more because we feel sorry for them, But the more they get paid, the better it will be for venture capitalists like me. The more money ordinary folks’ make, the greater the opportunity people like me have to innovate, create enterprises and sell them stuff. The better they do, the better I do.”

Hanauer is quick to point out that the converse isn’t true: “A thriving middle class causes growth, not the other way round”, he suggests. “You can’t drive a consumer-based economy – which our economies are based on – with only the extreme wealth of the few. What we need to do is to boost the minimum wage in the U.S to 15 dollars an hour.”

The venture capitalist then goes on to suggest that capitalism needs to be further controlled through a system of planned and coordinated regulation:

“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.”

Hanauer continues:

“The simple truth is, if a higher minimum wage was introduced universally, not only would it be affordable, but something like 40 per cent 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.”

In other words, Hanauer is arguing here that the actions of capitalists’ need to be reined-in through a system of planned and coordinated regulation in order that the system be saved from the rapacious actions of competing capitalists who are driven, as Marx put it, by their need to “accumulate for accumulations sake”.

Contradictions

Hanauer’s pragmatic arguments are similar to those being suggested by Labour leader Jeremy Corbyn and shadow chancellor, John McDonnell. What all three understand – but the Tories don’t – is that the ability to accumulate for accumulations sake doesn’t necessarily lead to higher profits. 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 theory, insisting employees work 14 or 16 hours a day for peanuts correlates to higher profits for capitalists. But in reality such an approach is very wasteful – like over-exploiting the soil. Accumulating for accumulations sake is concomitant to a deregulated economy in which the absence of relevant legislation means that capitalists will insist their workers are worked to the bone for as little money as possible for fear of the former losing their competitive advantage over their rivals.

What Hanauer and the Labour party under Corbyn are able to grasp is that the introduction of labour and wage regulations that the Tories try their utmost to resist, actually improves productivity, that from the perspective of the capitalist system, is beneficial to everybody.

This brings me back to the wisdom implicit in the Nick Hanauer quote above. 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.

Re-think

In reality, 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 enlightened capitalists like Hanauer, as well as pragmatic socialists like Corbyn and McDonnell grasp, is the necessity to radically re-think the failed neoliberal ‘trickle up’ economic model of austerity – in which, for example, huge subsidies are paid to rich landowners – and instead reconfigure policy towards a Keynesian demand-led strategy which redistributes wealth towards the bottom.

The former is what economist Paul Krugman describes  bluntly as “a con that does nothing but harm the wealth of this nation. It has been discredited everywhere else: only in Britain do we cling to the myth.”

As inequality continues to rise, so does the potential for public disorder. At present, the richest tenth pay 35 per cent of their income in tax, while the poorest tenth pay 43 per cent. 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. Politicians like Jeremy Corbyn, John McDonnell and Caroline Lucas, as well as economists like Paul Krugman and Joseph Stiglitz – all of whom are ideologically as far apart as its possible to be from venture capitalist Nick Hanauer –  are nevertheless in agreement that the direction of travel the Tories are on is wrong.

As far as the possibility for change in the future is concerned, Hanauer says:

“Most American’s (and by extension, British) have accepted this bankrupt idea of how you create growth in capitalist economies. If you think that wealth trickles down from the top; if you think that the rich are the wealth creators, and if you think that the more rich people you have the more jobs you will create, then the notion that the introduction of a high rate of tax for rich people makes no sense.”

Hanauer adds:

“However, if you reject that false idea of how capitalism works and you accept a more realistic 21st century notion that the more workers earn, the more customers’ businesses have and the greater the level of jobs that will be created, then you will understand that it’s part of a feedback loop in which everybody wins. The battle ahead is to change the parameters of debate around these things. At the moment we are on the wrong track.”

One might reasonably and instinctively assume that the interests of Hanauer, whose wealth runs into hundreds of millions of dollars, would be closely aligned with the right-wing government of Theresa May. But such a notion is counter-intuitive given that politically, he is closer to Labour’s Jeremy Corbyn.

The fact that Hanauer’s political outlook and approach to dealing with the challenges society faces, has more in common with Corbyn than May, completely undermines the arguments of those who smear Corbyn with the communist epithet.

Contrary to popular mythology, Corbynism and capitalism are, in reality, congruous concepts. It’s not only the social aspects like the health service and social care that’s safer in Labour’s hands, but from the perspective of capitalism’s longevity, its the economy too.

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The Austerity Con-Trick

Cash machines targeted by Occupy protesters

Cash machines targeted by Occupy protesters (Pic: Guy Smallman)

The UK government mantra that it’s imperative to reduce the deficit (the difference between the money coming in and going out) is one of the greatest confidence tricks to have ever been fostered on the British people. In reality, the deficit could be wiped out at a stroke. In his documentary film The Spirit of ’45, Ken Loach highlighted that in the decade after the war, the UK government built 300,000 affordable homes a year and brought the NHS into being.

The chart below shows at that time UK national debt – the accumulation of deficits – stood at about 180% of GDP. At present it’s about a third of that.

UK National Debt since 1900.

uk-national-debt
Source: Reinhart, Camen M. and Kenneth S. Rogoff, “From Financial Crash to Debt Crisis,” NBER Working Paper 15795, March 2010. and OBR from 2010.

So why in 2015 are we apparently unable to afford to prevent the most vulnerable in society from committing suicide as a result of cuts to their benefits, yet after the war we were able to build hundreds of thousands of affordable homes for people to live in as well as bring our NHS into being? Why the insistence on getting the deficit down especially since there is no law forcing the government to repay the debt?

The answer to those questions is that since the crisis hit in 2008, there’s been an iron clad consensus between both the Labour Party hierarchy and the Tory right, predicated on neoliberal ideology which is used as a weapon with which to beat the poor with by way of the former’s support for, and the latter’s implementation of, a sustained programme of austerity and cuts. It’s this iron clad consensus that Jeremy Corbyn wants to break.

The notion that it’s imperative the British government “balances the budget” in order to reduce government debt is nonsense, as is the analogy that national budgets need to be treated just like household budgets. The bailiffs won’t be entering the House of Commons or the Bank Of England any time soon. The truth is, unlike personal debt, the deficits and debts of governments’ are not of primary importance.

When he became chancellor in 2010, Gideon Osborne boasted that he would eliminate the deficit by April 2015. But that plan is in tatters. He has now put back the promise to 2018/19. The government had to borrow £3.7 billion more in the first seven months of last year. This was partly because North Sea oil and gas revenues plummeted to a four year low.

The UK is a relatively low wage economy compared to it’s major rivals and its productivity gap with these nations’ is at the widest it’s been for 20 years. Moreover, because many of the new jobs created in Britain are mainly part time (against a backdrop of the longest drop in real wages since records began), means that tax revenues are low.

In order to make up the shortfall between real and expected revenues, the government borrows money by selling bonds which are essentially IOUs with the promise of future repayment. In the meantime, the government pays interest on these bonds which are sold to banks, insurance firms and even pension funds. The total of bonds that have been sold is called “public debt”.

In a crisis like the one we’ve had since 2008, bond buyers can demand higher interest payments which they have done. This explains why the cost to the government in terms of the interest on the national debt has risen since the beginning of the crisis as illustrated in the table below.

uk-debt-interest-payments-total

To appease the bond buyers, the government has imposed austerity on the people. We constantly read in the gutter press about the rail workers allegedly holding the government to ransom, but never the bankers – funny that!

During the peak of the swinging sixties, government debt was greater than it is in 2015 and yet, unlike those golden days, we are told that both the government and the citizens of today have to tighten their belts as though we were living the austere days of the Great Depression in the 1930s.

The truth is the post war Keynesian boom resulted in a steadily declining debt from it’s peak in the 1950s. This is because higher wages and high employment means greater spending power, which in turn means greater economic activity and higher government tax revenues.

This is precisely the kind of argument progressive capitalists like Nick Hanauer point to. The reason billionaires like him argue for a doubling in the national minimum wage is not because they are altruistic but because they understand that it’s in their best interests’ and that of the capitalist system as a whole. That message needs to be relayed to Cameron and Osborne.

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.