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Monthly articles (English and French) on the theme "Querying economic orthodoxy"

No. 27 - March 2008

The economic tripod

ANGUS SIBLEY

What's the right balance? Are our gains as consumers and investors worth the price we're now paying for them?...The old institutions of democratic capitalism...have gone. But no new institutions have emerged to take their place. We have no means of balancing.
Robert B. Reich, Supercapitalism (Knopf, New York, 2007) chap. 3, page 89

The cult of competition, for the benefit of consumers, has threatened the incomes of both capitalists and their employees. The capitalists have found ways of protecting themselves against this threat; employees have not found, or have lost, adequate responses.

The business tripod

A business, like a tripod, is supported by three 'feet'; these are:

*the investors who provide its capital;

*the employees who work in the business; and

*the customers who provide its income by buying its products or services.

A tripod which leans heavily upon one of its feet and lightly on the other two is unstable and at risk of capsizing. It is the same for a business, which should not lean too heavily on any of its 'feet'. In this context, what do we mean by 'leaning heavily'?

A business leans heavily on its investors if it makes a poor return on its capital; on its workers if it rewards their work stingily; on its customers if it overcharges them.

A well-managed business should seek to avoid these errors, maintaining a fair balance between the interests of its investors, workers and customers. However, many businesses - and indeed whole economies - today are unbalanced. The American economy, for example, is flooded with consumer goods and generally provides investors with good returns; but it does not do very well by its workers. Employment is too often precarious, ill-paid and overstressful; unemployment is too high in many places; most workers have benefited very little from the robust economic growth of recent years. Most of the growth has gone to investors and to a tiny minority of overpaid executives. Moreover, businesses today pay too little attention to the public interest, the general good of society.

Tilted against the workers

In general we may say that the worldwide free-market economy is unbalanced, in that it pampers consumers and investors but is rough on workers. How can we explain this phenomenon?

Since the 1970s, for the benefit of consumers, we have idolised the principle of competition. We argue that the more competitive is an economy, the more will consumers enjoy an abundance of attractively-priced goods. That is true. The problem is that we consumers are also we workers. The effort to indulge us in the shopping mall has in the end hurt us in the workplace. Goods have become more affordable because they are produced and distributed more cheaply - that is to say, by workers (here and abroad) who are too often worse paid, harder worked, and less securely employed.

Many influences have made our economies more competitive. To mention a few: the disappearance of the former nationalised monopolies; government crusades against anti-competitive practices; the consumer movement with its comparative price studies; the new habit of buying on-line; cheap and efficient freight transport; international free-trade agreements; the dominance of powerful retail chains which impose strong pressures on producers to reduce their prices.

Competition and its consequences

In today's highly competitive global trade fair, consumers have the wind in their sails. But downward pressures on prices, though good for buyers, make life hard for all sellers, from producers to retailers.

However, the selling businesses have to satisfy their shareholders. These impose their own competitive pressures. Today the dominant investors are the big financial institutions (pension funds, mutual funds, private equity funds…), which are in competition with each other to maximize the returns on their portfolios. These powerful shareholders therefore oblige the businesses in which they invest to maximize their profits.

At this point, our explanation runs into a difficulty. One would think that rising competitive pressures on prices would squeeze business profits. In the 1990s, it seemed that businesses were maintaining their profits by reducing their operating costs, through redundancies and other cutbacks. One feared that, once businesses had trimmed their costs to the bone, the continuing pressures on prices would begin to eat into business profits.

But that has not happened. Most large businesses have continued to report rising profits. It follows that these businesses have been able, to a considerable extent, to restrain competition between themselves. It would appear that they have successfully played the shadowy game of tacit collusion. This is the practice of signalling to one's competitors, by manipulation of one's own prices, the price levels one considers acceptable, with the implied message that any attempt to push prices lower would lead to a price war that would hurt everyone in the trade.

Since most businesses share the same desire to keep their prices stable at profitable levels, this game generally works well. It has the great advantage of leaving no traces that could provide damning evidence in an investigation of illegal price-fixing.

Disunited workers

Workers, by contrast with capitalists, have not found the means to resist competitive pressures. Consumers have, in effect, united by shopping with big retail chains; investors have united by investing through big funds. Workers, on the other hand, have become less united than they used to be; their unions have lost much of their former clout. To quote Professor Robert Reich again (1): While Wal-Mart and Wall Street aggregate consumer and investor demands into formidable power blocs, the institutions that used to aggregate citizen values [including worker interests] have declined.

The cult of competition, for the benefit of consumers, has threatened the incomes of both capitalists and their employees. The capitalists have found ways of protecting themselves against this threat; employees have not found, or have lost, adequate responses.

Thus workers have become the losers under the free-market régime. The economic tripod is unbalanced; it leans heavily on workers, lightly on consumers and investors. And this imbalance leads to many problems: unemployment, excessive stresses at work, precarious jobs, 'working poverty' and troubles in the inner cities.

Some practical remedies

How can we rectify this imbalance? Here are a few practical suggestions. We should:

*Make trade unions more effective and more attractive to workers.

*Recognise that excessive competition is unhealthy and damaging. We should tolerate reasonable restraints on competition, as in the past we did, provided they are open and above-board. But we should also take a tougher line against companies that seek exorbitant market share, so that we may preserve a wider spectrum of competitors. Why has America allowed Wal-Mart (2) to become as big as the state of Massachusetts in terms of revenue? Is this not an inordinate concentration of power, such as the US Constitution aims to prevent? Indeed, we have here a concentration of political as well as economic power, since big corporations are such potent political lobbyists.

*Renounce certain attitudes promoted by free-market economists and their political followers. An example: Nigel Lawson, UK Chancellor of the Exchequer under Margaret Thatcher, recently complained (3) about the decision of Gordon Brown's government to support and keep in business the failed Newcastle bank, Northern Rock. According to Lawson, this bank should be closed down, despite the fact that it is a major employer in the north-east of England, an area of high unemployment. Nor, of course, is the survival of Northern Rock of any…importance to the UK economy thunders the ex-Chancellor.

*Put aside our obsession with 'labour productivity' and give more importance to other productivities, such as the productivity of energy, of petrochemicals, of paper...

*Restrict imports of very low-priced products.

*Encourage forms of business that are less heavily exposed to financial markets.

* * * * *

References

1 Robert B Reich, Supercapitalism (Knopf, New York, 2007), chap. 3, page 126

2 Wal-Mart's turnover in the year to 31 January 2007 was $345 billion. The GDP of the state of Massachusetts, at current prices, was $338 billion in 2006
(see http://www.bea.gov/regional/gsp/action.cfm).

3 Nigel Lawson, Failure after Failure in Time (New York, 3 March 2008) page 40