Marketing myths

Press coverage of economic affairs in Ireland is, frankly, laughable. Apart from the tendentious screeds of commentators with not so hidden agendas the vast majority of reports are staggeringly ignorant. The decisions made by government have been stripped of political meaning and, as far as the public is concerned, ‘There Is No Alternative’. Not only is this not true, even the most basic assumptions made about capitalist market economics, whether in favour of them or critiquing them, are often mistaken, over-simplified and sometimes just plain wrong.

Here are a few myths about markets that are in dire need of being exposed:

— Ireland is a capitalist country

Not quite. Ireland is certainly an ‘open economy’, as the economists call it, but it is not anything remotely like a free market. Of course, no country has had anything resembling anything like a true free market since the nineteenth century. Like it or not, people simply don’t have the stomach for it and the inevitable consequence of people starving to death in the streets. However, Ireland is even less of a free market economy than people think – but that doesn’t mean it’s at all socialist. Ireland is in fact semi-corporatist. Corporatism is, in fact, the economic model that underpinned fascism in the 1930s, the idea of which is that the various sectional ‘corporate’ groups such as business, farming, labour, military, patronage, technical, professional and religious groups are herded together into a single body and mandated to negotiate with each other to establish policies in the interest of the multiple groups within the body. Ireland’s ‘social partnership’ scheme is pure corporatism, as are Ireland’s neither-fish-nor-fowl semi-state bodies such as ESB, Bord Gáis and Coillte.

This exists alongside a free-ish market in the private sector, particularly in services. The recent breakdown of social partnership and alleged ‘Thatcherite’ leanings of finance minister Brian Lenihan suggests that Irish corporatism is coming apart – at least for those at the bottom. The system of patronage (that is frequently mistaken for Fianna Fáil-led patronage) remains intact.

— Keynes was anti-capitalist

Not at all. Keynes was in fact anti-socialist. Keynes, a roaring snob, feared socialism so much that he made it is life’s work to reform capitalism enough to blunt the appeal of communism – something which was a very real threat to Western ideology during his lifetime. Here are a few words straight from the horse’s ass: “For my part I think that capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable.”

And here is the great man on socialism: “Marxian socialism must always remain a portent to the historians of opinion — how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men, and, through them, the events of history.”

— Keynesianism has been discredited

It depends what you mean. Certainly, the monetarist policies of the early 1980s entirely rejected Keynes and, to a degree, for good reason. Keynesian policies had resulted in industrial stagnation and rising inflation. On the other hand, monetarism resulted in the mass unemployment that we live with today. In 1982, under prime minister Margaret Thatcher Britian’s unemployment figures hit three million for the first time since the 1930s – the era of the Jarrow marches and the Great Depression. This represented around eleven per cent of the population of Britain. In contrast, between 1940 and 1979 unemployment never reached five per cent. During the entire Thatcher-Major era, through both boom and bust and boom and bust again, unemployment remained above six percent, peaking at over ten per cent again in the early 1990s. In the United States, meanwhile, unemployment fluctuated between four and eight per cent between 1950 and 1979. Under (semi-) free-marketeer Ronald Reagan it peaked at almost ten per cent in 1982. In October 2009, in the midst of the current recession, unemployment hit 10.2 per cent before falling back to ten per cent in November.

The withdrawal of government stimulus clearly had a devastating effect on the workforce. This is only half of the story, however. In fact, Keynes never really went away. Throughout the ‘free market’ eras of Thatcher and Reagan the state continued to intervene in industry, just not in the name of creating employment. For instance, UK public spending grew from 44 to 47.5 percent of GDP between 1979 and 1983 – precisely the period when Thatcher was at her purest in terms of pushing anti-statist monetarist economic policies. (1)  The ‘recovery’ of the 1990s was in fact, nothing of the sort. What happened is that there was tremendous growth in low-paying service sector jobs and poverty was offset – temporarily – by the growth of cheap credit.

— Stock markets help companies finance themselves

Not true. Across the developed economies of the Western world the figures are remarkably similar: 90 per cent of investment expenditures are drawn from operating profits, not stock. (2) Despite their potential to ‘produce’ huge amounts of cash, stock markets are not even remotely close to being a major source of investment in actual business activity.

Moreover, between 1901 and 1996, net flotations of new stock paid for just 4 per cent of non-financial corporations’ capital expenditure. (3) Capital expenditure is expenditures that creates future benefits such as the purchase or upgrading of fixed assets, a cost that must be paid somehow but, it turns out, is paid from operating profits, not the issuing of new stock.

As a result of takeovers and buybacks in recent years, more stock has been retired than issued, resulting in the cold, hard fact that net new stock offerings were minus eleven per cent of capital expenditure between 1980 and 1997, making the stock market a negative source of funds. (4)

— Private business is always innovative

Is it? Not necessarily. Sometimes it is, sometimes it isn’t. Telecom Éireann, the state-owned telecommunications company that is now the privately owned Eircom, was no advertisement for state ownership – but then, Eircom is no advertisement for privatisation. In fact, the issuing of Eircom stock is now used as a textbook example of a stock market bubble – as many as 500,000, mostly small, investors lost money on the Eircom shares they bought. The company ended-up being hoovered-up by billionaire Tony O’Reilly who immediately slashed capital investment in order to make a return on his purchase before re-floating the business on the stock market in 2004.

The result? Ireland has been left with a third-world telecommunications network and a company too broke to upgrade it. Instead of following the lead of the likes of BT in Britain, Eircom has not only sought to profit from rent-seeking, but has actually acted as a brake on development by using its virtual monopoly to squeeze competitors and keeping them out of Eircom exchanges for longer than it was legally entitled to.

— Stock (and other) markets are just a form of gambling

Not quite. We’re all familiar with the term ‘casino capitalism’ these days. Politicians are particularly fond of using it for blaming individual groups, such as bankers and property developers, for what are actually structural failures in the economy.

As Daniel Ben-Ami has pointed out, contemporary financial markets are, despite the rhetoric, actually characterised by risk aversion rather than a hunger for big bets.

The main reason for the existence of financial markets was, traditionally, to move capital from one party to another. At its simplest this meant that savings in a bank account would be lent to a company for investment and then paid back, the interest going to both the bank and the saver. Today a key purpose of many financial instruments is the transfer of risk from one party to another.The derivatives markets, usually viewed as the ne plus ultra of capitalist greed and parasitism, are actually a way for institutions to pass on risks between each other by betting on potential ‘futures’.

The re-packaging or ‘securitising’ of mortgages provided a way for lenders to sell on the risk to other parties such as investment banks. This diversification of risk is all well and good but it is not a solution in its own right. In the short term it had what was seen as the desirable effect of diversifying risk but the risk did not go away, it was merely moved and so, as with the Lloyds named being bankrupted in 1988 by internal round-robin investing, one collapse led to another.

More importantly, the ‘casino capitalism’ narrative is, at an individual level, a naked morality play. Blame has been passed around, from the the regulatory mechanisms of the Commodity Futures Modernisation Act of 1999 to the repeal of Glass-Steagall anti-deflationary act but it eventually settles, with tedious inevitability, on the ‘greedy’ consumer who ‘wants too much’. Another way of putting this might be that ‘uppity working class people should be put back in their place’. (5)

The banks shouldn’t have lent in the ‘sub-prime’ market

Translation: poorer people should not be allowed to buy homes. The idea that everything was caused by the ‘sub-prime’ crisis is simply a neat way of blaming the poor. In fact, heavy borrowing was driven by economic policy across the West, from the US to the EU. The low interest rates maintained by the Federal Reserve and European Central Bank were an intentionally loose monetary policy intended to produce economic growth by fuelling consumer spending. Cheap credit was to make-up for poor or average wages and the economy was to be driven by consumption rather than production. Once this upside-down economic policy became the prevailing wisdom a crash was only a matter of time and was only held off for as long as it was because the structural problems in the economies in question were papered-over by financial means.

— Ordinary people win on the stock markets

Not in aggregate, they don’t. The ‘freedom’ unleashed by online trading has been the freedom to lose vast sums of money. Even those who trade well enough to return a profit lag behind the professionals. Writing in the Journal of Finance, Barber and Odean performed a statistical breakdown that shows: “The net returns lag a value-weighted market index by 46 basis points per month (or 5.5 percent annually). After a reasonable accounting for the fact that the average high-turnover household tilts its common stock investments toward small value stocks with high market risk, the underperformance averages 86 basis points per month (or 10.3 percent annually).” (6)

Barber and Odean conclude with the following line: “Those who trade the most are hurt the most.”

— Markets are increasingly democratic as a result of pension and savings scheme investments in stock

A popular idea, but a faulty one. The poorest 50 per cent of US citizens (the US is the country with the greatest spread of stock investment by pensions and mutual funds etc.) holds stock equity of just 1.4 per cent while the richest ten per cent has a holds of 76.9 per cent of stock. (7)

This, more or less, follows overall ownership figures (in fact, stock ownership is slightly lower, thus favouring the rich: the bottom 50 per cent of the population holds just 2.8 per cent of the country’s net worth, composed of 5.6 per cent of assets and 25.9 per cent of debts). (8)

— It was inevitable that developed economies would retreat from production as costs rose

Was it? Why then is Germany the world’s biggest exporter by value? Hardly a third-world state, Germany is an industrial behemoth whose 2008 exports totalled US$1,498,000,000,000 – that’s almost 1.5 trillion dollars – which accounts for an unbelievable 76.74 per cent of the exports of the entire European Union. Exports amount to 40 per cent of German GDP. (9)

For the record, Germany has higher wage rates and a much less ‘flexible’ employment market than Ireland.

In spite of this powerhouse performance Germany has no illusions about ‘sustainability’ or ‘self-sufficiency’, leaving such conservative fantasies to the likes of North Korea. In 2008 Germany’s imports totalled US$1.2 trillion. (10)

Rather than being a ‘fact of nature’, the Anglo-American retreat from production was, in fact, an intentional policy. Moreover, for all the blather about the ‘weightless’ post-material economy, the US remains the world third-biggest exporter by value, behind only Germany and China. Had the US not ‘financialised’ it would still be the world’s biggest exporter today, high labour costs and all.

Ireland, on the other hand, skipped industrial development altogether – this is not only why the country has such contradictory politics but also why it can be home to both a major international finance centre and still not have a complete road network or national broadband. 

— Marx hated capitalism

No he didn’t. Marx thought capitalism was a tremendous improvement on what went before and wrote endlessly – and breathlessly – about its virtues, even if many of his compliments to it were backhanded. His opposition to capitalism was not moral or aesthetic in character, rather it was political and economic. Marx though that capitalism was both insufficiently productive and incapable of providing universal access to goods. Marx’s goal was individual freedom but, unlike well-meaning liberals, he recognised that one cannot be truly free in a market economy unless one is also rich. Marx’s objective was to speed-up the productive revolution ushered-in by capitalism, replacing anarchic and failure-prone markets with production designed to meet human need.

— Capitalism is not ‘sustainable’
Is it not? Actually this statement is meaningless from from a traditional left-wing position. The term ‘sustainability’ arises from the 1973 publication of ‘The Limits to Growth’ by the right-wing Club of Rome think-tank and gained popularity after the 1987 Bruntland Report and is, in fact, completely at odds with the objectives of socialists. Socialists have, by and large, grabbed the concept because they think it indicates that Marx’s critique of capitalism was correct. It says nothing of the sort. Marx wrote of the tendency of the rate of profit to fall as capitalism replaced labour. This is still true, but it has nothing to do with supposedly ‘natural’ limits on production. For Marx the limitations were located in the contradictions of capitalism – the replacement of living labour which produced surplus value by that of dead labour (machinery) which did not. For sustainability gurus, the limits to production are actual, hard Malthusian limits on raw materials – this despite the fact that the nature of resource-use is in constant developmental flux. What the concept of sustainability fails to take into account is that yesterday’s inert material is today’s resource. And tomorrow’s commodity.

Sustainability amounts to stopping – or even turning back – the clock on humanity’s productive force, the motor by which billions have been raised out of poverty, thus condemning billions more to poverty or death. Whatever that is it is certainly not socialism. An endless today, or worse still yesterday, is no replacement for the future.

Jason Walsh is a journalist and the editor of forth

Acknowledgements: I could not have written this without the prior work of everyone cited below as well as Guy Rundle, Daniel Ben-Ami and Phil Mullan. Special thanks are due to James Heartfield and Doug Henwood for doing the heavy lifting. I have no idea if any of these people will agree with my conclusions but, ‘the shoulders of giants’ and all that…

(1) State capitalism in Britain, James Heartfield, forth, December 9, 2009
(2) See: After the New Economy, Doug Henwood, the New Press, New York, 2003, pp 187–188
(3) See: Wall Street: How It Works and for Whom, Doug Henwood, Verso, New York and London, 1998, p 72
(4) Ibid
(5) See: Cowardly Capitalism: The Myth of the Global Financial Casino, Daniel Ben-Ami, John Wiley & Sons, London, 2001
(6) Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors Brad M. Barber and Terrance Odean, The Journal of Finance, Vol. LV, No 2, April 2000
(7)A Rolling Tide: Changes in the Distribution of Wealth in the U.S., 1989-2001, Arthur B. Kennickell, Federal Reserve of the United States, 2003
(8) Ibid
(9) World Fact Book, Central Intelligence Agency of the United States of America
(10) Ibid