Tag Archives: wealth

Parliamentary pay, expenses and conditions: a remedy for corruption

 

Robert Henderson

Parliamentary pay and expenses are never  far from the public eye these days. Neither the Commons voting on its own remuneration nor the setting up a supposedly independent pay review body has proven satisfactory from the point of view of the public. Nor did an earlier attempt at linking pay to that of a middle ranking civil servant avoid the difficulty of the initial setting of the peg by which MPs’ pay should be decided. .

As for expenses they have been a standing cause for Parliamentary shame ever since the Daily Telegraph exposed the gross abuses which were going on in 2009 when they purchased records of Parliamentary expenses which politicians  had done their very best to keep secret (http://www.telegraph.co.uk/news/newstopics/mps-expenses/5297606/MPs-expenses-Full-list-of-MPs-investigated-by-the-Telegraph.html).

MPs Pay

MPs’ pay  should be comfortable but no more than that,  let us say  three times the average national wage. That  would take it up to around £80,000 at present. I think most people would accept  that as  reasonable if MPs were banned from taking other paid  work and expenses abuse, both legal and illegal, was tightly controlled. It would give the backbench MP a salary akin to that of a doctor or a solicitor.  In addition, they have a seriously generous pension by present day standards, subsidised food and drink within the Palace of  Westminster and a substantial payment to tide them over should they lose their seat.  There might be a case for removing or lessening such perks, but for the moment I would let them stay. The subsidised food is justified by the ending of any expense claims  allowed for meals in London and the transition payment is reasonable if  MPs are allowed no  outside of politics  employment whilst an MP. The pension is more vulnerable to attack because there is a case for saying MPs should not have a more generous pension regime than is the norm for British society.

We can be sure that there would be no shortage of takers at £80,000 pa even with the other conditions I have proposed.  Indeed  the Independent Parliamentary Standards Authority (Ipsa), which has recently recommended an 11% rise,  admits that the current £66, 000 is quite sufficient to entice many to be parliamentary candidates (http://www.telegraph.co.uk/news/politics/conservative/10516391/No-evidence-MPs-66000-salary-deters-people-from-standing-for-Parliament-pay-watchdog-admits.html).  The idea that if you pay peanuts you get monkeys should produce a hollow laugh from anyone who has paid attention to how MPs behave, whether  in terms of being dishonest or lazy or simply incompetent. Our present remuneration system produces all too often MPs who act as though they see being an MP as merely a ticket to ride the  gravy train and  an ego trip.  Few  show any real independence of thought or action for very rarely does an MP, even a backbencher, step radically out of line on a party policy, even where, so often these days, the policies are self-evidently not in the national interest, for example, the continuing mass immigration in the UK and the ever increasing suppression of dissent against the ever tighter grasp  of political correctness.  

Their pay should  be uprated up or down in  accordance with the rise or fall of the average wage.  That would provide both a simple and transparent system for the public to understand and give MPs a direct reminder once a year of how their stewardship of the country is going. It would also get rid of any squabbling over who makes the decision and remove, after the initial decision on the multiple of the average wage to be used, any further human decision making. Consequently, there would be an appearance of objectivity top any rise.

The job of an MP should be full time  for two reasons. The first is a matter of practicality:  the size of the average UK constituency is large (68, 000 – http://www.parliament.uk/about/how/elections-and-voting/constituencies/ ) and requires a good deal of time spent on it if people are to be represented properly . In addition,  much of the present business of Parliament goes through with precious little  scrutiny because MPs are so often absent – even the Commons committees routinely have MPs missing. 

The second reason is fundamental to the office of MP: if they have outside interests there is a strong likelihood they will be compromised, because their extra-Parliamentary work will very often impinge on Parliamentary business.  That is not just the obvious cases such as back benchers being sponsored by unions,  being in receipt of non-executive directorships or receiving   consultancy fees, but also that deriving from seemingly innocuous employment such as practising at the Bar or working as a doctor because these can readily give them vested interests.  For example, a barrister would have a vested interest in changes to legal Aid; a doctor in the alteration of the terms of general practice. MPs are supposed to declare any  interest but they can still vote.  In principle,  Ministers have to be not only honest in actuality, but show themselves to be like Caesar’s wife above suspicion. This they do  by divesting  themselves of  directorships and placing any shares they may have in blind trusts. If it is thought necessary for ministers to have such, it should be doubly  necessary for backbenchers because they would prima facie be much more in the way of  temptation when it comes to satisfying their own selfish interests rather than those of the country because they have far less pay than a Minister.   

The post-office legalised bribes that come in the form of sinecures on the boards of companies must also be stopped.  (http://www.telegraph.co.uk/news/politics/10516295/Whitehalls-revolving-door-speeds-up-ex-ministers-and-civil-servants-seeking-jobs-in-private-sector-doubles.html ).

MPs Expenses

It might be thought that after the revelation  by the Daily Telegraph in 2009 of the  grotesquely inappropriate  things for which MPs were allowed to claim,  caution if not morality would have greatly curbed the abuses.  Sadly, it appears there is still some bizarre  poking of Hon Members’ noses into the expenses trough, for example, the brawling Scottish MP Eric Joyce, who sits as an independent since losing the Labour whip, stung the taxpayer for  £229 for a pair of designer glasses. (http://www.dailyrecord.co.uk/news/politics/disgraced-mp-eric-joyce-stung-2896178).

The only expenses MPs should be allowed are for accommodation when they are in London and have constituencies a fair distance from the capital and the cost of travel between their constituencies. It is reasonable to expect them to meet their food costs whilst away from home, not least because of the subsidised  meals they can get within the Place of Westminster.

Housing can be met one of two ways,   build a furnished hostel to house MPs or simply put out contracts to London hoteliers for a bulk rate. Fully furnished accommodation with no need for  MPs to buy any household goods.

As for travel, the government should negotiate a bulk contract for MPs and their families with the rail companies. The spouses and children could be restricted to a set number of trips a year.  I doubt whether any MPs live far from a  railway station.  I would restrict them to railway travel if the taxpayer is paying. Those who  live  a genuinely long distance away, for example, in the far north of Scotland or Northern Ireland,  could be covered  by a bulk buy contract with one or more airlines.

If this seems somewhat Spartan rations,  remember that MPs who have constituencies too far from Westminster to make a daily commute practical  probably only spend Monday-Thursday nights in London. In addition, the Commons only sits for about 6 months of the year. Consequently, the argument that MPs need a flat or house in London to maintain family life is clearly untrue.

If such a regimen was introduced expenses fraud would vanish because an MP would have little  opportunity for it. Their  accommodation in London would be paid for by the government directly, there would be no household purchases needed because the accommodation would be furnished and travel expenses would be paid for by the government directly. MPs would have to claim nothing.

The other great abuse is the employment by MPs’ of their relatives or friends as staff.   As this is public money being spent it is reasonable that these positions are put out to open competition. But even if that was done, the  MP would still be likely to choose the relative or friend.  That is a good reason to ban MPs from employing anyone close to them. A second reason to ban their employment  is that a close relative or friend would be more likely on average to turn a blind eye to bad behaviour by an MP and MPs would be aware of this and moderate their criminal tendencies. The third reason is that some MPs at least have employed relatives and friends who have done precious little work. Someone unknown to the MP before employment is much more likely to do the work for which they are paid.

To help ensure that MPs are not illicitly enriching themselves, a full statement of assets including those held by close family members should be included in the Members Register of Interests. These should be checked against the actual material circumstances of each MP  when they first become and MP, once a Parliament and when the MP leaves Parliament.

There is also a crying need for a proper investigation into the way Parliamentary  expense administrators and the special HMRC unit dealing with MPs pay have failed to apply the HMRC’s  “Wholly, necessarily and exclusively incurred in the performance of the job”  expenses test. It was clear from the Telegraph data published in 2009 that well over half of MPs had claims which comprehensively failed the test, yet very few were brought to book over it.  Consequently, the Parliamentary administrators and the HMRC unit should be investigated for systematically failing to apply the test. 

The House of Lords

The Lords is a mess. It is neither political fish nor fowl nor good red flesh. Trying to reform it is really a lost cause because most of the hereditary peers  are gone (which removes the idea of independent members  beholden to no one) and the vast majority of the regular attendees are placemen of the major political parties. It would be better if the House was abolished and replaced by an entirely new chamber with none of the placemen in it so there is a genuine change of political personnel. (Personally, I would favour a House of 1,000 members selected by lot from those who were willing to serve with a single term of eight years. They would act as a kind of jury to oversee the legislation of the Commons but would not initiate the legislation.  The primacy of the Commons would not be challenged and political parties would not be able to control the house). 

However, there is no prospect of any radical change in the foreseeable future so what should be done under present circumstances?

Peers do not get pay, but  an attendance allowance and expenses, including London accommodation if they live far enough away. . They cheat  by selling influence , claiming illegitimate expenses and by abusing the attendance allowance rules. The last they do by signing on for the day then leaving the Lords shortly afterwards having pocketed £300 from the taxpayer (http://www.mirror.co.uk/news/uk-news/video-tory-lord-hanningfield-exposed-2934895#ixzz2nj1KwOwp)  It is doubtful  whether this abuse of the attendance allowance is illegal because there are no clear duties for peers, but it is clearly an abuse and should be stopped. As for the selling of influence, that  should be made a criminal offence. Expenses should be  restricted to travel and overnight accommodation and could be included within whatever arrangements are made for MPs.  

How could things be improved on the attendance allowance front?  By paying a salary? That is not really a starter because most of the peers entitled to sit in the House – there are approaching  800 at present – do not wish to attend regularly. The so-called working peers – almost all placemen and women of the major parties – might be given a salary while the others continued with a more rigorously policed  attendance allowance scheme  but that would be a messy arrangement.   The best option would be payment based on objective criteria such as participation in debates and voting  rather than simply clocking in.  This could be linked to definite duties such as I discuss in the next section.  

Terms of service

Apart from abuses in drawing expenses,  some  MPs neglect their political duties, both  at Westminster or in their constituency.  For example, Gordon Brown is notorious for very rarely being in the Commons since his  resignation as Prime Minister – he has even started describing himself as an ex-politician  (http://www.telegraph.co.uk/news/politics/gordon-brown/10415046/Gordon-Brown-Im-an-ex-politician.html). In addition  there is no general public scrutiny of the performance of  a constituency MP, the only real test of the latter being the opinion of their constituency party because the vast majority of constituents will never have cause to go to their MP seeking personal help. 

MPs can get away with such neglect because there is no legal requirement for an MP to do anything either at Westminster or in his constituency. There is a Code of Conduct for MPs but observation of the Code  is not a legal requirement.  Complaints under the Code  can be referred to the Parliamentary Commissioner for Standards and the Commissioner’s report on any investigation  he or she may undertake may  be considered by the Committee on Standards (until the beginning of 2012 the Committee on Standards and Privileges http://www.parliament.uk/business/committees/committees-a-z/commons-select/standards-and-privileges-committee/). In principle, the House of Commons can also take action as a House if it so chooses. 

Apart from the lack of legal teeth, here are two problems with this system: first, the penalties which are imposed are normally  minor, for example, a reprimand and instruction to apologise to the House; second, even the relatively  minor sanctions that the Committee for Standards can mete out are all too often not imposed.

MPs can be excluded from the House, sometimes for years, but these are rare punishments, especially where powerful and influential members are involved. Think of Peter Mandelson under Blair who was forced to resign a  ministerial position not once but twice: the first time over his false declaration when applying for a mortgage  and his acceptance of a very large loan accepted from a political colleague, the second after the Indian Hinduja brothers received British passports in questionable circumstances after Mandelson had taken a hand in the matter  (http://www.telegraph.co.uk/news/politics/labour/3130348/The-scandals-that-brought-Peter-Mandelson-down-twice-before.html). Nor would the police investigate Mandelson for his false declaration when applying for a mortgage, despite this being an established fact – I made a complaint to the Met asking them to do so but the police refused to even register the complaint (http://livinginamadhouse.wordpress.com/2011/07/07/laws-are-for-little-people-the-mandelson-mortgage-fraud-cover-up/).

The Code of Conduct is a document which shares something with  the 1936 Soviet Constitution. The latter was a wondrously cornucopia of democratic goodies; the Code of Conduct is splendidly ethical statement of how an MP should behave. Neither the Soviet Constitution nor the Code of Conduct had or has any connection with reality.  Consider these extracts from the Code of Conduct:

“Selflessness

Holders of public office should take decisions solely in terms of the public interest. They should not do so in order to gain financial or other material benefits for themselves, their family, or their friends.

Integrity

Holders of public office should not place themselves under any financial or other obligation to outside individuals or organisations that might influence them in the performance of their official duties.

Objectivity

In carrying out public business, including making public appointments, awarding contracts, or recommending individuals for rewards and benefits, holders of public office should make choices on merit.

Accountability

Holders of public office are accountable for their decisions and actions to the public and must submit themselves to whatever scrutiny is appropriate to their office.

Openness

Holders of public office should be as open as possible about all the decisions and actions that they take. They should give reasons for their decisions and restrict information only when the wider public interest clearly demands.

Honesty

Holders of public office have a duty to declare any private interests relating to their public duties and to take steps to resolve any conflicts arising in a way that protects the public interest.

Leadership

Holders of public office should promote and support these principles by leadership and example.” (http://www.publications.parliament.uk/pa/cm201012/cmcode/1885/188502.htm#a1)

How far  this is from reality is epitomised by the IPSA chairman claiming that the 11% pay rise for MPs is necessary otherwise they would return to large-scale abuse of expenses. (http://www.telegraph.co.uk/news/politics/david-cameron/10512763/Increase-MPs-pay-or-risk-another-expenses-scandal-Ipsa-chairman-says.html).

The Code of Conduct needs to be enforced rigorously, but that would still leave MPs free to  devote too little time to their political duties. Consequently, there needs to be a legal enforceable job description which requires MPs to do things such  hold regular constituency surgeries, respond to constituents mail within a certain numbers of days  and attend Westminster whenever Parliament is sitting unless they have a reasonable excuse for being absent such as attending to ministerial duties or undertaking official Parliamentary business away from Westminster.

What improvements in politicians’ behaviour would result?

The changes I propose, or something like them, would remove from Parliament those who are there to enrich themselves. The remuneration (including perks) would be sufficient to enable an MP to live decently but not extravagantly.  Because MPs would have all the previously legal ways of enriching themselves through such things as  absurdly lax expenses rules, employing relatives  or spending large amounts of  time on non-political work, only surreptitiously selling influence would be available to them.  However, with proper oversight  such as checking the actual material circumstances of  an MP even that would become decidedly risky. Make selling influence a criminal offence with a hefty prison sentence and it would be most unattractive prospect.

If MPs come to the business knowing they cannot be a law unto themselves but will be subject to the type of constraints which the general population are held by in their work, that in itself will tend to produce politicians who are interested in formulating and implementing policy and serving their constituents rather than serving their own interests.   What I propose  would not be a panacea but a good beginning in the sorely needed attempt to change the ethical weather in Parliament.  There is nothing more corrupting than seeing those with power being corrupt for it  taints the whole of society by example.

 

How governments created the present welfare mess

Robert Henderson

The current attempt by the British Coalition Government to radically alter the welfare state by severely restricting benefits is an exercise in gross  hypocrisy.  Why? Because the  increasingly shrill and uncouth portrayal of those in receipt of benefits as scroungers by Tories’ (and some on the left like Labour MP Frank Field) overlooks one very inconvenient fact: it is the actions of governments of all political hues over the past 35 years which created  the  welfare mess  we have today.    Between them these governments have produced a situation where millions of Britons  cannot either get a job at all  or can only obtain a  job which does not  pay enough to support them and their families  even meagrely.  This has produced the truly mad situation where substantial  benefits are out of necessity  paid to  not only the unemployed but to millions who are  in work, mainly  through tax credits and  housing benefit, because the wages on offer are too  low to allow someone to live an independent life.

Mass unemployment

How did this dire situation come about? Let us begin with the shrinkage of jobs.  Sustained large-scale unemployment did not begin with Thatcher in 1979 but she greatly increased it.  Unemployment was officially 1.4 million in 1979 and rose to over three million  (even by the dole claimant count) by the mid-1980s ( http://econ.economicshelp.org/2007/03/uk-economy-under-mrs-thatcher-1979-1984.html ).

Shocking as the 1979 figure of 1.4 million was at the time, it was primarily  the consequence of the  oil price quadrupling after in 1973, something over which the Labour governments  from 1974-79 had no control over because  North Sea oil was not yet flowing in commercial quantities.   Conversely, the remarkably rapid rise of unemployment in the 1980s was caused by the wilful economic vandalism of the Thatcher government which publicity celebrated (yes, I did say celebrated) destroying much of the UK’s heavy and extractive industries.

Privatisation

Privatisation   was the platform which placed large swathes of the public services into private hands,  including the strategically important providers of  gas, electricity, telecommunications, railways and water.  This alone removed several million well paid and secure jobs from the UK.  It also created areas with structural unemployment. Many of those made redundant in such areas never again obtained anything other than a low paid job or, worse, never obtained a new job.

The early big privatisations , such as those of gas and telecommunications,   were unashamed; other privatisations  proceeded piecemeal through the contracting out of public services to  private business.  Later  from the 1990s onwards came the Private Public Partnership and Private Finance Initiative which involved either joint financing between government and private business or private business providing the money for a project up-front with the taxpayer repaying the debt on generally extortionate terms  over periods of time as long as thirty years. As well as reducing employment and service standards  built up massive amounts of public debt whilst keeping most of it from being added to the official National Debt.  Bizarrely, the supposedly Labour governments headed by Blair and Brown  were  even more enthusiastic than the Thatcher and Major governments about using private contractors for public works. The effect of all these various forms of privatisation was to reduce manpower and conditions of work radically.

Outsourcing

Privatisation was followed and after the 1980s accompanied by outsourcing. The Thatcher  years broke the back of mainstream political resistance to laissez faire in both the domestic and foreign markets.  British companies exported jobs to the Third World incontinently squeezing the available jobs further both in terms of numbers and pay and conditions. This trait was propelled to a significant degree by the willingness of British governments of any political colour to allow British companies to be purchased by foreign countries. These had even less reason to retain jobs in Britain than British owned businesses.

The European Union

When the Single European Act  (SEA) was signed in 1986 the UK effectively  lost control of its borders and  its commerce and industry because the SEA required member states to allow the free movement of “goods, persons, services and capital”. (http://europa.eu/legislation_summaries/institutional_affairs/treaties/treaties_singleact_en.htm).  Later treaties whittled away the UK’s sovereignty a good deal further.

The signing up the SEA  fitted the laissez faire economics of the Thatcher government in one sense – a single market within the EU – but  not in another because it restricted UK trade with the rest of the world.  The Thatcherites also found the remnants of state economic control in the EU  such as the Common Agricultural Policy  unpalatable. As time passed they also had a growing concern about  the growing extent of EU  ambitions to remove sovereignty.

For all these reasons the Thatcher government developed a policy of enlarging the EU.  This policy was eventually adopted by all British governments up to  this day – David Cameron is  even now pushing for  Turkey’s admission  (http://www.bbc.co.uk/blogs/seealso/2010/07/daily_view_camerons_turkey.html).  The policy of enlargement was to have  profound consequences for immigration as  the EU expanded as workers from poor EU states, especially the new entrants from the old Soviet Bloc such as Poland flooded to the UK from 2004 onwards ( http://www.guardian.co.uk/uk/2010/jan/17/eastern-european-uk-migrants).

Immigration

On top of all this came immigration from outside the EU.  This really took off from the advent of Blair as Prime Minister  in 1997.  The combined net immigration from both the EU and the rest of the world (RoW) was  50,000  in the year before Blair took office . This rose to 250,000 in 2010, the year Labour lost power  (http://www.telegraph.co.uk/news/uknews/immigration/9713954/Interactive-graphic-how-UK-migration-has-changed-1964-2011.html).   The British population has officially  increased by a net 3 million from immigration  since 1997 (http://www.migrationwatchuk.org/).   How far these figures are accurate is debatable, but they certainly do not overstate the numbers which rest on the 2010 UK census.  It is probable that they substantially understate it as illegal immigrants  will not appear in a census for obvious reasons and foreigners generally may be cautious about registering for a census because they come from countries where the state is not trusted in any way.

Massive immigration  produced severe competition for jobs, most of them low-skill or unskilled, but also for skilled workers especially in the building trade.  The immigrants not only took jobs from native Britons but did so by accepting much lower wages.  The huge influx of immigrants also had the adverse effect of helping to raise housing costs, both for buying and renting.

Housing: the poison in the UK economy

House prices were inflated by the failure of all governments to continue to build enough new social housing from the mid-eighties onwards,by the introduction of Right-to-Buy (RTB)  which greatly reduced the existing stock of social housing by giving tenants the opportunity to buy the properties they rented at huge discounts and the lunatic absence of controls over the  provision of mortgages,  which at the height of their absurdity were being offered at 125% of the value of a property.   Come the crash of 2008 no deposit mortgages vanished and lenders began to demand deposits of 20-30%. The result was property prices too high for most first time buyers because they could not raise the deposit  and a general weakening of the housing market  as those with mortgages found that they could not re-mortgage on affordable terms when short term deals came to an end or obtain mortgages for a new property.  The freezing of the property market  meant that more and more needed to rent. Most could not find social housing and  were left at the mercy of  private landlords  who relentlessly raised rents to unaffordable levels for large sections of  even the employed.

To understand exactly how inflated property have become  compare the prices today with what they were in 1955.  Then the average residential property price was around £2,000. Uprated for inflation the average price of properties today would be around £40,000.  It is housing costs which are  the primary poison in the British economy. If there was sufficient housing to both rent and buy at the sort of  prices to wages ratio  which existed even  20 years ago, much of the general problem of rising benefit costs would not exist.

The manipulation of the UK’s unemployment statistics

Today the official unemployment figure for those drawing unemployment  benefit (the claimant count) is 1.54 million, which is the nearest to the way the 1979 figure is calculated. The 2013  Independent Labour Organisation measure of those seeking work has unemployment at 2.52 million. (http://www.hrmguide.co.uk/jobmarket/unemployment.htm) However,  the contrast between  the 1979  unemployment figure  (1.4 million) and the one now  is a false one because the figures are not really comparable.   This is because there has been a massaging of the unemployment figures, many  more pupils staying on a at school after the age of sixteen and a dramatic rise in those going into higher education.

Thatcher began the government’s  habit of fudging the employment figures by cynically shifting people from the unemployment registers to long-term sick benefit. By 2011 2.6 million were claiming such benefit. (http://statistics.dwp.gov.uk/asd/index.php?page=statistical_summaries).  In 1979 around 600,000 were doing so (http://www.guardian.co.uk/society/2011/jan/19/lax-benefit-rules-not-responsible-more-disability).

To this distortion was added the constant changing of the rules for eligibility for claiming benefits, the definition of who was unemployed and the exclusion from the unemployment claimant figures of those engaged in government training schemes receiving what was to all intents and purposes unemployment benefit .  To put the cherry on the massaging of the statistics those in training were counted as employed in the total workforce  statistics. This suppressed the unemployment figure as expressed as a percentage of the total workforce.  There were also issues with students. Between November 1986 to September 1990 they could claim some unemployment benefits in the summer vacation. They were excluded from the unemployment count.  ((http://www.radstats.org.uk/no072/article4.htm).

These changes to and exclusions  from the unemployment statistics had considerable repercussions. The Bank of  England wrote in 1991 “…although unemployment is falling because there are more jobs, it is also true that much of the decline in the claimant count which has occurred since mid-1986 has been due to a shift in the unemployment/employment relationship resulting from changes in the Government’s range of Special Employment Measures – especially the introduction of more rigorous availability for work tests and the rapid growth of the Restart programme (quoted in SSAC, 1991, p. 59). Ibid.

On top of all this came the vast increases in the numbers in post-16  education. The 1980s saw the beginning of the governmental drive to have much larger numbers of  schoolchildren staying at school  until they were eighteen . By 2011 they had almost doubled from the rate of those staying at school after the age of  sixteen  from what it was in in 1980  (see p10 www.parliament.uk/briefing-papers/sn04252.pdf).  From 2015 all those under the age of 18  will, in theory at least, have to be either in education or training – http://www.sec-ed.co.uk/news/warning-over-raising-of-school-leaving-age-to-18).

The expansion of  higher education   was even more dramatic. In 1980 only 13% of young Britons went to  into higher education (page F152 – http://users.ecs.soton.ac.uk/nmg/1468-0297.00102.pdf).  More than forty per cent of British school-leavers are now going on to start degree courses.  (The last Labour government had a target of 50% of school-leavers entering higher education  and in 2010/11 47% of those between the ages of 17-30 were in higher education  -http://www.timeshighereducation.co.uk/419496.article)

The false classification of people as long-term sick rather than unemployed, the rise in children saying on at school and the increase in students taking degrees means the official statistics  considerably understate  the true level of unemployment.    The wrongful classification speaks for itself,  while the extended schooling and increased university participation is important because it  delayed the point at which millions entered the employment market.

Exactly how distorting these interferences with the unemployment statistics are compared with those before 1980 is debatable, but its effects must be very substantial.  Those between the age of 16-64 deemed economically inactive  were 9.04 million according to the  official figures issued in October  2012  (http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/october-2012/statistical-bulletin.html.  This  gives an indication of the huge numbers who should really be listed as  unemployed.  Even if  the schoolchildren above the age of 16, the students and the sick and disabled were discounted, there would be several million left. Add that to the official unemployment rate of around 2.5 million and the true unemployment rate could be in the region of 5 million or even more.

But the picture is even bleaker than that because  large numbers of those now counted as employed are on short time. Many of those and the full time employed are on short contracts and have no security of employment.

Working tax credits

All of this – the destruction and export of jobs,  mass immigration,  and the government driven housing market  –  produced a  Britain which had become both a low-wage economy and an extremely expensive place to live. Many people in full time employment  could not afford to live on their pay.  As rents soared housing benefit was increasingly taken up by even those who ordinarily would not have been thought of as being at the bottom of the income pile. Eye-watering amounts of housing benefit  were paid for those with large families (http://www.telegraph.co.uk/news/politics/5663014/Family-claims-147000-a-year-in-housing-benefit-for-seven-bedroom-home.html) ,  especially to those  in London where by 2013 families  in private rented accommodation were paying 59% of their household income according to the housing charity Shelter (http://www.bbc.co.uk/news/uk-england-london-20943576).

In April 2003, the Blair government tacitly acknowledged that wages for many were simply inadequate  to support life by introducing working tax credits. (http://www.hmrc.gov.uk/taxcredits/start/who-qualifies/workingtaxcredit/work.htm).  This had several pernicious effects. It acted as a subsidy for employers which allowed them to offer ever lower wages secure in the knowledge that the taxpayer would subsidize business by making up their inadequate wages with working tax credits.  The regulations for working tax credits also allowed people to claim them when they were working part-time.  This provided an incentive for employees to work the minimum hours,  which were as little as 16 hours for a single parent. The employer also had an incentive to employ a number of part-timers rather than full time employees because the wages of the part timers could be kept below the level  at which national insurance had to be paid .  It thus became cheaper to employ two or three part-timers rather than one full timer.

The effects of working tax credits were made worse by the Blair and Brown governments ideologically driven desire to have every woman of working age out at work. This resulted in childcare tax credits (http://www.hmrc.gov.uk/calcs/ccin.htm#1) whereby mothers were paid to leave their children in the hands of other women while they went out to work.

The benefits situation  needs fixing but the way the Coalition is going about it is unreasonable. They are not starting from where we are now and taking regard of the effects of their changes in policy on people who are already encased in the circumstances of high unemployment, low paid and often insecure jobs and ever rising rents. Instead they are using the blunt instrument of cutting benefit suddenly and seriously disrupting the lives of millions.

Housing is the main bugbear.  it makes no sense to say housing benefit will be capped if this makes continued residency in an area impossible because of rental costs way beyond their means or the £26,000 cap on benefits. The policy may well drive many people in employment out of the area in which they not only live but work causing them to become unemployed.  Even if people are unemployed forcing them to move any real  distance will have effects on those with children at school and take away the informal support mechanisms of family and friends.

Similarly, the attempt to move those in social housing out of their properties if they are deemed to be too large for those now resident there (the “bedroom tax”)  is absurd unless there is smaller social housing accommodation they can move into. If this forces social housing tenants to move a long way from where they live they will suffer the same problems that those who move because they cannot afford private rented accommodation.  If social housing tenants have to rent from private landlords that will cost more than the social housing. Such tenants on housing benefit would be more expensive for the taxpayer to support.

What should be done?

What should be done? The answer is to change the general circumstances which cause the welfare bill to be so high. This can be done by creating an economy  in which any  full time wage will at least support a person and ideally will maintain a family. This can be done by adopting these policies although Britain would need to leave the EU or get the EU to agree to change the rules governing free movement of labour, goods, capital and  services to impose  many of them):

1. Cease all further mass immigration.

2. Address the housing shortage by introducing rent controls and much stronger legal backing for secure tenure  in  private rental properties, engaging in a massive programme of social house building, restricting all future social house tenancies to those born British citizens, abolishing  Right-to-Buy, banning  buy-to-let mortgages,  banning  foreigners from buying residential properties and giving private builders an incentive to build by taxing the land they hold until they build.

3.  Place a tax on employers for every foreign worker already here they employ to discourage their employment.

4. . Remove benefits from all foreigners to encourage those already here to return home.

These policies would have short term and longer term effects. For example, rent controls  and strong tenure conditions could  be brought in very rapidly giving tenants in private property both an assurance that they could continue in their rented  property for a long time with a rent that did not suddenly rise beyond their means. Building large numbers of new properties would take several years to gain momentum but there should be a considerable increase in the housing stock within five years.

Policies such as stopping further mass immigration and  incentives  for foreign labour already here  to leave like placing a tax on  employers if they employ foreigners and removing all benefits from foreigners should tighten the labour market . This will raise wages and make employers use labour more efficiently.

A tighter labour market will produce higher wages which added to much cheaper housing will lessen the need for people to draw benefits whilst in work and the cost of housing benefit generally should reduce substantially.  That will draw most of the poison from the benefit debate.

Even as things stand, the current hysteria about benefits is unjustified in its own terms. Most of the public say that it is right that the old and the ill or disabled are looked after by state action. That is very interesting because most of the benefit bill is spent on the old, the sick, the disabled and, this is the real  tragedy, on those in employment who simply cannot live on their wages.  (http://www.guardian.co.uk/news/datablog/2013/jan/08/uk-benefit-welfare-spending#zoomed-picture). The British elite are very successfully pursuing a policy of divide and rule by setting the less well-off members of society at each other’s throats. It is both highly distasteful and unjustified. The real culprits for the mess we have now are all the politicians who have produced the situation we have now and their all too compliant media supporters, especially over the past 25 years.

The credit crunch: an effect not a cause

Robert Henderson

 How did we get  into this economic hole?

What we are experiencing is a direct consequence of the dominant economic ideology of the age, laissez faire, an ideology which underpins the general political ideology of political elites in the West, the form of liberal internationalism we call globalism.

This neo-Liberal mentality has brought us to the brink of what is probably the most dangerous economic crisis since the Depression. Perhaps it may turn out to be even more disastrous because countries throughout the world (including Britain) are now so much less self-sufficient than they were in the 1930s, while the scope and speed of communications are beyond anything in existence during the Depression.

Most problematic are the immense and entirely novel opportunities permitted by digital technology, a technological development particularly pertinent to the money markets which are at the root of the credit crunch. No one remotely understands the medium-term let alone the long-term implications for the money markets of the creation of a universal market for every form of financial instrument, which is what the Internet potentially provides, or its potential for destabilising currencies. All that can be done at present is to guess, and guessing when the lives and prosperity of entire populations are at stake is a criminally reckless gamble.

 The consequences  of Thatcherism 

There have been outbreaks of  free market and free trade ideological  dominance in Britain from  the 1840s onwards,  but  since  Margaret Thatcher came to power in 1979 the worship of the laissez faire god has become more devout than ever.

Thatcher introduced something quite new. For the first time in history, a British prime minister and government actively welcomed the wholesale destruction of strategically important industries on the grounds that they could not compete. The doctrine of comparative advantage was pursued by the government in an advanced economy to a degree never previously seen. At the same time she emasculated the unions and began

recklessly selling the family silver with  her introduction of  the idea of privatisation which rapidly placed  almost all of the important nationalised industries in private hands.

Mrs Thatcher was also responsible for one great political act of folly in the name of laissez faire when she successfully fought for the Single European Market. The consequence of this was to rob Britain of its ability to favour its own industry economically (beyond what was already being done) and gave any citizen of another EU country the same rights as a British citizen to be employed in Britain or for any foreign corporation to bid for any public sector contract offered in Britain.

Her ultimate triumph was not only to drive the anti-laissez faire strain from her own party, ( a strain which had survived during previous bouts of  laissez faire dominance) but to eventually force the rest of the British political mainstream to follow suit. The upshot today is that the three major political parties in Britain have as articles of faith both a commitment to free trade and the belief that private enterprise is preferable to public provision in virtually every area or life.

The latter belief has created a novel situation in Britain. Great swathes of economic activity which were once controlled by the state – everything from the great nationalised industries to prisons – have been either sold off or contracted out to private companies.  Once privatised, these erstwhile public operations have become prey to foreigners. Because of post-1979 British governments’ commitment to laissez faire, anyone is allowed to purchase any British company, no matter its strategic importance, and most public contracts are given to the highest bidder regardless of their provenance. Nor in most instances (because of Britain’s membership of the EU) can the privatised industries be subsidised by the taxpayer, a particularly telling restriction in the case of the old public utilities when energy prices are rocketing.

Today, British utilities such as gas, electricity and water are largely in foreign hands, our major airports are owned by Spaniards, we no longer have serious mining or shipbuilding industries, and our largest native owned car manufacturer is the company which produces the Reliant Robin. In addition, many of the iconic names of British business – Bentley, Roll-Royce cars, Tetley Tea, ICI, Cunard, British Steel – have fallen to foreign buyers, while the supposed flagship of the British economy – the City of London – has seen the wholesale transfer of British merchant banks to foreign ownership. The present government has even stood sanguinely by while the London Stock Exchange has come under persistent foreign take-over attempts.

What the credit crunch  is not about

It is not about levels of government spending, although that is probably the next great economic shock which will hit Britain as the economy slows, tax revenues stagnate, the  Public Sector Borrowing Requirement grows and the Enron-style ‘off the books accounting’ involved in the Public Private Partnership (PPP) and Private Finance Initiative (PFI) schemes becomes impossible to hide.

What this crisis is about is the virtually unrestrained working of private enterprise, which has created a titanic pile of indebtedness ranging from dangerously generous mortgages to unsecured debt, much of it promiscuously and casually granted with a significant proportion going to people providing false information.

At the heart of the crisis lies the bundling of risky loans (especially mortgages in the United States – the so-called sub-prime mortgages) into financial packages. These have  been sold on and treated not as toxic debt but much better quality debt, debt which could be used by the banks as collateral against which to borrow. Eventually the game was up as people (especially in the United States) began defaulting on payments and banks stopped lending freely to one another because much of the debt they held was seen for what it was, toxic. Banks had to write off bewilderingly large amounts in bad debts and their store of useable collateral to set against future loans was much reduced.

This crisis is a peculiarly difficult thing for free marketers to explain. They cannot rationally blame it on too much government interference, because British financial institutions have been allowed to run their affairs largely unchecked by government for the better part of a quarter of a century, a process begun by the Thatcher governments when they threw away credit controls, permitted the de-mutualisation of building societies and their transformation into banks (which placed them under less rigorous rules regarding what they could borrow and lend) and generally slackened financial controls and state oversight.

These practices have been assiduously followed by successor British governments, who have failed to control the development of exotic financial instruments such as derivatives and by relinquishing the power to set Bank Rate (Bank Rate being, in theory at least, set by a body independent of the government, the Monetary Policy Committee (MPC) of the Bank of England) and by embracing fiscal restraints imposed by the EU, such as restrictions on state aid to industry and restrictions on the setting of VAT rates.

The upshot is that the present government is left with only two very general means of controlling the economy, the variation of taxation and of government borrowing and spending. These are hopelessly inadequate instruments to deal efficiently with the multifarious financial problems which arise in an advanced economy. For example, if  credit is growing too fast, raising taxes to take money out of the economy may actually fuel further borrowing, at least in the short term, as people try to service the debts they have and to maintain their standard of living, while the additional taxation will have the unwanted extra effect of depressing the economy.

Alternatively, cutting taxes could conceivably reduce borrowing, although human nature being what it is people might actually feel more confident about the future and hence even more willing to borrow. However, even if such action reduces borrowing it will tend to worsen inflation because the amount of money put into the economy will probably be larger than any reduction in borrowing.

The setting of Bank Rate by the MPC is arguably a third weapon in the government’s armoury, because the MPC works to a narrow government set remit of controlling inflation within certain limits and the government has a considerable say, both directly and indirectly, in the appointments to the MPC. The behaviour of the MPC in crisis conditions suggests that they will do what they think politicians want rather than sticking to their remit. For example, they have dropped interest rates in the past eight months when inflation is rising. However, even if the setting of Bank Rate is a third weapon in the hands of the British government, it suffers from the same deficiency as the other two, namely, that it is too broad a measure to deal with many economic difficulties. Worse, since the credit crunch began, the interest rates charged by the banks and other lenders (especially on mortgages) have not shadowed the reductions in Bank Rate as history suggests they should do, but have stayed stubbornly and significantly above Bank Rate.

Of course, all economic interventions by governments have consequences which go beyond the narrow desired ends of the intervention, but the more economic weapons in a government’s hands, the greater the likelihood that they will be able to find one which is best suited to solve a particular problem with the minimum of unwonted side effects. For example, if the multiplier of salary for mortgages had remained by law no more than two times salary throughout the past quarter century, the housing market would have been pegged back by what most people could afford to borrow.

The money supply

There is a vital technical reason why government should control credit: it increases the money supply. To understand why this is of fundamental  importance, it is necessary to comprehend  what constitutes money, a concept which is far from straightforward in the modern world and growing more complex by the day.

A currency based on precious metals formed into coins is a relatively simple thing, because it is to a large degree self-regulating. The practices of debasing the quality of the metal or of clipping the edges of coins to remove some of the metal may be common, but such things can be tested objectively by anyone with the requisite knowledge, for example, by weighing the coin.  Moreover, the amount of physical money is limited by the availability of the precious metal(s) used in the currency.

Once a country moves from a physical currency based entirely on a precious metal to one which remains, in theory at least, fully convertible to the precious metal but which uses paper money alongside coins made of the precious metal, government’s role is expanded in importance because it is ultimately the guarantor of the currency’s integrity.

The final stage of physical money is when the link between a precious metal and the currency is broken and the entire currency rests upon trust. At that point a currency is entirely at the mercy of governments because there is no natural restraint on how much money is printed or coined in base metals.

Describing physical money is the easy bit. The concept of money becomes complicated the first time someone makes a loan. That has the same effect as someone depositing money with a bank: where one person had the money before, now two have it. Once a society develops a banking system, government needs to intervene both because of potential fraud and an expansion of the money supply. That applies in principle even in a supposedly 100% precious metal based currency, because even then there are primitive financial instruments such as bills of exchange which effectively act as money.

The more advanced a society is, the less important physical cash becomes as the instruments by which the money supply is multiplied increases. To see what a confused state we are in today we need only reflect on some of the various measures of the money supply which have been used in modern times in attempts to quantify the money supply:

1        M0 is the total of coins and notes in circulation plus banks’ deposits at the Bank of England.

2        M1 is M0 plus current account deposits

3        M3 is M1 plus all other types of bank accounts (deposit accounts, foreign currency accounts, public sector accounts)

But there are many other financial products which none of these measures catches that

arguably have aspects of money. Anything which can be readily traded for money can in effect be used as money in certain circumstances: shares, the vast array of derivatives, debt itself. For example, if I wish to buy a house in theory I could do so by swapping shares I own for the house.

The Northern Rock Debacle

September 2007 saw the first run on a British bank since the 19th Century with people literally queuing round the block to get their money out. A converted building society, Northern Rock, had been operating a reckless business plan whereby their core business of mortgages was predominantly funded not by deposits but by borrowing on the money markets. When the credit market tightened, Northern Rock were left stranded and were forced to go to the Bank of England (BoE) as the lender of the last resort, which made a loan of 25 billion to them.

Once that news became public, the panic began and the government was forced to guarantee all Northern Rock deposits which committed the taxpayer to a further £25 billion, a total of £50 billion including the loan. The Government then left the bank in limbo until February 2008 as it desperately tried to find a private buyer for the bank. Eventually, it had to admit defeat and nationalised the bank, exposing the taxpayer to another £50 billion of risk as it took over responsibility for the bank’s mortgage book. The taxpayer is now in for a potential liability of £100 billion. To put the scale of the risk in context, the  Treasury  Red Book forecast  for total government expenditure in 2008/9 is £617 billion, so the Northern Rock risk amounts to around 18% of total Government expenditure for this financial year.

All this is worrying enough but just imagine what will happen if a few more banks go belly-up. It is as reckless an act by a chancellor as you can find in British history, for not only are massive liabilities being put around the neck of the entire population, a precedent has been set. If other banks (and quite possibly much larger banks) get into the same position, it is difficult to see how the government could underwrite another Northern Rock let alone one of the clearing banks, especially in the light of the extensive borrowing facilities the BoE has extended to the banks generally. Of course, we are constantly told by the government that the taxpayer is not really at risk as the assets of Northern Rock are solid and that the loans extended to banks generally are held against sound collateral and will cost the banks a pretty penny in a premium on the interest rate they pay. Frankly, why should we believe them when the government cannot even give a guarantee of when the Northern Rock liabilities will be cleared.

Yet it is difficult to see what else the chancellor could have done. If Northern Rock had folded, the rest of the banking sector would have been placed in real danger. The position was not helped by the drawn-out attempt to find a private buyer for Northern Rock (a symptom of the laissez faire mindset of the Government), but that was merely a detail, not the heart of the problem. Had the government nationalised the bank immediately the problem was known, the liabilities would still be on the taxpayer. The scandal is that the lax credit situation was allowed to arise, something which could have been prevented by proper government behaviour over the past quarter of a century.

The developing crisis

Not only have governments been forced in practice to abandon laissez faire, there have been few if any calls for the central banks to stand back and do nothing. Even in the case of Northern Rock the supporters of the “invisible hand” have been loath to let it go to the wall.

Faced with the dangerous mess they created, the banks and big business asked the government to rescue them. The consequence is that the ordinary person gets the worst of all worlds, for they not only have to suffer a contracting of the credit market, but they also have to fund the rescue of financial institutions, either directly in the case of Northern Rock by nationalisation or indirectly through the extension of credit by the Bank of England (as lender of the last resort) to introduce money into the market for the financial institutions to borrow. The ordinary citizen also has to pay in terms of lost jobs, lower pay, poorer conditions and higher prices.

Commercial banks throughout the developed world have run squealing for help to governments, while the major Western central banks have reacted with behaviour ranging from the dramatic to the reluctant. The Federal Reserve has led the way, slashing interest rates dramatically and making tens of billions of dollars in loans to the banks available to the money markets, much of it on distinctly questionable collateral. The European Central Bank (ECB) has been more cautious on interest rates but has also made vast sums in loans available to banks.

Britain has somewhat tardily followed suit, reducing Bank Rate by three quarters of a per cent since September and belatedly providing billions in loans to the banks on collateral of ever decreasing value. The disquieting thing is that no matter what action has been taken, the flow of credit remains stubbornly locked and governments, including Britain’s, are reduced to throwing more and more money at the banks with less and less assurance that the money the taxpayer is risking will ever be repaid.

On 19 April it was reported (for example, The Daily Telegraph) that not only will the Bank of England inject a further £50 billion into the market with the banks using some of the sub-prime mortgage products they invested as collateral, but that the British government will also underwrite credit card debts held by the banks – all this on top of the eye-watering Northern Rock liabilities.

The most frightening thing about the crisis

The truly frightening thing about this crisis is that the people who are supposed best to understand the financial markets, the central bankers, are completely at sea. The Bank of England (BoE) has admitted that its understanding of the money markets is inadequate. Amid accusations that it failed to respond quickly enough to the crisis at Northern Rock, the Bank has admitted that it is struggling to determine the impact of the credit meltdown on the economy.  Charles Bean, chief economist, said assessing conditions in the economy is “subject to considerable uncertainty”. Writing in the Bank’s quarterly bulletin, Mr Bean also stated “One important step in analysing monetary demand and supply shocks involves improving the Bank’s information about credit conditions”.

The Bank’s admission that it needs to improve its understanding of the credit markets comes as John McFall, chairman of the Treasury Select Committee, voiced his frustration following the appearance of Bank of England staff before the Parliamentary watchdog. In an interview with The Daily Telegraph, Mr McFall said: “The responses that people gave were unconvincing as a whole. I’m looking at the system and asking the question: Is it working? And it’s not working” (The Daily Telegraph, “We don’t understand the markets, BoE admits”, by Jonathan Sibun, 24 September 2007).

A failure of oversight by central banks both here and abroad has been compounded by the long period of very low interest rates led by the central bank rates of the leading currencies, most notably by the Federal Reserve (“the Fed”) in the USA, which kept money too cheap for a long time, thus encouraging people to borrow. The prime author of this cheap money was Alan Greenspan, who was treated with quasi-religious awe by politicians and so-called financial experts alike while he was running the Fed. Come the credit crunch and the knives came out for him, vide the famous American monetarist Professor Anna Schwartz: “It is clear that monetary policy was too accommodative. Rates of one per cent were bound to encourage all kinds of risky behaviour…..the Fed failed to confront something that was evident. It can’t be blamed on global events” (Daily Telegraph, 13 January 2008).

The inability of everyone from bankers to governments to provide a solution or even understand what is happening is palpable. In April, Gordon Brown ordered a “summit” with bankers to discuss a way out of the mess and his chancellor Alistair Darling railed against the irresponsibility of the banks for reckless lending, carefully overlooking government’s irresponsibility in this area. Massive amounts of public money have been ploughed in ever more desperately, without the squeeze on lending loosening – “The Bank confirmed it would swap treasury bills for premium asset backed debt owned by the banks. Banks have six months to use the facility. The swap is for 12 months and banks can ask for two year-long extensions, making a total of three years….. The Bank has put no ceiling on the scheme” (Daily Telegraph, 22 April 2008, “Banks hail £50bn boost to liquidity”). That it has had no effect is unsurprising, because the banks have used the money to shore up the holes in their balance sheets.

The effects of the credit crisis

The entire economy is rudely affected by a sudden shortage of credit. Apart from hyperinflation, there is no more toxic disease which can affect a modern economy, especially one dependent on consumer spending. The reduced availability of credit at any price causes an economic slowdown. More expensive credit causes people and organisations to draw in their borrowing horns. The reduction in the amount of money available to spend reduces demand. Reduced demand and more expensive credit drives down profits at best and puts companies out of business at worst. Wages are depressed and jobs are lost. This reduces demand even further.

People habituated to debt find they cannot service what they owe, and default. That is especially important in an economy like modern Britain’s where a large number of people have built their lives on a continuous stream of credit. Things which are heavily dependent on credit, most notably property, lose value. People either cannot pay their mortgage or find them selves unable to sell at all or that the price they could get would be much less than they owe on the property. Even those who are do not end up in a position of negative equity find they have great difficulty in selling both because prospective buyers cannot get a mortgage or because other people are unwilling to sell. Those wishing to move, especially if they wish to trade up, find they cannot easily get a new and larger mortgage.

Britain is more exposed to recession than most because her economy is built primarily on consumer spending, much of which is on non-necessities. Such an economy is inherently more fragile than one which is primarily rooted in the production and consumption of necessities because it is very responsive to changes in economic circumstances. In the language of economists, demand for much of what is purchased in Britain is very elastic.

The economic fragility of most peoples lives

Ever since Harold MacMillan famously declared in 1959 that “We’ve never had it so good”, British politicians have been religiously telling Britons that they are getting wealthier. To support this claim they point to such things as the growth in owner-occupation, the myriad of electronic consumer goods, holidays taken abroad and cost of living indices such as the Retail Price Index (RPI) and the CPI.

Most people have tended to take this at face value until fairly recently. They have ignored the fact if it takes two incomes to maintain a family where one was sufficient before, that is not wealthier. That if most people cannot afford to get on the housing ladder when once they could, that is not wealthier. That if the price of most essentials is rocketing that is not wealthier. And that if the Government uses bogus cost of living indices which ignore housing costs and council tax that is not a true measure of purchasing power.

Data released by the Office of National Statistics showed that household incomes fell last year in real terms, and have risen by only £2.25 a year on average since 2001. The reality is worse because these figures are based on the bogus CPI measure, which excludes housing  costs and council tax . In addition, a majority of the British population do not have savings which would allow them to survive for two months if they lost their jobs, and a large segment of the population lives on incomes well below the average wage, which is still below £30,000. A true recession will consequently hit millions of people very hard indeed.

How do we escape this mess?

The honest answer is there is no certain escape. Nor is a ‘soft’ economic landing likely. Circumstances are forcing more prudent lending behaviour onto private financial institutions, with substantial deposits being required before mortgages are granted, the feckless multipliers of six or seven times salary for mortgages vanishing, credit card limits being reduced, cards withdrawn and new card applications being refused. Unsecured personal loans are being subjected to the same type of scrutiny. The problem is that this is all happening in a rush which creates a tremendous shock to the economic system rather than a controlled decline of credit.

All this will probably cause a sharp contraction in the economy.  This creates a dilemma for the BoE. Its remit is to keep inflation close to 2% as measured by the Consumer Price Index (CPI). Inflation is significantly above that and showing every sign of rising. According to its remit, the Bank should be raising rates not lowering them. Yet the BoE has cut Bank Rate by three quarters of one percent already and is being urged universally by private business and many politicians to cut further and quickly. The likely outcome of such a policy would be our old friend stagflation. Indicatively, the growth in UK output was down to a miserly 0.4% in the first quarter of 2008.

The great problem is the dependence of housing to drive the economy. There is consequently no painless way out of our present predicament. If house prices are kept high by low levels of house building and continuing mass immigration an entire generation will find them selves stranded in a no man’s land where they cannot find good rented accommodation at a reasonable price.

Contrariwise, if there is a correction which brings housing within the reach of first-time buyers we shall have a massive problem of negative equity which will mean existing home owners cannot move and if their homes are re-possessed, being burdened with ongoing debts as their homes are sold for less than they owe. That is the bind governments over the past quarter century have got us into.

What can be done to make a safer future?

There needs to be a sea-change in the mentality of politicians. They need to recognise that government has a vital role in controlling the economy, not via the heavy hand of nationalisation or hideously complicated regulatory regimes, but by simple and effective measures such as restrictions on credit and the use of exotic financial instruments and the protection of strategic industries such as farming and energy supply.

Back to the future is the answer. We need to create a different moral climate. As little as 30 years ago, people still tended to look upon debt as something to be avoided. For the most part people saved up for things they wanted. Part of that caution was enforced because credit was nowhere as readily available as it is now although we were already into the age of the credit card. But much of the frugality was simply cultural; people had been brought up to feel debt was something loathsome and bankruptcy next door to theft. This was a Britain where the morally vital mechanism of shame still had its place.

The credit which was on offer almost always came with some strong strings attached. If you wanted a mortgage you had to save with a building society for quite some time to establish your credentials. When a mortgage was eventually granted, the amount you could borrow was restricted both absolutely (there was an upper ceiling of £13,000 in the 1970s) and by sensible multipliers of household income (commonly twice income and often the mortgage multiplier was applied only to the main wage earner’s pay). 100% mortgages or anything approaching them were not to be found. A deposit of 10% of the property’s price would have been the minimum required and in many cases more would have been asked. Bank loans required a similar establishment of creditworthiness over a decent period and credit card limits were modest. If anything was bought on hire purchase, a substantial deposit was required. The consequence of such a regime was that far fewer people got into serious financial trouble than today.

1        Here accordingly are a few examples of what might be done. Mortgages – the multiplier of salary used to calculate mortgages should be a maximum of three and a minimum deposit of ten per cent required. The re-mortgaging of owner-occupied property to release capital and buy-to-let mortgages should be outlawed.

2        Hire purchase – a minimum of 20% deposit with the monthly repayment no more than ten per cent of the monthly net pay (net pay to be that left after deduction tax, National Insurance and the repayment of any existing debts).

3        Personal loans other than mortgages – a maximum of 10% of net income.

There is also a need to tighten up checks on creditworthiness. Lenders have been incredibly lax about the information that prospective borrowers supply to them. That is a particular problem with credit card issuers who tend to accept whatever the lender says, but it is also a significant problem with mortgages with people allowed to self-certificate their earnings in some cases. The laxity has its roots in the belief by the lenders that they can reliably calculate the percentage of borrowers who are poor credit risks who will default and in the case of loans secured against property, that house prices will continue to rise rapidly, thus increasing the equity the borrower has in the property. The events of the past year have shown that lenders cannot reliably make calculations of defaulters nor rely on house price inflation to increase equity.

What now?

Is there a chance that the laissez-faire mentality of the elite will change and that common sense will prevail? Or will we stagger on in this ideological straightjacket until a true catastrophe strikes?

On the level of common humanity the hope must be that the crisis is contained reasonably quickly, although I think that unlikely. (I am writing this article in May 2008. By the time it is published the danger of a full blown depression may have been averted, although that is improbable because after more than eight months of increasingly desperate governmental pump priming around the developed world there is no sign that the credit crunch is lessening, let alone coming to an end. )

But there is danger in a rapid resolution for if it happens the underlying reasons for this economic trauma may not be addressed by those responsible for the operation of the economy and things will go on as before until the next crisis occurs. The credit crunch is simply the latest in a line of dangerous economic crises stretching back a century an a half which were brought about by the same fundamental problem, the abdication of government responsibility for the economy.

It isn’t a crisis of capitalism but a crisis of globalism

It isn’t a crisis of capitalism but a crisis of globalism

Robert Henderson

Contents

1. Turning a blind eye

2. What is capitalism?

3. Globalisation and the developed world

4. The suppression of dissent

5. The developing world

6. The loss of  national control

7. The undeveloping world

8. Supra-national  politics

9. Just another outbreak of an old  disease

10. Unemployment as a barometer of an economic system

11. Capitalism in a protected domestic economy

1. Turning a blind eye

Amongst the wailing and gnashing of teeth from all parts of the political mainstream over the ongoing  economic crisis  its prime cause goes unmentioned.   Free market capitalism, which has been accepted , whether enthusiastically or resignedly, by Western elites for the past quarter  of a century  as the only economic theory worthy of support, is being questioned.  Even some of its firmest adherents are questioning whether  there has been  too much freedom of individual  action in the economic sphere. Some mainstream commentators who write for resolutely “free market” supporting newspapers  like  the Daily Telegraph and Daily Mail, are even beginning to wonder if capitalism is in a crisis from which it may not recover:

http://www.dailymail.co.uk/news/article-2022993/Capitalism-crisis-80-years-ago-banking-collapse-devastated-Europe-triggering-war.html#ixzz1aUJrGGaG

and

http://www.telegraph.co.uk/finance/financialcrisis/8814560/If-capitalism-does-fail-the-alternative-is-far-far-worse.html

Those coming from the left are unsurprisingly joining in the “end of capitalism” rhetoric (http://www.marxist.com/world-capitalism-in-crisis-1.htm). What you will not find are many  if any  mainstream politicians and economic  commentators  addressing the real source of the crisis:  the cloying and uncritical embrace of the internationalist creed  which we call globalism by Western elites, especially those in Britain and the USA.

Before I turn to the ill  effects of globalism  the tricky  matter of defining capitalism needs to be addressed because  there is a case for saying that capitalism is a state of theoretical  purity which does not exist in the real world.

2. What is capitalism?

Capitalism is seriously difficult to define because it shares so much with economic systems which are not considered to be capitalist.  For example, if the state undertakes an  economic activity such as providing healthcare in an organisation such as the NHS or nationalises the railways and coalmining are they capitalism in action? After all they employ capital,  land and labour, the three  factors of production in classical economics and provide goods and services to the public just as a private business would do.

What do  state enterprises  lack which private business has? The entrepreneur? Well, most large companies are not run by entrepreneurs but corporate administrators.   The profit motive?  Perhaps, but what about state enterprises which consistently make profits for the taxpayer such as the Post Office in Britain while it had a monopoly?  Freedom of action?  Private enterprises are heavily constrained by law and state regulation in every developed economy and state organisations are often granted a remarkable operational freedom.   The risk of going bust if they do not perform? Any state enterprise can in principle be ended or privatised  while private companies when they are large enough  have a good chance of being rescued by taxpayers,  vide the banks in the present financial crisis.  An absence of private money?   State businesses frequently draw  all or much of  their income from  payments they receive from the general public in return for goods or services,  for example, nationalised  energy companies .  Moreover,  many  companies which are classified as private enterprise organisations draw all or much of their income from  taxpayer funded contracts. Then there are the not-for-profit organisations, especially the charities, which increasingly  act as sub-contracted arms of the state as they draw much of their income from the taxpayer  and the rest of their income from donations. Individual and corporate. How should  they be classified?  Part of capitalism? Part of the state? A separate class of economic actor altogether?  It could be any of the three options.

To all those blurrings  of the distinction between private enterprise and public  service must be added  the  macro-economic fact that  all developed economies have a massive part of their GDP in the hands of the state.  The mixed economy is a fact of all reputedly capitalistic economies.  Does that render the idea of capitalist society redundant?   In a sense it does. The broad  differences  in developed  (and increasingly the more advanced of the developing countries)  is in the degree to which state control and ownership is balanced against private enterprise.

There are of course qualitative  differences in the application of the law as it affects the economy and the nature of the control which is exercised over the economy by the state,  especially in areas such as the banking system and the ability of foreign companies to operate. For example,  while countries such as Britain and the USA  allow vast swathes of their economies to be purchased by foreign countries, China will often in practice only allow foreigners in on the basis of joint ventures with Chinese firms. (http://www.booz.com/media/uploads/Making_Partnerships_Work.pdf ) . Nonetheless, there is a general similarity in the economies in as much as all are a mixture of public and private and all permit some degree of government interference and direction of  the market.

Despite the difficulty of definition  the term capitalism is not without utility. There is clearly a difference between a company which acts on its own behalf  without state direction or assistance and a nationalised industry. Parts of mixed economies are capitalist if by that is meant private companies which  operate without  deriving any part of their revenue from the taxpayer,  have management free to act  within the general restraints  of the law  without  state direction  and  which operate on the principle that they stand or fall on  whether they can at least break even.  The companies which receive  taxpayers’ money, especially those which rely on the taxpayer for  only part of their income,  also  have much  of the aspect of a pure private enterprise business in that they will in practice dictate how things are done, the public body funding their work being essentially in the position of a customer who merely sets ends not means.  Capitalism is a spectrum of behaviours  rather than  a clear-cut behaviour.

It is important to understand that  free trade does not equal capitalism. Free trade is   simply the exchange of goods, services and capital between countries. It says  nothing about the circumstances in which these things  are created. These  can be anything from  a command economy to the economies in which free enterprise is most dominant.

3. Globalisation and the developed world

Globalism equals destabilisation.   Until  the financial crash of 2008 the globalists argued that ever increasing free trade generally and the internationalisation of financial markets in particular  increased  economic  and  international  stability by  spreading risk more widely  (which reduced the cost of credit and consequently increased economic activity ) and by that by making countries ever more interdependent  the likelihood of international conflict  was ameliorated.  In fact, both ideas were pipe dreams and the exact reverse  of what globalism actually creates.

There are two  central elements of globalism. The first  is the end (or at least considerable diminution) of protectionist practices. Domestic  economies in the developed world are stripped of  great swathes of their economies, including strategically important ones such as coal mining and steel making, by the removal of protectionist barriers such as quotas, embargoes and tariffs. This  results in either entirely foreign imports  from low-wage economies such as China driving out the necessarily higher priced goods made in the developed nations or businesses in the developed world throwing in the towel and off-shoring their production of goods and services to low-wage economies.    To that is added in much of the developed world the banning of state aid and intervention  by both  treaties  and the domestic laws and rules imposed by national governments in thrall to an uncritical belief in  laissez faire economics and small government.

Getting rid of protectionist barriers and privatising state owned industries  massively reduces opportunities  for employment for the native populations of the  developed countries.  This creates greater competition for jobs which reduces wages and other conditions of employment and   increases insecurity of employment.  In some instances,  as occurred with Britain in the 1980s,  the opening up the domestic markets  to imports results in the  most dramatic and socially damaging of economic traumas,  structural unemployment, which lays waste the primary sources of employment of  large areas , the effects of which carry down the generations.

The second central element of globalism, the free movement of peoples across borders, amplifies these consequences  of free trade  and adds other destabilising  effects.  Mass migration of labour inevitably  goes from lower-wage economies to higher wage economies because there is no incentive for those in higher paid economies to take a run-of-the-mill-job in a lower-paid economy. In a addition,  developed economies offer not only higher wages but also many non-monetary benefits such as those provided by a fully-fledged welfare state which are absent in developing economies.

Mass migration allows employers to radically cut wages in the higher-wage economies and greatly increases competition for most  jobs, especially those which require little training or skill.  The difference in cost of living between the immigrant’s country of origin (low)  and the developed country they go to (high)  are important. Immigrants, whether unskilled or skilled,  are willing to work in such jobs for mediocre pay and live in poor, cramped  accommodation because they know that they will be able to  save a few thousand pounds in a year or two . They can do this even if by  living honestly by paying tax. But  often they  will  be paid cash- in-hand (no deductions for tax) ,  and live in in a  squat (the taking over of someone’s house or flat without permission and living there rent free.   Many will work  while they are claiming unemployment benefits.   If they have saved four or five thousand after a year or two,  this  will be enough to buy a house or flat in their own country  where prices are a fraction of what  they are in a developed country.  (Give Britons the chance to save  the price of a house or flat in Britain by working for a couple of years in those conditions in a foreign country and you are likely to be trampled in the rush).

As more and more immigrants come to developed economies, the position of the native worker worsens. This is  because  not only  are there are more people chasing jobs, but also because native employers increasing rely on gang masters and other recruiters  who are foreign and only  want to  employ  foreigners (frequently foreigners from their own country:  in the following  case it was a Bulgarian employing Bulgarians http://www.express.co.uk/posts/view/277363/Workers-are-fired-for-being-British). Sometimes employers deliberately exclude  native workers by insisting that those employed speak a foreign  language in the workplace, for example,  http://www.dailymail.co.uk/news/article-1257784/Biggest-Asda-meat-supplier-excludes-English-speakers-instructions-given-Polish.html ).

In Britain many employers excuse their recruitment of foreign workers  on the grounds that they either cannot get native workers to apply or that  those who do apply are unqualified for the job.  As the vast majority of the British jobs being taken are low or non-skilled  and there are now millions of native  Britons desperately seeking work of any kind, this must be an excuse in most instances  (http://www.metro.co.uk/news/878903-500-queue-for-just-20-sales-assistant-jobs-at-new-poundland-store#ixzz1b85oCrLr)

Even in the case of skilled workers there is discordance between the claim of lack of skilled applicants and the numbers of skilled British workers unable to find jobs. For example, there are  large numbers of doctors and nurses trained in Britain who cannot find posts in Britain,  while at the same time the NHS is recruiting heavily from abroad. (http://englandcalling.wordpress.com/2011/09/09/no-need-to-speaka-da-english-in-the-nhs/).  More generally,   new British graduates are finding great difficulty in getting both appropriate jobs and, increasingly, any job at all (http://www.telegraph.co.uk/education/educationnews/8283862/Graduate-unemployment-hits-15-year-high.html).

All of that suggests that British employers are favouring foreigners for reasons other than they give. The most plausible causes are lower pay and inferior conditions being accepted by immigrants, the greater ease with which immigrants can be sacked , especially those who are here illegally,  and the possibility of bribes being paid, especially by foreign agencies, gangmasters using foreign labour and people traffickers,  to those recruiting for British employers to persuade them to choose immigrants over native workers.    An example would be where a public service employer uses a foreign agency to recruit abroad.  The agency will receive a hefty fee from the public service employer for each foreigner recruited and  that fee will be  split between the agency and  a corrupt recruiter in the UK.   There is also a natural disincentive for native workers to seek work where they would be in the ethnic minority in their own land, for example, if you are English imagine working a factory where the common language is Polish or Hindi even if it is not a requirement of the job that the language is spoken.

These various  practices mean large swathes of employment become effectively closed to the native population. The extent of the problem in Britain can be seen from one stark statistic: out of two million new jobs created under 13 years of the last  Labour Government 1.8 million went to immigrants (http://www.dailymail.co.uk/news/article-1325013/Migrants-took-9-10-jobs-created-Labour.html)

The removal of protection for the domestic market, off-shoring and mass immigration has meant that material inequality has grown considerably in the developed economies  over the past quarter of a century as the wages of those competing with immigrants has fallen and unemployment has risen, including an army of long term unemployed.   The countries showing the greatest growth between the haves and the have nots  have been the USA and Britain, arguably the two countries most committed to globalism. (http://www.guardian.co.uk/world/2011/sep/18/bronx-manhattan-us-wealth-divide).

But there is much more to globalisation than the creation of material inequality. Mass immigration does not just create competition for jobs. It means there are more people seeking housing, healthcare, benefits and  education .   This further increases insecurity and resentment amongst the native population, especially amongst the poor because  they  are the ones most reliant on the welfare state  and consequently  are the people most likely to be in direct completion with the immigrants.

More generally, there is the natural resistance to large numbers of foreigners  settling in an area. Any  sizeable  influx of immigrants is never evenly spread. Immigrants in large numbers congregate  in self-created ghettos which radically changes the nature of the area they settle in. This  arouses resentment amongst the native population, most fiercely  and poignantly by those directly affected, but as immigrant numbers grow massively, increasingly  amongst the native population generally,  regardless of whether people live in areas of heavy immigration.   The concern is not primarily that the immigrants provide completion for jobs, houses and social services , although those are important triggers of resentment, but anger at territory being  effectively conquered by  immigrants (http://englandcalling.wordpress.com/2011/02/22/part-of-england-has-been-invaded/)

4. The suppression of dissent

Those consequences  would be enough to condemn globalism as a political creed , but there is much more to be set in the debit column of its balance sheet.

Because native populations in the  richer countries  are increasingly disadvantaged and angered at the effects of  immigration, the elites who have permitted it and are committed to globalism have to control the resentment and anger. Politicians  do this in various ways. They use  their power to prevent any honest  opposition to  mass immigration and its consequences by  passing laws which criminalise  the native population if they express  dissent to the policy. They create other  laws which in practice privilege immigrants, for example,  the British Race Relations Amendment Act  2000 which forces all public bodies in the UK to prove they are not discriminating against racial and ethnic minorities. They  use their ready access to the mass media to incessantly  push the “multiculturalism is good” message  and  force it  in school curriculums – in Britain there is barely a subject untouched by its taint, even those subjects such as physics, chemistry and maths which you might imagine would be immune can be taught from this ethnic perspective or that ethnic perspective (Islamic maths anyone?)

Companies which rely on public contracts and charities have to play by the same multicultural rules as public service organisations  and large public companies whether  or not r they are reliant on public contracts in practice do so voluntarily.  As an overarching deterrent, all employers are liable to be taken to Employment Tribunals if someone claims racial discrimination relating to dismissal, unequal treatment or the failure to get a job and risk unlimited awards against them if a complaint against the employer is upheld.

The  multicultural message and the intimidation of dissenting views is religiously supported  and underpinned  by the British  mass media , the members of  which  all publicly subscribe to the idea that racial discrimination (by which they mean any preference for any racial or ethnic group not approved of by the politically correct) is the ultimate evil  and as a consequence are only too willing to conduct a hate campaign against anyone at whom the cry “racist” is directed and ensure that anyone with a dissenting voice is kept from public view.

The consequence of this wholesale  enforcement of the multicultural dogma is that anyone in Britain who expresses  an opinion which suggests that mass immigration and its consequences are less than the quickest path to social Nirvana runs the risk of penalties which range from losing their job (especially if the person works in the public sector) to being imprisoned  for inciting racial hatred.

As for the economic aspects of globalism, Western political elites  and their allies in the media and other positions of power and influence have overwhelmingly  bought into the idea of free trade, at least to the extent that they have been willing to agree to greatly reduced protectionism. Those who would vigorously oppose the idea of out-of-control  laissez faire economics at home and abroad have been  almost entirely censored out of the public picture.  On the odd occasions when some brave soul breaks the censorship and puts forward in public complaints about mass immigration reducing wages or taking jobs and scarce housing or the export of jobs to the developing world ,  these are squashed by the media proponents of globalism with mantras such as  “It’s inevitable because we live in a  global world” ; “It’s market forces”;  “We have to compete globally”.

5. The loss of  national control

On top of all this is piled two  things, the loss of control  of national governments over finance and the signing up of nation states to treaties which emasculate democracy by granting powers to supra-national bodies that should rightly belong to individual states.  The  most striking example of this is the EU, where the nations of the European Economic Area  (over 30  of them) are bound to the so-called four freedoms;  the free movement of goods, services, finance and  people.

The failure to control the banks and their ilk is  a direct consequence of globalism.  The political elites in the developed world have been  driven to not interfere  with the major players in finance by ideology,  self-interest (think of all the cosy post-politics sinecures  in private business  senior politicians acquire) and  fear  (they are terrified that if the banks are not pandered to economic catastrophe will follow). To those bars to  sane financial policies can be added  the interference of supranational  bodies  such as the EU. The existence of such bodies has meant  that even if national governments  had wished to behave responsibly by restraining the bankers’ excesses, they could not have done so because it would have been judged to be anti-competitive by a supra-national body such as the EU competition Commission.

The upshot of this development was frighteningly reckless finance industry business models based on selling mortgages to those who could not possible afford to service them, the development of exotic derivatives such as Collateralised Debt Obligations and Credit Default Swaps and the relentless gearing up of their debt to deposits ratio. This last practice resulted in even supposedly  staid financial institutions such as British building societies getting  into serious trouble  because they became dependent on constant and massive recourse to short term wholesale borrowing , something which froze once the financial panic of began in earnest in 2008.

If banking had remained primarily a national matter, as it was until the late 1980s before the sudden explosion of computers and the embrace of laissez faire economics ,  the damage caused would have been minor compared to what has occurred  even if banks had been allowed to engage in the unsafe practices described in the previous paragraph.  There would have been both far less scope for credit expansion and,  where bank  failures  occurred, they would have almost certainly happened sooner than they did under a globalised system because there would be far fewer  places for a bank in trouble to go to try to borrow to put off the evil day of insolvency. Most  importantly, the  national  financial institutions would have been smaller  and  less able to cause mortal damage to the national economy and would not have had the potential to undermine the international financial system.  In addition, if banking is kept within national boundaries it can be much more readily supervised. Once  it expands beyond a national single jurisdiction, as it does with the EU,  meaningful government supervision and control becomes utterly  impossible.

6. The developing world

Those are the ills of globalisation from the standpoint of the developed world.  But the developing world and the remnants of undeveloped and still undeveloping world are not left unscathed by globalisation.  The developing world experiences an aggregate increase in wealth as it takes manufacturing and service industries from the developed world and improves its infrastructure. But these improvements come at great human cost.  Traditional ways of living are disrupted. Vast numbers flood from the countryside to the towns where they live and, if they are lucky, work in miserable conditions. (http://www.telegraph.co.uk/news/worldnews/asia/china/8818059/100-million-Chinese-farmers-to-move-to-city-by-end-of-decade.html)

Many  find their material conditions  (but not necessarily their psychological state)  improve, but far more are actively disadvantaged by the changes.  If they remain outside the cities people find their  areas being  denuded of many of the most able and vigorous people who leave for the cities; their land being taken with little or no compensation  for infrastructure projects such as dams, railways and factories and their way of life becoming less and less sustainable.  Those who go to the cities for work find their lives are worse than they were before in terms of the conditions they have to endure and subject to great job insecurity . Even in the more developed of the developing Asian countries, where most of the world’s population now lives, there is  a great chasm between the  haves and the have-nots.

Although offshoring production and opening up their markets to  imports from low-wage economies are  disruptive for the developed world and  potentially dangerous  because it puts  them to an increasing extent in the hands of foreign powers , it also  bound the likes of China and India into a dependent embrace.  As the economies of the developing nations  grow they will increase their domestic demand and the capacity and willingness  to satisfy it which  will make them less dependent  on international markets. But that is a fair way in the future.  At present the developing world  is reliant to a very heavy extent on exporting to the developed world.

Countries such as China are also massive  holders of sovereign debt of Western countries, especially of the USA. These  two things mean that the developing economies  are affected by the present depression (let us give it its proper name)  in the developed world,   which is reducing demand for the products of the developing world and,   in the case of countries with large sovereign debt holdings, at risk of losing vast amounts of money.   It is also by no means clear that the financial systems of the developing nations are sound, even if they have not suffered from the same ills as the developed world’s financial  sector.  For example, China is constantly having to patch up bankrupt [projects and organisations (http://www.telegraph.co.uk/finance/china-business/8821094/Chinas-debt-spree-returns-to-haunt.html).

7. The undeveloping world

The part of the world which is not seriously  industrialising also suffers from the destruction of traditional ways of life with nothing adequate replacing them.   Again there has been a flight from the countryside to towns and cities, although in this instance it has not resulted in large-scale  industrial or even substantial  commercial development.   The only winners are those who have tapped into  the funds controlled by the elite who dispense the vast amounts of foreign Aid and the income from foreign companies for mineral rights  to those they favour, whether that be through the award of government jobs or  through straightforward corruption.

Many have been displaced by the demands of foreign countries, especially those extracting raw materials.  Countries have abandoned their traditional agriculture and turned to farming to produce food and flowers for the developed world.  A growing practice is for countries in the developing world, especially China, to buy or lease  large amounts of land in undeveloped countries to produce food for the country which has purchased the land.  It is a kind of  imperialism,  but imperialism without any sense of moral obligation to the ruled.

All of these practices mean that much of the undeveloped world, primarily black Africa, live their lives in conditions which range from abject poverty  to perpetual civil war.  Although I would never pretend that living under colonial rule is unreservedly palatable,  it can bring order and  where the colonial power develops a sense of moral obligation to those it rules, as happened with British officialdom in the final century of the Empire,  it can prevent  serious abuses.   What most of these countries currently have is the worst of all worlds,  deeply corrupt native elites  who sell their countries to the highest bidder, whether that selling being in the guise of gaining aid or commerce, and foreigners exploiting their people and land. There is no check  on abuse.

8. Supra-national  politics

There is a special subset of internationalism, the advanced supra-national body  comprised of nation states which has the nature of a federal government even if it does not have that formal structure.      The EU is the only organisation  which comes close to meeting  that description at present ,but it provides a warning of how such groupings can display the ill-effects of globalism together with some novel features of their  own.

Member states  of the EU have to allow unrestricted  migration within the EU (to be pedantic, within the European Economic Area which includes the likes of Norway and Switzerland as well as the EU) and accept the loss of other great swathes of sovereignty  ranging from  the economic (competition, the making of trade treaties) to the social  (the conditions of work, health and safety).

Most dramatically for the world in general,  17 of the 27 EU states have signed themselves up to the Euro. This  was a criminally reckless enterprise because it married massively disparate economies such as the German and Greek without creating a central executive with the powers of a nation state.  This meant that the controlling and guiding body for the Euro, the European Central Bank, was unable to do  such essential things for a supra-national currency as determine tax regimes throughout the Euro area and move money from the richer to the poorer Euro members .   These errors were compounded by  the failure to implement what  powers existed to impose financial discipline on the Euro members such as  the restriction on the size of  member states budget deficit.  Unsurprisingly,  the Euro eventually ran up against reality and for the past eighteen months the currency’s situation  has looked ever more dire as Greece, then Portugal, Spain and Italy looked candidates for a default as they found it more and more expensive to borrow  on the international markets to cover their budget deficits  and service their national debts, something exacerbated as their  tax bases shrunk during the depression .   In October 2011 the poison looks as though it might even encompass France and Germany.

The ill consequences of the formation of the Euro stretch  far beyond its members.  The constant delay in coming to a conclusion as to what should be done to deal with the Euro crisis, whether that be the wholesale or partial break-up of the Euro or a  decision for the Eurozone to go for full fiscal integration including massive movements of money from the rich members to the poor (the only thing which might rescue the Euro), has created uncertainly throughout  the world and has  significantly worsened an already dire world economic situation.

The Euro crisis has  also sucked in countries from outside the Eurozone to help fund the vast sums needed to bail out the Republic of Ireland and Greece.  This affects the  non-Euro members within the EU and those  from outside the EU who are liable to provide IMF loans.  Countries such as the UK have had to pay  both towards the EU stabilisation fund and the IMF loans.

The lessons from the EU (so far) are that far are that such supra-national bodies amplify the general problems of globalism, especially the loss of democratic control, and add the joker of grand  follies such as the Euro which have massive effects beyond  the supra-national body.

9. Just another outbreak of an old  disease

Globalisation should not be seen as a completely new phenomenon,  although its modern extent and scale  is novel, not least because of the ceaseless march of digital technology and the encouragement, or at least toleration, by Western elites of mass movements of people from the poor to the rich world .   From an historical perspective it is simply the latest example of  the laissez faire  economic ideology capturing  elites and becoming the dominant ideology.

Laissez faire economics has its roots in the late 18th Century when Adam Smith made himself its John the Baptist with his Wealth of Nations (The Invisible Hand playing the role of God’s avatar).   In comparison with those who became his disciples in the  following century,  Smith  was responsible and restrained,  acknowledging that there  were things such as the provision of roads which only the state could undertake and economic areas such as armaments which should as a matter of national prudence be kept in public hands.   His followers such as Richard Cobden, John Bright and David Ricardo In the 19th century knew no such restraint and wanted little if any state interference in the economy at home or abroad.

The consequence was that Britain was tied to the idea of free trade  from the 1840s until the First World War intervened in 1914. During that time the rest of the then advanced world  practised protectionism while Britain outside of the Empire did not.  This resulted in Britain’s dominant economic position in the world in 1850 deteriorating  badly by 1914, with the GDP  of the USA and Germany then  exceeding that of Britain. The years 1840-1914 were a period of great economic  instability in Britain with frequent booms and bust, frequent bubbles, bank failures  and great damage being done  to Britain’s self-sufficiency, most particularly in food.  It was also a period when British industry became deficient in many of the new major industries such as chemicals, despite having been leaders in the early days of those industries.   This was  the outcome of an economy which was allowed to evolve without any state guidance or initiative.  Come  war in 1914 and Britain found itself  dangerously dependent on  imports of not only food  but other vital materials and products, a dependency made  all the more problematic with the development by Germany of efficient submarines to prey upon boats bring the imports to Britain.

Nonetheless, the period  1850-1914 saw a very considerable increase in global transactions and movements of peoples.  This was a consequence of the  development of the railways , the steamship, the Telegraph  and vastly improved roads and the existence of the  various European  empires  (including the Russian) which allowed much free movement of people and goods within the bounds of each empire.

But although this was a form of globalism,  its pernicious social and economic effects were greatly  ameliorated  (at least for the developed world)  by the fact that so much of the world was controlled by the European empires.  The mass movement of peoples occurred  within the colonial possessions not between the colonial possessions and the colonial power’s homeland.   Politics was still contained within the nation state.  The developed countries, with the exception of Britain,   still thought  their national advantage was to be gained by protectionist measures.  Even Britain did not completely buy into the idea of free trade  because legal preference was given to trade within the Empire

A World war and the Great Depression  killed off the laissez faire creed as the elite British and British imperial ideology  for 50 years.  The European Empires were dismembered  and the Soviet and Chinese communist blocs created .   Protectionism ruled (even the European Economic Community, as the EU was then,  did not  greatly change the picture  because it was small to begin with and the radical measures such as the single market  were for the future).

After the second World War it was, for  the developed world,  an era of great stability.   There was no war in Europe worthy of the name, the nearest approaches to it were  several uprisings against Communist rule;  such serious wars as the West became involved in – most notably Korea and Vietnam – were either wars of  choice not necessity  or native uprisings at the fag-end of European colonialism like the British fight against communists in Malaya and  the French retreat  from Indo-China and Algeria.

In this protectionist world  the economies of the United States and Europe  did not shrink or stagnate. Just as the economies of those which practised protectionism in the nineteenth century  grew,  so did  those of the developed world grow between 1945 and 1980. It is a myth that only laissez faire economic policies produce strong growth.  Britain was an exceptionally  interesting case because the Attlee government of 1945-51 undertook arguably the most radical programme of nationalisation ever seen outside of the Communist world and British governments of all formal colours followed what were essentially social democratic policies domestically until the election of Thatcher in 1979

Most tellingly, after 1945 there was no general serious economic crisis until the early seventies when  two extraordinary events occurred. In 1971  the USA unilaterally collapsed the Bretton Woods system which  imposed discipline on the world’s freely exchangeable currencies by   pegging the dollar to the gold standard and the other currencies to the dollar at fixed prices. This  introduced the destabilising volatility of floating exchange rates into the world’s economic system. In  1973 the  oil producers’ cartel OPEC  doubled  oil prices. But even these  considerable shocks  did not knock the world economy over ; they merely made  it stagger.  It took the advent of Thatcher and the American neocons  to drive the economies of the developed world into a world of ever increasing make-believe where their politicians kept on saying how things were getting economically better, that countries such as Britain could become post-industrial and live off service industries alone.  The insanity of that mentality can be starkly seen now as unemployment has remained stubbornly high  in the developed world, something exacerbated by the present depression but not  created by it.

10. Unemployment as a barometer of an economic system

Unemployment is arguably the prime barometer of the social utility of an economic system. It was very low in Britain until the early seventies running along at 2-3%  (http://www.parliament.uk/documents/commons/lib/research/rp99/rp99-111.pdf). Even at the end of the 1970s its was low compared with what it has been since globalisation took off. In 1979 the Independent Labour Organisation (ILO) count  of those seeking work  without necessarily being signed on for unemployment pay  was 1,528,000 and the figure for those signed on for unemployment pay was 1,064,000. (http://www.york.ac.uk/res/ukhr/ukhr0405/tables&figures/04%20004.pdf)

In Britain in 2011 the official ILO  survey figure in August was 2,566,000 (8.1% of all economically active).  Those actually signing on for unemployment benefit totalled 1,597,200. (http://www.parliament.uk/topics/Unemployment.htm).  However, that is not the true figure because there  were 2.58 million people claiming long-term sickness benefit  (Incapacity Benefit and its 2008 successor Employment Support allowance)   in February 2011.  (Perhaps even more staggering there were 5.8 million working age benefit claimants).  (http://research.dwp.gov.uk/asd/index.php?page=statistical_summaries).

In 1979 the long-term sick figure stood at  720,000  (http://www.dailymail.co.uk/news/article-1042141/60-long-term-benefits-claimants-work-admits-minister.html). It stretches credulity beyond breaking point that there are there are some 1.8 million more people of working age who are too ill to work indefinitely in 2011 than 1979.  The reality is that much of  the 2.58 million will be disguised unemployment.

During the 1980s the Thatcher Governments adopted a policy of moving people off the ever growing unemployment register (those claiming unemployment benefit peaked at over 3 million in 1986) and onto the long-term sick count, where they often remained more or less permanently because much of the unemployment was structural (a consequence of deliberately destroying much of Britain’s extractive and manufacturing industry)  and the unemployed simply had no jobs to go to.  The policy was  carried on by  the Tory and Labour Governments which followed Thatcher.

How much of the 2.58 million now on the long-term sick register are really just unemployed?  As it is only those of working age (16-65) who are part of the statistics, it is difficult to see why the real figure would not be similar to that of 1979.  The population has grown since 1979 by a few million so let us say that 1 million are the  genuinely long-term sick.  Add the other 1.58 million to the ILO figure for 2011 and the unemployed rises to over 4 million. To that figure can be added  those who now stay on at school until they are 18 (in 1979 far fewer did) and the vast increase of university students (from around 13% in 1980 http://www.le.ac.uk/economics/to20/greenaway03.pdf to around 40%  in 2011 http://www.telegraph.co.uk/news/uknews/1584495/Labour-sticks-to-50-per-cent-university-target.html). It is difficult to give exact figures here but it would probably push the true figure of unemployed in the UK in 2011 up to around the 5 million mark.

As an example of how globalisation brings instability, both economic and social,  Britain is probably the prime example among developed nations.  All it has brought to Britain is seemingly permanent mass unemployment.

It would be argued by the Thatcherites and their ilk that the high level of employment in the post-war period was due to overmanning, especially in the nationalised industries.   That has some truth in it, although the extent of the overmanning is exaggerated by modern neo-liberals.  It is also a question of what service is given. Much of the supposed overmanning of the nationalised industries was really a matter of giving a superior service to that which is given by the nationalised industries after they were privatised  and manning levels drastically reduced.

But even if it is allowed that there was substantial overmanning  in the post-war period that does not necessarily mean it was not of social and economic benefit. What needs to be considered is the overall picture of society where such overmanning exists.  It ensures that  most people in a society are employed. That  creates social stability by giving people a routine in their lives, by ensuring that people are bound into society , by giving them a sense of purpose and most importantly a feeling of security so they can plan for the future, something particularly important when it comes to starting and raising a family.

That was essentially the situation in the period 1945-1979. People felt secure in their jobs, housing was cheap and plentiful, not least because the massive council housing programme of the  1950s and 1960s, the NHS had been created  and  perhaps most importantly a single adult wage was enough to support a family.

Compare that with what we have today.  People in Britain are increasingly insecure. If they have jobs they fear that they will lose them. If they keep their jobs there are pay freezes or wage reductions. The unemployed seek desperately for jobs – any jobs – but find they are competing with dozens or even hundreds of people for unskilled work. It is difficult in 2011  to support a family on a single adult average wage. Housing,  both bought and privately rented , has become obscenely  expensive  – If the average house price in 2011 was  the same in real terms as the average house price in 1955 it would be less than £40,000 (http://livinginamadhouse.wordpress.com/2010/10/24/the-vicious-poison-in-the-british-economy-is-the-outlandish-cost-of-housing/).  It is a recipe for rabid insecurity and the fuel for renewed class hatred and racial and  ethnic strife.

The dirtiest secret of all in this matter of overmanning under the social democratic regime of the post-war years  or the supposedly more efficient workings of laissez faire since 1980, is that the British government has developed a universal subsidy for employers. It is tax credits which are paid to people in work on low pay (the definition of low pay has been somewhat elastic being up to £60,000 until recently but it is still at £41,000 -  http://www.hmrc.gov.uk/taxcredits/start/who-qualifies/what-are-taxcredits.htm#8).   Hence, the taxpayer is in effect  paying employers to take on labour, rather than, as used to be the case, the taxpayer paying the employee by funding more generously manned  nationalised industries than were strictly required.

The true cost of unemployment  is rarely calculated.  For example, where structural unemployment occurs, as with the coal mining closures in Britain, large numbers of people are  lost to work for many years, not infrequently for life. The cost to the taxpayer in maintaining long-term unemployment is immense, as is the psychological cost to the unemployed individuals and their families.  Even where those made redundant get new jobs they are rarely as well paid as those which have gone. Often precious skills are lost to the country when an engineering company closes or offshores its production. These factors  are  rarely if ever built into cost-benefit analysis of the loss of employment.  British government contracts are a good example. They are frequently awarded simply on the basis of who offers the lowest price. A recent example of this is the awarding of a multi-billion pound contract to Siemens rather than the British-based Bombardier for trains for the Thames Link.  (http://www.bbc.co.uk/news/uk-england-derbyshire-14019992).  If skilled people cannot find appropriate work in Britain, they go abroad.

There is also a general economic benefit from having people in jobs, drawing regular wages and feeling secure: it helps maintain aggregate demand because people  both more confident about spending and , because the money and the spending appetite is spread throughout the population the rate of circulation of money is kept high which stimulates economic activity.

11. Capitalism in a protected domestic economy

If it is not  capitalism but free trade  and the mass movement of people across national borders which causes instability what is the solution?  WE could remove those practices and societies, but then what?

If  capitalism was  allowed free rein in the domestic economy  but free trade and mass immigration were not, would that be the ideal regime?   Capitalism in the domestic market  would certainly have the capacity for damage if there was no state support for the poor, the sick, the disabled  and the old in the form of ensuring that there was sufficient  housing,  healthcare , educational opportunity, pensions for the old  and support in times of unemployment and  illness within the reach of the poor.

There are also things which should remain in public hand as a matter of  policy either because it would dangerous for them to be  in private hands  (the armed forces, police, justice) or because they can only operate  efficiently as a monopoly  (the post office) or are a natural monopoly (roads, railways).

Perhaps most contentiously there is a strong case for nationalising banks,  both because of their potential  to wreak havoc in an economy and because their nationalisation would return control over the money supply, as far as it can ever be controlled  to national governments.  Nationalised banks should also make a handsome profit to for the taxpayer because it would  next to impossible not to regularly make large profits  if they  eschewed the reckless practices of the past generation. (There would of course have to be very strong  constitutional bars to politicians debauching the currency.)

But even if banks were not nationalised, they would be much easier to control within an economy operating within national borders  with national politicians committed to the idea of nations not internationalism. For example, national governments could ban any financial instrument which created confusion between lender and borrower, creditor and debtor.  They could cap the amount of sovereign debt held by a bank.  They could insist upon minimum deposits and maximum multipliers of wages for mortgages.  Restrictions on lending to foreign borrowers could be introduced.

The existing banks are of course operating internationally and it might be thought that all they would have to do is  shift their entire operations out of any national territory which tried to control them.   There are two good reasons why they would not want to do that. First, banks may be international in their trading, but often they still have much or a majority of their  business in a particular country, normally the country of their origin. That would make it difficult to shift their operations because they would have to be willing to  kiss goodbye to a large part of their business if the  national government of a country where they had much of their business was   serious about controlling them.  Any national government could simply say, all right you won’t play ball with us, we shall not let you trade in this country.. The second reason is the fact that banks rely on governments underwriting them to a large degree both in terms of guaranteeing deposits and by  Central Banks acting as lenders of the last resort.  There are not that many countries which can safely offer such guarantees.  That would make the threat of leaving somewhat hollow.

Provided that all  things are done – welfare, nationalisation, protection, control of the banks  -   allowing free enterprise to generally organise most  things economically within the nation state is the best way of proceeding.  If a general  protection for strategically important parts of the economy such as farming and energy production are put in place, a judicious use of quotas  for a wide range of necessary goods  implemented  (says, 75% of all necessary goods to be home produced)  and mass immigration is outlawed,  there is little harm  that capitalism (or private enterprise if you prefer) can do .On the credit side of the ledger, there is  undoubted great utility in  having a self-organising  part of the economic system which satisfies human ambition and efficiently delivers goods and services where the ability to pay is either not an issue or the good or service is not a necessity.  This  would cover  the large majority of economic activities,  because much of the welfare provision would come in the form of money to the claimant and this would then be spent to purchase food, clothes and so on provided by private enterprise.  There is also an argument that it is healthy for a society to have large numbers of people who are capable of taking charge, making their own decisions. One of the problems the countries of the Soviet bloc had after the USSR split and  the communism fell was the lack of people who were capable of taking charge, of creating new businesses or even doing jobs which required initiative.

The alternative to capitalism is states running command economies.  These do not have a happy record. Much better to allow a properly  controlled capitalism to do most of the job of meeting most human needs.

Will the elites of  developed world wake up and see that globalism is the problem? Not from choice because they have nailed their colours to the internationalist banner. But fear of what is happening  in the world they have created – growing class feeling, racial  and ethnic strife and increasing material deprivation and insecurity  - may drive them to bite the bullet. Let us hope that happens before it is too late.

See also

http://livinginamadhouse.wordpress.com/2011/05/23/the-wages-of-globalism/

http://livinginamadhouse.wordpress.com/2011/01/10/a-sane-alternative-to-globalism/

http://livinginamadhouse.wordpress.com/2011/03/13/market-economies-and-the-illusion-of-choice/

http://livinginamadhouse.wordpress.com/2011/03/03/does-the-welfare-state-corrupt/

http://livinginamadhouse.wordpress.com/2011/02/14/public-service-and-private-enterprise-what-do-we-mean-by-efficiency/

http://livinginamadhouse.wordpress.com/2011/09/21/another-day-another-lethal-financial-derivative/

http://livinginamadhouse.wordpress.com/2011/01/30/the-consequences-of-an-end-to-mass-immigration/

http://livinginamadhouse.wordpress.com/2010/12/27/does-free-trade-deliver-greater-prosperity-the-lessons-of-economic-history/

Another day another lethal financial derivative

Collateralised Debt Obligation (CDOs) and Credit Default Swap (CDS) are old hat. Say hello to the Exchange Traded Fund (ETF).

The EFT  is a fund which supposedly concentrates on a discrete area of economic activity such as a the trading of a commodity, a  particular  area of business, for example, banks, or a  particular country’s stock exchange index, for example, the FT 100.  Nothing wrong with that you might say.  Let me introduce you to its cousin the Synthetic ETF (SEFT). Suppose it is ostensibly an ETF concentrating on Japan ,  but contains  no Japanese shares. Instead it invests in  shares in Chile. That is an SEFT.

This sounds like an arrangement more suited to Alice in Wonderland than rational investment. The natural response would be to ask why on earth would  anyone set up such a fantastic investment vehicle? Well, it could entice the unwary and inexperienced investor into investing in funds they imagined were much sounder than they actually are. It also allows those holding unattractive hard-to-sell shares  to bundle them up in an SEFT and so disguised  shift them off the books.

The EFT fun does not end there. Holdings  in ETFs are  being shorted in massive numbers .  Short selling is the borrowing of shares for a fee for a period, say six months, selling them immediately  in the hope that their price will fall by the end of the borrowing period at which point they can be bought for less than they were sold for,  returned to the person or organisation from which the shares were borrowed with the difference between the selling and buying price representing the profit for those shorting. If the price rises they make a loss not a profit.  Just describing it makes it sound like a spiv’s delight. In fact it is worse than that because a share may be shorted by any number of people,  so at any one time short positions exceeding the total shares in existence  for a particular business or investment fund.  This means multiple people have a claim to the same share.  This could produce a situation where something akin to a bank to a run on a bank is possible.

The SEFT may be a new boy on the dodgy investment block, but  the CDO and CDS have not become extinct.  CDOs began in a quiet way  with those holding debt  bundling together a  few mortgages  or other debts such as those arising from credit cards, calling them a CDO and selling them to a third party.  Nothing too alarming at first, but the business rapidly ballooned so that vast amounts of debt of greatly varying quality were  bundled together  and traded freely so that the process became ever more complex and opaque the further the debt moved from the initial lender and borrower and the individual CDOs were divided into various layers  (tranches) of risk so that if the cash from the assets covered by a CDO were insufficient to pay all the investors those in the higher risk tranches suffered losses before those i9n the lower rick tranches.  Much more dangerous.

Much more dangerous became an open invitation to disaster when the rating agencies such as Moody’s and Standard and Poor  gave CDOs sparkling credit ratings, quite often AAA marks, almost regardless of the quality of the debt they contained.   Both the CDO issuers and the rating agencies had a vested interest in keeping the CDO balls in the air. The issuer of the CDO, typically an investment bank, earns a commission at time of issue and earns management fees during the life of the CDO;  credit rating agencies  receives fees from CDO issuers  for their service in providing a rating for  CDOs.

To put the cherry on the investment disaster, along came the CDS. This was in its original form simply an insurance against the repayment of the debt held by owners of a CDO not being met.  No harm so far. Then came Naked  Credit Default Swaps  (NCDS)  where the thing insured by the CDS is not held by the owner of the thing insured. This gives the  holder of the NCDS incentive to cause the default of that which is insured by the NCDS because they do not own the thing which is insured but can still get the insurance if, for example, a mortgage fails to be paid.   It is akin to the situation of someone being able to insure a house they did not own and then burning it down and being able to collect the insurance.

The fact that banks and their ilk are still behaving in this reckless fashion shows that either politicians have learnt nothing since the  economic crisis began or are too scared of  or too complicit with bankers to put a stop to their criminally reckless behaviour.

 

Laws are for “little people” – the Mandelson mortgage fraud cover-up

The present furore should have disabused those of the public who still believed the law and rules such as codes of conduct apply to the powerful as they do to the ordinary person. At present we are seeing how widespread-hacking by the media and the bribing of police by the media to gain information could go on uninterrupted by politicians doing anything about and the police failing to prosecute either their own people or the media people paying the bribes. (The most telling fact about the payment of police bribes is that no policeman or woman has come forward to say they reported such an attempt to their superiors).

The story below is another graphic example of how elites can get away with murder. It was published in the magazine The Individual in July 1999 under the title of ‘Elite Mischief’  (http://individualist.org.uk/pdf/1999julindiv_em.pdf.) It deals with Peter Mandelson’s gaining of a mortgage by making a false declaration to his mortgage provider and his taking of a £373,000 loan from a fellow minister in  the Blair Government Geoffrey Robinson, a loan he failed to publicly declare as required by the Commons’ own rules.

The story exemplifies the way in those with power, wealth and influence manage to live outside the rules and laws which supposedly bind them. For elites laws and rules are for the “little people”, not them.  In this instance politicians in the Government, the Labour Party and the Commons’ committee with responsible for disciplining MPs all failed to wholeheartedly condemn Mandelson, investigate his misbehaviour properly (especially the mortgage fraud) or impose appropriate penalties. The civil servant responsible for investigating complaints about MPs, the Parliamentary Ombudsman, refused to press the most damaging parts of the complaints (the mortgage fraud and the failure to declare the Robinson loan) and the police refused to open an investigation.  To close the circle, the media also failed to press the matter of criminal charges and tellingly I could get none of the mainstream media to take up the story of the police’s refusal to investigate.

The outcome of the protection of Mandelson is that went on to twice return to the Cabinet, received a peerage and got an EU sinecure as one of Britain’s Brussels commissioners. He is now a wealthy man, having benefited from the capital gains on the property he obtained through the mortgage fraud and Robinson’s loan, the considerable salaries drawn from his return to a Cabinet position under Blair; his remuneration as an EU Commissioner and the considerable returns from his autobiography. Those are the wages of elite sin.

Robert Henderson

7 July 2011

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Elite Mischief

The report of the  Standards and Privileges Committee (henceforth “the Committee) on three  complaints laid against Peter Mandelson is best described as incongruous.  The complaints concerned irregularities involving more than £500,000 and the report’s content is damming. Two  of the three complaints were found to have substance.  Yet the Committee treated Mandelson’s serious misbehaviour  as essentially trivial and concluded smugly  “We recommend that no further action be taken”. The report  is above all a classic example of how an elite controls  matters for its own advantage.

Why is the report damning? It contains explanations  and justifications from Mandelson so improbable  that I would stake my life on the vast majority of human  beings finding them incredible. Mandelson is also shown to be  massively arrogant by the manner of his rejection of the  complaints – he really cannot understand what all the fuss is about or why his private behaviour is under scrutiny. What  if I did accept a massive loan secretly from a fellow Member  of Parliament? What if that Member did became my junior  minister? What if I did obtain a mortgage as the result of a  failure to disclose all the relevant facts to the lender? What  business is it of the public? So says Peter Benjamin Mandelson. The affair is extremely complex.

In the space  available it is impossible to cover the detail as fully as  I would wish. That being so, rather than give a blow by blow  account, I have written an impressionistic piece which is designed to give the reader a flavour of the dominant themes  - in particular, the palpable desire of all those  engaged in the investigation and judgement to mitigate Mandelson’s misbehaviour by any means possible – while  providing enough detail to allow the reader to understand the  basics of the story.

To properly understand the matter even in outline,  it is necessary to ingest a paragraph or three of  facts which would bore a chartered accountant. Sorry about that.  First the main players in the business. Apart from  Mandelson and the ex-trade minister Geoffrey Robinson, these are  the Parliamentary Commissioner for Standards in Public  Life (Elizabeth Filkin), the firm of solicitors appointed  by the Britannia Building Society to report on  Mandelson’s mortgage application (Herbert Smith Solicitors),  Mandelson’s solicitor (Stephen Wegg-Prosser of Wegg-Prosser and  Farmer – WPF) and Mandelson’s personal aide (Ben Wegg-Prosser). Robert  Sheldon was the Committee chairman. The two named  complainants in the report were the conservative MP, John Redwood,  and myself.

The Committee acted on Mrs Filkin’s submission  after her investigation of the three complaints. The  first concerned a failure to declare a flight taken by Mandelson  at the expense Linda Wachner, chairwoman of a company  (Warnaco Ltd) which had interests in the UK. The other complaints  arose from Mandelson’s failure to declare loan of  £373,000 from a fellow MP, Geoffrey Robinson, in the Register  of Members’ Interests and irregularities in his application  for a mortgage of £150,000 from the Britannia  Building Society.

Mrs Filkin’s conclusions The Warnaco complaint concerned a potential conflict of interest arising from Mandelson’s position as Trade Secretary. Mrs Filkin found the complaint  unproven because she judged that the flight was “offered  to him as a personal friend rather than in his capacity as a Member of Parliament”. For reasons of space and the  fact that the complaint involved benefits involving only a few  thousand pounds, I will not spend any further time on Mrs  Filkin’s dismissal of the complaint other than to reflect  that politicians without great wealth are always  suspect if they take favours from the rich, and that the  public’s only guard against corruption in such circumstances is if  the favours are public knowledge. The rules governing the Register of Members’ Interests need amending to make the  receipt of any large benefit notifiable, regardless of the  nature of the giver.

Mrs Filkin found the other complaints proven. Of Mandelson’s failure to declare the loan from Geoffrey Robinson on the Register of Member’s  interests, she decided that Mandelson should have registered the loan  because of the possible conflict of interest when he became Trade  and Industry Secretary. The interesting thing about  this judgement is that Mrs Filkin decided that it would  have been acceptable not to declare the loan if he  had not become Trade and Industry Secretary and consequently  was subject to the Ministerial Code of Conduct. It was this latter code which necessitated the registration of the loan  on the Members’ Register of Interests. This is a dangerous precedent.

The receipt or supply of large material  benefits from one politician to another are self-evidently of public interest, for anything which can compromise  their freedom of action is a matter of public interest. That  applies as much to backbenchers as to ministers. Again, plainly  the register rules need amending. But a  declaration of interest is not enough for favours between MPs, because  both the participants to such a transaction are  directly involved in the political process, and therefore have the  opportunity to illicitly manipulate matters from the inside, unlike interests and individuals outside Parliament. There  needs to be a ban on substantial material favours  between MPs.

Of the third complaint concerning the Britannia  Building Society mortgage Mrs Filkin said this: “The  mortgage was obtained on a basis outside normal commercial practice. Mandelson’s mortgage application was incomplete  and inaccurate and therefore breached the Code of Conduct  for Members of Parliament”.

The objective facts of the Britannia mortgage

The Britannia mortgage was used (with the  Robinson loan) to fund the purchase of a property in Notting Hill, a district in the West of London. Mandelson made his mortgage application in August 1996 and completed his purchase of the Notting Hill property in October 1996.

At the time of the mortgage application for  the Notting Hill property, Mandelson owned two properties: a  house in his constituency (henceforth Hutton) and a flat in  Clerkenwell, London (henceforth Wilmington). He had  mortgages on both. Thus his application for the Britannia  mortgage was, at the least, the third time he had made a mortgage  application.

The Britannia interviewer (Mr Michael McDermott)  completed the application form for Mandelson who then  signed it. Mr McDermott was the branch manager and thus a  very experienced employee. He was consequently  unlikely to have made an  error when completing the form.

When he made the mortgage application (30/8/96)  Mandelson told the Britannia interviewer that the balance  of the purchase price for the Notting Hill flat would  be provided by his family. He also said that the purchase of the  Notting Hill property would be simultaneous with the sale  of his Wilmington flat.

Mandelson’s mortgage application form  unambiguously shows a failure to declare his the Hutton mortgage and  was thus false at the time he signed it. The application  became further invalidated by two failures to keep the  Britannia informed of changes in his circumstances, namely  his acceptance of the Robinson loan and the  failure to sell his Wilmington flat at the same time as he  purchased the Notting Hill property.

Section D of the application form contains the  questions “Do you have any hire purchase/loan agreements? (D1);  “Have you any other outstanding commitments including maintenance payments (D.3) and “Do you propose to borrow any other money upon the security of the property to assist in  the purchase of the property (D.5). Mandelson answered NO to  all questions.

The declaration at the end of the form which  was signed by Mandelson includes this statement: “I  confirm that this form has been completed by myself or at my  dictation and that the information given is true to the best of my knowledge and belief and all material information as  explained above has been disclosed. I understand that if any answer  has been written by any other person that person shall  for that person be regarded as acting for me.”

The Robinson loan and Mrs Mandelson

Mandelson claims that when he signed the  mortgage application on 30/8/96, he believed that his mother would give  him, as a gift, the money he needed to bridge the gap between  the proceeds of the Wilmington flat and Notting  Hill. Amazingly, during his evidence to the Committee Mandelson  admitted that he had not discussed the likely amount of the  gift prior to committing himself to a mortgage. His mother’s  subsequent rapid refusal of help shows how nebulous Mandelson’s expectation of a gift was, if it existed at  all.

Mandelson first discussed the Robinson loan in  May 1996. It was not finalised until October 1996 after  Mandelson’s mother had refused to help Mandelson. Mandelson’s explanations Mr Mandelson shares a quality with Ronald Reagan,  he is terribly forgetful. The report shows that he could  not remember when he first discussed the loan with  Geoffrey Robinson. He could not remember whether he mentioned the Hutton mortgage during his interview with Mr McDermott.  He could not remember what he had done during his  previous mortgage applications. He could not even  remember in 1999 (this is my personal favourite) how much he sold  his Wilmington flat for in 1997.

Mandelson is also apparently seriously lacking  in intellect and basic general knowledge. According to the  evidence given to the Committee, he did not even understand  the meaning of such difficult questions as “Do you propose to borrow any other money on the security of the property to  assist in the purchase” because at the time of completing  the mortgage application he “would not…have  understood what ‘security of the property meant”. 1

Translated into honestspeak most of  Mandelson’s excuses and explanations amount to this: I, Peter  Mandelson, a man deemed competent to sit in a British Cabinet, am  so lacking in intellect and general knowledge that I  cannot understand what every adult of normal intelligence in Britain  is presumed by the law to understand, namely a mortgage application form, despite the fact that I had previous experience of obtaining mortgages.

Mandelson’s other excuses rest on blaming  people such as his solicitor (WPF) and pleading overwork. The  latter is special pleading; the former deserves attention. WPF  in the person of Stephen Wegg-Prosser undoubtedly had a duty to  inform the Britannia of the Robinson loan and the failure  to complete the sale of the Wilmington flat on time. The  question is why he did not do so. Wegg-Prosser accepted that  he was grossly at fault but blamed it on family problems. Should  we believe him? In other words, was there a conspiracy  between Mandelson and Wegg-Prosser to keep the fact of the  Robinson loan from the Britannia? Consider these facts and judge  for yourself.

Mandelson’s Secrecy

For a man with nothing to hide, Mandelson was remarkably reticent about his loan from Robinson. He  failed to notify Tony Blair, the DTI permanent secretary, the cabinet secretary and the parliamentary commissioner of the Robinson loan. He failed to register the loan in the  Members Register of Interests. He used the solicitor father of  his aide Ben Wegg-Prosser to draw up the legal agreement with Robinson.

Such secrecy speaks of a desire to prevent not  only the general public and his political opponents and  colleagues from knowing the truth, but an intention also to  prevent the Britannia Building Society from discovering the true state of affairs. Publicity for the loan would  have revealed the illegality of the application. Thus  Mandelson had a prime dishonest motive for silence and secrecy. If any of the other people directly involved in the loan from  Geoffrey Robinson knew of Mandelson’s failure to declare  the loan and/or his mortgage on the Hutton property,  they would on the face of things be guilty of a criminal  conspiracy to enable Mandelson to obtain a mortgage fraudulently.

Mandelson’s desire to keep the matter secret  and his apparent willingness to lie to do so is further seen in  his reply to a question put by the Evening Standard in April 1997.  The Standard reporter, Mark Honigsbaum, asked Mandelson  to explain the difference between the amount of  money borrowed to finance the purchase of the house  registered on the Land Registry and the purchase price of the  Paddington house, ie the difference between the Britannia mortgage and  the purchase price. Mandelson complained of an invasion  of privacy (a rather rum do in a politician) to a more senior reporter, Alex Renton. However, he did tell  Renton that the balance of the cost of his new house would be  paid by the sale of his Clerkenwell flat and money from  his mother (see folios 5/6). He failed to mention the fact  that the purchase price had been met wholly by a loan from  Robinson and the Britannia mortgage.

Behind the scenes

Although her findings were significant, Mrs  Filkin studiously avoided the most serious and damaging issues which  were posed by Mandelson’s behaviour, namely the questions  of criminality and the relationship between MPs, both of which I asked her to consider in relation to Mandelson  and Robinson.

I had a considerable correspondence with Mrs Filkin,  yet after the publication of the report I discovered  that the committee only saw the first letter I sent to Mrs  Filkin. When I brought this to the attention of Robert  Sheldon, the chairman of the committee, he refused to either reopen the nvestigation or show the additional letters to theCommittee members. This is urther evidence of the Committee’s intention to produce a verdict favourable  to Mandelson come what may.

The Code of Conduct

In 19 July 1995 by a resolution of the Commons  a Code of Conduct for MPs was adopted. Rather like the 1936  Soviet Constitution, the code is a model of democratic  principle, regulating public duty, personal conduct, objectivity, accountability, openness, honesty and leadership.  My experience with Mrs Filkin and the committee  shows that it shares another quality with the 1936 Soviet  Constitution: it is not worth the paper it is written on.

I suggested to Mrs Filkin that Mandelson had  breached these parts of the Code:

Public Duty

Members have a duty to uphold the law and to act on all occasions in accordance with the public trust placed in them.

Personal Conduct

Members shall base their conduct on a consideration of the public interest, avoid conflict between personal and the public interest and resolve any conflict between the two, at once, in favour of the public  interest.

Members shall at all times conduct themselves in a manner which will tend to maintain and strengthen the public’s trust and confidence in the integrity of Parliament and never take any action which would bring the House of Commons, or its members generally, into disrepute.

In any activities with, or on behalf of, an organisation with which a member has a financial relationship which may not be a matter of public record such as informal meetings and functions, he or she must always bear in mind  the need to be frank with Ministers, Members and officials.

Leadership

Holders of public office should promote and support these principles [of the Code of Conduct] by leadership and example. Mandelson has clearly breached these parts of  the Code. Mrs Filkin concluded that he had done so, but only by his behaviour in obtaining a mortgage. Incredibly,  she judged that Mandelson’s failure to register a loan  eight times his salary did not breach the Code.

The Britannia Building Society

The failure of the Britannia to make a complaint  to the police goes against their normal policy. The  Daily Telegraph (26/12/98) ran this quote from a spokesman for  the Britannia, Joanne Hine: “When fraud has  been discovered in the past, then we have passed that to the police  to deal with.”

The Britannia commissioned the solicitors  Herbert Smith to produce a report on the Mandelson affair. This  report was codenamed Offenbach. It is worth noting that  the Committee Chairman had to quietly threaten the Britannia  with his powers to requisition documents before a copy of  the Offenbach report was supplied to the  Committee.

Was a crime committed?

In their report for the Britannia, the  solicitors, Herbert Smith, considered the question of mortgage  fraud which falls under Section 16 of the Theft Act 1968. This  runs:

“a person who by deception dishonestly  obtains for himself or for another any pecuniary advantage  is liable on conviction on indictment to imprisonment for a term not exceeding five years…”

The report continued by stressing that for an offence  to exist, it is not necessary for the person  deceived to have suffered a loss.

Peter Mandelson did profit from his irregular mortgage application because he obtained a mortgage unfairly.  This allowed him to gain a further pecuniary advantage  by acquiring a more expensive property, which  enabled him to make a massive capital gain he would not  otherwise have had the opportunity to make. Those facts would seem  to fall within the Theft Act’s provisions.

Herbert Smith claimed that the Britannia’s  money was never under threat from Mandelson’s failure to disclose  his financial circumstances. This is simply false.  It is true that if Mandelson kept to the terms of his agreement  with Geoffrey Robinson, that is did not put any  further charge on the property, the building society would have  been safe. But what if Mandelson did not keep to the terms of  the agreement? Suppose, for example, that he ran  into severe financial trouble and took further loans  against the property which exceeded the value of the property?

Such a scenario is plausible. Mandelson has  shown himself to be, secretive, very reckless and spendthrift. The  Commons report also shows how slender his means were  in 1996 – he had to borrow money from his mother to tide him  over the period when he had to pay not only the Notting Hill mortgage but also the mortgages on Hutton and Wilmington. A  situation could have easily arisen whereby Mandelson had taken loans to the value of less than the value of the  house at the time the loans were granted, but which exceeded the  value of the property when the loans were called in. The  most likely cause of such a situation would be a collapse in property  values similar to that which occurred in the early  nineties.

It is true that in such circumstances the Britannia  might still be able to exercise first call on the property eventually. But they would at best have to go  through a great deal of legal aggravation to make good their claim.  At worst, they might not be able to sustain a  claim if other loans taken by Mandelson had been given on the  same basis as that give by the Britannia.

The police

I submitted a complaint to the Metropolitan Police asking them to investigate Mandelson for gaining a pecuniary advantage by the use of false statements and  embezzlement and for possibly engaging in a conspiracy to  obtain a pecuniary advantage and embezzlement. I received this  reply from Chief Supt Paul Scotney: “After careful  consideration of all the facts outlined in your two letters, I have  decided not to commit police resources to investigate this matter.”

Wonderful isn’t it? Pure insolence of office. Police officers have an obligation to  investigate where they have reasonable grounds for believing that a  crime has been committed. Patently they did in this case because  of irregularities in Mandelson’s mortgage  application. Failure to investigate amounts to a perversion of the course  of justice.

Elite misbehaviour

What does all this show? It is classic elite  behaviour in an ostensible democracy. A member of the elite was  caught publicly in circumstances which were too serious  and outlandish for the elite to simply ignore.  Thus a charade was performed whereby an “investigation”  took place with a predetermined outcome, namely that no  meaningful punishment would be meted out to the errant member of the elite regardless of the evidence offered. The purpose  of the charade was to allow the elite to make a pretence that justice had been done.

The Code of Conduct for MPs demonstrates  beautifully the ease with which the elite can control things. The  introduction of this code was a major constitutional change. Before  then, there was precious little by way of formal restraints  on MPs’ behaviour beyond the election rules of the Representation of the People Act and the  rather toothlessregister of interests. Most extraordinary was  the fact that an MP’s behaviour towards his constituents was  unrestrained by anything other than convention, which were  mostly the product of the Commons of the eighteenth and  early nineteenth centuries which developed conventions in  keeping with the aristocratic flavour of its membership which took  Burke’s dictum that a member is not a delegate as its watchword.

Once the Code of Conduct was accepted by the  Resolution of 24/6/96, in theory the game changed. MPs became obligated formally and the old conventions were superseded where the Code of Conduct impinged upon them. Yet for all the practical effect it had in  the Mandelson case, it might as well not exist. As  things stand, it is simply a propaganda tool for the ruling elite.

Only the House of Commons can meaningfully enforce  the Code. The Code gives the appearance of an attempt to maintain  public probity but that is all it is, the appearance. Elites in an ostensible democracy have to make  a public playof honest dealing with members of the elite, but  it is just that, a play. The reality is that elites  ensure that justice is not done by controlling the bodies which  make judgements of members of the elite. The people who investigated  and udged Mandelson were a committee which had a majority of embers from Mandelson’s own party and a public servant whose appointment depended on the very politicians  she was due to judge. Just to add spice to this elite sauce, Elizabeth Filkin was a non-excutive director of the Britannia until a few weeks before her appointment as Commissioner  for Standards. Strangely, she did not feel that  this disqualified her from investigating Mandelson. I asked to  appear before the Committee. The request was refused. All  very cosy, all very elite controlled.

Throughout this affair every person involved in the investigation has behaved to benefit Mandelson  and mitigate his offence. Elizabeth Filkin refused to  investigate the most damaging charges against Mandelson, those of  criminality and of being under the influence of Robinson  because of the loan. She refused to investigate Robinson at all. The  Britannia’s solicitors, Herbert Smith, put the best possible gloss on everything Mandelson did or failed to do. The Committee concluded against all the evidence that Mandelson’s misbehaviour was trivial.

This affair raises the vital questions of  equality before the law and democratic control. Both have been negated comprehensively. The general public have been treated as impotent fools. We have not a democracy but an elective oligarchy, which is as effective at  maintaining control as any formal aristocracy.

1 Mniutes of  Report para 51

Robotics and the real (sorry, Karl, you got it wrong) final crisis of capitalism

Robert Henderson

Humans and Robots

Robotics is advancing rapidly. Probably within the lifetime of most people now living – and conceivably within the next ten years – there will be general purpose robots (GPRs) capable of doing the vast majority of the work now undertaken by human beings. When that happens international free trade and free market economics even within a closed domestic market will become untenable.  The final crisis of capitalism will be the development of technology so advanced that it makes capitalism in the Marxist sense impossible because machines make humans redundant.

Robots are already undertaking  surprisingly sophisticated work, but almost all are designed to undertake a limited range of tasks(http://www.sciencedaily.com/news/computers_math/robotics/). None is a true GPR. That makes them expensive because of the limited nature of their possible uses and the restricted production runs they can generate. Many of the most sophisticated are either one–offs or counted in single figures. (http://www.telegraph.co.uk/science/space/8330246/Japanese-robot-could-be-sent-to-Space-Station.html).   A GPR will change that. They will be able to work across a wide range of tasks which will both enhance their utility and result in massive production runs. GPRs will become cheap, much cheaper than human labour.

The cost of GPRs will also fall because GPRs will sooner or later reach a stage where they can replicate one another or design and build new types of robot.  This is potentially startling in terms of what might be produced. Let us say that it takes one week for one GPR to create another. At the end of the first week you have two GPRs. At the end of the second week you have four GPRs. Let us suppose you keep on doubling up every week. In thirty three weeks you have more GPRs that the entire present population of the world. In thirty four weeks you have more than twice the population of the world. The only restrictions on production would be government curbs or a shortage of materials and energy to build and run them.

Economic history to date shows that technological advance creates new work. It may have very painful consequences for individuals whose livelihood disappears – the hand-loomweavers of the early industrial revolution are a classic example – but new opportunities for employment arise as an economy becomes more sophisticated and variegated. The hand-loom weaver found work in the new factories; the redundant western factory worker of today in a call centre. At worst they might only get a MacJob but at least it was a job.

But if the GPRs can do the MacJobs as well as the more demanding work, then there will not be any new jobs for humans, not even much supervisory work because GPRs will need little supervising, and less and less as they become ever more sophisticated. Hence, this technological advance will be like no other. GPRs will not only take away existing jobs, they will devour any new work; the easier work first, then the more complex.

The normal human response to such ideas is not reasonable scepticism, but rejection based on a refusal to accept the reality of change, a rejection expressed with ridicule along the lines of the Victorians’ response to the car:  “It will never replace the horse”. Mention robots and people commonly scoff “Science Fiction” to get rid of the matter without further debate. This type of response is natural enough because human beings, apart from disliking change, do not like to think of themselves as dispensable or redundant. Moreover, incessant propagandising by western elites has made it a received opinion of the age that work is becoming ever more demanding and requires an increasingly educated and knowledgeable workforce, something which seems to most humans to make them uniquely capable of doing the jobs of the future and, by implication, this excludes mechanisation (and robots) from the majority of future human employments.

If that were true the dominion of GPRs might be at least delayed. Unfortunately, the reality is that the large majority of modern jobs, in both the developed and developing world, are non-skilled or low skilled. Just sit and ponder how many our jobs need a great deal of intelligence or knowledge. Think of the huge numbers who are employed in call centres, shops, cafes, cleaning, driving car, on farms picking fruit and vegetables or assembling items on production lines which require no more than a repetitive task to be performed. These may be hard work but the training or innate skill required is small. Even work whose nature suggests that it is more demanding of education, training and knowledge such as much clerical work can be readily done by anyone with a reasonable facility with the 3Rs and a familiarity with basic computer operations, such as using a word processor and a search engine, something which the large majority of those in Western labour markets at least should possess. If twenty per cent of jobs in a developed country require an above average IQ or a long period of specialised training I should be surprised. In places such as India and China it will be less as they have taken on much of the repetitive factory production of the advanced world and are less inclined to substitute machines for labour, which is still by western standards very cheap.

The overproduction of graduates in both the developed and developing world is a strong indicator of the predominance of simple jobs.  In Britain there is a target of getting 50% of school-leavers to university. At present that does not look like being achieved because the figure has been stuck around 40% for years and the recent massive increase in university fees for UK students is likely to cause even that figure to drop in the future. But even with 40%, experience shows that is far too high a figure because large numbers of graduates are either unemployed or employed in jobs which do not require a degree-level education. The latest Office of National Statistics figures show 20% of recent UK graduates are without jobs, but even before the present  recession began in 2008, graduate unemployment was twice the UK unemployment average at 10.6%  (http://www.statistics.gov.uk/cci/nugget.asp?id=1162). The  figures are worse than they look because graduates in employment include those in jobs for which a degree is unnecessary. In 2010 one in three new graduates were forced to take menial work  (http://www.thisismoney.co.uk/money/article-1697466/Stop-gap-graduates-forced-into-menial-work.html).

The picture is similar elsewhere. In China there are more than six million unemployed graduates (http://www.businessweek.com/magazine/content/10_37/b4194008546907.htm); the USA  had 2.4 million unemployed graduates unemployed as of June 2010  (http://www.usatoday.com/money/economy/employment/2010-12-06-collegegrads06_ST_N.htm) and the Eurozone generally experiences a high level of graduate unemployment  (http://www.barcelonareporter.com/index.php?/comments/graduate_unemployment_rate_one_of_eus_highest/).  The position in less developed countries is considerably worse because the number of graduate-level jobs is meagre and often only available in government funded positions.

Employability also varies according to education below degree level.  Take the country which started the so-called “Arab Spring” uprisings, Egypt, as an example. In 2011 Egyptian high-school graduates accounted for “42% of the workforce, but 80% of the unemployed.” (http://www.afripol.org/afripol/item/237-africa-middle-east-the-jobless-graduate-time-bomb.html?tmpl=component&print=1). Most startling, a 2007 report found that the rate of unemployment in Egypt is ten times higher in the educated section of the population than among illiterates. There education equals disadvantage.  (,http://www.huliq.com/29092/unemployment-in-egypt-highest-among-literate-population).

The hard truth is that most modern work requires less knowledge and skill than was required in the past. A peasant four hundred years ago had to know about his soil, his plants and animals, the seasons, the weather, where natural water was and be able to do a hundred and one practical things such as ploughing, sowing, harvesting, making and repairing of fences and ditches, using tools and turning out cheese and cream and dried meat and vegetables How many jobs today require a tenth of that volume of knowledge? Nor did more demanding work stop at peasants. A 17th century craftsman would have served a long apprenticeship. Jobs which did not require an apprenticeship would have probably required some manual skill. Those who aspired to intellectual employment had to laboriously write and amend their works rather than enjoying the immense convenience of a word processor. That and the cost of writing materials forced them to become precise in a way that virtually no one is today. Perhaps most importantly,  modern division of labour with one person doing a repetitive job was not king. A person making something four centuries ago would probably make the entire item and quite often a variety of items, for example, a 17th century blacksmith would not merely shoe horses but make a wide range of iron goods.

GPRs would arguably have much more immediate difficulty in displacing human labour in a sophisticated pre-industrial society such as England in 1600 than they would today, because of the more complex demands made by 17th century employments. The large majority of  English people in 1600 were employed on the land where subjective judgement rather than decisions made on objective facts were pre-eminent in the days before science and advanced technology entered farming. A very sophisticated GPR would be needed to make such judgements. (I am assuming that GPRs sent to England in 1600 would only have the knowledge available in 1600). Conversely, GPRs today could take over a great deal of employment in Western economies and much of the industrialised parts of the developing world, especially China, because there are so many simple jobs which would be within the capabilities of very basic GPRs.

But that is only half of the story. If most jobs are not demanding of much by way of learned skills and even less of intellect, they do need diligence. Human beings are generally more than a little reluctant to put themselves out in work which has no intrinsic interest for them or which is not very highly paid.. Most people do not have a vocation, or at least not one at which they can make a living. Left with  work which is seen as simply a livelihood, most  just want to do enough to live what they think is a comfortable life. If the job they are doing is laborious and boring and pays not a lot more than is needed to feed and clothe and house them, then it’s a certainty that they will be more than a little resentful. (An old Soviet joke about low wages ran that the communist government pretended to pay the workers and they pretended to work). Resentful equals careless equals idle equals dishonest equals loss of custom equals loss of profit. So what will an employer do when he can employ a robot instead? He will go and gets himself some GPRs which will not get awkward, do what they are told, keep working all the time without being watched, does not make regular mistakes and requires no wages or social security taxes or holidays or sick leave. And it will not be able to sue you for being a bad employer.

The GPRs will have all the capabilities of computers. They will be able to compute and model and display and manipulate data to your heart’s content. They will absorb unlimited amounts of data in the blink of an eye. You need a GPR to speak French, the GPR will speak or translate French. If you want a GPR to explain quantum mechanics, the GPR will produce a lecture by an eminent physicist. You need to fix your car, the GPR will fix your car.

Now, how could any human being compete with that? At that level they could not, but in the beginning at least there will still be a sizeable chunk of jobs which GPRs will not be able to do. These will be the jobs which cannot be reduced to quantifiable tasks; jobs which cannot be done by following an algorithm; jobs which require judgement and jobs which require motivation to achieve a complex end which is not obvious from the units of means which are required to achieve it.  But those type of jobs are only a minority of jobs, probably a small minority, perhaps 20% of the total. If the earliest GPRs could only undertake fifty per cent of the jobs which humans do that would be catastrophic. Human beings will not be able to kid themselves for long that everything is going to be all right.

There will be two further advantages enjoyed by GPRs over humans. In principle there are no limits to increases in the capabilities of GPRs; there is no such human potential in the present state of knowledge. It may be possible in the future to enhance human capabilities dramatically through genetic engineering or a marriage of human and machine to produce a cybernetic means of advancement, although in both cases the question would arise are such beings human? But for the foreseeable future there is nothing to suggest that human capacity can be raised dramatically through education and training, not least because attempts to raise IQ substantially and permanently through enhanced environments have a record of unadulterated failure over the past fifty years or more. Most tellingly, all the claims for raised IQs through enhanced environments involve people without well above average IQs. No one has claimed to have demonstrated that those with IQs of over 150 can have their IQs raised by environmental means. Nor do adult IQs increase as people experience more and learn more. That suggests humans have reached an intellectual plateau in terms of an ability to comprehend by the middle teens. With GPRs as many robots as were wanted of a certain ability uld be created.

The second advantage is that GPRs will come with a guarantee of performance. An employer gets what it says on the tin. Moreover, the performance will be consistent. Humans beings do not carry such a guarantee. The individual’s qualities only become apparent once on the job and are subject to variation according to the physical and mental wellbeing of the person.  This makes them a gamble for anyone who employs them. A faulty or rogue GPR could be repaired or replaced without moral qualms; sacking a human being raises all sorts of ethical questions and matters of sentiment.

The social and economic effects of GPRs  

When the first GPRs appear those in political authority will probably try to say everything will be all right when they are first presented with the problem. Now it might be thought that it would be pretty obvious that a GPR which could do everything the average human could do and then some would spell trouble for the human race, but it never does to underestimate the power of custom, ideology and the sheer unwillingness of human beings to face troubles which are not immediately upon them.  The tired old and worthless comparison with technological change in the past will doubtless be made, namely, that new jobs for humans will be generated by the GPRs. But that will not last long because the reality of the situation will very rapidly force elites to accept the entirely new circumstances.

There would be a dilemma for the makers and distributors of goods and services.. At first it might seem attractive to use GPRs, but as humans lose their employment and purchasing power the question for private business would be who exactly are we producing for? Very few would be the answer. For politicians the question would be how can we finance government including public services when our tax base has collapsed? The answer is we cannot as things stand.

As GPRs threaten to destroy the world’s economy, politicians will be faced with an excruciating dilemma. If GPRs are allowed free rein by governments the consequence will be a catastrophic collapse in demand as humans lose their employment en masse and an inability of the state as it is presently constituted to provide welfare to those put out of work or even to maintain the essential services of the minimalist state such as the police and army.

The situation will be pressing no matter how supposedly rich a country is because the majority of people even in the developed world are actually poor. They are only a few pay packets away from destitution (http://www.retirementsolutions.co.uk/many-britons-have-little-or-no-savings). Even those who own their own home will not be able to sell it because who will
there be to buy?

To begin with attempts will probably be made to control the crisis bureaucratically by instigating rationing and price controls. But that will not go to heart of the problem which is how do you sustain an economy in which most people are not working. In the end politicians will be faced with two choices: ban or at least seriously curb, the use of GPRs or adopt a largely non-market economy. Banning GPRs completely would create a particular problem because some countries would continue to use them and this could lead not merely to cheaper goods and services but technological leaps which exceeded anything humans could do. For example, suppose that a country produced GPRs to their fighting. A country which relied only on humans would be at a hopeless disadvantage.

The widespread banning of the use of GPRs in national territories would severely shrink international trade, because as sure as eggs are eggs not all countries would stop using GPRs  to produce items for export.  Any country using GPRs could undercut any country which banned GPRs. Protectionist barriers against countries using GPRs freely would have to be erected, although human nature being what it is, this would doubtless result in GPR products being supplied through a third country which had ostensibly banned GPR produced goods and services. The likely outcome of such a situation would be for protectionism to grow beyond the banning of GPR products to the banning of products simply because they were suspected to be GPR produced. This would also be a convenient excuse for simply banning imports.

As free trade (or more accurately freer trade) and internationalism generally has been the Holy Grail of politicians in the developed world for a generation or more, the re-embracing of protectionism and state control might seem to be a tremendous psychological blow for western political elites to accommodate.  In practice it is unlikely to give them any great emotional difficulty because elites only have one fixed principle, namely, to do what is necessary to preserve their position. Think how the British mainstream Left, most notably the Labour Party, happily embraced the idea of the market and globalism in the early 1990s after having been resolutely opposed to both only a few years before. Here is Blair in the late 1980s: “We will speak up for a country that knows the good sense of a public industry in public hands.” (The Blair Necessities p52 1988). Dearie me, who would have thought it?

The alternative to a protected economy in which GPRs are banned or severely restricted is a society in which the market is largely defunct. A perfectly rational and workable society could be created in which human beings stopped thinking they had to work to live and simply lived off the products and services the GPRs produced.  The GPRs would do the large majority of the work and the goods and services they provide would be given free to everyone whether or not they had formal employment. No GPRs would be allowed in private hands. Such a situation would mean the market would not make the choice of which goods and services were provided. Rather, the choice would be made by the consumer through an expression of what was needed or wanted before products were developed or supplied.  This could be done by anything from elected representatives to online voting by any member of a community for which goods and services should be supplied. For example, all available items could be voted from by the general population and those which were least popular dropped. The provision of proposed new lines or inventions could be similarly decided.

As for allocating who could have what in such a world, money could be issued equally to everyone in lieu of wages (a form of the social wage). Alternatively, in a more controlled society vouchers or rations cards could be issued equally to everyone for specific classes of goods. Greater flexibility could be built into the system by allowing the vouchers to be swopped between individuals, for example, a voucher for footwear swapped for food vouchers.

In such societies there would be scope for a limited use of private enterprise. People could be allowed to provide personal services, for example, entertainment, and produce goods just using human labour (human-made would gain the cachet that hand-made has now). There would also need to be some greater reward for those who occupied those jobs which still required a human to do them such as political representation, management and administration. The reward could either be material or public approbation. It would not be unreasonable to imagine that in a society where necessary work was at a premium quite a few would take on such positions for the kudos.    There could also be some legal requirement to undertake work when required.

The greatest change resulting from such a social upheaval would be the removal of most of the advantage the haves now enjoy over the have-nots. Because the vast majority of things would be provided by the state one way or another, the advantages of wealth would be greatly diminished. Those with wealth at the time the GRPs forced a change on society might still have their money, but what would they spend it on? Not the goods and services provided by society because they would be sufficient for any  individual? On the luxury goods and services offered by human-labour enterprises? Perhaps, but that would be a petty pleasure. What the rich would have lost is what they prize most, their power. They would not be able to hire other humans easily because why should anyone work as a servant when they already have the means to live? Instead they would have to live as “the little people do” (copyright Leona Helmsley). The historical experience of those with privilege relinquishing it peacefully is something of a desert, but in the circumstances of where no one has to work simply to live they would have little choice.

It would be difficult to build up a great fortune even where money remained the means of exchange, because all that would be permitted outside of socially controlled provision would be that which humans could produce without the aid of GPRs or perhaps without any form of robot, would be items which because of their means of production or provision would be expensive. This would make them luxury items. There would also be an incentive for most people not to buy them because the socially produced items would be much cheaper, in effect free because no work would have been done to earn the money to buy them. Money in such a society would have much of the quality of a voucher.

Perhaps some entertainers and artists might still command high incomes but fortunes made from business would be next to impossible. The vast fortunes made in banking and other financial service providers would not exist because financial services would become redundant in a society which has decided to provide the means of living without working for it. But like the rich generally, what would it really buy them?

Could an economic system akin to those which depended heavily on slaves not be created with GPRs taking the place of slaves which might be owned by anyone? The answer is negative. No slave society has ever relied overwhelmingly on slaves.  In slave societies there is always a good deal of free labour, both because of the scarcity and cost of slaves and the inability of owners to trust slaves to do all work or work without the supervision of free men and women. The demand created by the free part of the population through work or accumulated wealth provide the basis for a market economy in a slave-owning society. In many slave societies, slaves have acquired rights to earn money, own property and have families, all of which bolsters the demand of the free part of the population.  In the case of the GPRs, they would undertake so much of the work there would be insufficient realisable demand to sustain a market economy. There would be no point in private business using GPRs on a large scale because there would be no mass market to serve.

Who would be best placed to survive? 

It might be thought that the people best placed to survive would have been those in the least industrially developed states because they would be less dependent on machines. But the trouble is that there is scarcely a part of the world which had not been tied into the global economy. If a country does not manufacture products on a large scale, it exports food and raw materials and accepts Aid.

The fundamental trouble with Aid is not that it breaks the initiative of the recipient or props up dictators or alters traditional trading patterns or drains countries of money through everlasting interest, although all those are important features. . The killer fact is that it produces a level of population in the Third World which the Third World cannot naturally support. If the  economies of the industrial nations collapse, the Aid will stop and the market for their export of food and raw materials dry up. All of a sudden the Third World will find they cannot feed their populations and their elites will no longer have the means of maintaining order because they will not be able to finance forces to subdue and control the population.  The chaos which will ensue will be aggravated by the fact that the old economic and social relationships have been fractured so that even maintaining a population appropriate to the traditional ways of living will be problematic.

Low-wage developing countries such as China is now will be struck particularly hard because when GPRs are available their labour cost benefits will disappear.

The future

The rate at which robotics evolves will play a large part in how the story unfolds.  The speed with which GPRs replace human beings could be truly bewildering. The example of digital technology to date suggests that the stretch from a primitive GPR doing simple work which can be broken down into physical actions to a GPR with some sort of consciousness or a facsimile of what humans think of as consciousness will not be massive. Such development could well be speeded up by GPRs assisting with development as they attain more and more sophisticated abilities. The faster the development of  really sophisticated GPRs, the more chaos there is likely to be because there will be little time to plan and implement changes or for the human population to accommodate itself psychologically and sociologically to a radically different world

How sophisticated GPRs will get is unknowable, but the development of Artificial Intelligence programs which allow a process of learning are already well established. These have the potential not only to produce the wide-ranging intelligence which would allow value judgements, but also for GPRs to develop in ways which humans cannot predict. (http://www.telegraph.co.uk/technology/microsoft/8344028/Xbox-Kinect-foretells-computers-of-the-future.html).

It is reasonable to assume technology will develop until GPRs are showing behaviour which suggests consciousness. They will make decisions such as what would be the best way of  achieving ends which are loosely defined, for example, an instruction to design a city redevelopment in a way which would have the greatest utility for human beings. At that point the GPRs would be effectively making value judgements. Perhaps they already are doing that at some level. (http://www.telegraph.co.uk/science/roger-highfield/8587577/The-big-plan-to-build-a-brain.html).

This is a real danger with potentially catastrophic world-wide consequences. The problem is getting people in power to address the subject seriously. There needs to be discussion and  planning now about how far GPRs,  or indeed robots or any type,  should be allowed to displace human beings in the functioning of human societies. Nor should we assume humans will happily tolerate GPRs  for reasons other than the economic. Robots which are too like humans make humans uncomfortable, probably because it is difficult to view a machine which looks like a human and acts like a human simply as a machine.  (http://www.telegraph.co.uk/technology/8494633/Japanese-robot-twins-fail-to-bridge-the-uncanny-valley.html)

Apart from the economic consequences, GPRs also offer dangers such as the possibility of the realisation of the tyrant’s dream; an army of unlimited and utterly loyal and obedient servants who will refuse no command and GPRs developing intelligence and human-like qualities so profound humans have difficulty in treating them as slaves.  But those are subjects for another day…

Foreign Aid – A Danegeld extracted by the Liberal Internationalists

“Aid – an excellent method for transferring money from poor people in rich countries to rich people in poor countries”. — Peter Bauer  (http://www.lse.ac.uk/collections/globalDimensions/research/aidTradeDevelopment/Default.htm)

The UK has been pumping Aid into the Third World since the 1950s.  At present day values several hundred billion pounds of British taxpayers’ money has been given to foreigners.   Despite the present  economic crisis all three major British Parties have committed themselves to not merely maintaining the Aid but substantially  raising it.  This year around £9 billion will be given away ; by 2014/15 that is projected to increase to £11.5 billion as our political class have committed themselves to meeting the UN’s 0.7% of GDP target by then.  (http://www.dfid.gov.uk/Media-Room/News-Stories/2010/Spending-Review-2010/).   If  the UK’s economy  grows by more than anticipated by 2015,  the figure would be higher and to maintain the 0.7%  target  it will continue to rise after 2015 as UK GDP increases. No other developed country of larger or greater size than the UK  spends as much on Aid (http://www.express.co.uk/posts/view/207565/Britain-s-foreign-aid-bill-scandal)

Because all the parties which can realistically to be expected to have a major presence in the House of Commons  are for the payment of ever increasing Aid, the British people have no choice in the matter.   This is indubitably not what the electorate wants.  A poll in July 2010 (after the Coalition Government announced only two  budgets would not be severely reduced – the NHS and Foreign Aid) came down firmly on the side of reducing the Aid budget  (http://www.bbc.co.uk/news/10504916).  Such polls, together with the consistent placing of worries about immigration and race relations as high on the public’s list of concerns , suggest  that scrapping Aid altogether  would meet with widespread  approval.

There is also growing evidence that the political and media elites are beginning to get cold feet over Aid.   Tory backbenchers got into the act early in this Parliament (http://www.telegraph.co.uk/news/politics/conservative/8196241/Tories-warn-Cameron-Listen-to-us-or-we-mutiny.html) and the Defence Secretary  Liam Fox argued against the cutting of the Defence budget when the Aid budget was protected and enhanced (http://www.thisislondon.co.uk/standard/article-23950774-tories-back-liam-fox-warning-against-overseas-aid-law.do).

On the media front,  most of the national press has criticised the ring-fencing of Aid  from cuts and there have even been a few brave souls who have called for Aid to  be discontinued at least during present circumstances (http://www.telegraph.co.uk/finance/comment/rogerbootle/8571156/No-need-for-UK-economy-Plan-B-but-lets-suspend-the-foreign-aid-budget.html).

The problem is that the leadership of all the major political parties and the broadcast media, especially the BBC, are still Hell bent  on showing  how  “compassionate” they are and make ever more absurd and reckless statements about their commitment to Aid.  Here are a selection of recent statements  from supposed Tories:

“My ambition is that over the next four years, people across the country will come to think of Britain’s fantastic development work around the poorest parts of the world with the same pride and satisfaction they have in some of our great institution like the Armed Forces and the monarchy,” he said. “This is brilliant work that Britain is doing.” (Andrew Mitchell Overseas Development Secretary http://www.telegraph.co.uk/news/8560089/Britain-will-love-being-an-aid-superpower.html).

“We, as a nation, should be proud that our humanity and generous spirit will reach every corner of the world – and we will all be richer for that.”  (Sir John Major  ex-Tory PM http://www.telegraph.co.uk/news/politics/conservative/8556639/Sir-John-Major-foreign-spending-isnt-just-right-it-should-make-us-proud.html).

“I think there is a strong moral case for keeping our promises to the world’s poorest and helping them, even when we face challenges at home,” he said.

“When you make a promise to the poorest children in the world, you should keep it.”

Mr Cameron recalled watching the G8 summit at Gleneagles and the Live 8 pop concert in 2005 and thinking it was right that world leaders should make public pledges to help the poorest countries.

“For me, it is a question of values,” he said.

“This is about saving lives. It was the right thing to promise. It was the right thing for Britain to do. And it is the right thing for this Government to honour that commitment.”

Some people were pressing him to put off aid commitments until after Britain’s economy is back on an even keel, said Mr Cameron.

But he insisted: “We can’t afford to wait. How many minutes do we wait? Three children die every minute from pneumonia alone. Waiting is not the right thing to do. I don’t think 0.7% of our gross national income is too high a price to pay for saving lives.”  (David Cameron on announcing a further £814 million Aid to fund vaccinations in the Third World (http://www.bbc.co.uk/news/uk-13744922)

This is so far removed from what the vast majority of Britons believe that it is risible.  Its  relationship to the truth is akin to Soviet grain harvest and tractor production figures and reality. The reality is that Foreign Aid is a Danegeld extracted from the populations of Western states by political elites in thrall to the doctrine of liberal internationalism.  In the fifty odd years of this practice the countries which have been the main beneficiaries of Aid have either seen their economic  condition deteriorate (for example, virtually all of  sub-Saharan Africa) or no discernible relationship between Aid and economic development can be shown (for example, India and China).  This is unsurprising given the amount of money spent on war and repression or embezzled by Third World elites whose wealth is often not measured in  millions but   billions (http://finance.yahoo.com/news/How-Hosni-Mubarak-Got-So-usnews-3723955512.html?x=0).

But determined as they are to continue with Aid,  those with power and influence realise that it is becoming an ever more toxic issue. Because of this,  the supporters of Aid have begun to argue that Aid is good value for the UK taxpayer because it reduces the risk of the UK becoming involved in wars, reduces the likelihood of terrorism in Britain and  makes mass migration less likely.  The most used argument is that Aid is part of our defence  strategy. To this end UK foreign Aid has been included in the official Government spending on UK defence  (www.ukpublicspending.co.uk/uk_defence_spending_30.html).   David Cameron has led the way with repeated claims of a defence aspect for Aid , for example, before a panel of House of Commons select committee chairs: “Preventing a conflict is always cheaper than taking part in it.” (http://www.guardian.co.uk/politics/blog/2010/nov/18/1)

The idea that  Aid prevents wars is risible, especially while we have governments following the so-called Blair Doctrine that intervention in states which had not been aggressors to other states was legitimate if it promoted liberal internationalist values . Since this dangerous nonsense was floated in the late 1990s, the UK has been embroiled in more wars  than in  the  previous fifty years.  Not only that,  but the provision of massive amounts of Aid has enabled dictatorial regimes to conduct war and repress their populations far more efficiently than would be the case without or fuel civil wars. It is also deeply ironic that the likes of Cameron are arguing this when they are at the currently  deserting regimes  the West has supported for years .  If foreign Aid has had a national interest element in it has been to prop up regimes which are beholden to Western governments  on the basis that that they may be bastards, but they are our bastards.

As for terrorism, the claim  that Aid prevents the radicalising of  Muslims abroad who will then attack the UK is fanciful in the extreme.   There have only been two Muslim terrorist attacks which got as far as an actual attempt, 7/7 (which succeeded) and 21/7 (which failed).  This in itself suggests the actual threat, as opposed to fears of a threat, is not massive given the ease with which bombings  could be made if there was a widespread and serious attempt at terrorism in the UK by those here and abroad.   There is a great deal of difference between those who are serious about being terrorists and those who like to fantasise about it and form groups who do nothing but talk or the individuals who  get a thrill from downloading  bomb-making instructions,.   Moreover, both UK attacks were carried out by Muslims either born in Britain or Muslims who had spent a long time in the country.  In addition, those convicted of terrorist offences short of an actual terrorist attack in the UK  have mostly involved Muslims who have been long resident here.

The highly questionable effect of  Aid on  extremism abroad is mirrored by the outcome  of money spent in Britain to discourage radical Islam. The Government have just admitted that the millions poured in has been ineffective at best and may well have financed radical groups at worst (http://www.telegraph.co.uk/news/uknews/terrorism-in-the-uk/8560679/Failed-anti-terror-campaigns-waste-of-money-Prevent-strategy-admits.html).

With the claim that  Aid prevents  mass migration to Britain, it is difficult to know whether to laugh or cry. Not only has there been massive and ever increasing immigration to the UK since the Blair Doctrine was established (http://www.telegraph.co.uk/news/uknews/immigration/8449324/David-Cameron-migration-threatens-our-way-of-life.html), a large part of that immigration has come from places where Britain has intervened (the Balkans, Iraq, Afghanistan) and immigrants have continued to flood in from the Third World countries to which we have given the largest amounts of Aid (for example, India, Bangladesh) (http://www.dfid.gov.uk/About-DFID/Finance-and-performance/Aid-Statistics/Statistic-on-International-Development-2010/SID-2010-Section-4-Where-does-UK-expenditure-on-International-Development-go/).   It is also worth bearing in mind that  we do not give large amounts of Aid to most of the Third World (http://www.dfid.gov.uk/Where-we-work/). Even if the idea of Aid as an immigration preventative carried weight, it would not prevent vast numbers of  people from the Third World seeking to come to Britain because we do not send them any or much Aid.

The second prong to the defence of Aid  is the ending  of direct Aid  to some of the more outrageous recipients of such as Russia and China. This is Aid still within the UK’s power to directly allocate rather than be allocated by bodies such as the EU and UN) ended . (http://www.bbc.co.uk/news/uk-12589626).  However,  Britain will still be handing large amounts of direct Aid to India, a country with its own space and nuclear weapons programmes  and more billionaires than Britain (http://www.telegraph.co.uk/news/worldnews/8350487/Andrew-Mitchell-British-aid-to-India-will-continue.html) and indirect Aid may still go to the likes of Russia and China through the UN and EU.  Any changes will be  essentially cosmetic and an attempt to blind the public to what is happening.

Finally, there is the claim that  Foreign Aid will buy Britain friends as the recipient countries grow richer. The fact that there is no evidence of the Aid enhancing the wealth of countries is strong evidence against the claim, but any one with normal psychological and sociological insight will also doubt whether Aid will leave a residue of gratitude. Rather , it is more likely to leave resentment  because people do not like to be dependent on others especially those outside their community, a resentment which will be enhanced by the constant refrain from Western liberals  and Third World dictators that the West is to blame for Third World poverty .

Despite these rumblings of public dissent,  on 13 June 2011 David Cameron put two fingers up at the British public  by committing the UK to a further £814 million of Aid for vaccinations in the Third World, money which will make the UK the largest donor in the world to this programme (http://www.express.co.uk/posts/view/252594).

Disruptive and unpleasant as the effect that  Aid on foreign governments in terms of promoting war, repression and corruption,  there is a  more fundamental problem. Despite the corruption and violence of experienced by many  Aid recipient countries, the provision of  governmental  Aid and the work of NGOs such as  Oxfam  has fed a population explosion in countries whose ability to accommodate their now vastly increased populations from their own resources is nil. By keeping the Aid flowing a vicious circle is created. The population in a country rises because the Aid allows more to survive which generates a demand for more Aid is made because the country cannot support them. More Aid is forthcoming and the population increases again above what the country can bear. This was an easily foreseeable outcome and a policy  no responsible person let alone a government should ever have advocated, bringing increased  poverty to the  poorest countries. Aid has disrupted the traditional structures which supported and limited the population to what the environment would bear.

The disruption of  the Third World  has  been worsened by the West to varying degrees driving them  towards economic practices which have radically altered their native economies for the worse. In the poorer, less developed states, the political policies with regard to international trade and consumer demand of the developed world (and latterly the developing world in the shape of the Chinese) has slanted their economies towards dangerously narrow economic bases, most commonly built on the extraction of raw materials, tourism and the production of food and horticultural products

The extraction of raw materials commonly has little benefit for the local population because the countries lack the ability to develop the resources themselves and have to sell licences to foreign companies. This means deals between foreign companies and governments   with the money derived from the licences going directly to the governments. The consequence of that is it commonly ends up in the pockets of a corrupt native elite, is squandered on grandiose projects, used to fund civil wars or simply employed to keep a regime in power by force (Nigeria is a prime example of how a great natural resource – oil – can turn into albatross around the neck of a country).

The solution to Third World debt  is in principle simple: the debtor nations  repudiate the debts and take the consequences of bankrupts. The debts should be ameliorated by the West by their identification of  money stolen and placed in Western banks  by third World kleptocrats. This money should be sequestered by the West and used to defray the  debts of the defaulting states. Simply writing off debt and increasing Aid will feed the corruption and debt accumulation.

The claim that Western protectionism is  keeping much of the Third World in poverty does not stand up to scrutiny. The agonised liberal directed public debate over African poverty ignores two  fundamental facts.  First, the trade relationship between Africa and the developed world is the choice the African rulers. They could, if they chose,  protect  their own markets and refuse the trade regime wanted by the West.  That would do far more for the long term stability and wealth of the poorer states of the world because they would develop a strong domestic economy based on the resources of the country and the capacities of its people.  Economic history tells us that a strong stable domestic economy is the most certain way of economic progression.  As for relaxing trade barriers one-sidedly, that is, by allowing African  goods freely  into the West but not vice versa ,   what of those in  West who lose their jobs because of it? Fair and unfair to whom is the question?

If I wanted to play the politically correct game I could rest my argument on black commentators who have called for its end such as Dambisa Moyo (: Dead Aid: Why aid is not working and how there is another way for Africa, 208 pages, Allen Lane. http://www.deadaid.org http://www.hiiraan.com/news2/2009/mar/_stop_giving_aid_to_africa_it_s_just_not_working.aspx) But that would not only be cowardly but  to miss the point.  Peter  Bauer’s dictum on Aid: “A system which  takes money from poor people in rich countries and gives it to rich  people in poor countries”  is all too true.  But even it  was “taking money from rich people in rich countries to give to people in poor countries”  it would indefensible.  It should not be the business of a government in a supposed democracy to tax its own people to give money to foreigners.  That the UK is currently having to borrow the money given  in Aid because of the massive fiscal deficit whilst massive cuts are being to British public services makes the situation more poignantly absurd and indefensible, but any Aid is indefensible because it is taken from the taxpayer  without the public  having any meaningful say in the matter.

Aid should be  restricted to private charity. Then we would see how much the British public want to subsidise foreigners.  Of course, those who support Aid know very well that only a minute proportion of what is currently sent abroad would be voluntarily donated. That is why they are so determined to keep state-enforced Aid.  ( It should be remembered that many of those who wish to keep Aid  have a vested interest because they either work for the  government directly or for NGOs which are substantially funded by the taxpayer. )

Could Britain end its Foreign Aid? The direct Aid could be stopped, but Britain would need to leave or get them to moderate their  Aid demands, organisations such as the  EU  and the UN.  Yet another fine internationalist mess our politicians have got us into with their love of “right-on” vanity projects.

 

How do we explain liberal internationalism as a biological phenomenon?

Robert Henderson

What the liberals have done

The general facts of liberal internationalist elite behaviour are these. They have socially fractured societies which previously enjoyed a high degree of racial and cultural homogeneity by permitting the mass immigration of the racially and culturally different. They have undermined national security and reduced domestic employment opportunities by removing protection for their own agriculture, commerce and industry. They have wilfully suppressed their own cultures through manipulation of the education system in particular and public policy generally. They have engaged in a ceaseless propaganda conducted through the mass media which diminishes the native culture and promotes the interests of minority groups. They have dissolved national democratic control by entrapping their countries in treaties such as those which empower the EU, NAFTA, the WTO and the UN, the consequence of which is to greatly restrict the scope for national action.

Beyond the boundaries of their own countries, these elites have inflated through Aid the populations of Third World countries beyond that which their societies can naturally support. In addition, the traditional social and economic arrangements of these countries are eroded by direct Western political interference and trade rules which encourage cash crops over farming to feed their own people. The consequence of all this is an ever growing number of people in the developing world who have a desperate urge to move to the rich West, something made ever easier by the liberals’ support, tacit or open, for continuing mass immigration into the West.

At the same time, the populations of the liberals elites’ own countries are falling and are ever more vulnerable to the effects of the mass immigration being promoted by the elite. The necessary eventual consequence is the effective colonisation of Western states by immigrants.

The declining birthrates of the West are themselves the fruit of liberal elite decisions to permit abortion on demand, to actively promote the feminist agenda and to create economic circumstances which discourage breeding, for example, it is increasingly difficult for a family in Britain to be raised on a single average male wage. The relaxation of trade barriers weakens their own countries and leave them ever more vulnerable as they become progressively less self-sufficient, while promoting the wealth and self-sufficiency not merely of other states comparable in size, but states – particularly India and China – whose individual populations exceed the combined populations of Europe and North America.

Natural selection and group fitness

Western elites are doing just about everything an organism should not do to protect itself: allowing large numbers of those outside the social group to invade the group’s territory, removing resources from their territory and giving those resources to those outside the group and, most bewilderingly, assisting competitor groups to expand their population whilst restricting their own.

Why are liberal elites exhibiting such ostensibly self-destructive behaviour?? The answer may lie in the fact that elites think of themselves as a separate group, a group which extends beyond national and cultural boundaries. There is nothing new in this. The medieval aristocracies of Western Europe thought themselves part of a chivalric whole.

The putative advantage to the elites of international elite solidarity is that it allows them to weaken their dependence upon their immediate (native) populations.

How elites evolve

England provides a model of how elites can survive through evolution for a very long time. From the 14th Century onwards the general trend was to broaden the elite with, in the long term, the inexorable movement was towards Parliamentary government and from monarchical power. During this development the wishes of the masses were largely but not entirely ignored – the masses made their presence felt through rioting (the historian Lewis Namier memorably described the government of 18th Century England as “aristocracy tempered by riot”)

As the franchise broadened the masses were able to exercise an ever larger degree of democratic control because politics was still national and a political party had to respond to the electors’ wishes. The elite resented this control over their behaviour and looked around for a way to diminish democratic influence. They found the means to do it in internationalism.

In a sovereign country politicians cannot say this or that cannot be done if it is practical to do it. That is a considerable block on elite misbehaviour. So the elites decided that the way round this unfortunate restraint on their misbehaviour was to commit their countries to treaties which would remove the opportunity for the electorate to exercise control over policy. In the British case, the most notable example is the Treaty of Rome and the subsequent treaties which have tied Britain into the EU. Vast swathes of policy are no longer within the control of the British Parliament because of these treaties. Add in the treaties tying Britain to the UN and the WTO and the commitment of every mainstream British party to them, and democratic control has essentially gone. What has happened in Britain is mirrored to a lesser or greater degree throughout the West.

Does liberal internationalism make evolutionary sense?

Assuming the ultimate biological imperative for any organism is to pass on as many of its copies of its genes as possible to future generations, the liberal elites might seem to have a considerable advantage because the richer and more powerful the person the greater the potential for more and better quality mates and consequent offspring. The problem with this argument is that elites in the West do not breed prolifically and, indeed, have on average fewer children than those of the native masses whom they despise. Cultural norms have seemingly subverted biology.

But cultural norms are ultimately an expression of biology, so how has this occurred? I will offer this hypothesis: there is a strong natural selfishness in the individual. This is held in check to a greater or lesser degree by the social arrangements of a society. A society which emphasises tradition will rein in selfishness. Such societies will have a strong sense of “tribe” and frequently a religion which emphasises the need to breed, demands charitable behaviour and threatens punishment in an afterlife. There will also be an absence of any easy means of contraception – and quite probably a religious ban on it – strictly enforced marriage and the lack of a welfare state. All of these things will reinforce social cohesion and the immediate interdependence of individuals on one another.

Such societies are anathema to the modern liberal mind, whose perfect society is one from which national feeling has been leeched and whose members are held together by only a shared sense of “rational” desires such as a fair justice system and a good material standard of living. Having no sense of tribe they will not see it as a duty to breed. Having easy access to contraception they can copulate at will yet have few children. They even have an ideology which tells them that having children is simply a “life choice”. Selfishness is made respectable. A society has been created in which the restraints on selfishness have been loosened too far. The consequence is that the liberal elite behave in a way to satisfy themselves at the expense of their descendants.

What counts as biological fitness in human beings?

All organisms other than Man pass on their genes in the most obvious and straightforward way. The organism breeds and its descendants breed or do not breed. In animals which engage in extensive parental care what might be called cultural inheritance plays a part in the transmission process with members of the species varying in their ability to nurture their offspring. The young of such animals undoubtedly rely on the example of their parents and, in the case of social animals, other adults to acquire many of the behaviours needed to survive.

But even the biologically fittest of the most socially advanced non-human animal cannot pass on an advantage to their offspring which in any way approaches that which a human can pass to their children. Indeed, Man’s behaviour in passing non-genetic advantage from one generation to the next is so radically different from that of any other organism that it may be the biological imperatives which drive the rest of the natural world have been subordinated to this immense ability to pass on non-genetic advantage, an ability driven by the unique nature of Man who consciously identifies how advantage may be gained and passed on. Biological fitness in humans may be predominantly the ability to pass on non-genetic advantage rather than genetic advantage.

It might be argued that inherited non-genetic advantage will dissipate over the generations and that few families will maintain their privilege over more than a few generations. But the genetic inheritance of a family line is soon dissipated reducing by 50% per generation. In other words, non-genetic inheritance is at worst no poorer a bet in maintaining fitness than genetic inheritance and in some cases a considerably better one because the inherited advantage can be passed through a larger number of generations than any meaningful genetic legacy. There are aristocratic families in England today who descend from nobles who came over with William the Conqueror in 1066. But you do not need to be an aristocrat because the advantage goes down the social scale. In 2010 Prof Gregory Davis of the University of California published a very interesting piece of research which demonstrated that those with Norman descended surnames in England were on average richer than those with artisan origin names (Regression to Mediocrity? Surnames and Social Mobility in England, 1200-2009 http://www.econ.ucdavis.edu/faculty/gclark/papers/Ruling%20Class%20-%20EJS%20version.pdf).

If this a correct interpretation of biological fitness in Man, it makes sense for elites to grab as much power, wealth and privilege for themselves. But the haves must create social circumstances which allow them to pass their non-genetic advantages to descendants. It is no good enraging the have-nots to such a degree that they simply kill the haves or take their privileges away or changing the conditions of a society so radically that the elite loses control. The latter is precisely what modern liberal elites appear to be doing.

Can the liberal elite change?

It is undoubtedly true that elites as a group only ever have one settled principle, namely, to do whatever is necessary to secure their power, wealth and privilege. It is also true that liberals have at the personal level long feared the consequences of non-white immigration – vide the way they choose to live in very white worlds themselves – and since 911 have begun to openly acknowledge that heterogeneous societies are a problem. Many probably want change. The difficulty is that by internationalising their ideology through treaties and membership of supranational bodies such as the UN and the EU and a commitment to laissez faire economics, the liberal elites have surrendered control of their own individual national destinies and hence their power to readily change matters.

To this must be added the sheer inertia which is built into an international system which has grown since 1945 into an immense heap of political and bureaucratic power and privilege. An international army of politicians and bureaucrats have the most vested of interests in maintaining the status quo.

Most important is the existence of large populations of unassimilated and probably unassimilatable recent immigrants and their descendants. These populations manipulate the political process through their increasing electoral power and the tacit threat of serious violence to ensure further immigration from their respective groups, to influence foreign policy (including foreign Aid) and to maintain the practice of allowing unimpeded remittances from the host country to the ancestral country.

The liberal elites have seemingly adopted a suicidal strategy which because Man is a creature of culture and the culture of the Western elites has trumped not only the normal biological imperatives, but has led the liberal elites to create circumstances in which the human biological imperative of non-genetic inherited advantage cannot be exercised. By forgetting the importance of the tribe or, rather, mistaking what the tribe is, that is,  their own national group, they have set themselves on the road to oblivion. It might be likened to the evolutionary overshoot of certain of the nautiloids which evolved ever more convolutedly spiralled shells until they became biologically unfit and finally extinct. Evolution is not just about winners.

Why did auditors fail to blow the whistle on the banks?

1. Audit Failure

2. Why does the failure of large concerns matter?

3. Why false accounting happens

4. The incestuous relationship between auditor and audited

5. How collusion may arise between the auditor and their client

6. Is it possible to audit companies meaningfully?

7. The scarcity of IT skills

8. The responsibilities of directors

9. Non-executive directors

10. What can be done to improve matters?

1. Audit Failure

The failure of the massive US energy company Enron in the early years of the century and the incestuous relationship between the company and its auditors Arthur Anderson gave a graphic public example of the dangers of relying on company accounts to provide a true picture of the financial state of a company. Enron went from being worth $80 billion to virtually nothing in a year, yet Arthur Anderson kept on giving them a clean bill of financial health right up to the end.

Since the Enron crash, a series of major private enterprise failures has occurred culminating in the catastrophic financial implosion of major banks and their ilk, most notably those in the USA and Britain. Much has been written about the failures of formal regulatory regimes for banks and their ilk, but surprisingly little media and political attention has been given to the failure of the part played by the general regulatory rules for business – the audit of business accounts- in preventing the excesses of the banks, for example, how did the banks’ auditors persistently accept the value placed on the exotic financial instruments which underpinned the sub-prime debt or time and again fail to uncover fraudulent trading positions of dealers like Nick Leeson?

It is this aspect of failed regulation – the audit of companies – upon which I shall concentrate, an examination which will address the general problems of auditing rather than just those associated with banks.

What is the audit? Any limited liability company in Britain has by law to be inspected to some degree (the level of audit for very small companies is much less onerous than for the larger ones) once a year by a qualified accountant or firm of accountants. The auditors must either certify the annual accounts as a fair representation of the company’s business or certify the accounts with reservations. Where the accounts are blatantly and seriously flawed, the auditors will refuse to sign the accounts and resign as auditors. Such events are very rare indeed in the case of the largest companies.

The audit regimes of different jurisdictions vary in detail, for example, British companies are required to divulge substantially more financial information than their US counterparts. Nonetheless, the regimes in any advanced country are similar enough for statements about auditing problems to be generally pertinent.

2. Why does the failure of large concerns matter?

Before I turn to the practical difficulties of producing honest and accurate audits, there is a prior question to answer, namely, why is the audit necessary? after all, private enterprises which do not take public money for government contract work are simply risking the money of their shareholders and those who extend credit to them.  Pathological free marketers would say that even a large business failure it is merely the market at work and that all will come out in the competitive wash.  Those not afflicted with this quasi-religious belief will see things rather differently. However, the free market case does need to be answered because of its present dominance in politics. So, why is the failure of a large company so important?

Obviously those who lose money or their jobs through the collapse of a large company suffer, but what about the general population? Why should they care? Indeed, many people  shrug their shoulders when they hear of  business failures, thinking “I own no shares, I have no pension with them. I do not work for them. I am not a creditor. It will not affect me.” In the special case of banks they may be concerned about money deposited, but that fear soon evaporates in a country such as Britain as they discover that the government underwrites either all or a large proportion of their deposits.

Those with this I’m-all-right-Jack mentality dwell in a fool’s paradise. In aggregate, business failures of any size are important to an economy, but a large company going bust is particularly bad news, both immediately and in the longer term. To begin with there is a strong possibility that it will have most of its staff concentrated in a few areas or even in one area. If so, it will cause a local crisis. Structural unemployment on the heroic scale of the 1930s or even of the 1980s and early 90s,  when British industries such as coal and steel were rationalised” almost out of existence, may be a thing of the past in Britain  because the country has been cleansed of most of its great manpower demanding manufacturing and extractive industries,  but a company can still employ sufficient people in an area to cause severe economic and social dislocation if it stops trading for it puts out of work its own employees and the employees of firms dependent upon its orders and the  local economy as a whole shrinks as purchasing power is reduced. Beyond the local economy, the taxpayer generally suffers because those now redundant pay no income tax and have to rely on taxpayer funded benefits while the tax take generally in the area is reduced as demand shrinks.

Less tangibly, the failure of a company as large as Enron affects the general confidence of the population.  They think, not unnaturally, that if a company that big can go down the pan, what company is safe?  When people are unsure about the future they tend to reduce their spending. That deflates the economy. but not only do they fear for their immediate jobs. If they have  a private or occupational pension, they begin to ask awkward questions such as “Is it safe?” Those without pensions as yet ask “What is the point of paying into a pension if it goes the way of Enron’s pension scheme?”

These are very pertinent questions to ask.  Private and occupational pensions are heavily linked to the stock market because pension funds tend to hold much of their investment capital in shares. Any large pension fund will be likely to hold shares in  many  major companies. If a large company fails completely or even does very badly, non-state pensions  will suffer. Even state pensions may indirectly feel the pinch because  reduced tax revenues due to a slowing economy means that state funding cannot be so generous.  Moreover, the failure of large companies has a depressive effect on the stock market generally, which again is to the general disadvantage of pension funds, which hold a large proportion of their funds in equities.  

But the ripples spread even further. Companies rely directly and indirectly on the reliability of their audited accounts and the accounts of others. So do credit rating agencies and market analysts. Once confidence in audited accounts falls, then the cost of doing business rises as companies take steps to try to safeguard themselves against losses from honest business failures or outright fraud. They will become more cautious in their business dealings generally. They will attempt to insure against losses. The general cost of borrowing money will almost certainly rise as banks become warier. New investment may become impossible. This is what caused the Asian Crash in the late nineties. Far Eastern companies looked a good bet from their accounts, but many were far from sound in reality. Once the accounts of a few big companies were exposed as works of fiction, a general collapse in confidence followed and even companies which on a trading level were perfectly sound found their supply of new capital drying up.

Finally, there is the loss of the capacity to provide of goods and services . A  large company may fail through incompetence or fraud rather than a decline in demand for their products or competition from other at home and abroad. If that  happens the country and its people lose the opportunity to purchase the goods and services. This may mean either no goods or more probably imported goods  at a higher price. In the case of strategic industries, such as microchips or energy, it can also mean a dangerous dependence on foreign suppliers.

A single large failure will not capsize a first world economy on its own, although it can do a great deal of trouble – Wall Street lost 2% of its value after Enron collapsed.  But often one large failure will signal others. There is a good reason for this: such failures almost invariably occur in difficult economic times, either at the very end of overheated boom or on the downturn.  In boom times, incompetence and even fraud can be hidden by a company because confidence is high, money is plentiful and cheap and customers  easy  to  find,  legal regulation  becomes  lax  and self-regulation next to non-existent. Financial castles in the air can be  and are happily and rapidly constructed.  Come recession, the fruits of incompetence and fraud rapidly ripen to the point of collapse and exposure. If one large company has been caught by incompetence or fraud, you may bet the farm on a number of others having fallen into the same trap.

If audits are fair and accurate, the chances for reckless or criminal behaviour are greatly reduced. That is why they are essential to the efficient functioning of economies which are predominantly capitalist. The problem is that time and again audits fail to be either fair or accurate. To understand why this is so we need to understand the reasons and methods of those within companies who would  act dishonestly or incompetently, the process of auditing and what practical steps can be taken to prevent abuses by both directors and auditors.

3. Why false accounting happens

 False accounting occurs for two general reasons. The first is the “honest” reason: accounts are falsified simply to keep a  company afloat. This is very common. It may often have a moral slant to it as many employers who own the companies they run have a genuine sense of responsibility towards their staff as well as their own interests.

The other reason why accounts are falsified is fraud for the direct benefit of the individual.  This has three basic forms. The first is when the directors of a company dishonestly influence the price of shares through the provision of false information, directly or indirectly,  to the  markets to hide the poor performance of a company and persuade shareholders and suppliers that it is still a viable and attractive going concern. Higher share prices and misleadingly favourable accounts can also trigger very large bonuses and share options.  

The second form of fraud is the direct attempt to steal the assets of a company.  This often occurs in cases where directors are all in the know and have started off falsifying the accounts to keep a company afloat. They get to a stage where it is obvious the company is going under and the directors suddenly take what they can and run. However, it can also be fraud which consists simply of taking money or assets by one or more people – who need not be directors – without the directors as a whole knowing that fraud is being perpetrated.

4. The incestuous relationship between auditor and audited

The relationship between auditor and audited can be very close regardless of the size of a company (private limited companies with few shareholders are very prone to having a tame auditor, especially family owned businesses), In the case of very large companies the relationship between company and auditor becomes very incestuous. Very few firms of accountants have the capacity to perform such audits – in Britain, perhaps three could handle a company the size of Enron.  This means that the same handful of accountancy firms carry on auditing the larger companies more or  less regardless of their performance, simply because there is no one else to do it. For the same reason governments are reluctant to act against such audit firms no matter how they behave, because to do so could result in audits for the largest companies becoming a practical impossibility. There is probably not one large firm of auditors in Britain which has in the past 30 years not been involved in some serious failure to uncover financial wrongdoing.

The primary problem with the audit as a regulatory instrument is that the auditor has a vested interest in keeping the company audited sweet because there is money in “them thar audits”. Auditors go from year to year or  even  decade  to decade with the  same  companies, happily drawing their auditing fees, which can be very substantial in a large company – Enron paid Arthur Anderson $25 million for their last audit. The incentive not to kill the goose that lays the golden egg is obvious,  and the auditor may be tempted to turn a blind  eye  to irregularities ranging from trading whilst insolvent to outright and wilful criminality.

Accountants will often tell you there is no money in auditing. Well, up to a point, Lord Copper. As auditing is a statutory requirement and qualified accountants have a monopoly of the work, there is little excuse for auditing not to be profitable. Indeed, at the smaller end of the trade auditing is a staple of an accountant’s practice. The larger the company, the more complicated matters become. Small companies frequently have their accounts audited by their accountant and little else done. Large companies commonly purchase a range of non-audit related services from their auditors, for example, management consultancy and sophisticated accounting and financial services software. (Enron paid more in consultancy fees ($27 million) to Arthur Anderson than they paid for their audit.) Auditors will drop the  price of the audit to entice the customer to buy the non-audit services. The audit may even appear as a “loss leader” in the audit house’s ledgers. But of course it would not be offered at a “loss leader” price if the other non-audit fees were not forthcoming. It does not require much imagination to see that such non-audit fees are going to end if the accounts being audited are not passed as satisfactory. It is worth adding that amounts paid by large companies to auditors for non-audit services are small compared to the value of the businesses they audit and the financial resources they command.  What after all was the $27 million Enron paid Arthur Anderson for consultancy work in their last trading year when compared to the billions Enron commanded?

Why is this laxness tolerated? Because the government cannot act, even in a purely legislative sense, too harshly against auditors for they know that if they make the rules for auditing too onerous, it may dissuade so many accountants from undertaking audits as to make the legal requirement to have accounts audited a practical impossibility. In the case of those accountants auditing the largest companies, there is a particular problem because none of the accountancy practices which have the capacity to undertake such audits has clean hands.  If the largest audit firms were brought to book for their failures to audit meaningfully, the government might as well relieve the largest companies of their obligation to be audited for there would be no one left to do it.  

The sad truth is that whatever regulatory legislation a government might pass to improve audits would be virtually a dead letter in practice if the audit profession does not wish to play  ball.   Government  does  not have the  capacity to meaningfully police auditing and could not in practice acquire it.  Because of the technical expertise required, the only people who could do it are accountants and they are never going to work as paid government employees in any numbers. That is so because accountants in private practice can both earn much more than public service could possibly offer and be their own masters – this is a general problem for public service with jobs which require expertise with a high value in the private market.

But even if sharp accountants could be persuaded to work for the government, their numbers would always be vastly less than the numbers needed to police audits meaningfully. In fact, the active policing of any law involving a fraud is always something of a confidence trick because the numbers of fraudsters are invariably vastly greater than the forces the state can muster against them.

5. How collusion may arise between the auditor and their client

The turning of a blind eye to irregularities may happen tacitly, that is, both auditor and the company to be audited understand what the “deal” is without anything being said – you get the fees, we get the clean bill of financial health. However, outright conspiracy between the auditor and the audited to suppress the true financial state of the company must happen reasonably frequently because apart from those instances which result in criminal charges, there are  any cases of publicly reported company failure which involve such dramatic  failures of auditors to qualify accounts that it is difficult to imagine they are down to simple negligence or incompetence. In Britain, think of the failure of auditors to unmask the corrupt behaviour of Robert Maxwell (Mirror Group), Asil Nadir (Polly Peck) and BCCI.

Such a conspiracy might include all the partners in a accountancy firm or just one. Where a large company is audited, the number of people  required to carry out the audit is substantial.  There is consequently a good chance that irregularities will be known to quite a number of people and a conspiracy might seem impossible to keep within the conspirators.  However, most of the people who do the physical auditing are not partners or even qualified accountants, accountancy trainees being commonly used as the auditing footsoldiers. Such people have a vested interest – progressing their careers – in keeping quiet if  they think the audit is being conducted dishonestly and also lack both the expertise to unravel fraud and the access to the overall audit data, which access often may be necessary to see a fraud.

6. Is it possible to audit companies meaningfully?

he problem for the auditor is how to balance the time available for the audit with the amount of data to be audited. As the data for a company of any size always vastly exceeds the time available all an auditor can do is sample the data. But that is only the start of his difficulties. Take the most basic act of auditing, comparing one document with another to verify that a transaction has taken place. The auditor checks one against another, say an electronic record against a paper invoice. One substantiates the other. What then? Does the auditor simply take the records at face value or does he institute further checks such as contacting a supplier of the audited company to see whether an invoice ostensibly from the supplier was actually issued by the supplier? The norm is that records which seemingly corroborate one another will be taken as genuine because the auditor simply does not have the time to check further all of the documents he inspects. The  best that can be done is to investigate more fully a sample of the documents the auditor  has chosen for inspection. But that means he is down to investigating a sample of a sample, and even if he does it rigorously, the chances of discovering that data has been falsified are pretty slight because most frauds will only affect a small part of a company’s records.

Interrogation software can be used go “data mining” on computerised records, but the best one can ever do with the manual data (which is probably the most easily identifiable source of irregularities) is sampling. Moreover, even where computer files can be interrogated efficiently – something dependent upon the IT skills of the user – that produces another sort of problem: the large volume of extracted data to be scrutinised. There is only so much time and effort that can be put into an audit.

If the directors are determined to obstruct an audit by supplying false or incomplete data as Enron routinely did in the most complicated and opaque manner,  I doubt whether it is possible to meaningfully audit a company of any real size, let alone one as enormous and as complicated as Enron. Their main accounting trick  was the creation of fictitious revenue  by setting up a complex chain of dummy companies, that is, companies owned and controlled surreptitiously by Enron,  which pretended to trade with Enron as independent customers and the hiding of debt in those companies.  A satirical email which did the rounds at the time of the Enron collapse was perhaps not far short of the mark:

Capitalism – You have two cows. You sell one and    buy a bull. Your herd multiplies, and the economy    grows. You sell them and retire on the income.

Enron Venture Capitalism – You have two cows. You sell three of them to your publicly listed company,  using  letters  of  credit  opened  by  your   brother-in-law  at the bank,  then execute  a   debt/equity swap with an associated general offer so that you get all four cows back, with a tax  exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman  Island company secretly owned by the majority shareholder who sells the rights to all  seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more.

But whatever the size of company, the auditor is always at the mercy of his client in the sense that he can only work from the data the client gives him. A false set of plausible “books” is presented and there is not much an auditor can do in practice because of the constraints of time and money. And a false set of “books” is all too possible these days because computers have made the business of falsifying records a doddle. Keeping two sets of books manually involves considerable effort, with computers all that needs to be done is keep two separate accounts programs running. one truthful, one bogus, Moreover, with computerised systems changes to hide fraud can be made without leaving the obvious tell-tale signs of alteration commonly found within manual systems such as rubbings out, pages torn from ledgers, obvious attempts to change data and other evidence of human interference.

Computers also affect the veracity of paper documents. As a reasonable stab at counterfeiting banknotes can be made using run of the mill IT equipment, it is not difficult to imagine how easy it is to forge other documents which have no security features built into them.

Suppose I want to forge an invoice from a regular supplier to account for money which in reality has been siphoned off illegally. I take an actual invoice from the company. I scan it in and then use a graphics package to remove the original sales data and to put in the false data. I then print out the forged invoice (using similar paper to the original) which for all the world looks like the other genuine invoices I have from the supplier.  

There is also the problem of the auditors ability as an investigator. Investigators like salesmen, are born not made. You can make a natural investigator better by training and giving him experience, but you can never make someone without the natural talent a good investigator. That is because an investigator must be someone with initiative, someone who does not require a textbook to tell them what to do. Many auditors frankly do not have that quality in any great degree and are literally incapable of conducting a serious investigation rather than a “tick and turn” inspection, that is merely satisfying an audit by taking things at face value. . Indeed, the type of personality which makes a good technical accountant – attention to detail, accuracy in small things and so on – may mitigate against him being an efficient investigator. As already mentioned, it is also true that the least able and experienced members of an accountancy firm are put to audit work, while the more able and experienced do the consultancy work.

7. The scarcity of IT skills

Even after 25-30 years of computerised accounting systems being the norm, auditors all too often lack the computer skills needed to interrogate electronic data in a sufficiently sophisticated manner, something which is far from simple for even someone with good IT skills when they are dealing an unfamiliar computerised records and accounting system. It could be argued that such skills should be made mandatory for auditors dealing with large companies with complex computerised accounting systems. That idea like many a legislative wheeze sounds attractive at first glance. The problem is that people with such skills are thin on the ground and very costly. If the employment of such people were made mandatory, large firms of auditors might well be unable to employ the staff they need. That  in turn could lead to the auditing of all  limited companies becoming impractical.

But let us assume for the sake of argument that there were sufficient people with IT skills and they could be enticed to work for  auditing firms, what then? Very few of those IT competent people will also have the accountancy skills needed to properly perform an audit. Nor is it probable that sufficient people could be trained to have both at a high level, because the dual training would simply take too long and be too costly. Consequently, auditors without high level IT skills would often have to work through IT specialists without accountancy skills. Apart from the immense cost implications of this, there is also the problem of meshing the IT specialist and the accountant together. As any systems analyst will tell you, the point in the creation of a new system where things are most likely to go wrong is the process of the computer illiterate customer telling the systems analyst what he wants of the system he is asking the systems analyst to design. Accountants without advanced IT knowledge are all too likely to ask for things which do not produce the data they want.

8. The responsibilities of directors

Directors, both executive and non-executive have legal obligations to take all reasonable steps to ensure that their company trades within the law. That obligation includes the presentation of an honest set of accounts.

Directors cannot be passive and automatically escape the consequences of any criminality or gross incompetence. Ignorance of wilful criminality or of gross incompetence in maintaining records adequate to show the true financial position of a company, does not excuse directors from their obligation, although it may be enough to save them from criminal charges.

Directors have limited liability in normal circumstances. However, if it can be shown that the directors have not met their legal obligations as directors, for example criminality is proven or inadequate records have resulted in a company making a loss, their limited liability can be removed. However that is  extraordinarily rare, which suggests that either the law is inadequate or there is a tacit understanding amongst those with the power to take action to remove their limited liability, especially the large pension and other managed funds, that pursuing individual directors would not be playing the game. As we shall see the law would appear to be adequate if it were only enforced. .

Nowhere is this reluctance to act  better seen than in the aftermath of the banking crisis which caused the present recession. Not one of the directors of the Royal Bank of Scotland or HBOS has been subject to criminal or civil action. Being a banker is a small-risk occupation for those at the top. As the Government almost invariably steps in when it is a bank going bust, being a banker is a one way bet: the bank makes money you get the vast remuneration: the bank fails the taxpayer steps in and you do not suffer any punishment such as summary dismissal, the removal of limited liability if you are a director or criminal proceedings, but instead leave with a massive pay-off at worst

Section 174 of the 2006 Companies Act details the duties of the directors as follows :

(1) A director of a company must exercise reasonable care, skill and diligence.

(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with—

(a) the general knowledge, skill and experience that may reasonably be

expected of a person carrying out the functions carried out by the director

in relation to the company, and

(b) the general knowledge, skill and experience that the director has.

How can the directors of the nationalised or partly nationalized British banks –  RBS, HBOS, Lloyds TSB and Northern Rock – be said to have met these requirements? Lloyds TSB have even admitted that inadequate due diligence was done before the takeover of HBOS. Yet there has been no suggestion of taking criminal or civil action against them. .

There is also the question of general competence. The alarming truth is that the executive directors of the banks almost certainly did not understand the complex financial packages being devised by their investment arms which led to the crisis. On 10 February 2009 the recently removed executive directors of the RBS and the HBOS appeared before the Commons Treasury Select Committee: Sir Fred Goodwin (ex-RBS chief executive) and Sir Tom McKillop (ex-RBS Chairman),e Andy Hornby (ex-HBOS chief executive) and Lord Steveson of Conandsham (ex-HBOS Chairman).

During their examination by the committee, each of the four directors on show was asked to detail their formal banking qualifications. All four had to admit that they had none. I am generally an enemy of credentialitis, but in this case technical qualifications are necessary to ensure that the directors understand the very complex financial instruments being used and the exotic accounting practices employed by large corporations. If failure to understand such things does not amount to gross negligence what does?

The Companies Act allows shareholders, subject to the agreement of a court, to sue directors for negligence, default, breach of duty or breach of trust. No attempt has been made to removed their limited liability to allow this to happen. Nor, as far as I can discover, has any attempt has been made to get bank directors banned from holding directorships in the future. Why have the institutional shareholders not started such legal action to remove limited liability from directors so they can be sued? Why has no politician raised the possibility of banning ex-bank directors from being directors in the future? The only plausible reason is the tacit class interest encompassing politicians, bankers and large institutional investors, the last being the only non-governmental people generally with the financial muscle to fund actions to remove the limited liability of directors. There is a simple legal way to stop them enjoying the fruits of their ill-gotten gains: remove their limited liability and ban them from holding directorships for life.

As for criminal charges, I wonder if something could not be done under the laws relating to fraud. There must come a point where recklessness behaviour becomes fraud because the director knows they are taking chances which will most probably not come off. For the future we need a law of reckless endangerment which would make any director who endangered a bank or allied institution through their criminally reckless behaviour to be punished by the criminal law.

Far from being punished, bankers who have left the banks they have helped ruin have received  gigantic pay-offs to reward them for their incompetence. The case best known to the public is that of Sir Fred Goodwin of RBS who originally was to receive an immediately payable pension of more than £700,000 per annum,(since reduced to a more modest £400,000 odd ) but he does not stand alone. To take a couple of other examples, according to the Telegraph (27 Feb 2009) “Eric Daniels, the chief executive of Lloyds Bank, which has accepted tens of billions of pounds from the Government, could receive almost £10 million in pay, perks and bonuses this year”, while Adam Applegarth, the chief executive of Northern Rock when it failed, a bank so badly damaged that it is now wholly owned by the British taxpayer, reportedly  trousered £760.000 (Northern Rock boss to get £760,000 payoff Telegraph Tony Undercastle 31/03/2008).

When it comes to human behaviour, it is always risky to say that something has never happened, but I will stick my neck and say that there is no instance of a director of a large public company audited in Britain ever publicly blowing the whistle on criminality or recklessness verging on criminal irresponsibility and getting the backing of their board to publicly expose what was going on. I think one would even be hard pressed to find a director of such a company who has publicly exposed breaches of the law or recklessness on his own authority whilst still sitting on the board.  In the case of Enron a so-called whistle blower, Sherron Watkins, was not in fact a public whistleblower. She merely told senior Enron executives that massive debt was being hidden. When the senior executives did nothing, she followed their lead and kept quiet until after the company collapsed.

9. Non-executive directors

The sinecure is alive and well in boardrooms. Non-executive directors (or their foreign equivalents) are meant to bring some particular benefit, for example contacts or expertise, and a certain independence of mind to a board. That is the theory,  In practice, and especially with large companies, non-execs have a pretty dismal record of bringing neither particular benefit nor independence of mind to their position. Where were  Enron’s non-execs when what appears to have been outright fraud was being practised? How did Robert Maxwell manage to perpetrate the frauds that he did within the context of public limited companies  packed with non-execs? What were Marconi’s non-execs doing as the management  through sheer recklessness reduced a company worth £30 billion with a cash balance of £3 billion to one worth less than £1 billion with £4 billion of debt within 18 months in the 1990s? More dramatically why did the bank non-execs fail so spectacularly to raise concerns about the exotic financial instruments and other reckless behaviour which led to the banking collapse of 2008 They were  at best simply drawing their salaries whilst doing as little as possible .

The truth is that non-execs in the vast majority of cases are no more than PR wallpaper. The case of the former Tory Minster, John Wakeham, is instructive. Wakeham is an accountant by training with considerable commercial experience before he went into politics. Not only did he accept a non-exec directorship with Enron, he also agreed to chair  Enron’s audit committee.

In theory, Wakeham was the ideal non-exec. He had particular expertise (accountancy), contacts (politics) and was not dependent on Enron for his main remuneration – apart from his then position of Press Complaints Commission chairman (for which he received £150,000) Wakeham also held 16 other non-exec directorships. Yet it did not make a blind bit of difference. Enron and their auditors were able to do what they did without a peep from Wakeham. I will leave readers to judge why Wakeham behaved as he did.

Wakerham’s situation when he was with Enron also raises a very interesting question: how it is possible for any person to head the PCC and hold as many directorships as he did (and Wakeham is far from being the champion in terms of numbers of directorships) and meaningfully satisfy his obligations as a director. Commonsense says it is not possible, even for the most conscientious and able man.

But non-execs are all too often not conscientious or able. They sit on boards to lend their names (a title is always very useful on the letterhead) and to give the illusion that a company is being properly scrutinised by those not involved with its  day-to-day management. The non-exec in return gets handsomely rewarded for doing very little and causing even fewer waves.

How are non-execs appointed? The Old Pals Act is the answer often enough. In the case of very large public companies there is a magic circle of non-execs who circulate around the companies.

10. What can be done to improve matters?

When one contemplates the practical difficulties involved in policing fraudulent or grossly incompetent behaviour by directors and auditors, the temptation is to throw up one’s hands in despair, yet something radical clearly needs to be done for at present, directors can act negligently or even fraudulently with near impunity. If you want to be a fraudster with little chance of going to prison, go into business on your own account. If you maintain at least the semblance of attempting to trade normally, generally you will be safe from criminal prosecution. If action is taken, the worst that can happen is normally a ban for a few years from being a director of a company, although in practice this is often a dead letter for very little check is made on their future employment. They may not formally be directors, but all too often they are to be found controlling companies through nominees (if the companies are small) or are employed as consultants.

How can matters be improved? Consider the practical restrictions within which any state-prescribed audit must exist. The state could never undertake the business of auditing itself because it would be impossible for the state to employ accountants in sufficient numbers to undertake the auditing. Nor, for the same reason, can the state police auditing even to the degree that it can make checks on the reduction of VAT or income tax under PAYE.  The best the state can do is investigate after the damage is done and even then the lack of accountancy expertise directly employed by the state means that the state has to rely largely  on accountants  in  private  practice to undertake the work of investigation.

If a regulatory system is reliant on private individuals – the directors, auditors and suchlike – to behave honestly and competently but cannot make any meaningful general check on them, the only course left is to work on the minds of such people. The most potent way to do that is to make the penalties for fraud and incompetence by directors and auditors severe and their application exemplary, which means prison, heavyweight fines and banning them from any position of responsibility within a company for substantial periods, including life in the worst cases and any director who has liquidated three companies. The same willingness to prosecute should apply to any other person involved in a gross misrepresentation or outright fraud connected to a company, for example lawyers, credit agencies, financial journalists, and politicians. In addition, the state should provide the means to pursue civil actions for damages against those who defraud or act with. The strongest incentives they can have to behave properly are convincing threats of imprisonment and personal financial ruin.

If the removal of limited liability is to be effective, the ability to recover of assets passed to family members and any other third party by a director must be greatly improved.  At present all that can be done is to try to show that the assets passed to a third party were passed simply to keep the assets from the director’s creditors, something which in practice is the devil‘s own job. What is required is a law that would allow assets to be seized if the third party could not show they had acquired them in a manner other than by receiving them from the director in question either directly or indirectly – a frequent ploy by directors who own all or much of a business is to pay a third party, normally the wife, substantial remuneration for work they do not do.

I would also advocate a new criminal offence to deal with situations where a prosecution is presently difficult or impossible because the directors are claiming gross incompetence to explain the collapse of a company or the unexplained vanishing of company assets. Directors should face criminal charges for such failures as inadequate or missing records as and the inability to account for missing company assets. These should be strict liability offences, that is, offences where intent does not have to be proved merely the fact that something has or has not been done. 

The position of non-executive directors needs to be tightened. As many of them do little more than lend their names (and sometimes their titles) in the manner described by Trollope in “The Way we live now”, the complete banning of non-execs would be no great loss. Any particular expertise a company needs can be brought in at non-directorial level. The same applies to people with contacts. The same applies to general independent advice on running the company.

The argument that non-execs provide oversight is unsustainable because they rarely if ever blow the whistle on corporate misbehaviour. Nor, as the example of British banks has recently shown, do they often have the expertise to understand the business they are supposedly overseeing. There might be a case of a small number of independent non-execs voted for by the smaller shareholders (to exclude the class interest between directors and the big managed funds), but the problem there would be whether sufficient people with the right expertise could be found to fill such roles. I would very much doubt whether they could be.

It might seem logical for audit firms to be restricted to auditing work. That sounds fine in theory but it raises two severe practical problems. The first is obvious: what if insufficient accountants are willing to set up audit-only firms? Obviously the system of audit as we know it would collapse.  That problem could conceivably be overcome by the government using taxpayers’ money to pay audit-only firms a substantial retainer to add to their audit fees to make the work worthwhile.  However, even if that did work, such a solution is unlikely to overcome the second problem, at least for the larger audit firms. Bright young would-be accountants, particularly with the larger accountancy practices, join because of the variety of work which is available. This provides them with not merely a good accountancy background but also valuable general management and business skills.  An audit-only company would not provide such a background. It is also true that audit work is pretty dull.

What could be done instead of having audit-only firms? A halfway house is possible. Auditors could be forbidden by law to offer other services to a company they are auditing. That will mean they have to adjust their audit and non-audit fees, but it is a practical suggestion in the sense that it could be done. It could reasonably be objected that faced with such rules accountancy firms, especially the large ones, might drop auditing.  In theory they might, but the majority of firms undertaking audits either have that as their main business or it is profitable for them. Even the larger firms would find auditing profitable if they stopped using it as a loss leader to entice clients to buy other services. If no auditor was allowed to do this, all would be forced to raise the cost of audits.

Whatever is done would of course leave the problem that only a small group of audit firms can handle very large companies. That can to a degree be addressed by especially strict oversight of the auditors of such companies, but it will always be a problem. The application of penalties should be auspiciously rigorous where collusion or fraud occurs in such companies and audit firms.

Insolvency law needs to enforced more strictly. However, that does present difficulties. In theory, a company unable to meet its debts is insolvent and should cease trading,  but few if any companies have not been technically insolvent at some time, not least because trade is often strongly seasonal. But if that was the standard by which businesses operated the economy would collapse. What businesses do is trade while they have reasonable expectations that debts will be met in the course of normal trading fluctuations or they believe they have the ability to raise fresh capital through such devices as bond and rights issues.  Of course, what constitutes a reasonable expectation is debatable and that gives great scope for interpretation by auditors as well as directors.  The line between fraudulent trading and misjudgement of a company’s circumstances is not always an easy one to discern. However, there are many blatant examples of companies going into administration or liquidation with debts which are simply so overwhelming that it stretches credulity well past breaking point to imagine that the directors had any reasonable belief that they could trade or borrow themselves out of an insolvent situation. (Think Portsmouth FC).

It is also important to realise that the audit at present is a narrow exercise designed to assess the past financial year. It is not meant to judge the broader viability of a company such as its longer term potential to trade legally. There is a case for giving the auditor responsibility for making broader judgements, for example, whether a company‘s borrowing is such as to overwhelm it with a slight change in circumstances, for example, a hike in Bank Rate. 

But no matter what steps are taken to enforce penalties against directors or to improve oversight, the policing of private business like all other policing in any society with pretensions to be free, involves a large dollop of public consent. It relies on the honesty and good will of both those running a company and those with the duty to check the financial state of a company. Consequently, the general moral tenor of a society will to a considerable extent determine the volume of dishonesty in business.

The fact that at present directors rightly believe that they have little chance of being held responsible for their incompetence or criminality means, quite naturally, that they are more likely to behave in such ways. But their propensity for doing so is also bolstered by thirty years of laissez faire propaganda by businessmen, academics, politicians and much of the mainstream media which has promoted the idea that state regulation is an evil, that the “free market” will police itself in a way ultimately benign to society as a whole and that Gordon Gecko’s “Greed is good” is by implication a worthy aspiration for everybody. That has created a moral vacuum which desperately needs to be filled. We need to get back to the idea that honesty is not merely a moral virtue but a necessity for a stable and prosperous society. Enforcing the law more assiduously and creating new laws where necessary, is one way to achieve that. Another is for politicians to stop their uncritical acceptance of so-called free markets (in reality, state controlled markets through anti-monopoly laws and privileges such as patents and limited liability) and start advocating a more pragmatic and broader approach to economic policy based on what actually happens rather than what an ideology tells them will happen.

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