Broken Capitalism

The parallels between two big news stories this morning - Amazon.co.uk paying practically no UK tax and TESCO’s legally unstoppable tactic of converting pubs to Express stores - struck me. And yet these cases are not linked in the press - but seen as isolated “evil” companies.

They both earn profits of about £3bn a year, TESCO accounting for 1 in every 8 shopping pounds spent (with a total income of circa £60bn), Amazon with £1 in every 60 (with c.£7bn income)

That’s a heck of a chunk of all the wealth generated by the UK’s 62 million people each year, and where does that wealth go? Amazon’s case is more clear-cut. It employs 2,265 people in the UK, whom it pays out of it’s UK shell company turnover of just £147m. The rest of the money goes to… Jeff Bezos, the Amazon board and their (mostly rich) shareholders. Where would it go if Tim Waterstone’s shops got that income? Sure a big chunk would end up with Tim Waterstone, but way more than in Amazon’s case would end up with shop staff, shop fitting firms, etc and the people who those staff then spend their money with.

TESCO is not so clear cut. They argue that their Express stores offer employment - and so they do. TESCO employs 1/2 million people across the board. Yet with Express shops more people will have worked in the local shops that existed before they came - as well as local accountants (TESCO will do theirs centrally) and suppliers. You do get cheaper - and in some cases higher quality food - but their overall impact on a local economy is negative. What’s more, the existence of TESCO - like any monopolistic company - is stifling for the ambitions of ordinary people. Want to open a bakery? No chance. Want to get your first foot on the ladder of retail in your local area? Almost impossible. So small time entrepreneurs are left with the option of opening a coffee shop - and I can tell you from the personal experience of friends that this is not a readily profitable long-term career choice.

In exchange for your cheap goods you have given up the chance to forge a retail business, but can work on a till (or as a manager of people who work on tills) as consolation.

But this is not just Amazon’s Jeff Bezos or the management of TESCO being “evil”. It is the natural consequence of a maturing liberal market place. As I have argued previously, free-market capitalism tends towards monopoly and inequality - and these trends will only get worse despite the protestations of Tim Waterstone or the banners of anti-TESCO protestors. It is not TESCO and Amazon what broke it - it is the fundamental way in which we have arranged our western societies… and that is not so easy to fix.

Except more funneling of wealth to the already wealthy company owners and CEOs over the coming years - and the relative decline of business opportunity for ordinary people.

Evolution works at the group as well as the individual level. If the strongest screw over everyone else to increase their position, when the group meets a well organised competitor they will be defeated, taking the strongest with them. Thus nature although working to select for individual success, also makes sweeping selections in favour of those who can work together as a group.

This group-level evolution is ignored by free-market thinkers. Focusing purely on the individual, they argue succinctly that laissez-faire light touch liberalism and tax-breaks for the “successful” are needed as a way to help the natural order of things. However, it is the de-regulation which that entails that leads to gifts those “fittest” individuals the ability  to screw over the weaker with impunity, monopolise wealth and drive inequality to such levels that the whole society begins to creak. In extremis, a single tiny group ends up controling almost all wealth and power, using it to ever increase their own lot.

This is why individualist free-market economic liberalism is - if not wrong - ideologically half-cocked. If unchecked this current approach-du-jour will lead to the eventual ceding of the western practitioners to more equitable societies who are better (and more fairly) organised.

The Vampire Squid’s execute director and head of US equity derivatives resigned yesterday and made his resignation letter open to the world via the New York Times. Enlightening, but not surprising: http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=1&hp 

Think of the people you most admire - either famous or personal to you. Have any of them got to be who they are through following entirely extrinsic motivation such as personal financial gain? Anyone motivated purely by end rewards will not create something truly great. Look at the past decade: sure, Steve Jobs was not adverse to making money - but his motivation in an iPhone being so great was intrinsic - he wanted an iPhone to be great. If he wanted only to maximise money for shareholders, he would have listened to focus groups who said it wasn’t needed or wanted. Yet he already had a bucket of money and a vision - something that would have ended up worse if he had been motivated purely by the financial reward. This really is the crux of what’s broken about capitalism today - text books say it’s all about personal extrinsic monetary bonuses, which is the complete opposite of why Apple is now one of - and at times the - most valuable company in the world.

Another analogy - think of the great albums you love. How many were made purely for financial reasons? And think of the albums made purely for financial reasons (e.g. most major label releases today) - how many of those are great albums? When those same labels began in the 60s and 70s they wanted to put out the amazing music they had heard. Again, they didn’t mind making money out of them - but that was not their primary motivation. Once those founders slowly one-by-one sold out to shareholders and investors (those faceless beings who only care if their share-price goes up or down) and so the motivation has switched to an extrinsic one. Shareholder return.

Bonuses make the whole thing worse - by encouraging people to be more focussed on the extrinsic.

It’s pretty simple and obvious when you look at it - someone’s motivation determines how good a product can be. Adam Smith alas assumed that men were almost exclusively concerned with extrinsic motivation, and with that assumption inspired a whole capitalist system that ultimately leads to diminishing returns - both culturally and (ironically) economically.

Arguing to make everyone else’s lot better by taxing the rich less is a favourite sport of the right wing the world over. It has a certain illogic that can disarm you though - make you think, hang on - there might (must?) be something in this..?

And so there might. There are at least 3 sensible-sounding arguments to prove that it is not just rich people thinking “that’d be lovely” then working out how to justify it:

1. DRIVING INVESTMENT : If rich people have more money, they can reinvest that money. Their investments tend to be more astute than a government’s, so drive growth more effectively. The trickle down comes through opening more factories, creating jobs etc.
2. REWARDING SUCCESS : High achievers need to be motivated to start new businesses and expand their existing ones, and must be properly rewarded - or they won’t bother
3. TAX AVOIDANCE : If you tax rich people more, they find ways around it and so won’t pay it anyhow. Or they’ll move abroad.