Responsible Capitalism II – Wealth vs Value

Part 2 of Series of Opinions and Reflections on Responsible Capitalism.

With the economic crisis that followed the worldwide collapse of the financial and banking systems, there was a moment of truth looming for the concept of free markets and Capitalism. Can Capitalism overcome these as it did Communism?

The year 2009 will surely be remembered in history as the ‘Day of Reckoning’ for the free market, and the new conservatism, which has been on the ascendancy since the 1980s. With Mrs Thatcher sweeping all before her, the rules of the game changed forever. Whilst many individuals and political commentators, would love to blame Lady Thatcher for all the ills of the world, it is not her revolution, or her belief systems that have failed us, but instead it is the ‘free-for-all’ attitude and the unbridled Capitalism that emerged during the 90s that has failed. The question is, where did it all go wrong?

The dysfunctional 1970s

The 1980s’ revolution was a necessary and inevitable consequence of the 1970s’ excessive government intervention, combined with the growing power of the trade unions. Inefficient nationalised industries, industrial unrest, politicisation of services, and flight of capital, were all a legacy of the 1970s. The 1980s changed the UK, and the values it had depended on, beyond recognition – leaving in its place a new generation of entrepreneurs, full of energy and vigour, that helped to transform the failing economy.

Paradigm Shift of 1990s

During 1990s another group of economic activists started their ascendancy in the economy, namely bankers and financial institutions lead by libertarian zealots. Whereas the entrepreneurs of 1980s were from the same mould as the Victorian industrialist, contributing to the ‘Nation’s Wealth’ with industrial and intellectual property output, the contribution to the nation’s wealth from this new breed of bankers, financial experts, and City dealers could not be measured by the traditional means. There has been continuous and relentless propaganda that these new ‘service industries’ were somehow contributing to the nation’s wealth and wellbeing, but most of their function was unfathomable and their contributions were, at best, a mystery.

Wealth Creation vs Wealth of the Nation

So what is the difference between creating jobs and wealth in service industries such as banking, financial services, tourism and so on, versus creating jobs and wealth in manufacturing?

Let us take a look at an example to illustrate the real difference, and the profound impact of manufacturing loss. When MG Rover went into administration in 2005, around 6,300 direct employees lost their jobs. However, in addition to these jobs at Longbridge, the factory also supported a further 18,000 jobs in the downstream supply chain, including parts manufacturers, local services and so on – and a further 6,000 jobs in the upstream supply chain including dealers, service centres, advertising companies and the like.

Furthermore, the study by the Work Foundation and Birmingham Business School found that, although 90% of MG Rover ex-employees had since found employment, two thirds of them had to accept pay cut of up to £5,600 per annum in the process. The pay cut for those who had moved into service industries was even larger, with an average of £6,000 per annum reduction in their salary. This means, not only did MG Rover supported a further 4 jobs for every direct employee, but it also generated higher income, hence higher individual purchasing power for those it employed. The loss of MG Rover was not just a symbolic loss of manufacturing, but was also loss of skills, local wealth, and quality employment. MG Rover, and other similar manufacturing companies, create ‘Value’ rather than just ‘Wealth’ for shareholders and stock market investors.

By contrast, when Lehman Brothers filed for bankruptcy in September 2008, it employed 25,000 staff in total, including 5,000 in the UK. Whilst we have not seen any post mortem for Lehman Brothers, it’s doubtful it could claim that those 5,000 direct employees in the UK were responsible for 20,000 jobs in upstream and downstream supply chains. However, those who argue that the 5,000 jobs where all highly paid, and therefore worth more to the UK economy, are totally missing the point by not including the downstream and upstream value of employment. It can be argued that in terms of individual income, the total value of these jobs was probably equal, or more likely less than, the total value of income from the 30,000 jobs that were dependent on MG Rover.

This is not unlike the dilemma of a hypothetical multimillionaire who has £100m to share out. Does he make 10,000 people happy by dividing his fortune into £10,000 individual bequeaths? Or does he make 100 people millionaires? Or one person absolutely delirious?! This is not just a moral dilemma, or a hypothetical situation about the personal view point; it’s a fundamental question about the type of society we wish to leave behind for our children, and for generations to come. Do we want to create Personal Wealth at the expense of the values that bind our society together? Is creating value and social order the function and responsibility of the economic system we support, or do we think that caring for social justice is the preserve of the Socialists and the Left?

Responsible Capitalism

Responsible Capitalism is about creating both personal, and national wealth. It recognises the need to reduce the imbalance in opportunity and wealth, as well as the need to increase access to services such as education and healthcare. Lack of access to these fundamental services and opportunities will create the foundation for Trotskyite and reactionary radicals. If personal pursuit of wealth goes unchecked and un-tampered by a sense of social responsibility, the resulting disenfranchisement, leads to the dispossessed, and the disgruntled, providing rich pickings for the revolutionaries, fundamentalists, and criminal gangs.

Existential Threat

These reactions against economic imbalances are the real enemies of liberty, democracy, and threaten the very existence of Capitalism. If Capitalism, and those who support it truly wish it to succeed, then it must change and moderate, by showing compassion and restraint. It must provide opportunity for all, and create safety nets within the Welfare State. It should also invest in education, and not just accept ‘fair’ taxation, but welcome it. These are not the ideas of left wing radicals, but instead are the very essence of survival for Capitalism. If financial success becomes a minority sport, with education becoming the privilege of the rich, and taxes paid only by those who cannot afford trusts in tax havens, then the ‘end of capitalism is nigh & certain’.

The problems we are facing today are the result of 3 decades of obsession with personal wealth creation. We have switched our attention from creating national value to creating personal wealth. This has resulted in a concentration of wealth amongst a small elite, rather than the creation of value that spreads wealth and prosperity. It’s the ‘me-me’ concept of creating personal wealth through speculation, and high risk ventures, with no regard for the impact on wider society, and with obsessive tendencies that knows ‘the cost of everything and the value of nothing’. We have seen the proof that “Trickle Down” does not work as envisaged.

Dysfunctional Stock Markets

Buying and selling companies at will, based on the whims of the stock market, has created a short-term, quarterly-based time horizon that is not in synchrony with real life. In Victorian Britain the industrialists created companies, and institutions, with the aim of passing their leadership down to their grandchildren and generations beyond. The modern stock market expects results in 90 days! With such short-sighted time horizons, is it any wonder that the very essence and the fabric of our society and its moral codes are falling apart?

The original concept of Stock Markets was to bring entrepreneurs and industrialists together with sources of capital and finance. The idea was of organisations funding their expansion, or that individuals financing new ventures by offering shares in their success to those with capital, succeeded in creating an economy with vigour, vitality and adventure. New ideas, concepts, companies were created and even new continents were discovered and explored thanks to the simple idea of bringing those with capital together with those who had ideas and concepts. This method of financing served the industrial revolution well and helped to fund the expansion and the industrialisation of Western nations. This simple concept created wealth, value, jobs and prosperity which reached its climax in the 1960s, with British Prime Minister Harold Macmillan famously pronounced, “You’ve never had it so good!” in as early as 1957.

Unfortunately someone had a bright idea that you could actually make this concept into an industry of its own. Somehow the perverse idea that we could bet our pensions, national prosperity, jobs and income on the very risky concept of lending money to new and expanding ventures took root – and the Stock Market is now a casino grander than the Casino Royale! Every day, millions of pounds and dollars are bet on numbers by those who do not have the first idea of what these companies do. This new game has taken on a life of its own, with rules, regulations and benchmarks that attempt to measure and compare company performance.

One Size Doesn’t Fit All

The so-called experts make pronouncements on company performance even though they do not understand the product, the function, or the market in which the company operates within. These ‘experts’ also claim to understand every industry you can think of, and would have you believe that their benchmarks can accurately measure the viability and performance of all companies, regardless of whether they are in car production, paint manufacturing, or food retail. No-one in their right mind with any understanding of business, product lifecycle, cashflow, supply chain, or customer demand can truly believe the ‘one size fits all’ and that financial benchmarks such as the P&L or the balance sheet of a company can tell you if you should invest or not.

If you care to disagree then please explain GM, Chrysler, Worldcom, Marconi, Woolworths (UK), Lucent Technologies, Nortel, RBS, Fortis etcetera . . . The list is as long as you have time to read it!

Stock markets have become the source of personal wealth and no longer function as they were originally intended to, as a means of distributing capital so that it can create further wealth and jobs. The personal wealth is restricted to those who operate within the market and some crumbs fall out for the rest. Just like a true casino, the house always wins, regardless of how much a player thinks they have won. No outsider can beat the system, so a few individuals may take a flutter and by chance win, but largely only those operating within the system can ever gain true wealth. Namely the traders, merchant bankers, short sellers, bond holders, pension funds, fund managers and the banks themselves – and should they ever lose any money they are the first to cry foul or bring out the begging bowl to tax payer!

Failings of Stock Market

In discharging its duty and its economic function, the stock market has failed on so many levels that it has become dysfunctional.

Firstly, if the function of the stock market is to provide a venue for the meeting together of capital and entrepreneurs, then it is clearly not working. Every actor in this game is being forced to behave with self-interest, individual greed or ambition – and often all three – with no regard for the long term effects and results. Shares in companies are bought and sold based on the latest quarterly results and on rumours and ‘herd mentality’, without any long term plan or strategy. But this is not surprising, given that those who decide the fate of these unfortunate companies are, in principal, clueless about individual businesses – so they cannot make decisions based on the individual merits of each one. They follow their instinct, inventing benchmarks that have no proven validity or relevance, all for the sake of the next quick buck and, let us not forget, their next bonus!

Secondly, if the markets were supposed to deliver secure and growing pension funds, then how come the value of pensions has collapsed, despite the fact pension fund managers were meant to have been the guardians of our fund values? These managers were supposed to have protected our hard-earned pensions. They were the experts, entrusted by us to safeguard the value of our pensions, but it appears that the only thing which is safe is their own jobs, bonuses and personal pensions.

Thirdly, stock markets do not enrich the nation’s wealth, nor do they add value to the economy. They are now simply parasitic monstrosities which provide employment and a mechanism for those who work within the system means of creating personal wealth. It creates no downstream or upstream value as it has no supply chain. It creates zero jobs outside its own self-serving circle, and it destroys the value of the very businesses on which it feeds. In a perverse fashion it is not even a smart parasite, as a smart parasite never kills its host!

Responsible Capitalism Response

Society mirrors the behaviour of its leadership. The accepted norms in business, commerce, and trade are reflected in our general society, in the way individuals behave and interact. A civilised society is not measured by the level of its personal wealth or by its material possessions – fast cars, high rise buildings or the electronic gadgets that clutter the houses. Civilisation is measured by the level of crime and violence, the degree of tolerance and the quality of care for the poor, the needy, the infirm and the old. It is the provision of this ‘safety net’ that stops individuals and entire sections of society from falling into despair and economic inactivity. The more we attach value to our possessions, relying on and emphasising personal wealth, the poorer we are in terms of a civilised society and the further we travel from the ideals of human decency.

Responsible Capitalism is all-embracing, providing equal opportunities for all in education, wealth creation and success. It is not the preserve of a few bankers and financiers, and of those with inherited estate. The growth and success of the financial services industry is great for those that can take part in its function, but it does not create ‘high value’ jobs, even if does create highly paid jobs! The financial services industry does not create jobs in the value and supply chain, nor does it contribute to the economy in the same way that the manufacturing industry does.

Government’s Role

Governments need to focus on developing, nurturing and growing the mechanisms and frameworks which encourage entrepreneurship, long-term investment and manufacturing output growth. We need to discourage the ‘quick buck’ mentality, in the same way as we have made drink-driving socially unacceptable. We need to encourage and promote the creation of value in the economy, rather than chase ‘get rich quick’ schemes.

Governments must instil a sense of national duty, social obligation and justice, by taking the lead. Successive government of every colour have failed to deliver. Governments have failed on every moral and social responsibility subject, from leading us to war on false pretences, to restricting our personal liberty, abandoning responsible financial control, and failing to enforce responsible behaviour on banks and industry – right through to the MPs that take advantage of their personal privileges. In order to lead the country, governments and politicians, need to rediscover their moral compass.

And Finally

Our world does not need a new social order. Instead, it needs to rediscover its old values of social responsibility, accountability and long-term thinking. These values created industrial powerhouses which in turn created the wealth of the nation, and it’s about time we rediscovered them.

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