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September 10 - October 28, 2018
‘The highest-earning 0.01 per cent of U.S. families (150,000 in number), for example, now receives 10 per cent of all of the income earned by the remaining 150 million families, three times the 3 to 4 per cent share that prevailed from 1945 to 1980. It is no secret that about 35,000 of those families have made their fortunes on Wall Street.’
At VW, a hidden design flaw (potentially just as injurious to life and health) arose less through cynical calculation at the top than through pressures placed on subordinates to promote financial performance.
in a capitalist economy some rent is necessary: there is an unavoidable price tag to maintaining the circulation of capital in the economic system. But the scale of the financial sector and of financialization generally has increased value extraction to the point where two critical questions must be answered: where is value created, extracted and even destroyed? And how can we steer the economy away from excessive financialization towards true value creation?
Executive pay should be kept in check through an understanding that there are many other stakeholders who are critical to value creation, from workers and the state to civil society movements.
Reinvestment of profits back into the real economy–rather than hoarding or engaging in share buy-backs–should be a condition attached to any type of government support, whether through subsidies or government grants and loans.
the dominant narratives about innovators and the reasons for their success fundamentally ignore the deeply collective and cumulative process behind innovation. This failure to recognize these processes has in turn led to a problematic distribution of the rewards for innovation, and to policies which, in the name of innovation, have enabled a few companies to extract value from the economy.
that the most modern form of rent-seeking in the twenty-first-century knowledge economy is through the way in which risks in the innovation economy are socialized, while the rewards are privatized.
Those who might otherwise be seen as lone entrepreneurs in fact benefit from such collectivity; moreover, they stand on the shoulders of both previous entrepreneurs and taxpayers who, as we will see, often contribute to the underlying infrastructure and technologies on which innovation builds.
In the very early days it is often public R&D agencies or universities that fund the science base, and only when innovation is close to having a commercial application do private actors enter.
the private VC industry’s share of the rewards tends to be about 20 per cent, excluding other fees and charges; by contrast, the public sector’s direct share is close to nil. The public sector is generally deemed to reap its rewards in other, more indirect ways: through taxation or from the benefits of products with high quality and low cost. Not only is this a way of thinking that all but ignores the crucial and risky early investments made by public funds in innovation; it disproportionally privileges the later, private investors in terms of rewards.
IPOs are, first, a way for early investors to get their money out. The very possibility of an IPO encourages investment–although it has to be said that investors with one eye on the exit door and the other on the clock might not be ideal for nurturing a company to its potential.
if it has proved hard to make reliable money from the development of actual new blockbuster drugs, it seems that there have been plenty of ways to derive income by speculating about the possibilities of doing so. Nor has this unremarkable history of turning taxpayer-funded investments in life sciences into successful products prevented top executives in those companies being well rewarded in salaries and stock.
In the last century patents, and associated tools like copyrights and trademarks, have gone from being devices to stimulate innovation to means of blocking it.
In practice, however, most innovations are not patented, which in itself shows that patents are not really necessary, as there are other ways to protect innovations, including lead-times and trade secrecy.
in aggregate, ‘patent litigation destroys over $60 billion in firm wealth each year’,35 with the costs falling more heavily on smaller firms.36
In many circumstances, entrepreneurship can be unproductive: where it involves innovations in rent-seeking, for instance, or discovering unused but effective legal gambits to deploy against competitors. Today, the patent system offers many opportunities for these kinds of ‘unproductive entrepreneurship’; patents can reinforce monopolies and intensify abuse of market power, block the diffusion of knowledge and follow-on innovations, and make it easier to privatize research that is publicly funded and collectively created.
because public institutions funded most of the key scientific discoveries behind health innovations,42 taxpayers are now paying twice: first for the research and second for the premium that pharmaceutical companies charge for their drugs.
What is not being pointed out, however, is that the principle that a specialty drug’s price should equal the costs it saves society is fundamentally flawed. If we took such a principle seriously, basic therapies or vaccines should cost a fortune. For that matter, how high should the price of water be, given its indispensable value to society?
The standard defence of companies such as Facebook that ‘competition is just one click away’ is simply false in markets where network effects are so important.
The low rates of tax that technology companies are typically paying on these rewards are also paradoxical, given that their success was built on technologies funded and developed by high-risk public investments.75 If anything, companies owing their fortunes to taxpayer investment should be repaying the taxpayer, not seeking tax breaks.
The confused and misleading approach to the concept of value that is currently dominating economics is generating a truly paradoxical result: unproductive advertising activities are counted as a net contribution of online giants to national income, while the more valuable services that they provide to users are not.
It is this gap between the collective distribution of risk-taking in innovation and the more individualized, privatized way in which the returns are distributed that is the most modern form of rent.
Taxpayers footed the bill for Solyndra’s losses–yet got hardly any of Tesla’s profits.
Patents themselves should not be seen as ‘rights’ (IPR), but rather as a tool with which to incentivize innovation in the sectors where they are relevant–but in such a way that the public sector also gets its return; drug prices could become ‘fairer’, reflecting the collective contribution of different actors and making a healthcare system sustainable.
Monopolies like patents are contracts which must be negotiated. One party (business) receives protection of its profits, the other party (government) receives benefits for the public, whether through lower costs and prices (by economies of scale), diffusion of innovation (by the way patents disclose information), or through reinvestment of the profits in specific areas considered beneficial for growth–in this case, innovation.
But this fixation on austerity to reduce debt misses a basic point: what matters is long-run growth, its source (what is being invested in), and its distribution (who reaps the rewards). If, through austerity, cuts are made to essential areas that create the capacity for future growth (education, infrastructure, care for a healthy population), then GDP (however ill defined) will not grow.
Keynes only went part of the way. He changed our thinking about how government can create value in the bad times, through counter-cyclical policies; but he, and his followers, had much less to say about how it can do so in good times as well.
Market-oriented reforms of healthcare fail to appreciate the evidence that there is no such thing as a competitive market for those services: contracts run for several years and they are granted to a small number of firms which come to dominate the outsourcing market.
Moreover, the whole system of contracting out has a distortive effect on the activities of NHS personnel. As noted by Pollock, ‘clinicians, nurses, managers and armies of consultants and lawyers spend their days preparing multiple bids, tenders and awarding contracts, instead of providing patient care’.
outsourcing often increases costs and is a form of monopoly.
The cost to the taxpayer of all the contract workers is double that of civil servants, not because contract workers are paid better–they often have to put up with low wages and poor conditions–but because the contractors’ fees, overheads and profit margins, and the ratio of the number of contract workers to the number of civil servants is sometimes as high as four, revealing how bloated and inefficient the outsourcing process can become.
What the public gets is frequently less transparency, lower quality, higher costs and monopoly–exactly the opposite of what in theory privatization (poorly justified as it was in the first place) is supposed to achieve.
Similar situations have occurred with banks which are affected by bad loans, such as RBS in the UK. Such banks end up with balance sheets full of worthless loans that then prevent the banks in question from making any further loans. The default answer in such cases has often been to take out all the toxic assets from the ‘good’ part of the bank, and to put them in a government-run ‘bad bank’. The idea is that doing so will allow the private bank to get back on its feet, with the taxpayer taking on the responsibility of managing or selling off the bad assets. But this has resulted in the
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lack of belief in government thereby becomes a self-fulfilling prophecy: when we don’t believe in government’s ability to create value, it eventually cannot do so. And, when it does create value, such value is treated as a private-sector success or goes unnoticed.
Doing ‘hard’ things means being willing to explore, experiment, make mistakes and to learn from those mistakes. But this is almost impossible in a context in which government ‘failure’ is deemed the worst of all sins, and in which the guns are loaded, waiting for government to make the slightest mistake.
incentives (indirect spending through a tax cut), unless complemented by strategic direct investment by government, will rarely make things happen that would not have happened anyway
the primary objective of the policymaker should be to increase business investment, not profits. Indeed, as seen earlier the relationship between profits and wages is at record levels. There is no profits problem, but an investment problem.
Value has gone from being a category at the core of economic theory, tied to the dynamics of production (the division of labour, changing costs of production), to a subjective category tied to the ‘preferences’ of economic agents.
even Adam Smith was of the opinion that markets needed to be shaped. Contrary to the modern interpretation of his work as ‘laissez-faire’ (leave the market alone), he believed that the right kind of freedom is not the absence of government policy, but freedom from rent extraction.
