Amazon, Tesco and the direction of the free market

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.


In the 1980s capitalism triumphed over communism. In the 1990s it triumphed over democracy.
David Korten

What’s Broken? Why The Individualist View Of Market Economics Is Seriously Flawed

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.


Goldman Sachs Boss Quits And Tells It As It Is

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 


rottencapital:

Looking at the graph above we are not really surprised seeing the top 1% making about 20% of the total income in the US, right? Nor are we for the top 10%.
What is however mindboggling, is that the financial crisis had no effect at all for the richest groups in society. Whereas we all know the effects for the rest of Americans from loosing their job to home foreclosures. According to The Economist what really changed the situation in the crisis in 1930 was the regulation afterwards, which can be immediately seen by this graph. In the 21th century, however it doesn’t look anything like that:

Excluding capital gains, the top 10% of earners captured a near-record share of income in 2010. More increases may follow.

Once more, the income inequality is regulated by the US oligarchy.

rottencapital:

Looking at the graph above we are not really surprised seeing the top 1% making about 20% of the total income in the US, right? Nor are we for the top 10%.

What is however mindboggling, is that the financial crisis had no effect at all for the richest groups in society. Whereas we all know the effects for the rest of Americans from loosing their job to home foreclosures. According to The Economist what really changed the situation in the crisis in 1930 was the regulation afterwards, which can be immediately seen by this graph. In the 21th century, however it doesn’t look anything like that:

Excluding capital gains, the top 10% of earners captured a near-record share of income in 2010. More increases may follow.

Once more, the income inequality is regulated by the US oligarchy.


What’s Broken? Short-termism & Quarterly Returns
BELL LABS is a good case study.
They invented transistors, lasers, information theory and UNIX. None of that stuff was profitable within two quarters, was it? Modern capitalist parameters would deem that they shouldn’t have wasted the money developing any of them. In fact, we now see pressure on Google to stop “wasting it’s money” - $16bn apparently - on projects that go nowhere.
I mean, what else should they spend their money on - bigger CEO bonuses and higher dividends for whoever happens to be holding their shares at this particular minute?
So what of Bell Labs? They went down the instant monetize project route, changed into Lucent Technologies and stopped doing first-class change-the-world fundamental research.

What’s Broken? Short-termism & Quarterly Returns

BELL LABS is a good case study.

They invented transistors, lasers, information theory and UNIX. None of that stuff was profitable within two quarters, was it? Modern capitalist parameters would deem that they shouldn’t have wasted the money developing any of them. In fact, we now see pressure on Google to stop “wasting it’s money” - $16bn apparently - on projects that go nowhere.

I mean, what else should they spend their money on - bigger CEO bonuses and higher dividends for whoever happens to be holding their shares at this particular minute?

So what of Bell Labs? They went down the instant monetize project route, changed into Lucent Technologies and stopped doing first-class change-the-world fundamental research.


Just read up on Ayn Rand - what a nutcase; and it seems largely responsible for the individualist ideology at the root of US/UK capitalism.
More on that later…

Just read up on Ayn Rand - what a nutcase; and it seems largely responsible for the individualist ideology at the root of US/UK capitalism.

More on that later…


Brilliant quotes from Vince Cable this morning - he is the only politician showing any signs of “getting it”, which is a shame as no-one else seems to be behind him, but great in that at least 1 person is balancing off the ideologues on both left and right.
“I am going to confront the old-fashioned negative thinking which says that all government needs to do to generate growth is cut worker and environmental protections, cut taxes on the rich and stroke ‘fat cats’ until they purr with pleasure. I’m completely repudiating the idea that government has to get out of the way. Government has a positive role to play.”
“This is not the time for navel-gazing or free-market purism,” he says. “Financial markets have failed and we need thoughtful, intelligent government to take a lead.”
More here: http://www.guardian.co.uk/politics/2012/mar/09/vince-cable-hits-out-tory-right

Brilliant quotes from Vince Cable this morning - he is the only politician showing any signs of “getting it”, which is a shame as no-one else seems to be behind him, but great in that at least 1 person is balancing off the ideologues on both left and right.

“I am going to confront the old-fashioned negative thinking which says that all government needs to do to generate growth is cut worker and environmental protections, cut taxes on the rich and stroke ‘fat cats’ until they purr with pleasure. I’m completely repudiating the idea that government has to get out of the way. Government has a positive role to play.”

“This is not the time for navel-gazing or free-market purism,” he says. “Financial markets have failed and we need thoughtful, intelligent government to take a lead.”

More here: http://www.guardian.co.uk/politics/2012/mar/09/vince-cable-hits-out-tory-right


Intrinsic vs Extrinsic Motivation (or why bonuses don’t work)

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.


Why Arguments For Cutting The 50p Tax Rate Are Utter Hokum

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.
Let’s work through these in reverse order:
  • TAX AVOIDANCE : this is simply varying levels of fraud - something poorer people would have their car repossessed for. As an argument for building laws upon it is amazing this case is even made. By the same token should prostitution and drug dealing be legalised because they cannot be avoided?
  • REWARDING SUCCESS : See my recent post on Intrinsic vs Extrinsic Motivation to see why this old Smithian view of the world is just plain wrong. Most entrepreneurs I know - including myself - would be doing what they do to the absolutely maximum of their ability regardless of what their tax status is. And those motivated entirely by extrinsic financial recompense? I don’t a) like those people b) think those people produce really valued companies and consequently c) I’m really not that bothered if they want to leave the country.
  • TAX AVOIDANCE : Looking at it another way, a tax cut for the rich is essentially a spending increase with more money spent on the rich. It’s ironic that they do not seem to see this argument is the same as on the left - cuts stop growth. It really boils down to whether you think more money in the hands of the wealthy (through creating jobs) or the poor/middle class (because they are more likely to go out and spend it) results in higher economic growth. Either way, it would be monumentally hypocritical to preach spending cuts over growth and cave in to these rich lobbyists. And as for trickle down - read my previous post on that topic.