Two-speed economics – Technology and Governance

The Price of Externalities: Georgescu Roegen Extravagance

Fast lane – Markets at the speed of technology

Tom Standage’s book “The Victorian Internet” describes how the mass of wired communications – the telegraph – changed the developing world – (http://www.amazon.co.uk/Victorian-Internet-Tom-Standage/dp/0753807033/ref=sr_1_1?s=books&ie=UTF8&qid=1347191394&sr=1-1).

As did Gutenberg’s printing press around 1450, the telegraph, the telephone, the fax, the mobile phone and now the internet and the world wide web continue to transform our ability to communicate and miscommunicate – instantaneously. There is no question that technological development races onwards. The human race has a special ability to make extraordinary progress in scientific research and understanding and in the application of that through engineering into products that transform the way we live.

The technological advance is propelled by the “marketplace” – where supply and demand perpetually force change.

Slow lane – Governance at the speed of bureaucracy

As we continue to make enormous gains in technology, our ability to keep up with the excesses of the market (market waste) is almost the opposite. It seems that we react late to technological advancement – delays that can cause inconvenience but also (at the extreme) loss of life.

Inconvenience: the UK awaits the Leveson Commission report into phone-hacking – the use of technology by certain newspapers to obtain salacious stories on (mainly) celebrities. Newspapers are closed, criminal prosecutions are under way and the possibility that press freedom will be curtailed.

Loss of life: the destruction of our environment through global warming (CO2 emissions and the potential for vast amounts of methane to be released by the rapidly melting glaciers) is a direct result of technology and manufacturing’s use of fossil fuels. It could prove just as damaging (or more) than the technology and development of weaponry that fuelled the two World Wars of the 20th Century.

The slow lane is inhabited by politicians and civil servants that exist in a variety of slow lane decision-making arenas. These could be democracies; they may be legalist governments such as China.

The slow lane is inhabited by the “mechanics of government” or “Market Governance Mechanisms” (MGM)– “governance”.

The tortoise and the hare

Since the development of governing institutions, those in government have continuously sought to control technology and its effects. From the control of counterfeiting (as in Newton’s day or now), developing health and safety standards, maintaining arms control, to reducing environmental degradation, people have put their faith in governments’ ability to manage the sweep of technology. Time after time, technology has been at the forefront and governance has been slow to catch up.

Aesop’s fable of the tortoise and the hare had the tortoise winning, but while the hare of technology can be tamed, it is continuously ahead of tortoise governance and, in the global economy we now inhabit, will extend that lead. It is only where governance is centralized and total (such as in Japan prior to the Treaty of Kanagawa in 1854 or where the government may be theistic such as with the Taliban) that the market is not allowed to exist at all and technology is starved.

As soon as market forces allow, the pace quickens. China is a recent example of a centralized, legalist state that remains in control but has opened up the marketplace – totalitarianism plus capitalism. Of course, the rise of technology is a serious threat to governance stability in China. This is exacerbated by world-wide communications technology that provides comparisons with the rest of the world to every region. This comparative data spreads the world on what is available and draws everyone to want the same – more products and the latest technology. The hare merely passes on the baton to the next hare.

In the same race?

The question of how Governance reacts to the market is being played out constantly. Whether it is the forlorn approach of international Governance to environmental issues or national Governance reaction to the internet or any number of other interactions, Governance and the governing seeks to manage technology and the effects of technology.

The rationale for Governance (and control) over technology is based on a mandate from the public (whether by vote via manifestos or on a perceived basis – as in China or a theistic basis or historic basis as in most of the Middle East). This mandate often runs against the market – and many, for example, Tea Party libertarians in the USA, believe that Government should play no part whatsoever in managing the market. They do not believe that Government has a role to play at all. This Ayn Rand view of the world, the most extreme market view of governance, believes that the “invisible hand” will provide the right result.

So, should technology be subject to control? Is this two-speed race real?

The answer has to be “yes” – but an acknowledgement that it is a race would be a start. Then, we may be able to establish some of the rules: rules which enable the development of products and technology while ensuring that the trade-offs that we have to endure are sufficient to allow us (and other life forms) to continue to survive.

Race to what?

The marketplace works best when there is an identifiable demand and an ability to supply. This is the basis upon which economics exists. The market, however, is but one aspect of our lives and the market cannot dictate whether a particular form of animal life is allowed to survive or whether desertification is made worse in Sudan, for example.

These are typical market externalities and the market appears to have no answer to such difficult outcomes. These are outside the market and the invisible hand assumes that they can be dealt with as externalities – and forgotten.

These externalities, or market anomalies, are where non-market forces reside. Much of this is the responsibility of market governance; some of it is charitable work or non-market, voluntary activities. However, technology is primarily (at least in the 21st Century) market driven (as opposed to driven by government spending on defence, which brought into play technological advances in the 19th and 20th Centuries).

The race that technology exists to fight is one of material “progress” (advances in health care, biotechnology and the like are within this area) where there is a defined demand.

Governance is then required to sweep up behind in ensuring that the advances or changes in technology are suitable or genuinely advantageous.

Of course, as Georgescu Roegen (a leading economist) stated in 1975: “Perhaps the destiny of man is to have a short but fiery, exciting, and extravagant life rather than a long, uneventful, and vegetative existence.”

Intersection: market and governance

At present, the governance of technological externalities problem is two-fold:

(1) Each nation works out its own response to changes – often many years behind the change itself

(2) There are serious world-wide technological implications – changes that impact regions and the world – not just nations.

The problems get bigger as the intersection of the marketplace and governance is mainly concerned with economics, not externalities. Yet, this may be the biggest problem concerning mankind. Working out how to properly manage the interaction between the marketplace and governance in terms of market externalities while allowing for competition (the essence of the market and the progenitor of technological change) may well be the biggest challenge we have. If capitalism is the norm – and through this the market economy – what role has governance of the market – nationally and internationally?

Can institutions that are already in place (such as the WTO or UN Conferences on the Environment or IAEA or any number of international institutions that operate today (see: http://www.genevainternational.org/pages/en/55;International_Organisations) keep up with the market whilst enabling or at least allowing the best of what the market does to flourish?

Is it even possible for the market – now on a global scale – to be centrally managed to the extent that externalities that we all pay for in terms of health and safety and maybe inter-generational catastrophes of the future can be in any meaningful way properly be taken into account?

Or, are there self-organizing principles that guide human evolution and probably guide our economic and technological progress which work and negate the need for any central institutions?

An Olympian Challenge

 

To repeat: the governance of market externalities may well be the major challenge that mankind has to bear.

Already, we may be dangerously close to bequeathing future generations with a challenge that may be unwinnable.

Whether it is genetic engineering, or nuclear warheads, or CO2 emissions or whatever, the global challenge is to admit that the challenge is a real one and that the market, left to its own devices, is unlikely to deliver the desired results in a timeframe that will allow life to continue to prosper – the Georgescu Roegen extravagance

Libertarians argue that we will ensure that technology and the market will find the solutions – a hope for the best approach that they believe will get us out of the Georgescu Roegen extravagance.

However, the danger that the challenge will be beyond the capability of the marketplace is large enough for us to consider the consequences of failure. The fact that we can obtain information quickly and internationally does not help unless we can use the information and make decisions quickly. Governance mechanisms are the opposite. It now looks increasingly like 19th Century institutions are incapable of addressing the negatives that the marketplace throws up – unpriced externalities Maybe the only way to solve the problems of the marketplace is through using technology and self-organization on a local basis so that externalities are assessed and redressed as appropriate.

This means that the role of international organizations would be to assist the process. Instead of not-for-profits like Witness (http://www.witness.org/) acting on their own to provide assistance to local groups (“See it, film it, change it”) it would be the role of large national and international institutions to enable local groups through technology. Markets are self-organizing but have created a degree of externality that is seriously and adversely impacting societies throughout the world. International governmental organizations are failing to come to terms with this. So, the role of national and international institutions has to be to equip and enable local groups – through finance and law changes but on a vast international scale.

Just like companies and government work together to develop the markets, so governments and NGO’s /local groups should be working to develop externality solutions (with the companies wherever possible) but on an international basis.

Research is ongoing such as at http://shapingsustainablemarkets.iied.org/ and sustainability in business is now a constant theme in best in class organizations. Those such a CIMA (Chartered Institute of Management Accountants – www.cimaglobal.com) have adopted sustainability and the role of senior management in delivering this for some time. Sustainability is the central mantra of organizations like Tomorrow’s Company (http://www.tomorrowscompany.com/) and the whole CSR movement.

But, just like microeconomics and macroeconomics never come together, so the business by business approach and the international institutional approaches never seem to gel.

Witness provides a great example of the ability of self-organization – governments, local, regional, national and international should now be harnessing the technologies to equip civil society to the same on a scale never before seen. Every national government should have an Externalities Minister – where such market problems are evaluated in total, practical help is provided to civil society to address the problems and genuine dialogue established with business. Governance and the markets would then be in the same race.

Left-right, left-right: Parties and cliff edges

In the UK, Members of Parliament go back to work after the summer recess. All the talk is about Cameron’s reshuffle and leadership issues: Cameron is accused of acting like a “mouse”; Clegg’s leadership is under threat from his own party; the two Ed’s of Labour (Miliband and Balls) are said to be continuously arguing and that the phrase “two Eds are better than one” may not be true in this case.

More seriously, as the post-summer issues are traditionally short-term nonsense, last week’s Prospect Magazine has Peter Kellner (President of the pollsters, youGuv) writing an intriguing article on how the Liberal Democrats’ support has collapsed since the last General Election  http://www.prospectmagazine.co.uk/magazine/death-by-coalition/. As a result of entering into coalition with the Conservatives, their support has gone from 24% to 10% – which would result in a fall from 57 to around 10-12 seats if an election were to be held today.

While much of Kellner’s response to the polling made good sense, one aspect of the questions his pollsters asked concerns me greatly. This aspect focuses on how much to the left or right the party is.

The concern is this: surely, this form of questioning is out of date in the realpolitik of 21st Century thinking and 21st Century politics. Surely, in an age of individualism and the lobbying by NGO’s and many one-issue organisations of one issue arguments, the left / right analogy is no longer relevant?

Is politics really about left vs right anymore?

The left and right of politics were named after where the French parties sat in the National Assembly in 1789 at the time of the revolution. In 1791, the Legislative Assembly had the “innovators” on the left, moderates in the middle and the defenders of the Constitution on the right. This became the dominant march of politics in the 20th Century. Different and violently opposed political doctrines literally fought it out on the battlefield throughout the 20th Century. Fascism and Nazi-ism on the right, Communism on the left were the extremes in the battlefields of China, Spain, Cambodia, Europe (in WWII) or wherever the post-feudal wars (those that we fought up to the end of the first world war) were fought. Innovation became muddled with socialism and communism; defenders of the constitution became muddled with economic rigour and libertarianism capitalism (never the manner of the “ancient regime”).

Right and left became doctrinal and, with the fight for the rights of labour against the owner class, the 20th Century adopted the political norm.

Is economics an argument of right and left?

Now that the 21st Century is into its twelfth year, the left / right argument appears completely out of date. Sure, there are arguments about economics that will be with us forever: from libertarian, tea party protagonists all the way to Keynesian interventionists. But, because capitalism is now the standard economic and accepted model, the battle is not right vs left in economics but which form of economic model around the capitalist norm. Arguments are much less severe in developed nations and turn on moderate changes in taxation.

Much bigger issues, such as ending tax havens, transfer pricing, corporate power, corporate governance, the role of banks, corruption and many other crucial issues are stymied as politicians argue over the short-term vote catching issues – 1p or 1c on income tax, for instance.

Is the way we are governed right vs left?

Communism or socialism now only survives on the periphery. China is not a communist state – its economics are capitalist within a statist structure and the party ensures a legalist control (it is above the law). This is not communism. Russia is now a centrally controlled capitalist enterprise (run as a large corporate machine). The rest of the world operates in a democratic to quasi-democratic state. Hereditary monarchy is now mainly for the tourists and the press (celebrities within a celebrity culture).

There is little traditional right vs left in government.

Is the environment a subject for right vs left?

Here, confusion reigns. Traditional right-wingers in the UK (from a Tory mould) can be classed as conservative when it comes to the environment. They often oppose untrammelled modernity and defend the right to conserve (as “Conservatives”). Yet, they oppose green movements because they associate them with restrictions on economic growth. Roger Scruton in “how to Think Seriously About the Planet – the case for an environmental conservativism” http://www.amazon.co.uk/Think-Seriously-About-Planet-ebook/dp/B00829L62C/ref=sr_1_1?ie=UTF8&qid=1346585639&sr=8-1 puts the case for the right to take back control of the agenda.

The affects of CO2 are now disputed only at the periphery but the case for changing our ways is not agreed. This is now much more about individual nations wanting their own freedom and more about the problem of worldwide agreements – not a right vs left issue at all.

Does politics need right vs left?

Less and less people vote in general elections. Maybe the reason is that the left vs right arguments that drew people’s interest and motivation are no longer prevalent. The motivation to vote for broad platforms which mainly focus on short-term issues designed to entrap voters based on their short-term economic concerns is weak. Tradition still subjects most voters to choose their party and most political parties focus on swing votes – the 2% that Romney and Obama will work to win over in the USA, for example. The 2% that means that 98% are virtually disenfranchised!

The traditional view of politics is one where political parties are formed to organize themselves so that they can attract votes from the individuals who are not organized. This is changing.

Individuals have always formed into non-political party groupings – from trades unions to employer associations, from charities to NGO’s. Many of these groups are single-issue campaigning groups or lobbyists that work hard to influence political opinion and political parties directly and via the media. These range from economic groups to environmental, from governance to charitable, health to education – the spectrum is vast.

This third sector (usually a reference to charities, but comprising all citizen action groups, from sports clubs onwards) is not primarily left of right, but single focus – taking up an issue or cause around some issues. Their influence on government is substantial. Most Government Bills are developed as a result of significant lobbying from single-issue groups. For example, the Bribery Act came into being as a direct result of such lobbying and formal meetings between Government and a diverse range of lobby groups from CBI to NGO’s.

This means that the ancient Greek form of democracy – where every individual is supposed to have an equal say in Government – which was never the norm in most democracies as political parties formed – is now fractured into more layers. Government now relies on the lobbyists and reacts more to them than the community or study groups assembled from the general populace prior to elections.

This means that the left and right of politics (already under strain anyway) are meaningless. Single-issue groups lobby on single issues and political parties, no longer fighting on the issues of left vs right, sway as they are buffeted by those who are able to articulate the issues and now the means to communicate effectively. This means that the individual voter is now even more disenfranchised as it is only a small fraction of the population that is engaged in this process – and that, even at elections, the driving force behind vote-catching is bound to short-term or lobby focused.

A new politics?

In an era of globalization and instant communications, individual nations are less able to maintain an individualist position. Nevertheless, as the Olympics and Paralympics have shown in the UK, national pride remains important and is a reason why the Eurozone crisis will endure much longer than hoped.

However, within this national pride, it is likely to be an era when individualism is also crucial. The mass movements of left vs right are no longer relevant and single issues are much stronger in motivating and exciting.

If there is any truth in this then it is interesting to note the preamble to the Liberal Democrats Federal Constitution:

“The Liberal Democrats exist to build and safeguard a fair, free and open society, in which we seek to balance the fundamental values of liberty, equality and community, and in which no-one shall be enslaved by poverty, ignorance or conformity. We champion the freedom, dignity and well-being of individuals, we acknowledge and respect their right to freedom of conscience and their right to develop their talents to the full. We aim to disperse power, to foster diversity and to nurture creativity. We believe that the role of the state is to enable all citizens to attain these ideals, to contribute fully to their communities and to take part in the decisions which affect their lives.”

In the nonsense over cabinet reshuffles and personalities, it is probably the case that very few even know where to look for the above statement http://www.libdems.org.uk/who_we_are.aspx  – (which is found on the Liberal Democrat website after its coalition agreement – which is all short-term).

Yet, it could be the clarion call for our age – a liberal theme that is far more “of our age” than the 20th Century arguments of right or left.

If right vs left is truly out of date, then open society, balancing liberty, equality and community, individualism cherished, developing talents, creativity and the rest within a coherent community is a proper and enticing call that should be further developed. Apart from a better focus on the environment (our natural capital) which demands more from us, the preamble is not right or left – it is also not middle ground but moves the argument away from traditional left vs right.

Citizens of the 21st Century world maybe deserve something more from our governing elites that have not moved from their 19th Century models.  How we balance our competing single issues and how citizens get to have their say in the crucial issues that determine how we spend our lives is what 21st Century politics should be about. Maybe parties like the Liberal Democrats should think of the themes that will dominate thinking in the 21st Century. Maybe that is a way to get some common ground with citizens – the voters.

Business and bribery – globally speaking

A couple of weeks ago, I posted “Everyone should be allowed to bribe”

https://jeffkaye.wordpress.com/2012/05/27/everyone-should-be-allowed-to-bribe/

and received a lot of good feedback. From business people, from NGO’s, from those in countries where the bribes take place and impact the most, it is clear that this is a major concern.

The NGOs’ position is understood – bribery is bad, it is illegal in most countries, it does irreparable harm, it distorts the market, and it creates poverty in those countries, which cannot afford to exacerbate intolerable economic conditions.

For those in those countries where bribery takes place, the impact is felt acutely. It is not just that money is wasted on bribes that could be spent elsewhere; it is not just that money is wasted on products and services that are bought only because of the bribes. Just as critical is the fact that the country may see bribery and corruption as the norm – nothing is done without a bribe – it is a mafia-type culture where favours and reward for favours are the norm. This is a distortion of the market that leads to those in certain positions benefitting and the rest (those outside the inner circles) are deprived of economic well being (maybe no housing or food) and deprived of being part of a moral centre to their lives.

The Business of Bribery

For large businesses operating out of countries with well-developed legal structures, bribery and corruption is now officially not on the agenda – reputational losses are, in the main, far too severe to allow a short-term gain to be allowed if through bribery. The problems that Wall-Mart is suffering from alleged facilitation payments in Mexico is a case in point – the legal hassles, the continuing publicity, the constant press all drain the company and, overall, question the economic sense of the payments (which may well not be illegal under the Foreign Corrupt Practices Act – FCPA).

For large organisations operating in corruption-endemic parts of the world, the situation is fraught with danger. A business operating in the UK or USA, for example, would be acting illegally if bribing overseas. Yet, there are many instances where it appears that business takes a calculated risk – using money to influence decisions that (even if found out and prosecuted) may well represent a reasonable return on investment overall. These companies may well be in mining or construction, or defence – industries prone to bribery opportunities where the dangers are continuous.

For small to medium-size enterprises (SME’s), the situation is hugely risky. Many complain that meeting the requirements of the UK’s Bribery Act are severe and highly costly. Lawyers require large fees for sifting through the processes of any business to “ensure” that “Adequate Procedures” are in place. Many have gone too far and maybe spending too much in ensuring no bribery takes place.

For others, there remains the feeling that bribery is not a bad thing – it is the norm, they say, for doing business in certain places and British business (or American or whoever) should not be crowded out by parsimonious governments led by the nose by the NGO’s.

For these businesses, they are competing for the survival of the company (in their minds) – why does the UK not “get it” – that “we are not on a level playing field with the Chinese and others who allow their firms to do what they want when overseas?” Arguing that it is unethical produces a wry smile – and a call to deal in the real world where business is tough and economic conditions tougher. A business does whatever it needs to do.

From 19th Century business ethics to 21st Century Globalisation

A parallel with the business of bribery was the rise of industry in the 19th Century and how the demand for health and safety procedures were crowded out and resisted by businesses that saw this as an affront to their rights to do business. The laws allowed child labour and working conditions modeled on workhouses – prison-like conditions.

In 1833, the UK introduced a law that ruled that:

  • Children under nine could not be employed in textile factories.
  • Children aged nine to thirteen could work a maximum of nine hours per day and 48 hours per week.
  • Young persons aged thirteen to eighteen could work a maximum of 12 hours per day and 69 hours per week.
  • Night work for children and young persons was not permitted.
  • Children were to attend school.
  • Four independent factory inspectors were to be appointed.

This was the beginning of a movement that business owners felt would wreck their businesses.

We can now look back on the waves of pressure in both directions that pushed for better working conditions on one side and the status quo on the other.

But, the world changed – developing countries realized that to be prosperous meant developing the so-called middle class and that all parts of society had to be covered – not enslaved by appalling conditions. While risks still persist in many industries in the UK and other developed nations, the focus has moved.

Globalisation has meant that we now source so much of our goods from overseas and this means that Asia, for example (mainly China) now represents our supply base just as the under-9’s did before 1833. Our natural resources (from which the British Empire rose up) are still derived from many of those countries, which were plundered in the 19th Century.

Yet, the norms that we require in our own countries are not the norms in our supplier base – even if we obtain the benefits. When a UK retailer is discovered using child labour in one of its overseas suppliers, there is an outcry and their reputation suffers. Our consumerism does not, in the main, take precedence over what we see as basic ethical norms – which have changed in the last 180 years.

So, bribery and corruption is no different. Early 19th Century England was a place where bribery was endemic. We have, for the most part, cleaned up our act at home. This ethical state was not transposed to the work we do overseas for many years – in 2001, the costs of overseas bribes remained tax deductible in the UK. Now, the situation has changed – the ethical state has changed in law – if not yet in practice. Globalisation does not mean we should hide our eyes from the rest of the world – we are now all part of the same economy (just as the textile workers and their 9 year-old children were in 1833).

Taking business beyond bribery

The laws are in place but business (operating under difficult economic conditions) and business people feel under pressure. Passing a law does not mean that it becomes easy to deal with it. There are a number of changes that we need to see made.

  1. SME’s feel under pressure because they have been scared by the Adequate Procedures requirement in the UK – which means that individual Directors are unlikely to be prosecuted even if someone in their firm is guilty of bribery if there exist processes, which mean that the bribery charge is shown to focus on a rogue element. Lawyers and others have made the most of this – firms are hit by high charges if their risk assessments show them vulnerable. The answers lie in common sense (like all business decisions) but also, for many who think themselves vulnerable, for Chambers of Commerce and other business organisations (CBI, IOD) to go to their aid by working with government and NGO’s (like Transparency International) to educate wherever possible.

I have myself chaired conferences in the Bribery Act – I hesitate to state the percentage of companies that have been to such conferences, but I bet it is a low one.

2. Working for a US corporation for many years, I had to sign-off every three months that I was unaware of any bribery going on in my business. We should have the same in the UK – this should be done for all companies audited, where a document should be signed off every year by the Board. For those companies that are too small for an audit, there should be a statement that is sent in with the Balance Sheet to this effect.

3. For companies that are subject to bribery requests and / or intimidation, there has to be somewhere to go just like the Embassy if an individual is imperiled. Every embassy should have a commercial attaché or equivalent that is trained in the Bribery Act and knows how to deal with the issue. This entails pressure on host governments as well as alerting the issue to UK Authorities – as it is anti-competitive and will hurt British firms in the short-term. It also requires links between the Embassies and industry groups to channel information and to act on it.

4. The Governments that are signed up to the OECD Anti-Bribery Convention have to seriously and continuously pressure those countries that aren’t to enter into a world wide anti-bribery agreement – it should be a WTO requirement for trade that countries make their firms bribe-free and that supplier nations work towards bribe-free regimes. This should also include those regimes that have surpassed bribery and where small groups have taken over the resources completely. Angola comes to mind (Sonangol controls the energy industry and is vitally owned by the governing clique) but South Sudan (one of the poorest nations on earth) is bemoaning the loss of $4 billion through corruption in its oil sector.

Business Ethics good for Business

Business has to deal with many challenges – and external challenges can be the hardest. I have seen businesses in aerospace and defence positively transformed because of the adoption of good ethical practices. CSR has focused many large companies on to going beyond what is legally required to what is right. That usually makes for good business as consumers are far more “savvy” and can change their buying habits very quickly.

For small businesses (maybe part of a supply chain where the end-consumer is not in sight), it is just as important. Large companies are responsible for their supply chain, too under the Bribery Act. There is not much escape.

The Bribery Act took 200 years to get into Law – it is very unlikely to be overturned. The 21st Century world is one economy – each nation and group of nations are linked by trade flows, supply and demand, financial flows, people flows. Just like CO2 emissions, one country impacts another. Bribery may be an unseen crime – it is a crime nonetheless, but, like in regard to health and safety (and child labour laws) we move on.