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THE ABUSE OF CAPITAL
Reviewed by ANDRE BEAUMONT
Capital was given a bad press in the 19th century, principally by Karl Marx. Were he to have been alive in the 21st century, he would have done better to target monopoly.
It was lack of economic choice, or local monopoly, that constrained serfs to serve a particular feudal lord or workers to go to a particular mill, more than capital.
The last decade has seen a re-growth of monopolistic practices as a brake on the fluid operation of economies.
The 20th century slowly but surely proved that capital was the friend of those with modest or ordinary means. To possess some could confer freedom.
To possess some in something other than national currency was also useful.
Even in the Anglo-Saxon economies, which have long enjoyed political stability, it has been known at least since Harold Wilson devalued the pound or Richard Nixon untied the dollar from gold (since which events sterling has nearly halved in value against the dollar and gold has appreciated 47 times) that just keeping savings denominated in currency did not necessarily equate to capital preserved.
Of course, the contrary view, that such possession is not necessary, deserves respect. I recall listening to a retired man on a train explaining with happiness how pleasant it was to be retired. He viewed retirement as the first time in his life that he did not have to worry where next week's money was coming from. He had never had any possessions that could be called capital.
Indeed, one must accept that three-quarters of people in the world probably never have capital but happiness in old age is then likely to depend either on the support of family, provision by the state, pension systems which can guarantee against a progressive decline in standard of living, or a combination of these.
All of these are very much under threat in the 21st century.
With greater life expectancy, retention and preservation of capital has become at least as good a guarantor, but not in isolation, of meeting later life needs.
The dominance of debt finance in the new millennium has resulted in a declining understanding of the role of capital and a new generation of boardroom executives who have not seen that its retention and preservation in advance of a downturn are sometimes requisites for survival.
Some companies have succumbed to siren voices and operate almost entirely on debt finance. They are particularly vulnerable to the disappearance of their income streams. These companies may never grow old.
The popularity of equity investment in the 20th century was partially fuelled by the expectation that there would be profit retention by companies, year on year if possible, thereby building the stock of identifiable capital. Rising values were loosely linked to the growth in this capital.
Quite a few large companies have diminished their capital base through takeovers and others have 'returned' it to shareholders though it never came from them in the first place.
Rising equity prices, on which meeting pension obligations has historically been partially dependent, cannot be sustained on a diminished equity capital base.
The valuation of companies on discounted income streams alone has always been flawed. It was not popular in the 1970s and may not be popular in the future.
More troubling, in the new millennium, has been for the financial sector to convert capital to income.
If, as widely reported, the managements of hedge funds took their fees in the successful times in the form of double digit percentages of the capital appreciation this, in practice, has been the conversion of capital to income.
Likewise, whenever multiple layers of fees have been charged e.g. by brokers and pension companies to prospective pensioners, fund management companies to pension companies, hedge funds to fund management companies, the tendency has been to convert capital to income.
The income has been that of those involved in the management of funds. Some of it has in turn become their capital but some has been lost to the stock of capital.
This conversion is a partial reason why the recent boom lasted so long. This is an abuse of capital.
Likewise, and little understood by governments, sustained high rates of personal capital taxation have the same effect. Individuals usually increase their capital by taking some risk. If taking that risk proves profitable, it may be taxed. If that risk proves unprofitable, only a relatively few individuals will have profits to offset the loss against, unlike larger companies.
If people are to partially fund their healthcare and other needs in later life, they must accumulate and preserve capital and not be too inclined to give it away early because of low thresholds for inheritance tax.
For calls on the state to be reduced, fiscal good sense must prevail once again.
In television appearances, former Prime Minister Tony Blair came across as not being particularly fiscally literate and behind the curve on economic matters. This was largely disguised by spin.
Blairite economics can now be characterised as including a decade of high personal capital taxation, abstemiousness in facing up to monopolistic practices, a blind eye turned to ageism and the ending of free university education for most British students.
This is not entirely historical. The continental European press, particularly the financial press, never understood the spin. It tried to report the economic facts and Blairite economics are seen as very ancien regime. It is wary of a comeback not seen since Juan Peron, this time by the former Prime Minister as President of the European Council.
Part of the problem was that Mr. Blair never had a politically close politician in his Cabinet who thoroughly understood business.
Churchill had Beaverbrook, Heath has Peter Walker, Thatcher has David Young, Major had Michael Heseltine and Callaghan was fortunate to have had Harold Lever.
Harold Lever was an appealing personality whose intelligence and commonsense shone through.
He did his greatest services to the state from the age of 69. Ageism did not rule then.
He lived in a style that most of his Cabinet colleagues never had a conception of.
I recall hearing from a source more reliable than any government department that he was due to leave for a skiing holiday with a date given about two weeks on. Skiing usually meant a stay at the Grand Hotel in St Moritz.
Then James Callaghan appointed him to resolve a long-running and seemingly intractable pay dispute with the mining union, the same union that had caused Ted Heath so much trouble.
This promised to last for months. Surely my source could not continue to be correct?
Then the day before the scheduled holiday it was announced that a pay deal had been agreed and the union leaders pronounced themselves pleased. The public could have a winter without fear of a miners' strike.
Genuine negotiating ability like his should never be underestimated. The mining union leaders never got an inkling that next day he was abroad for his private holiday as intended.
Men like Beaverbrook and Lever understood business because they personally bore financial risk. Tycoons like Sir James Goldsmith had little regard for professional managers who rose to run large companies since they were not owners and had borne little risk personally.
Today, most medium and large sized companies are run by professional managers. The equivalent risk bearing experience is to be found in the small business sector.
Very deep downturns, such as the world has experienced since 2007, are indicators that men and women all over the world are unhappy, in many ways, with the nature of economic organization that went before.
Recovery is unlikely to be delivered by government policies favouring mainly the 500 largest companies whilst doing little for the 5 million other ones willing to give enterprise a go. The largest companies depend on a healthy flora of business beneath to flourish.
The temptation for some large companies is to engage in group think and seek the protection of quasi-monopoly. It is not detailed regulation that prevents this but firm context setting by legislators.
Flag carriers all with similar pricing structures, premium prices charged for right-hand drive cars sold in Britain and high roaming charges for mobile telephony in Europe are all past examples of group think in search of quasi-monopoly profits.
Where large companies in one sector all act similarly one must suspect quasi-monopoly rather than genuine competition.
All U.K. high street banks now charge interest rates many multiples of base rate on products essentially similar.
The Japanese camera industry collectively has global market share that national high street banks would greatly envy but Nikon, Fuji and Olympus, for example, operate in essentially different segments from one another. Other companies like Canon, Sony, Panasonic, Casio and Ricoh also have strategies that result in differential market coverage but with a little more overlap.
If the consumer does not like the prices of one company, he can switch sensor or film format and buy elsewhere.
This kind of choice is absent in banking.
It is probable that deploying capital in favour of purchaser satisfaction and innovation will raise overall GDP more than pursuing quasi-monopoly.
It is also probable that it is better for the companies concerned. Banks, flag carriers and car companies have scarcely done well recently, partly due to the legacy of their earlier practices.
In the personal realm, policies should not show disfavour to capital.
Compulsory tuition fees, the only memorable legacy of Mr. Blair's education policies, have encouraged university students to look upon debt as acceptable whilst delaying capital acquisition.
The dislike of monopoly expressed in this review also extends to monopoly in the form of marriage contract.
Given a strong preference for seeing people retain capital into old age to help provide for themselves, this retention should not be undermined by the marriage contract being too much of a lottery.
In France, three types of marriage contract exist, one of which allows for the assets and debts of one spouse to be kept separate from the other. The choice of contract is made on marriage.
Just as in The Fourth Revolution new economic frameworks were suggested for those over forty (and since unemployment has risen since that review, work is underway on developing these), so an additional form of marriage contract is proposed in this review, initially for those over thirty and not retrospective.
This additional form would allow assets brought into the marriage and their capital appreciation to be legally segregated from wealth created by joint endeavour.
For those who marry very early, it might be said that they both have a full economic life ahead of them and so the existing contractual monopoly might suffice.
For those who marry over thirty, for the first time or for a subsequent time, most have views on how they like to run their financial affairs.
For women, they may have accumulated capital or they may have been assisted in the acquisition of a home by parents who do not feel comfortable about their daughter's future husband subsuming their contribution into his wealth over a period of time.
For men, they too may have accumulated capital or been assisted in the acquisition of a home by female relatives who do not feel comfortable about the future wife becoming, in practice, immediately entitled to half or more of their contribution.
For those marrying again, planning with certainty the management of capital for old age, or planning to provide for dependents or relatives, may loom large as considerations. To leave division of capital to the courts in the event of divorce may well negate the ability to undertake such planning in the first place.
For politicians and churchmen, encouraging marriage may only become words if some reform of this kind does not take place.
Capital is a form of surplus value, the result of saved endeavour. Lending against it to those in advanced old age, with interest rolled up, may yet become necessary to finance end of life care.
If so, legislation must define strict parameters as to interest charged, and provide for the absence of fees, to avoid the very old being subject to predatory practices by lenders and brokers.
(It would help banks meet their post-crash lending targets and be a secure form of lending for them).
Politics must do more to shape the future.
Lending against surplus value to those with enterprising ideas may also have to come back if current income streams dry up in a prolonged downturn.
Capital is a valuable commodity. It should not be abused by being subtly converted into the current income of those taking fees.
Perhaps the most striking reminder of how little we have come to understand and value capital was provided by the 2008 banking crisis.
Banks that had lost fortunes through unwise lending or doubtful investments came to governments to be bailed out. Authorities had to act in a hurry to maintain confidence and avoid systemic collapse.
That most valuable of commodities, capital, was provided to failing banks in prodigious quantities, in turn endangering the credit rating of nations.
A purpose of capital was lost from view - to be seen to be lost in misfortune.
2008 losses are still, in some cases, not fully quantified.
In the late 1880s into 1890, the partnership bank of Baring Brothers and Company, once called the sixth great power of Europe by the Duc de Richelieu, overspeculated in the issuance of Argentinean debt.
A great bank failure was in the offing. The government was opposed to lending assistance and had no money so the Bank of England, with some difficulty, arranged a guarantee which would allow the liquidation of the partnership bank with a sizeable surplus remaining. Business was transferred to a new limited liability company called Baring Brothers and Company, Limited which raised new capital.
The partners of the old bank sold great houses and consigned works of art for sale to the auction houses to meet its liabilities.
Today, governments have little money. If any of the same banks who were bailed out come back for more funds, it may be time for only guarantees that facilitate orderly liquidation to be given, with business being sold to those willing to inject or raise new capital.
Banks may be too large to fail but not to be broken up.