Wednesday, November 26, 2008

The Market Values and Globalisation Fantasies – and an alternative


Why markets give no accurate measure of the value of anything

P.J O’Rourke and other advocates of an unrestrained free market claim that the market is like a set of scales which determine what the real price or value of each commodity (including labour) is worth. He claims that we may not like the result our scales give us, just as we may not like the weight when we are when we weigh ourselves on our bathroom scales, but that it’s still our real weight – the real value of that commodity.

Recent events have shown how wildly inaccurate this analogy is. The stock markets valued some banks and companies at one value one day and then half or a tenth of that value a few days or months later. There is no way that the real value of those companies and banks changed that much that quickly. The markets actually massively over-valued them initially and then, when they found out they weren’t worth quite that much, massively under-valued them in a panic the next. In many cases traders were deliberately trying to push down the value of banks’ shares so that their futures’ trading (basically bets that the value of a commodity or the shares in a company will fall or rise) would make them a profit. So in reality the market is wildly inaccurate and erratic as a device to measure the real value of anything. If it’s a set of scales its an old-fashioned double sided one with a manic depressive heroin addict on either side jumping in and out of the balance based on their current mood and the rumours they’ve just heard. If we tried to measure our own weight on it we’d be told we were amazingly trim one minute and morbidly obese the next.

What we’ve seen over and over again from the 18th century ‘South Sea Bubble’ to the Great Depression to the Asian currency crisis and the present crisis is that markets are incapable of regulating themselves and are sometimes wildly inaccurate and erratic in deciding the value of things. We should stop treating markets as wise bastions of stability who know the true value of everything, because the markets’ judgements are not only erratic but often morally degraded. According to the markets coltan for playstations, laptops and mobile phones is worth more than the lives of any number of Congolese people killed to steal it or forced to work as slave labourers at gunpoint to mine it. Can that be an acceptable judgement on the value of human life? According to the markets some Chief Executives of big companies and banks can be worth hundreds of times as much in annual salaries and bonuses of their banks employees, whose work is likewise valued at dozens or hundreds of times as much as the work done by people in China or India or Latin America. The result is that even when the bank fails the CEO gets a big pay-off, the employees may lose their mortgaged homes and the third world employees may die of malnutrition or due to lack of affordable health care. This is not, despite the hype, usually the result of the brilliance of the Chief Executive, but because most Chief Executives make sure big institutional shareholders get the big share dividends they want at the expense of falling or pitiful real wages for the banks or companies domestic or overseas employees and suppliers. In return the shareholders approve a big payoff to the firm’s executives. That isn’t an unbiased appraisal of the value of the work done by different people – it’s a cosy relationship between executives and major shareholders which may be legal but in any moral sense that takes into account fairness, justice and the value of human life is utterly corrupt.

We need to decide what we actually value rather than let a few executives and big shareholders decide that they themselves are valuable and deserve to be massively rewarded at the expense of everyone else. If we keep allowing them to pretend they are a neutral force ‘the market’ which accurately judges the value of everything then we will keep on being fed a mixture of reduced real wages for longer hours of work (‘increased productivity’) combined with wildly unrealistic judgements on the rate the real economy can grow it, followed by massive crises as the stock markets realise that real people have limits on their productivity and that they have let their fantasies collide with the reality that the economy isn’t as big as they’d gambled on it being.

The unrestrained ‘free market’ knows the price of everything but has no idea of the real value of anything – not even lives.

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Why deregulated markets slow the development of new technologies - and reduce living standards

Free markets famously result in innovation and entrepreneurship, but take the deregulation too far and in fact they do the opposite. In a deregulated market the demand on big companies' executives from big institutional shareholders is for ever increasing share dividend payments. If the executives fail to deliver these the big share-holders will vote them off the board of the company - i.e sack them. If the executives deliver the big share dividends in the short term though the big share-holders won't vote them off the board - and will even let them take big bonuses for themselves. If it goes pear-shaped in the long term the top executives usually have a 'golden hand-shake' clause in their contract which means they get a very generous pay off.

Ever increasing share dividends require ever increasing profits. It's not enough for a company to be profitable - many may close down or move plants overseas to ensure they have bigger profits than their rivals or ever increasing profits. Investing in new technologies could bring bigger profits in the long term, but will result in a reduction of the amount of money available for share dividends in the short term. So in a deregulated environment company executives are discouraged from big investments in new technologies or new training, mostly making do with token ones which are more part of the advertising budget than a major investment (e.g every oil company now makes small investments in wind power so they can run adverts about it). So investment in new technologies is reduced - even though they're exactly the thing that could raise productivity in ways that actually increase peoples' standards of living rather than make them work longer hours.

One easy way to get ever increasing profits without big investments of money is to sack people and make less people do more work - reducing their standard of living (the opposite of what the free market is supposed to do); another is to close down operations in the developed world and transfer them to third world countries, one party states and dictatorships where the labour is cheaper - or contract out those operations to firms that do. If these options are legal and accepted then any executive who doesnt take them will see their firm put out of business or taken over by one of its rivals who has taken those options. There are alternative systems though.

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Banking on Sanity; Favouring Small Businesses; Fair Taxes

Two possible ways to do this would be to allow central banks to take deposits and lend to people and companies, rather than just set interest rates or print money (as suggested by John O’Dowd ); and to expand community credit organizations. The latter have not been affected by the credit crisis as they mostly don’t make big acquisitions or large risky loans, but just involve people in a neighbourhood setting up their own local bank that only accepts deposits from and lends to that neighbourhood. The former – central banks – would similarly be immune to stock markets causing a run on their shares or lenders withdrawing their deposits in a panic en masse as they are backed by the government. This would be even more certain if they didn’t issue any shares. So both could lend money to alleviate a credit crisis even when private banks are refusing to lend. This would also be a lot cheaper than having to bail out the private banks every time there’s a crisis and would ensure some of the profits went to taxpayers. The current deal we have with the banks may ensure the government gets some of our money back from the banks eventually but won’t get us a share of their profits in the long term. Central banks have taxes to lend right away even before they accept any deposits. The central bank should not be independent but run by either the government or an all party committee. John McDonnell MP has suggested of making all banks include a significant proportion of employees and customers on their boards by law – possibly at least 50% of the board, so that banks lending policies and their division of their profits has to benefit everyone.

The same set-up could work for companies.

We also need to change government policy so it stops being biased towards big multinationals who make big donations to party funds but frequently move employment to other countries and starts favouring native small and medium sized businesses who can be relied on to keep employing people in their home country and who provide almost 60% of the private sector jobs in the UK and over half the British private sector’s turnover.

We also need to cut income tax for low earners. Recently the New Labour government in the UK has begun to repeat an argument they previously derided when Tommy Sheridan and others made – that people on low incomes are more likely to spend any money they get. This is pretty obviously true, so tax cuts for low earners are not only the morally right thing to do but good for everyone. Unfortunately Brown and Darling haven’t got round to actually cutting income tax on low earners, or even restoring Brown’s former 10p tax rate for low earners which they scrapped last year, doubling taxes on the lowest paid.

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The Globalisation Fantasy and an Alternative

Finally we need to end the fantasy of globalization, which is the fantasy that globalization benefits everyone by allowing different countries to specialize in whatever they’re best at. In theory this means that say China and India are more efficient at producing textiles while the UK is better at banking, so if each country restricts itself to what its best at doing most cheaply and there’s free trade everyone benefits from reduced prices for everything. What actually happens is very different. Companies based in the ‘developed’ world move production overseas to countries with few or no minimum levels for employees’ wages, hours, working conditions and damage to the environment. This reduces their production costs. They then export the finished product back to the UK (or move their call centre to India). In many cases the countries production is moved to are one party states or dictatorships like China, where trade unions independent of the ruling party are not allowed, trade union leaders are often sent to insane asylums or ‘re-education’ camps for torture and workers sometimes die of sheer exhaustion or in fires after being locked into the factory to prevent them leaving work too early.

The worst thing about this system is that any company which doesn’t ‘out source’ to India or China or wherever is almost certain to be put out of business by others that will – so even many responsible companies who would prefer to pay people in their own country a decent wage, or buy from suppliers in their own country, are forced to outsource abroad or go out of business.

Many governments and economists claim we have no choice in this, that we have to ‘raise our game’ and work harder to compete with China and other rising economies or go under.
The truth is that there is no way people in Britain or other developed countries can compete on costs with those used as sweatshop or slave labour in countries like India and China, except by turning into an India or China with massive levels of poverty and pollution and no independent trade unions allowed to protect workers’ rights. The only real alternative under the free market system would be for unemployment to rise and less workers work many times harder for longer hours to compete with China.

The theory is that China is like say 19th century Britain and as its economy develops it will create a middle class which will bring about democracy and decent living standards. The reality is that people had to fight for decent wages, working conditions and democracy in Britain, with independent trade unions being one of the major causes of a fairer distribution of income and better working conditions rather than the result of economic development. This process went into reverse in the late 1970s.

There is an alternative. Our governments do have leverage with China – that leverage is access to huge markets like the EU and US. They currently use this leverage in negotiations to get access for our firms exports to China, but we could use it instead to demand increased minimum wages and working conditions in China, real democratization allowing other parties and independent candidates to stand in elections, an end to torture and jail without trial and toleration of independent trade unions. This would increase wages and improve working conditions for the majority of Chinese people, most of whom have had little or no share of the benefits of economic growth and at the same time stop wages falling and jobs being lost in the ‘developed’ world as we’d be able to compete with China on the costs of products, so competition would become more to do with the quality of products and service rather than a vicious cycle of falling wages and growing unemployment worldwide.

This highlights another myth of the free market – that for it to benefit everyone everyone must act in their own selfish interests, with suffering, even for the majority, being a necessary stage towards progress. In fact if the vast majority of people in the developed world want to keep their own jobs and maintain or increase their own wages and standard of living they need to push for increases in the wages and working conditions of the poorest people in some of the poorest countries in the world. It’s in their vital self interest to do so.

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Unregulated markets cause mass unemployment, which causes extremism and wars

If we allow this vicious circle to continue we risk another Great Depression and the growth of extremist groups and parties. In the 1930s mass unemployment led to the rise of fascism, Nazism and Stalinist communism. This was not only in Germany and Japan but worldwide. Britain had its own Blackshirts under Sir Oswald Mosley, who fought running battles in the streets with the
Communists, with the police often favouring the fascists, or even being fascists themselves. The rise of the extremist movements and dictators at their head soon led to war.

Today we’re seeing the growth of extreme nationalist parties again – the neo-conservatives and Christian fundamentalists in the US for instance. In Britain from the 90s on as clothing retailers started buying their products from India and China the last textile mills in the North of England closed down. Within a few years there were neo-fascist British National Party councilors elected there and running battles in the street between whites and people of Asian descent. The area has also provided a high proportion of British Al-Qaeda inspired suicide bombers. The Iraq war and the British government’s blind adherence to the Israeli government line in the Israel-Palestine conflict are also major factors here, but there’s no doubt that rapid rises in unemployment and poverty trend to lead to an increase in support for extreme sectarian and violent groups and parties. This may be because having a job has become a major source of peoples’ self-respect and identities. When made unemployed and given no prospect of getting another decent job they may feel isolated from membership of any social group and reduced in status. So many may be more likely to be persuaded by ideologies like the BNP’s racist one – which tells them they are valued members of a group - white and British people, whether they’re employed or not; or like Al Qaeda’s, which tells them they matter as Muslims and have a purpose in life – to fight against the ‘enemies of Islam’. I’m tempted to add all nationalists of all nations, who, at the extremes, tend to see the lives of people of their own nationality as worth a great deal while those of other nationalities don’t matter too much. This holds true to some extent for all nationalities including ‘multinational’ ones like British nationalism of the type that New Labour and One Nation Conservatives hold to.

One party states like China and Russia are doing the same thing the neo-conservatives in the US have done and which European countries did before World War One and Two – using nationalism and tension and wars with other countries to unite their people behind the government in order to silence anyone demanding a fairer distribution of wealth or jobs or equitable use of taxes and label them ‘unpatriotic’.

(Of course not all violent extremists are motivated by poverty or unemployment – Osama Bin Laden and many wealthy and middle class Saudis and Egyptians in Al Qaeda are motivated by opposition to corrupt, torturing dictatorships in their own countries which are militarily, politically and financially supported by developed world governments. Some Iraqis and Palestinians targeting civilians are seeking revenge for the killing of civilians in their own, occupied countries. That of course does not make their actions right just as mass unemployment and poverty in Germany could never be a justification for the Holocaust or Hitler’s wars )

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Protectionism Isn’t a dirty word – We need a balance between Free Trade and Protectionism

The only other alternative is protectionism, which, while it definitely has it’s drawbacks in reduced economic growth, is not the disaster it’s been presented as. The establishment view is that the Great Depression was caused by protectionism, which is an unlikely claim since the protectionist policies actually came after the Depression began, as a reaction to it – and not before it, so can hardly have caused it. The British Empire and American governments both maintained protectionist policies for centuries until they were confident that their own industries could compete and defeat others internationally. Then they became advocates of free trade – and even then in reality the EU and US have maintained protection for many of their industries while insisting other countries open their markets to developed world companies’ exports in return for IMF and World Bank loans. The free trade policy is more ‘do as we say’ than ‘do as we do’. African, Middle Eastern, Asian and former Communist countries could probably benefit from free trade areas with some of their neighbours who have industries of similar strength, their own firms and farmers have no chance of competing with developed world based multinationals. They would probably benefit from having their own trade barriers and tarrifs from imports from outside their region, much as the EU does. This would allow their industries and farmers to develop to a level where they could compete internationally – and give these countries more collective negotiating power if e.g the EU had to negotiate for access to the whole trade zone and not just one country at a time. Opening up African waters to EU trawlers has destroyed fish stocks in Somalia and elsewhere and turned fishermen into pirates. That’s one of the many ‘benefits’ of developed world governments’ hypocritical demands for ‘free trade’.

It’s also worth remembering that the reason the Great Depression affected every country in the world was that there was a completely free trade system in place which gave no country protection from the crisis which began with the 1929 crash in the US. If democratic governments and Germany’s creditors had allowed some protectionism and public works projects to create jobs – and if the French hadn’t maintained a military occupation of the Rhur and the Rhineland and punitive payments which left many Germans in poverty so bad they couldn’t get enough food, then Hitler might never have come to power. (He and Mussolini were both seen as ‘bulwarks against Communism’, much as dictatorships and military governments today are frequently viewed as ‘bulwarks against Islamism’). The question isn’t whether we should have protectionism or free trade but what the best balance between the two is.

Total Free Trade with the Developing World would make things worse, not better;
We need to level up, not level down

Nor would real free trade with Africa or Asia result in benefits for everyone ; it would more likely result in more of what we’ve already seen – a choice for the majority of people of leveling down to third-world wages and lives or else mass unemployment. The solution is the one already mentioned – use the negotiating power on access to our markets for developing world imports to demand democracy, human rights and decent wages for people in the developing world in order to level up developing world living conditions to developed world ones instead of leveling the majority down to third world wages and living standards.

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Harry Barnes said...

There needs to be an international recognition of the need for growth within the world's poorer nations. This will often require them (individually or under group arrangements) to operate protective barriers against imports from the more technologically advanced nations. In the meantime they need rewarding markets for their existing produce within the weathier West. For this to happen, they need to be encouraged and assisted to join with fellow third world producers in order to improve the price of their exports on world markets - in the style of OPEC, but with international recognition.

Protective measures against them by the more advanced nations need to be outlawed, under such international agreements.

Protective measures taken AMONGST the world's advanced nations may, however, be counter-productive and is likely to reduce both trade and output. Because Britain has seen such a significant decline in its manufacturing base, we would suffer badly from a round of beggar-my-neighbour policies.

World wide, we need a delicate balance between protective and free trade arrangements. The trouble in working out the pattern (which will keep needing to be adjusted) will be the vested interests of the negotiators. Which we can but pay attention to.

calgacus said...

I agree with 90% of what you're saying there Harry - especially on the need for OPEC style organisations for other developing world products. In fact the Rwandan genocide was partly caused by the US government helping coffee companies split up a cartel of coffee exporting nations. That led to a rapid rise in unemployment in Rwanda and growing support for extremists like the anti-Tutsi Hutu extremists. (see Linda Melvern's book 'A People Betrayed' for more on that).

The one thing i disagree with you on is banning protectionism in the developed world against developing world imports.

Unless we improve working conditions, wages and human rights in the developing world first then we risk just levelling the majority of people down to third world wages or causing mass unemployment in the developed world that way without improving the lives of people in the third world.

That's why i think we need to level their conditions up first by using negotiations for access to developed world markets to demand developing country governments democratise and increase minimum wages and working conditions and allow independent trade unions first. That would level up the third world poor instead of levelling middle and low income people in the developed world to third world living standards.

Currently our governments just demand access to developing countries' markets in return for access to ours - which will only really benefit the big multinationals and the very wealthy by driving down the price of labour , working conditions, environmental protections and other 'costs' globally.

Harry Barnes said...

Calgacus : I think that we are near agreement on the other 10% also. There are widespread problems of civil strife, expliotation and corruption in many of the world's poorest nations - resulting from the circumstances they find themslves in. So efforts to bring about democratisation, civil liberties and improved workers' conditions are essential in moving towards the position I advocated. Given such moves, then I would be less worried about the impact on the output of the more advanced nations - who are in a stonger position (despite recent problems) to tackle such difficulties.

In typing up my original comments, I had started to try to express the above viewpoint, but then I felt that I was rambling. You express the point much more clearly and succinctly than I was trying to.