DOES CAPITALISM REALLY HAVE TO BE FOUNDED ON GREED?

The following article by Lucy Kellaway in the 'Financial Times' is absolutely accurate in its portrayal of Anglo-Saxon free-market capitalist values. Such insights! We recommend that you read on....

Strange kind of capitalism that celebrates self-denial

"Merve should get a medal!" wrote a reader on The Times website last week on hearing that the governor of the Bank of England had turned down a £100,000 pay rise. Others agreed: "Well done Mervyn." "Good on him!" "A real hero - and from WOLVERHAMPTON!!"

Over on FT.com, the same feeling was expressed in more schoolmasterly fashion. Mervyn King, it said, "merits applause".

And applause he got, from nearly everyone. Mervyn was not only deemed a nice bloke, but columnists went so far as to argue that neither Northern Rock nor rising inflation were really his fault after all.

Mainly, though, everyone was impressed because the governor was setting a good example. By turning down his pay rise, he was shaming overpaid CEOs for being so greedy.

But actually Mr King wasn't setting a good example: he was setting a lousy one. We have to hope that CEOs are not tempted by the avalanche of positive PR that Mr King generated by a mere £100,000 into following suit.

The Lex column wrote approvingly: "Mr King's caution . . . highlights how rarely chief executives demonstrate such tasteful self-denial."

This is sentimental bilge. Of course chief executives don't go in for tasteful self-denial; they would never have made it to the corner office if they did. Business is not about self-denial or tastefulness, and to hanker after either betrays a hopelessly British, screwed-up attitude to money. Like most Brits, I am inclined to tasteful guilt and confusion over money - but it is not a trait I admire in myself and I am saddened if the governor of the Bank of England shares it too.

For a capitalist economy to work, we all need to believe that more money is better than less money, and that a pay rise is a good thing. To set a good example to the rest of us, chief executives must be sticklers about taking their rises, just as they must be sticklers about taking their holidays.

To commend them for doing otherwise is to get us into a mad inverted world that is like the bazaar in Monty Python's Life of Brian, in which Eric Idle attempts to buy something but confuses the haggling process and keeps bidding his purchase price up. The only reason for not taking a rise is if it was offered in error, or if it was arrived at by idiots. In the case of the Bank of England one does wonder why the consultants Towers Perrin suggested such a big rise after a fairly cruddy year for Mervyn, especially when his counterparts at the Fed and the ECB were getting less.

In fairness to Mr King, he is not in charge of the system that determines his salary. But a CEO who turns down a pay rise should not get applause: he should be sacked for presiding over a pay system that produces a number so far in excess of what he deserves. The solution to excess pay at the top is not to curry favour by waiving rises, but to sack the remuneration committee and start again.

An even more objectionable thing about turning down a rise is that it muddies the moral waters. If the CEO doesn't take his money, is that a message to the troops not to take theirs? Or is it saying that the moral high ground belongs only to the man at the top; that only he can rise above the grubby business of money and that those below are lesser beings who can be excused for having their noses in the trough?

If CEOs started routinely saying no to rises, greed would not go away; the system would simply adapt. One imagines a ridiculous situation where remuneration committees would suggest even more ginormous numbers, knowing that the CEO would want some to get some brownie points by publicly haggling them down to a lower figure.

And if one wants further evidence of the sort of thing that happens when one disallows people from taking pay rises, then one only has to look at members of parliament. They fiddle their expenses instead.

© The Financial Times Limited 2008

A FEW COMMENTS

Ms, Kellaway seems to believe that capitalism will only function if people act as greedy individualists - and indeed this has been a fundamental tenet of free-market fundamentalism. However, a little more thought might cause us to reach quite different conclusions.

Anglo-Saxon free-market market capitalism is causing widespread chaos and misery

Lucy Kellaway seems to believe that there is only one form of capitalism- that practiced in the Anglo-Saxon cultures, especially the US and UK.

The fruits of these systems are ripening really well in the form of the current global financial crisis, not the first of its kind and unless there is radical change, by no means the last. The sufferers from this system of unregulated greed are not the minority of winners, but the large majority of losers, starting with savers, borrowers, many house-owners in America and Britain, spreading to a large numbers of people who have been conned into believing that they are what they consume and onwards to the poor and socially excluded in societies suffering from gross inequality. One thing unregulated free markets undoubtedly do is to enable the rich and powerful to hog most of the wealth and power, to the detriment of the poor and powerless. To the winner goes all!

The ripples spread much further of course - to Russia, where public health and well-being has been devastated by the greed of oligarchs and the disintegration of the Soviet system to be replaced not by responsible capitalism, but by unregulated avarice. The chaos thus created has enabled many in Russia to welcome a re-centralisation of power in the hands of strong men who are able to re-introduce some certainty. We may all come to regret this.

Move on to most of Africa, and large swathes of South America - the insistence of the IMF and World Bank that poor countries should espouse the free market in all aspects of their economies has caused the destruction of local industry, the imposition of monetarist policies that have destroyed large parts of emerging economies. Of course, the imposition of a 'level playing field' has allowed the introduction of global banks and companies, which extract value rather than add it.

For a full description of the impacts of free-market fundamentalism, click neo-liberal free market economics rules - but does it work?

There are other forms of capitalism and other versions of market economies

Ms. Kellaway seems to be under the illusion that capitalism as practiced in Britain and the USA represents a sort of Platonic ideal. Nothing could be further from the truth. Japan, Korea, Germany, Norway, Sweden, Denmark, Finland and many other countries also have market-based capitalist economies - but in various ways they have tempered the excesses of the free market and made capitalism the servant of society, rather than its master. As time goes on, it may sink in that

capitalism is not the captive of a privileged few, but should be judged by the quality of the societies in which it is embedded. In many of these societies, people willingly give up some advantages for the well-being of the whole.

For more, click Economics at the service of society - social market philosophies

Pay and performance

Another matter to note, Ms. Kellaway: there is hardly any correlation between the performance of FTSE 100 companies and the pay of their CEO's. The top managers of our largest companies have been creaming off pay increases that are absolutely not justified by performance. Nor is there a competitive market for talent. Most appointments are made from inside companies and there is little movement between continental Europe or the US and the UK. Despite vastly higher and even less justified pay levels than in the UK, hardly any British top managers work in the US - something to do with quality? A final point - the impact of the CEO on large companies is limited - big businesses depend on the efforts of thousands of skilful people not the messianic leadership of one person. So why pay The One so much? Because they have the opportunity to grab it and others do not.

Those interested to see the real facts can browse Addendum One at the end of this article.

Greed, Individualistic Materialism, Healthy Societies and Happiness

Free-market capitalism is based on the notion that people are individualistic economic animals, motivated to maximise their own material well-being. The Anglo-Saxon capitalist system has consumption as its foundation. Whole industries exist to persuade people that that their happiness and well-being depends on what they consume - politicians in Britain and America have actively supported these notions, the advertising, finance and consumer services industries depend on persuading people to consume more and more.

Yet other capitalist societies are quite different - the Nordic cultures are based on the idea of a healthy, harmonious society in which the more fortunate are willing to give up some of their advantages for the good of society as a whole.

They have less inequality, better public health, a much better educated populace and less crime than the bastions of free-market capitalism, the US and UK.

Oh, and they are economically just as successful - probably more so as the toxic effects of the untrammelled greed of the market fundamentalist systems bite harder and harder.

The growing field of research into the roots of human satisfaction and happiness is also unearthing interesting findings - for example that people derive much more satisfaction from giving than taking, and happiness is based on relationships and being content with work and social life - not on accumulating wealth.

"Materialism is toxic for happiness," says University of Illinois psychologist Ed Diener. Even rich materialists aren't as happy as those who care less about getting and spending.

Think before you speak, Ms Kellaway

Journalists have a hard life - they have to produce material to meet tight deadlines and produce regular material, even if they may have little of value to say. But they are also quite influential, which it is important that they are accurate and responsible in their work. Alas! This is seldom the case. The quality of UK journalism is rather poor. Nick Davies in Flat Earth News,(Chatto and Windus) estimates that journalists only check out the facts in their articles about 12% of the time, which means that they mainly regurgitate second hand material without verifying their sources.

It would do Ms Kellaway no harm to explore the ideas behind her view of capitalism. They are based on social Darwinism and the theory that humans are inherently selfish - they can't help it, its in their genes. This notion of inherent human selfishness has driven the version of capitalism that is dominant in the US and UK - but virtually nowhere else.

But it appears that one of the high priests of gene theory has progressed beyond his original ideas and now believes that humans have advanced beyond a state of selfish greed. Their intelligence, says Dawkins, has enabled people to develop more altruistic societies in which people are able to act on behalf of the common good just like Mervyn King .

Maybe Ms. Kellaway might write something on the effects of selfish greed on society, just to balance matters a little.

See Our media have become mass producers of distortion

PS It has just occurred to us that Lucy Kellaway wrote her column as an ironic joke and doesn't really believe the rubbish about greed and capitalism at all. If so, good joke! We are really sorry, we missed the irony.

ADDENDUM ONE

Pay and Performance

So, against this background of successful adoption of the various Codes, and over 15 years of developing corporate governance practices, it is important to examine what has actually happened as a result.

Corporate performance

The data presented have come from a number of sources, in particular government reports and research from CRESC, the Centre For Research in Socio-Cultural Change, University of Manchester. CRESC is part-funded by the widely respected Economic and Social Research Centre.

FTSE 100 - % annual change 1983 to 2002 in:

FTSE 100 - % total real change 1983 to 2002 in:

FTSE 100 - Net Income, dividends and retained earnings (2003 prices)

Pay differentials

Ratio of pay, directors to average pay

SUMMARY

Performance:

• Sales growth and profits growth only matches GDP
• Dividends increase much more than profit, retained earnings have declined: Dividends are therefore probably increasing at the expense of investment, which is very low by international standards. R&D expenditure amongst large companies is declining
• The rate of attrition and failure of FTSE 100 companies is very high, mainly due to M&A and foreign acquisition
• There is strong evidence that British-owned companies are less productive and invest less than most foreign counterparts, even in the UK. The most productive companies in Britain and the highest investors are foreign-owned multi-nationals, followed by UK multi-nationals in Britain. Last come UK indigenous companies.

Pay

• At the aggregate level, there is little evidence of any linkages between directors' pay and corporate performance, although there are some individual examples - Glaxo from 1983 to 2002 being a good one, although the performance/reward relationship has changed since then
• The differentials between the pay of the average employee and directors have widened dramatically over the period, and markedly since the adoption of the Greenbury provisions.
• A significant large part of the 'performance-related' element of directors' pay has come, not from real company performance improvement, but from non-profit related increases in dividend distributions to investors and general increases in share prices. Other main drivers seem to be company size and "the market for executive talent".

Analysis

• There is a marked paradox between the adoption of the provisions of the Combined Code related to pay and the actual 'on-the-ground' trends. It would appear that companies have adopted the letter of the Code almost in its entirety and have then ignored the spirit. At the very least, it appears that procedural observance has had little traction so far when it comes to actual practice.

ADDENDUM TWO

NOTEWORTHY FACTS ABOUT UK SOCIETY

The UK has experienced a system of free-market economics since the early 1980's. Before that time, inequality was decreasing and social mobility increasing. What has happened since then and how does Britain compare with some other societies?

UK Wealth distribution, 2006

The top 1% own 25% of national wealth
The top 10% own 52% of total wealth
The top 50% own 94% of total wealth

Income distribution

GINI Index : 0= perfect equality, 100 = perfect inequality (One person owns all the wealth)

In Europe, only Greece has more unequal income distribution than Britain. The US stands out as having the highest level of inequality in the developed world

Relative wealth and poverty

• Since 1970, area rates of poverty and wealth in Britain have changed significantly. Britain is moving back towards levels of inequality in wealth and poverty last seen more than 40 years ago.
• Over the last 15 years, more households have become poor, but fewer are very poor. Even though there was less extreme poverty, the overall number of 'breadline poor' households increased - households where people live below the standard poverty line. This number has consistently been above 17 per cent, peaking at 27 per cent in 2001.
• Already-wealthy areas have tended to become disproportionately wealthier. There is evidence of increasing polarisation, where rich and poor now live further apart. In areas of some cities over half of all households are now breadline poor.
• There has been slower change in wealth patterns overall. The national percentage of 'asset wealthy' households fell slightly in the early 1990s but rose dramatically between 1999 and 2003 - 23 per cent of households are now wealthy in terms of housing assets.
• The general pattern is of increases in social equality during the 1970s, followed by rising inequality in the 1980s and 1990s. Changes since 2000 are less clear.
• Urban clustering of poverty has increased, while wealthy households have concentrated in the outskirts and surrounds of major cities, especially those classified as 'exclusive wealthy', which have been steadily concentrating around London.
• Both poor and wealthy households have become more and more geographically segregated from the rest of society.
• 'Average' households (neither poor nor wealthy) have been diminishing in number and gradually disappearing from London and the south east.

Source: Joseph Rowntree Foundation

Poverty Facts

Poverty is defined as income of less than 60% of median household income. In 2006, this was £103 per week for a single person and £301 per week for two adults with two children.

• In the 8 years to 2006, over 33% of the population experienced poverty at least once
• In 2004/5, 3.4 million children are living in poor households - this has reduced from 4.1 million in 1998/9. Of these, 41% are in two parent households where at least one member works, and 34% in lone parent families without work.

Crime and imprisonment

Number of prisoners per 100 thousand population

Number of prisoners per 100 thousand (2001) and incidence of crime

There appear to be no causal links between incidence of crime and imprisonment

Source: Home Office/Council of Europe 2003

Voting in last Parliamentary election, %

UK had the lowest voter turnout in Europe

Trust in democratic representatives %

Trust in other people generally - 10=very high, 0=very low

Upper secondary education attainment aged 25 to 64 %

Minimum standards - UK

• 27% of 19 year olds fail to reach the minimum standard of NVQ2
• 25% of 16 year olds are not in education or training programmes

Access to higher education: % from unskilled and professional households

Percentage of people with a degree by parental income, 1999

Education, skills, earnings and economic performance

From Britain's record on skills, Layard, McIntosh, & Vignoles

%adult population who are functionally illiterate and inumerate

% of 17-year-olds involved in any formal maths study

Productivity per hour

The UK lags behind Germany and France by about 20% and the US by about 40%. The researchers assess that this is a result of low capital investment and poor education and skills.

Hourly wages (£'s)

Employment

There have been considerable changes in the distribution of occupations in the economy between 1995 and 2005.

• The number of men employed in skilled trades and semi-skilled process and plant operations has dropped considerably
• The number of men employed in elementary occupations has increased considerably
• There has been considerable growth for men and women in sales and customer service occupations
• There has been a considerable increase for men and women in intermediate occupations such as section head and supervisor
• There has been a marked drop for women in secretarial and administrative work.

Whilst the numbers of men and women employed in professional, senior managerial and associate professional work has grown considerably, the opportunities for men in skilled and semi-skilled occupations have significantly decreased, to be replaced by work in 'customer services', and unskilled work in services such as hospitality, security and cleaning. For women, there has been a marked decrease in secretarial and administrative work and rapid increases in sales, customer and personal service work.

Trade Union Membership % working population

Immigration and emigration, 2005

Inflow to Britain

590,000 people

Outflow

350, 000

Human development Index

In the UN Human Development Index, which measures how countries convert their wealth into educational, health and life expectancy outcomes, the UK comes 18th, trailing behind the US, Japan and most of Europe.

Sources

Joseph Rowntree Foundation, EurLIFE, Eurostat, "Britain's record on skills", Layard, McIntosh and Vignobles, UN, EU, OECD.