The free-market eats itself

Pfizer’s putative takeover of British pharma giant Astra Zeneca exposes yet another intellectual paradox of free market economics. Left to their own devices, firms will always try to takeover other firms or force them out of business. But every takeover (or bankruptcy) by definition reduces competition and choice, which is supposed to be the whole point of the free market in the first place.

It’s always seemed to me that the three top dogmas of free market economics — rational behaviour, perfectly functioning markets and government non-intervention — contradict each other. If companies and firms always act rationally in their own self interest, they will always try to subvert the free market, unless the law stops them (and sometimes not even then). But in a free market, the government is supposed to stand aside. How can this work? Imagine a football match in which all 22 players are determined to commit as many fouls as they can get away with. Then send the referee to the stands.

Free market fundamentalists are always trying to kid us that firms are falling over themselves to "compete" for our custom. They aren't. Occasionally some business people will claim that they “welcome” competition. They don't, or if they do, their shareholders or owners certainly don’t. They don't want competition. They want, if possible, a monopoly, or as close to one as they can get. Is there any example, anywhere in the world, of a joint stock private company willingly giving up its stranglehold over a market? I tried really hard, but I couldn't think of one.

So how can “free” markets ever work perfectly, or even near perfectly, if every firm in the market has an existential urge to make sure they don't? It’s an idea that, as soon as it’s set in motion, destroys itself from the inside out.

As usual, free marketeers have little to say when the weird contradictions in their beliefs come to the surface. Some do admit that enforcing the rules of the free market might be a legitimate role for strong government, but they always seem to cry foul whenever a real government proposes to act — for example by blocking a takeover like Astra Zeneca which, whatever other damage it will do, will definitely reduce choice and competition.

In theory, a real free market government should not allow any takeovers at all, except where the target firm is seriously at risk of failure. But then it wouldn’t be a free market any more, would it?

Machiavelli and the Half-Blood Prince

niccolo_machiavelli_statue-2I’ve just caught up with Alan Yentob’s BBC documentary on Machiavelli and The Prince, broadcast (I think) around Christmas. Old Nick is going through something of a rehabilitation at the moment (Jonathan Powell has recently published a sympathetic “updating”, for example) at the hands of our plutocratic elite, who are increasingly confident and willing to openly flaunt their Machiavellianism. Boris Johnson’s remarks last year about greed being good and rich and poor deserving their lot was another example of this tendency.

Taken on its own, The Prince is a horrible book, but one perfectly in tune again with the age. One of Yentob’s contributors made the point that we’re living through times remarkably similar to those Niccolò Machiavelli lived through at the beginning of the Renaissance: intense but futile competition for power, instability, a collapse of old certainties, widespread fear about security, and a bunch of unscrupulous rulers of dubious competence.

It’s an age of turbulence and Machiavelli’s harsh message strikes a chord with many. Not least those in power, to whom it offers a virtual carte blanche to behave as they see fit if they can get away with it.  “The common people,” Machiavelli wrote, “are only interested in appearances and results.” But what are these “results” and why should a Machiavellian ruler care?

Machiavelli’s fans — always most plentiful among the rich and powerful — contend that he is “only telling it the way it is”. Like it or lump it, people really do only care about themselves, and experience shows it is better to be feared as a leader than loved (obviously no one told that to Nelson Mandela). But for me it’s never been really clear what all this Machaivellianism is for. Often boiled down to “the ends justify the means”, Machiavelli’s thinking in The Prince seems to lack any concept of the common good. What are the ends exactly? Sometimes he talks (in striking echo to today’s leaders in the US and UK) about the “security of the state”, but this often means little more than the leaders own personal interests.

Machiavelli’s is an impoverished view of human nature. Even if it’s true to some extent of all of us, it’s not all that we are. Yes, we all want power and control over our own destiny, not everyone wants the same destiny, or sees the means of pursuing it as irrelevant to the value of acquiring it. He assumes everyone wants to live in a perpetual state of competition. This may suit the story of hyper global capitalism, but I don’t think it’s how most people want to live their lives.

The Prince is a book born of despair, written by a desperate man just released from prison trying to ingratiate himself with the new Mr Big in Florence, Lorenzo di Piero de’ Medici. It leaves no room for love or kindness, or for the idea that the people might want to collaborate (or any other “idea” for that matter). Machiavelli knew a lot about one aspect of human nature and one aspect of power, but he either knew nothing about the other half, or chose not to express it in The Prince. Probably, every politician needs a bit of Machiavelli. But Machiavelli’s Prince, and Powell’s “new Machiavelli”, would be half a politician and, worse still, a bloodless half of a human being.

(Incidentally, Machiavelli emphatically did not take his own advice. Shortly after writing The Prince, he retired to his vineyard outside Florence and lived a quiet life writing books and plays. You can still buy his wine – I imagine it leaves a bitter taste.)

Andrew Rawnsley wrote on Nelson Mandela: ‘His ego was pressed into the service of an idea, not self’. Machiavelli has nothing to say about ideas and, for him, self-interest is the only thing that a prince should concern himself with. But there is low scheming and there is scheming in pursuit of an idea, what Rawnsley called Mandela’s ‘classy cunning’. Ultimately, what’s wrong with the Machiavelli of The Prince is not that he thinks the means don’t matter (although they do a bit, because bad means can tarnish good ends), but that he doesn’t think the ends matter much either.

A new Bambi or a new Speedy at the Matignon?

Manuel Valls, France’s new prime minister, is often compared to Tony Blair. He even describes himself, without apparent irony, as “Blairiste”. Surprisingly, this hasn’t done him much harm. In recent months, Valls has emerged from relative obscurity to become by far the most popular member of France’s embattled Socialist government.

Like Blair, he comes from the right of of a left-wing party. Like Blair, it’s crime that brought Valls to political prominence. Blair made his name with his “tough on crime, tough on the causes of crime” slogan as shadow home secretary in the early 1990s. As interior minister since 2012, Valls has revelled in his role as France’s premier flic (‘top cop’), and ruffled the feathers of his socialist comrades with his generally hawkish approach to crime and immigration. And like Blair, Valls likes preaching the virtues of free market capitalism to a party that remains very suspicious of its vices.

Valls was even endorsed by the free marketeers house rag, The Economist, (also an early fan of Blair’s) — when he ran for president in 2012. This didn’t impress Parti Socialist activists much: he got just 6% of the vote in the party’s primary

To me, a more useful comparison would be with Hollande’s predecessor as president, Nicholas Sarkozy. Valls’s energetic, media-savvy image, evokes Sarkozy’s time as interior minister under Jacques Chirac, when he earned the nickname “Speedy”. Valls has enthusiastically adopted Sarkozy’s ultra-aggressive style. Hollande, announcing his appointment on Monday night, was playing this up when he said Valls’s administration would be ‘a government for combat’.

Both as mayor of the depressed Paris suburb of Evry (Essonne) and as interior minister, Valls has endorsed — and even stepped up — Sarkozy’s policies on immigration and crime.

Valls took a lot of flak over his support for cops in their heavy-handed deportation of a 15-year-old Kosovan schoolgirl from France last year. Tough new immigration rules and quotas, introduced by Valls, build more in Sarkozy’s legacy than Socialist Party principle. His remarks on Roma people — “these people have ways of life extremely different to ours”, and claims that it was impossible for most Roma to integrate into France, echo similarly controversial remarks by the former president.

(Interestingly, like Sarkozy, Valls is of foreign origin himself. Sarkozy was famously the son of Hungarian immigrants, while Valls is a Catalan, born in Barcelona, who did not become a French citizen until he was 20.)

Valls’s appointment sets the seal on Hollande’s “tournant social-démocrate”, his supposed shift towards pro-market and austerity-based solutions to France’s economic woes. While Valls’s is hard to pin down on economics (he’s certainly more “left”, as we Brits would understand it, than Tony Blair, although not necessarily more so than Sarkozy) there’s no doubt Valls is a more credible frontman for Hollande’s “responsibility pact” — his pledge to cut France’s deficit in line with EU demands — than the outgoing Jean-Marc Ayrault.

Valls is an enthusiast for austerity. He has supported the idea — floated by Sarkozy himself — of enshrining the need for a balanced budget (France hasn’t had one since 1974) in the French constitution. Valls’s enthusiasm for “TVA sociale” — shifting some of France’s social insurance charges onto VAT — is another a policy which finds more favour in Sarkozy’s party than his own.

He has also been critical of France’s 35-hour working week, introduced by Lionel Jospin’s Socialist government in 1998, which remains a talismanic policy for many French Socialists. The policy was also a frequent target of Sarkozy’s ire, although he never got round to doing much more than moaning about it. In true Blairite style, Valls talks about “flexisecurité” — a vague and meaningless blend of protection against unemployment and making it easier to sack people.

The appointment is not without risks for Hollande. Valls is loathed by many on the centre and left of the PS and has little real power base in the party. The Greens have threatened to leave the government over his appointment. And everyone knows, like Sarkozy, Valls is murderously ambitious.

Sarkozy’s noisy campaigning for the presidency was a constant pain in the backside for Chirac after the president passed over his interior minister and appointed the donnish Dominique de Villepin as prime minister in 2005.

In sending Valls to the Matignon, Hollande has perhaps been shrewder, and tied Valls’s political fortunes to his own. Yes, the president has a big problem in 2017 if his ambitious prime minister is successful. But he has an even bigger one if he isn’t.

Is France being let down?

Is France going into a deflationary spiral? Some economists — a minority, admittedly, but a growing one — fear it might be. If so, the consequences for France, for the eurozone and ultimately for the UK, would be serious indeed.

In 2013, inflation in France averaged just 0.9%. For January 2014, the estimate is lower still, just 0.7%. As the respected French columnist Christine Kerdellant said recently, ‘If this isn’t deflation, then it’s certainly disinflation.’

Things are heading the same way across Europe. In January, UK inflation dipped below the Bank of England’s 2% target for the first time in years, despite the supposedly “strong” economic recovery, which would normally be expected to add to inflationary pressure.

Few people, I think realise, how serious deflation is. Falling prices sound nice, but they’re never good news for long. Just ask Japan, which took two decades to recover from the deflation of the early 1990s. Even a small bit of deflation can be catastrophic, especially in a modern economy where reaction times are faster, panic spreads quicker, sacking people is as easy as pie, and everyone’s up to their eyeballs in debt.

Once prices start to fall, people stop buying. Why shell out for that new computer or holiday when it will be cheaper next week or next month? People stop investing. Why buy that expensive piece of kit when it might well be cheaper next year, and when the price you get for whatever you’re making or doing is falling. People stop borrowing. Why take out a loan, when the real value of the debt will get bigger not smaller?

Inflation erodes the value of debt, helping over time to make it more manageable. With deflation, this process goes into reverse, inflating the burden of mortgages and loans.

Companies, seeing the price of their products fall, may try to recoup their losses by cutting wages or laying off staff, triggering another vicious downward swing in the spiral. Confidence drains away, uncertainty takes grip. Pretty soon, everything starts to fold.

If deflation takes hold in France — or any other eurozone economy — the only way to avoid this vortex will be for the European Central Bank to effectively start printing euros (and perhaps, as Ben Bernanke suggested for the US, dropping them over Paris and Marseille from a helicopter). France desperately needs looser monetary policy to counteract the tightening of fiscal policy imposed on François Hollande by the international markets and Eurozone rules.

But with a single currency and open borders, there’s no way to flood France with euros without also flooding Germany. It’s one big bath and there’s only one tap. Germany wants the tap turned off. And with the ECB, what Germany wants, Germany usually gets.

Deflation in an economy as big as France’s could put at least as much pressure on the euro as Grexit or any of the other crises which have threatened to blow the single currency apart in the last five years.

Germany’s antipathy to even mild inflation is often attributed to the hyperinflation of the 1920s. But it’s worth remembering that it was Heinrich Brüning’s disastrous policy of deflation in the early 1930s that led directly to Hitler’s rise to power.

Thumbs up for the real digital revolution

Cover of Petite Poucette by Michel Serres
Petite Poucette, by Michel Serres. Editions Le Pommier 2012.

Saint Denis was beheaded on the hill looming over northern Paris now known as Montmartre. The legend is that he picked up his own head and carried it several miles north, before finally collapsing and expiring on the site of the present day suburb that bears his name.

It’s to Saint Denis that Michel Serres compares future generations of human beings in this remarkable little book (barely 90 pages long). Petite Poucette (“little thumb”) is his female avatar for today’s young people who, with their dextrous digits, carry their heads — their knowledge — on laptops, mobiles and tablets. This is changing everything, not just the way we learn, do business and enjoy ourselves. It’s changing human nature itself, and just as importantly, the way we live together.

I’ve been a Serres fan since writing about him in my very first blog three years ago. His reasoning is razor-sharp, and he writes with the radical clarity of someone very young and the wisdom of someone very old. Yes, he’s 83, French, and professor of something very intellectual at Stanford. But he’s no grumpy old don whingeing about porn-addicted kids with minuscule attention spans and the world going to hell in an online shopping cart. Believe it or not, Serres is optimistic about the future.

You might think only a conservative could be optimistic at the moment, but Serres reckons that if the powers that be aren’t trembling yet, it’s only because they don’t understand what’s hit them. “I see our institutions shining with a brightness similar to that of constellations that astronomers tells us have been dead for a long time,” he says.

With knowledge freed, existing power structures will crumble. It starts, says Serres, with education.

Why sit listening to a tired teacher reading “approved” excerpts from a book, when the whole book is out there, freely accessible from anywhere, at any time? Why accept the established interpretations when you can read and discuss the comments of thousands if not millions of people who’ve read it and thought about it?

Why sit with your ‘arse parked’ in serried ranks, when you can sit in the park, on the beach, in the pub? Why listen to this single narrow conduit of knowledge and power (the teacher at the lectern) when the whole world of knowledge is there in your hands? And why bother learning facts when you can bring them up under your thumb? The minds of Petite Poucette will be free to think and have ideas instead of being clogged up with remembering second-hand information.

This, says Serres, is the true birth of the individual. ‘Grumpy adults’ may see this as “selfish”, but weigh that egotism against where the “libido of affiliation” has got us in the last 100 years. In the name of abstract collectives like the nation, race and religion, hundreds of millions have died. Individuals rarely ask this of each other. And no one was ever asked to die for a virtual community.

Michel Serres
Michel Serres: “I would like to be 18 years old, since everything is to be remade, everything is left to invent.”

“To no longer build a community on the massacre of another or of oneself — this is our future life set against your history and your politics of death,” replies Petite Poucette.

And are the virtual communities young people have created any less “real” than the ones we have been taught to value? ’We adults have succeeded in creating no new social connections,’ says Serres. The “community”, the nation, the church, school, family, class, the market — where do they stand today? To Petite Poucette, they are just ‘abstractions flying overhead like cardboard mascots’.

Are the British and French “nations” any more “real” than a Facebook group? Do we “belong” to a social class, or the company we work for, more than the online communities we choose to join?

For thousands of years, from the pyramid of Cheops to the Eiffel Tower, the ‘global form’ of human society has been broad at the bottom and narrow at the top, with power, wealth and the control of knowledge concentrated in a few hands. New technology is set to change that, perhaps within a generation, says Serres. The real revolutionaries are not the inventors of this technology, but the users. They will turn the world upside down.

It’s a striking view of the future, both optimistic and disturbing at the same time. But unlike the zombie ideology of free market capitalism, young people don’t have to sit back and take it. It’s something that they can shape for themselves. Serres has no fear. ‘I like to be 18 years old,’ he says, ‘because everything is to be remade, everything is left to re-invent.’

Forgive, but don’t forget

The Blunders of our Governments by Anthony King and Ivor Crewe
The Blunders of our Governments
by Anthony King and Ivor Crewe
Oneworld, 470pp, £25

‘To err is human, to forgive, divine,’ wrote Alexander Pope. But we mortals often forget rather than forgive. Even if you lived through all the calamities described in The Blunders of our Governments, you’ll probably still find yourself asking, ‘How the hell did they get away with that?’

Veteran political observers Tony King and Ivor Crewe kick off this analysis of the biggest political cock-ups of the last 30 years with the textbook case. The poll tax was cooked up in splendid isolation by two ambitious junior ministers (William Waldergrave and Kenneth Baker, since you ask). The team never seriously considered alternative policies, ignored implementation problems and seemed deaf to even constructive criticism.

No one has ever successfully introduced a ‘head tax’ in Britain (the last attempt was in Pope’s time, in 1698). This one became a ‘runaway train’ which led to riots on the streets and cost taxpayers billions of pounds.

But at least Mrs Thatcher paid the price, and hopefully it will be another 300 years before anyone tries it again. With most blunders, say the authors, the chances of ministers ever being held accountable ‘approach zero’. Worse still, the same mistakes are repeated over and over again.

Often policymakers seem to develop a defensive ‘group-think’ mentality which sees ‘all objections as obstruction’, a tendency made worse by the ubiquitous PowerPoint presentation – ‘a dangerous instrument of persuasion’ which encourages group-think, warn the authors.

Then there is ‘cultural and operational disconnect’ – the authors’ polite term for ignorance. The Child Support Agency failed mainly because policymakers just didn’t realise that many absent fathers couldn’t or wouldn’t pay maintenance. Years later, ministers presiding over the individual learning accounts fiasco simply didn’t understand that some people in the training ‘marketplace’ could be dishonest. Fraudsters siphoned off a third of the £290m spent on the project.

These are Pope’s ‘human failings’, and they can affect any large organisation with ambitious plans, private as well as public. In fact, private contractors were at the heart of some our costliest blunders, including the public-private partnership to modernise the London tube, which collapsed in 2007, leaving taxpayers with a bill of at least £20bn (John Prescott and Gordon Brown, since you ask).

But, without completely exonerating officials, King and Crewe largely blame the specific behaviour of British politicians for making blunders much more likely and costly. We pay a high price for our adversarial politics and ‘decisive’ system of government, they say. ‘British politicians in general have a curious habit of functioning in crisis mode…even when no crisis exists. They seem to enjoy it.’

Far from being presidential, they argue that British government suffers from a ‘weak, under-organised and understaffed’ centre, a rapidly revolving door of ministers and officials and a chronic lack of accountability. As for parliament, their verdict is brutal: ‘As a legislative assembly…parliament is either peripheral or totally irrelevant. It might as well not exist.’

Although the authors reserve judgement on the Cameron government, the early signs are not good. ‘Omnishambles…is scarcely too strong a word to describe its performance so far,’ they warn. In fact, Cameron’s ‘may turn out to be the most blunder-prone government of modern times’.

Reform is possible, say the authors, but their tone is not optimistic. We’ll have more forgetting – and perhaps forgiving – to do in the years ahead.


A version of this review was published in Public Service Magazine, Autumn 2013.

Stopping councils from building houses hurts us all

housing_completions_GDNThis graph from Monday’s Guardian tells you most of what you need to know about the housing crisis in the UK. It tells a simple but very sorry tale.

Nothing much happened to private sector housing completions for thirty years, at least until they fell off a cliff after the 2008 crash. Housing association building remains an insignificant part of the picture. What really matters is the complete collapse of council house building since the 1980s. This has been a disaster, and not just for potential council house tenants.

The boom in house building during the 1950s and 1960s (which ensured for the first time in our history that most people could spend their lives in sanitary housing conditions) was a highly effective partnership between the private and public sector. Very crudely, the councils built for renting and the private sector built for buying (it wasn’t entirely true – I was brought up in a house built by the GLC for sale as part of its “overspill” policy of encouraging people to move out of London). This ensured there was a plentiful supply of affordable housing for renting and kept the lid on house prices even while incomes rose.

This is why so many middle and even working class people were able to buy their own homes in the 1960s and 1970s, without getting into silly amounts of debt. These were the golden years when working families, if they were in secure employment, could buy the sort of reasonable family home that only millionaires can afford in London today. There was plenty of housing about and plenty of ways to put a roof over your head: council flats and houses, private landlords, rooms to rent, bedsits – we were providing houses of all shapes and sizes for families of all shapes, sizes and means.

Far from “crowding out” private investment in housing, or making people “reliant” on the state (as if people don’t have minds of their own), council house building was the reason people could afford to buy their own homes. Council development stimulated private development. There is no evidence from this data that the private sector is capable or willing to respond to today’s unprecedented demand for housing: the long boom in house prices which began in the 1960s has had no net effect on private housing completions at all, even from the 1980s onwards when private developers no longer had to compete with councils for tenants and buyers. It’s a dismal market failure.

If we want affordable housing to buy, we have to have affordable housing to rent, and that probably means council housing. That means lower rents and lower prices. Of course, people who are relying on property hyperinflation to fund their retirement won’t like it. But at least they’ll still have a roof over their heads.

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