The Hindu : Does anyone believe in the free market?

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Wednesday, Oct 02, 2002

Opinion

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Does anyone believe in the free market?

By Arvind Sivaramakrishnan

The free market, far from delivering us to utopia, begins to look like one of the biggest confidence tricks ever pulled.

"CORPORATE CORRUPTION has permeated the public imagination." Thus spoke an American big-business insider, live on international radio. The companies involved are among the biggest in the world; they include not only Enron, which turns out to have been such a sham that some call it a `virtual' corporation, but giants such as Tyco, WorldCom, Marconi, IBM and General Electric.

The names figure in allegations about variously-dubious accounting, grossly inflated bosses' pay and corporate greed that are leading even the most prejudiced free-marketers to acknowledge serious problems. Even lawful, if scarcely believable, packages, such as that given to the former General Electric CEO, Jack Welch, are being described in the same terms as the alleged crimes by Enron executives and Tyco's Dennis Kozlowski, who has been indicted for apparently embezzling some $600 million of company money. For the record, Mr. Welch, whose pension is $9 million a year, was also given free lifetime use of the company jet (not an executive toy but a Boeing 737, which in commercial use carries 140 passengers), a free Manhattan apartment, free lifetime wine, food and laundry, and free tickets to Wimbledon and major baseball stadia.

Excess is not the sole problem, or Mr. Welch might not have deemed it necessary to give up his perks and scrape by on $9 million a year. Aristotle called excess, or pleonexia, a moral vice, but his great work, The Nicomachean Ethics, is not found on Wall Street newsstands, and it is unlikely that corporate giants engage in moral introspection.

Rather, it is now clear that a series of very serious problems are interlinked so as to undermine the very idea of the market as a space which empowers anyone, or as a space for the rational maximisation of utility through its pruning of the uncompetitive.

The biggest corporate successes, it now turns out, were successes only in virtue of share prices which bore no relation to their actual performance — which in turn was ignored by shareholders, accountants and regulatory bodies in a climate of complacency and self-satisfaction (Mr. Welch's perks only came to light when his wife told the divorce court about them).

The difficulty of reaching any truth about corporate performance is compounded by the financial press; when the Enron scandal blew up, one CEO said, "Nobody would dream of telling a financial journalist the truth; the share price is too important."

The first major problem is shareholder pressure for quick paper returns irrespective of anything else; this is not solved by sacking or prosecuting CEOs for failing to meet, for example, U.S. statutory responsibilities to shareholders.

Second, the very assumptions on which loans and investments are based seem to be at best incompetent, and at worst fantasy. For example, the expected revenues for the privatised U.K. air traffic control system (NATS) were based on predictions of continuing growth in civil aviation through 2001 and beyond. No one involved seems to have noticed that even as the predictions were being made, passenger numbers were falling. The September 11 attacks in the U.S. only exacerbated the trend (British Airways recently said it had nearly "gone into meltdown" months earlier).

Third, corporate dependence on the state is greater than ever. Inevitably, NATS had to request taxpayers' money to bail it out. The same has happened with the privatised U.K. railways, which has repeatedly been granted hundreds of millions of pounds of public money so that an essential service does not collapse, and with the privatised nuclear-power company British Energy, which has become grossly uncompetitive as a result of the apparent deregulation of the U.K. electricity market; but nuclear power plants cannot be shut down, and therefore their continued operation in the U.K. is now funded — once again — by the state. The electronics firm Marconi is openly said to have collapsed as soon as it stopped bidding for U.K. defence contracts. In the U.S., the Federal Government has since September 11, 2001, given U.S. airlines $5 billion in cash and promised them $10 billion more in loans.

Fourth, it is a fiction that the private sector will build infrastructure where the state will not. The most blatant example is the Public Private Partnership, known in the U.K. as the Private Finance Initiative (PFI). The Prime Minister, Tony Blair, obsessively repeats that this transfers risk to the private sector, but the facts are exactly the opposite. The state guarantees all PFIs their profits; for a PFI hospital, the state must pay the owners £30 million a year for the next 30 years. Building the hospital out of public funds would cost £180 million over two years, with all assets remaining in public hands thereafter. It only adds insult to waste that the state is given lower interest rates by the very banks from which the PFI companies borrow money.

In addition, such PFI hospitals as have been built have turned out a complete shambles, quite irrespective of their attitudes to NHS patients (such as charging patients £ 5 per incoming phone call).

Fifth, corporate control of the state is now almost total. It is public knowledge that Enron dictated the environmental policy and legislation for the incoming George W. Bush administration, and that in April 2001 the U.S. imposed import duties of 1,000 per cent on Indian steel. Less widely known is the sheer scale of corporate control of politicians. In the E.U., the 15 largest businesses have formed the European Round Table (ERT). The E.U. has given them everything they want — the single market in goods and services, the single currency, the Channel Tunnel, the Sweden-Denmark road bridge, the European high-speed rail system and the all-European road-building programme.

Further, the ERT wanted and got the power to sign trade treaties delegated by the E.U. Council of Ministers to the notoriously secretive European Commission, administrative branch of the E.U. The E.U.'s national Governments and Parliaments, apparently, have no further part to play in such treaties. The Governments have not resisted this; the former ERT Secretary-General boasts that whenever he wanted a change in E.U. policy, he simply telephoned the heads of Government.

If then, the empirical evidence is that the private sector wants only to annex the state and take monopoly control of markets, the theoretical evidence is that even the greatest gurus of the free market have no faith in the market either. Milton Friedman has said that the U.S. Federal Reserve should have prevented the Great Depression by injecting money into the system.

The other legendary free-marketeer, Friedrich Hayek, openly argues that the outcome of the market has nothing to do with talent and is an unpredictable result of luck — but he insists that this be concealed from the public lest they lose all willingness to work. Very recently, Joseph Stiglitz, who was fired from the World Bank for dissent in 1999, called privatisation "briberisation" because of the readiness with which national leaders are bought by offers of commissions paid into Swiss bank accounts. In sum, the free market, far from delivering us to utopia, begins to look like one of the biggest confidence tricks ever pulled.

(The writer is Lecturer in politics and law at Tauntons College, Southampton, U.K.)

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