The Joys Of Actual Existing Capitalism

I remember back before the Berlin Wall fell that the socio-economic system found in Eastern Bloc countries was often referred to as Actual Existing Socialism. Apart from USSR worshippers, the phrase Actual Existing Socialism was seen as a negative reality check for those socialists who thought the world could be made better by socialist policies or governments. In the end, the argument ran, all socialist societies would end up like those east of the Iron Curtain.

In a similar spirit of pouring cold water over the dreams of those who should know better, I use the phrase Actual Existing Capitalism. This is the capitalist society we live in, which is very different in essence from the capitalist system which is lauded in economic text books, justified by economists and praised by politicians. In the utopian fantasies of Actual Existing Capitalism's front people, capitalism's companies are efficient, dynamic, responsive to the needs of consumers and serve the public in a way that the state never could.

However, these claims are as false as the idea that the USSR was the Workers' State. You just have to look at the personal finance pages of national newspapers to see that the consumer gets ripped off big time by Actual Existing Capitalism. Everyone I know has tales about the raw deal they had when dealing with customer complaints departments, or waiting at home all day for something to be delivered (leading to them using up a day of their annual leave or having their pay deducted), or getting charged for something they were unaware that they had bought. Does everyone love their bank or the travel companies they use? Also how many people really enjoy their job or respect their employers? I admit living under Actual Existing Capitalism is preferable to living under Actual Existing Socialism (as was), but surely there must be something better than that? (a rhetorical question I'll go a way towards answering in my next post.)

Another feature of Actual Existing Capitalism which differs from the utopian vision of Capitalism our politicians profess to believe in is that companies hate competition like the plague and will do everything in their power to avoid it. Companies are like people- they generally want a quiet life if they can possibly help it.

The following article was an eye opener to me. If you read the business pages of the national press over here you get the impression that the City of London and its associated financial services are as efficient and dynamic as any capitalist organisation can be. In fact, the UK financial sector is nothing of the kind...

Short-term gain, long-term pain
Simon Caulkin on how collusion between the City and top executives is killing real investment
The Observer, Sunday October 30, 2005

The FT reported last Tuesday that salaries for senior City of London staff rose 9.2 per cent in the year to September - before the annual bonus round, which promises to be high. On the next page, an international productivity comparison showed that in financial services - covering high street banks, pension and insurance advisers, international banks and investment institutions - the UK ranked 14th out of 15 countries.

Some mistake surely? The official line is that financial services are one of the UK's most profitable and internationally competitive industries, a pointer to the sunny uplands of post-industrialism. Meanwhile, in accord for once, the Prime Minister and Chancellor lose no opportunity to laud the City of London for its exports, job creation and power of attraction - British dynamism at its best. In short, the City is the UK's jewel in the crown.

That's the authorised version. But the gap between feeble productivity on one side and soaraway profits and salaries on the other supports a quite different construction that puts a less comforting slant on the Square Mile.

In this interpretation, the City doesn't give a used fiver about productivity, either its own or that of its clients in the wider economy. For itself it doesn't have to, being an oligopoly that can charge fat margins whatever its methods: 'The usual relationship between inputs and outputs doesn't apply,' notes Don Young (www.havingtheircake.com), one-time Redland director and now consultant and author.

To the contrary: the enormous profits and salaries that are the norm in investment banking are the result of 'perhaps the biggest case of market failure the world has ever seen', in the words of Evening Standard City editor Anthony Hilton. Witness the inability of either savings institutions on one side or client companies in the 'real' economy to keep the banks' eye-watering fees in check. In truth, they have no incentive to. It's not the institutions' money, after all, and since their fortunes, and the salaries of their fund managers, depend on measuring up well against their rivals in the next comparative league table, they are willing to pay almost any price for a good deal that puts them ahead.

As for company executives, they are in no position to counter the influence the City wields over their investment strategies. City and media pressures to meet performance targets now govern senior executives' lives, research shows, while governance codes have become more 'investor-centric'. At the same time that going against the City grain is career-limiting, those who comply with its dictates can expect rapid elevation to the elite of super-earners, albeit not quite on City scales, since that is what they are measured on.

In this context, clients' productivity is simply irrelevant, since institutions are no longer investors in any real sense. Short-term pressures on fund managers mean that 'churning', as opposed to long-term holding, is rife. This has been given a mighty boost by the rise of the hedge funds, which are now estimated to account for up to 45 per cent of stock market trades in London and New York.

Unregulated, opaque, with close ties to or sometimes owned by the banks themselves (conflict of interest, anyone?) - hedge funds, Young points out, don't even pretend to invest in the future of companies. They bet on the movement of share prices, often not even owning the shares they are speculating with, borrowing them instead.

The results of the de facto collusion between the City and top management are incalculable. One, in whole or in part, is the pensions crisis. Pleasing the institutions has been a powerful if unspoken reason why managers have rushed to close their defined benefit schemes with such unseemly haste (albeit ensuring that their own schemes remain largely untouched). How else to account for the fact that last year, at the height of the pensions concern, the top 100 UK companies paid out £39 billion in dividends, nearly four times as much as they invested in their final pension schemes?

Another consequence is the emphasis on the deal. Hence City veneration for companies such as Rentokil and Hanson, and in the US Enron and WorldCom, even as they run themselves into the ground. Never mind the evidence that they mostly destroy value: deals provide fee income for investment banks and share movements for hedge funds to bet on. They are the only conceivable way that companies can reach the short-term targets that institutions have obliged them to set - and if they don't, well, breaking up the company will do just as well. 'If your company doesn't enable me to meet my short-term investment objectives, no matter how misguided my judgments, it is the company that must give way - even if it is destroyed,' as Young sums up the institutional attitude.

As usual, Keynes had it right when he predicted that capital development as the offshoot of a casino was likely to yield dodgy results. The deal-orientated, short-term form it has taken in the UK leaves no time, money or understanding for the patient organisation-building work that is the foundation for enduring companies and real wealth creation, nor for large-scale investment in technology. It is no accident that the UK supports so few big high-tech firms (farewell, Marconi, dismembered and sold off last week); and noticeable that the exceptions, the pharmaceutical and aerospace companies, have what is effectively a regulated relationship with one of their main buyers: the government.

The City retains barely a shred of its initial purpose of supplying capital for long-term corporate development, now only for deals, which may be why the number of SE-quoted companies is shrinking. Yet its influence is pervasive. It is the spiritual home of asshole management, the source of the relentless demand for overperformance that demoralises employees, causes managers to jeopardise their companies and, as City court cases demonstrate, can easily tip over into bullying and harassment.

The tail is wagging the dog, the means has become the end. It's symbolic that the vast bonuses announced for City accountants last week have been generated not by creating new enterprise but by compliance work - policing the governance rules that have been installed to control the excesses of the deal culture itself. Alchemy or what? No wonder the government loves it.

Simon.caulkin@observer.co.uk

The only other point I want to make is that Margaret Thatcher and the current New Labour cabinet are similar in that they both make a big deal about making the public/state sector more efficient like the private sector. What is ironic is that neither Thatcher nor most Blairite ministers have a clue about what goes on in the private sector as they have never worked in it. As John Campbell remarks in his biography of Margaret Thatcher, she had "no experience of business" (quoted in a review of Margaret Thatcher, Vol II: The Iron Lady by Ross McKibbin in the London Review of Books 18/3/04), and gave up a potentially "useful" career as a chemist to become a lawyer. As for NuLab, Larry Elliott a few years ago wrote the following:

Hollow histories
The cabinet may talk the talk on risk taking and wealth creation, but it has little experience of either
Larry Elliott, The Guardian, Friday July 9, 1999

Britain, says Tony Blair, is risk averse. What we need is more enterprise, more venture capitalists willing to stake all on a good idea in the pursuit of wealth.
John Prescott has obviously been incensed by the signs that his boss is continuing Mrs Thatcher's fatwah against the public sector. But image is everything for this government, and the image in this case is that the prime minister and the rest of the cabinet understand the problems of wealth creation from their own long and bitter experience of making a crust.

Nothing, of course, could be further from the truth. Rarely has a government been as devoid of experience of the private sector as this one. The cabinet is PhD class when it comes to spin-doctoring, in the failing school category when it comes to risk taking.

The prime minister was called to the bar in 1976 and worked as a barrister (represented by the most powerful and hidebound trade union in the country, the Bar Council) for seven years before becoming a full-time politician. Gordon Brown talks the talk when it comes to wealth creation, but can he walk the walk? Not on the basis of his record before becoming an MP, which consists of four years as a lecturer at Glasgow College of Technology and three years at Scottish TV.

Stephen Byers, the cabinet minister actually responsible for the venture capital world is equally deficient in the risk-taking stakes. Since Who's Who records that his only job before becoming an MP in 1992 was 15 years as a senior lecturer in law at Newcastle Polytechnic, the secretary of state for trade and industry has been positively risk averse in his own life. And so it goes on. Alan Milburn, the chief secretary to the treasury and the man responsible for the public finances, was briefly a senior business development officer for North Tyneside metropolitan borough council, which by the standards of the rest of the cabinet, makes him the government's answer to Bill Gates. [Alan Milburn also used to help run a radical bookshop in North East England a fair few years ago called Days of Hope. It was commonly referred to by local people as Haze of Dope, for some unknown reason].

Frank Dobson spent 13 years at the Central Electricity Generating Board and the Electricity Council in the days when the nationalised industries represented a steady, secure job; George Robertson was Scottish organiser for the GMWU union; Robin Cook chaired the education committee on Edinburgh council.

All in all, it's not the sort of CV to get headhunters salivating. To be fair, David Blunkett was once the leader of Sheffield council, Mr Prescott was a ship's steward and Jack Straw is a member of the council of the Institute for Fiscal Studies, but as far as the cabinet's big guns are concerned that's about it.

The prime minister and his colleagues have tried to disguise their lack of private-sector experience. They have drawn an entirely spurious contrast with old Labour, in an attempt to suggest that the governments of Attlee, Wilson and Callaghan were indifferent to wealth creation. The reality is that those cabinets contained both ministers who knew how industry worked from their experiences during the war or were businessmen in their own right.

Second, the Blair government has bought into every one of the washed-up, crackpot ideas left behind by the Conservatives when they left office - privatisation, the fetishisation of management consultants, the denigration of the private sector.

The Private Finance Initiative might have been made for this government, since the sales pitch is that it harnesses the dynamism (a key New Labour word) to modernise (ditto) the public sector. The impression given is that private sector firms will be vying with each other to design, build and run hospitals, keeping down costs and improving patient care.

What has actually happened is that the private sector will only get involved if the government earmarks a preferred bidder - abandoning competitive tendering - leaving the field clear to jack up the cost. Money has to be found to pay for these inflated schemes, and it comes from hospital closures, a cut in the number of beds and increased patient throughput (a polite way of saying patients are sent home before they should be in order to provide a profit for the private operators). Fewer staff plus increased demand equals deteriorating service, as in the passport office fiasco. This is not exactly rocket science.

Sometimes the government's lack of understanding is positively harmful. Research by the Institute for Personnel Development shows that those organisations with progressive human resources policies tend to be 16% more successful than the average. Yet Labour's record as a public sector employer so far has been deplorable. Public spending has been frozen for two years, the gap between private and public sector earnings has widened, and the PM is now doing what every bad boss does - blames the workers for his own shortcomings.

Of course, it may be that the problems of overcrowding on the railways are all down to Jimmy Knapp. It may be that the problems of the NHS are due to junior doctors working 70 hours a week being resistant to change. It may be that people can't get their passports on time because the staff (what's left of them) are not suitably steeped in the culture of risk taking. On the other hand, it could be that a government made up of people who have never run anything but elections couldn't run the proverbial knees-up in a brewery.

In a similar vein to how members of the Socialist Workers Party don't have much of a clue how a future socialist economy would be run, it appears that many apologists for Actual Existing Capitalism have very little idea how a capitalist economy "in the real world" (which always seems a much more horrible place than the actual world) runs in practice.