Great Investment Blunders and Disastrous Political dogmas……

Investment is a many-sided activity. It requires a wide variety of actions:

• Inputs, Resources, Finance, skills, Management, planning, including timescales
• The scale of investment can range from tiny, very local expecting small scale results, as in a local business or organisation; through wide scale results in a city, town or region and businesses; or an organisation with national or international scale
• Investment can require the creation of small scale to massive organisations, and a wide variety of skills plant and equipment
• Organisations that carry out investment can be multi-national, national or local.

Investment and Political Dogmas

The 20th, 21st, 22nd, 23rd centuries have seen massive changes in political beliefs and dogmas affecting the nature of investment decisions.

One of the most powerful dogmas has emanated from institutions of learning and political thought. Examples of one powerful stream has come from the university of Chicago

Neoliberalism: the idea that swallowed the world

Last summer, researchers at the International Monetary Fund settled a long and bitter debate over “neoliberalism”: they admitted it exists. Three senior economists at the IMF, an organisation not known for its incaution, published a paper questioning the benefits of neoliberalism. In so doing, they helped put to rest the idea that the word is nothing more than a political slur, or a term without any analytic power. The paper gently called out a “neoliberal agenda” for pushing deregulation on economies around the world, for forcing open national markets to trade and capital, and for demanding that governments shrink themselves via austerity or privatisation. The authors cited statistical evidence for the spread of neoliberal policies since 1980, and their correlation with anaemic growth, boom-and-bust cycles and inequality.

In Britain, the most violent initiatives that forced the Free Market and neo-liberal thinking on society came from Prime Minister Margaret Thatcher and her right-wing Conservative governments. Amongst other initiatives, Thatcher de-regulated the banking and finance systems from what she saw was the “Dead Hand” of governments, and attacked the machinery of government via privatisation and programmes of austerity (cutting back funding and support).

Von Hayek

Von Hayek and the Free Market

Thatcher’s successors, in particular the governments of David Cameron and George Osborne sought to massively reduce the involvement of central and local governments in decision-making and influence in financial and investment matters. Hayek’s was a total worldview: a way of structuring all reality on the model of economic competition. He begins by assuming that nearly all (if not all) human activity is a form of economic calculation, and so can be assimilated to the master concepts of wealth, value, exchange, cost – and especially price. Prices are a means of allocating scarce resources efficiently, according to need and utility, as governed by supply and demand. For the price system to function efficiently, markets must be free and competitive. Ever since Adam Smith imagined the economy as an autonomous sphere, the possibility existed that the market might not just be one piece of society, but society as a whole. Within such a society, men and women need only follow their own self-interest and compete for scarce rewards.

The lawmaker is obliged to leave well enough alone – to not distort the natural actions of the marketplace – and so, ideally, the state provides a fixed, neutral, universal legal framework within which market forces operate spontaneously. The conscious direction of government is never preferable to the “automatic mechanism of adjustment” – i.e. the price system, which is not only efficient but maximises liberty, or the opportunity for men and women to make free choices about their own lives

Thirty years on, and it can fairly be said that von Hayek’s victory is unrivalled. We live in a paradise built by his Big Idea. The more closely the world can be made to resemble an ideal market governed only by perfect competition, the more law-like and “scientific” human behaviour, in the aggregate, becomes. Every day we ourselves – no one has to tell us to anymore! – strive to become more perfectly like scattered, discrete, anonymous buyers and sellers; and every day we treat the residual desire to be something more than a consumer as nostalgia, or elitism.

Effects of neo-liberalism

The past four decades have been characterised by a transfer of wealth not only from the poor to the rich, but within the ranks of the wealthy: from those who make their money by producing new goods or services to those who make their money by controlling existing assets and harvesting rent, interest or capital gains. Earned income has been supplanted by unearned income.

Neoliberal policies are everywhere beset by market failures. Not only are the banks too big to fail, but so are the corporations now charged with delivering public services. As Tony Judt pointed out in Ill Fares the Land, Hayek forgot that vital national services cannot be allowed to collapse, which means that competition cannot run its course. Business takes the profits, the state keeps the risk.

The greater the failure, the more extreme the ideology becomes. Governments use neoliberal crises as both excuse and opportunity to cut taxes, privatise remaining public services, rip holes in the social safety net, deregulate corporations and re-regulate citizens. The self-hating state now sinks its teeth into every organ of the public sector.

Perhaps the most dangerous impact of neoliberalism is not the economic crises it has caused, but the political crisis. As the domain of the state is reduced, our ability to change the course of our lives through voting also contracts. Instead, neoliberal theory asserts, people can exercise choice through spending. But some have more to spend than others: in the great consumer or shareholder democracy, votes are not equally distributed. The result is a disempowerment of the poor and middle. As parties of the right and former left adopt similar neoliberal policies, disempowerment turns to disenfranchisement. Large numbers of people have been shed from politics.

Devastating effects of Neo-liberalism…
Lord Hansworth, House of Lords UK Speech

“My Lords, I wish to talk of an enduring problem of the UK economy that is of increasing severity: our inability to pay our way in the world by means of our exports of goods and services. The consequence of this failure is our indebtedness to foreigners, which has resulted in their ownership of an ever-increasing proportion of our capital assets. It is essential that we should understand the causes and consequences of these circumstances. We need to dispel the complacency that has allowed us to reach this state of affairs, and to take action urgently to remedy it.

It is appropriate at this juncture to note that Britain’s financial sector has been greatly enriched by the business of selling our assets abroad. Each sale commands a sizeable commission. One is therefore likely to find great enthusiasm for so-called inward foreign investment among those who work in the City of London. Moreover, politicians who are allied to the financial interest are unlikely to cast doubt on a strategy that favours inward investment.

The manufacturing sector, which accounted for 25% of gross domestic product in 1979, now accounts for less than 10%. It now contributes less to our GDP than does our financial sector. The policies that have favoured the financial sector have been to the detriment of the industrial sector and they will eventually be to the detriment of us all.

Derelict factory

Our transport network provides a good example of a UK industry dominated by foreign-owned franchises. Three-quarters of rail franchises in the UK are now owned by foreign state-owned or state-backed rail companies.

One is startled to discover how much of Britain’s infrastructure is now in foreign ownership. This includes our seaports, our airports, our power stations, our railways and buses, our water companies and much else besides. Large swathes of our manufacturing industry are also now in foreign ownership. This includes our car industry, our steel industry, our cement manufacturing industry, a large proportion of our food processing industry and so on. Britain’s aerospace industry has been celebrated by politicians as an exemplar of economic and technological success. However, a recent study by Norman Smith and Joseph Wright on mergers and acquisitions in the aerospace supply chain, “Losing Control”, published by Civitas in June this year, has shown that this industry too is passing into foreign ownership. Of the 155 companies still present in 2014, only a third had avoided takeovers or mergers between 1990 and 2014. Of 101 companies that experienced a change of ownership, over half passed into foreign hands. As the report wryly remarked, a great deal of effort and energy was devoted by managements to pursuing these transactions, generating large fees and commissions that have been paid to bankers, brokers, accountants and solicitors. The report also observes that foreign enterprises have been cherry-picking smaller British aerospace companies that have been in possession of valuable intellectual capital and technical expertise. Few of these companies have survived the takeover.

The availability of British assets to foreign takeover can be seen both as a product of an ideological predisposition and as the result of the influence of some powerful vested interests. The ideological predisposition has favoured the widespread privatisation of industries that were formerly in public ownership. The risible irony is that much of what has been privatised that was previously in public ownership has fallen into the hands of foreign nationalised industries or state-sponsored industries. We have seen that this has been the case throughout our transport network and in our electricity-generating industry. It is also true of our aerospace and defence industries. The Thales Group—or “Groupe Thales”, as it would be in French pronunciation—which has taken ownership of some of the leading UK defence contractors and of a fair proportion of our electronics industry, is a French state-backed company that is partly state-owned.

The City of London has a vested interest in trading financial assets of every description. Our financial sector is no longer devoted to the purpose of raising capital to finance industrial investment. Instead, its main activities are in financial arbitrage and trading”.

Main Points. In 2020, 1.4% of the 2.5 million businesses operating in the UK non-financial business economy were foreign-owned (35,234 businesses); foreign-owned businesses contributed 28.4% of approximate gross value added (aGVA) in 2020.

Investment and Borrowing (From the new Economics Foundation)

“Borrowing to invest is the best way to secure our childrens’ future”

“The UK government should act responsibly and borrow to invest in our future prosperity”

“The UK should also borrow for investments with a high social or economic return that will increase overall prosperity”

“The limit to government is where the economic and social costs of borrowing outweigh the potential benefits” Borrowing for investment that leads to a stronger economy simultaneously pushes up the limits of borrowing too”

• Value Creation. Large companies are judged to have created economic value if the cost of servicing their shares covering their loans is exceeded by the financial returns generated
• The same can be stated about most forms of investment: investment by governments should also be judged by the social and financial benefits so generated. Investments by Social Enterprises should also be judged by an assessment of the social benefits created by their expenditures

The Free Market and investment

The disastrous flaws in a neo-liberal approach to investment is that players in a market are able to spend their resources in any fashion they want. A particularly good example of this sort of strategy is that adopted by premier Liz Truss in her short spell in office. She and her Chancellor opted for massive cuts in taxation, seemingly on the assumption that the cash so generated would be spent wisely on investment. The financial markets for a change wisely, did not believe this, and the crash in the markets brought her government down.

The effects of many years of Free Market economics, combined with the culture of the financial markets, which is focused on transactions, not investments, and has no mechanisms for judging social or economic national interest has been catastrophic for the UK economy.

The results of the Free Market and governmental ineptitude:

“Business investment in Britain is lower than any other country in the G7. The economy would have an extra £562 billion of investment since 2005 if Britain kept pace with other leading economies, the Institute for Public policy research said. Luke Murphy, its associate director for energy and climate said: “The UK is in an investment and growth doom loop. Chronic underinvestment, public and private, is delivering stagnating growth and a struggling Economy”.

The solutions?

The strategies that will lead out of the current mess lie in a commitment to Collaboration as opposed to Competition, so beloved of Free Market advocates. There is a rich seam of positive ideas in this website: www.havingtheircake.com

• IDEAS Section: “SOCIAL MARKET PHILOSOPHIES”
• SOCIETY SECTION: “Anatomy of a Social Market Society”
• FINANCE SECTION: “The Psychology of Corporate Immorality”
• ECONOMY SECTION: “Let’s get real, financial Markets won’t create new technology”
• POLITICS SECTION: “Strong government is an essential component of a healthy Society”
• INEQUALITY SECTION: “How dominance by wealthy elites ruins economies and Societies”