Politics and polar bears – the race for extinction

Polar bears evolved into a niche that for thousands of years gave them a status at the top of their local food chain. Global warming is putting paid to that and, swimming from one ice-island to another they give the appearance of a doomed species. It may take some time, but the human race is ensuring that they are no longer suited to the new environment in which they have survived for so long.

Changing Environments

It’s probably less important, but the world is changing for politicians, too. They are suffering from their own form of global warming that shows that they have not sufficiently evolved to meet the demands of the new environment that they face. It is an environment in which the political systems of the 19th century don’t work and the where the fixed mental states of those in politics and who have grown up in politics and nurtured by 19th and 20th Century models no longer have the validity or purpose that they once did. Populations see them incapable of creating the conditions for us to live well and are giving up on them.

Voting is down to 50% in many democracies; in Western Europe, corruption and greed has isolated the political factions from their people. When Mario Monti said in an article in Spiegel recently, “If governments allow themselves to be entirely bound to the decisions of their parliament, without protecting their own freedom to act, a break up of Europe would be a more probable outcome than deeper integration”, then you know the game is up. Politicians and the people are separated and democracy itself us in danger.

When you have evolved into something of no use, then it is time to give way or you erode (or, worse, implode) with time.

Fukuyama believed that politics had evolved successfully and that liberal democracy had won. The problem with that analysis (apart from being plainly wrong, as he now agrees) is that he was providing an answer to the wrong question. The question was not which political system out of communism, fascism or democracy would win. Nor, was it a question about whether capitalism in one form or other would win – we know the market has its place on the winner’s podium already.

No, the question to be asked is more fundamental – what is the role of government in a modern society? Monti would argue that democracy might well not be part of it. There are other, better positions.

“The Gardens of Democracy” by Eric Liu and Nick Hanauer (http://www.amazon.co.uk/The-Gardens-Democracy-Citizenship-ebook/dp/B0061S3UMA/ref=sr_1_1?ie=UTF8&qid=1344783105&sr=8-1) describes, from an American vantage point, the type of new politics (combined with new economics and new citizenships) that could dominate in the future. More a long pamphlet (but no less important for its Tom Paine comparisons) than a major book, it describes the “big what and the small how” of politics in the 21st Century. But, it will require a sea change in politics and in politicians and take us well away from the technocratic (mechanical) notions of 19th Century thinking.

What is different now?

Liu and Hanauer’s work is based on discoveries made in the late 20th Century in places like the Santa Fe Institute (they base much of their work on the Eric Beinhocker’s great book “The Origin of Wealth”) into complexity and the new rules that completely shake the 19th Century idealism of economics doctrine that still rules (mainly through econometrics – the 20th Century form of alchemy) the policies of the 21st Century.

They bind together the new guidelines into citizenship and politics and, probably for the first time, attempt to develop a society-wide thesis based on the new rules. It is a bold attempt and no different to the aims of Common Threads (this blog) – to rid ourselves of 19th Century prescriptions based on Newtonian (they call it “mechanical”) rules and forward to what they call “gardening” – the desire for politics to shape and cajole (and, as necessary, fund and intervene) but not to control or to allow the unfettered invisible hand of the markets to run riot.

While their focus is on the USA (developing a point of attack against both free marketeers such as the Republicans – or, worse, the Tea Party – and the pro-government-does-all wing of the Democrats), this is a model for all nations.

What is different now is that in many countries people are tired of the old left against right philosophies and are reaching (or have already reached) a level of economic “wealth” (at least measured by numbers) that should allow us to turn our minds to what actually matters – Maslow’s self-actualization but on a global scale. More than this, education is sufficient for people no longer to want to be ruled by governments in every sphere of life but educated enough to know that massive income variations should not be the norm and that society is important – it is our position in society that matters more than the material wealth on its own.

As a Brit, nothing is clearer than the genuine pride shown during the 2012 Olympics – a pride of a nation that (despite may problems) has provided a high value games with genuine affection for all nations as well as pride in itself. The pride of the many volunteers that contributed will resound as long as the concerns over the amount it cost. This was a society working together – a form of national self-actualization.

This self-actualization has to take us away from the mechanical drudge of being a cog in a wheel – focused only on what monetary wealth provides – to a society that encourages growth of all its citizens. That growth is whatever we believe to be important and government’s role is to help us understand what that is (not “tell” – this is not a totalitarian regime proposal) and assist in attainment. It means  (according to Liu and Hanauer) the “big what” – i.e. what we aim for – and the “small how” (i.e. not controlling how we get there but aiding the process).

Politicians as leaders not controllers

Society in the developed world is driven (in the main) by money. We count our wealth in dollars or euros or pounds or yen or yuan. But, we all know that there is more to life than that. Our memories of our lives are far more than how much money we make – they are of family, education, learning, books we have read or films we have seen or football matches played in or viewed, pride in our kids, helping loved ones over illnesses or a myriad of other prized mental possessions.

Yet, modern society always seems hell-bent on just monetary gain – “it’s the economy, stupid”. This is a 19th Century concept given heart by 20th Century victories of democracies run on market economics against totalitarianism, communism and fascism. The result was a victory that was far, far better than the alternatives. We now have a chance to modify that victory and show that the 21st Century offers more than the Chinese alternative of a market economy driven by a legalist clique that fears for its life. Competing on those terms is not what we should consider.

The market economy is the best worst option but not as a free (unfettered) one. Government has to play a role and Liu and Hanauer point us towards that role.

The role of government changes in this worldview and the role of politicians, too. Instead of CEO’s in charge of a business, Liu and Hanauer propose that they become gardeners – working out the general landscape and then tilling the soil, weeding and watering the plants, as it needs it. This is a worldview that is consistent with the way the world works – not the way that 19th Century politicians and economists have developed the simulation.

What’s the next step?

I have been interested in complexity and the new findings of this deeper, richer analysis of how the world works since the 1980’s when I attended a lecture in London on complexity in business – with Michael McMasters, then a guru of the subject. Murray Gell-Mann (who found the quark) and Stuart Kauffman were presenters amongst a stellar mix of experts in science and economics. Work done at places like the Santa Fe Institute and elsewhere have pushed the boundaries of thinking in this area and there are now areas where this new (er) thinking is taking hold. Eric Beinhocker’s recent article in the Independent  (http://blogs.independent.co.uk/2012/08/08/new-economic-thinking-and-the-potential-to-transform-politics/) which highlights the Liu and Hanauer book also provides an example of how computing technology is assisting the process – how the difficult arguments of complexity can be made real.

However, in the last thirty years (since I attended that conference), it has been hard to see the visible signs on a macro-scale that complexity has made to make a difference in a society that is driven by simplicity – the drive to count based on GDP and earnings.

Liu and Hanauer have in a large pamphlet done something important in working to make a tough subject easier to understand. Now, we should be shouting like Tom Paine and working to establish such thinking in schools and universities and to challenge our leaders to address the world’s problems through the dose of reality that complexity provides. This is a major challenge of explanation no less important than any other doctrinal assertion over the years but without (yet) the simplistic notions that the Tea Party or labour rights or communism or centralized government (or left vs. right) have.

Should Everything have a Price?

Michael Sandel in his recent book “What Money Can’t Buy: The Moral Limits of Markets” writes excellently on how the market economy has turned into the “market society”. This view echoes Galbraith and “The Affluent Society”. Galbraith’s warning from the 1950’s has not been heeded – we are now subject to the “market” in everything we do – anything and everything has a price.

 

Sandel cites many examples – such as someone selling their organs, someone saving a place in a queue, schools being sponsored by companies and many others.

 

It could be argued that it was always so. Slavery, the selling of humans in the marketplace, was a common market phenomenon and still exists. Bribery and corruption – the selling of favours or ensuring something goes in your favour – remains common and Iraq and Afghanistan are riven by corruption on the grandest scale. Russia and much of Eastern Europe are held to be gangster nations – like much of the USA in the time of prohibition. Somalian pirates resort to kidnapping as an outcome of pure economic theory.

 

Yet, society does, from time to time, attempt to apply limits in a world where it seems that everything has a monetary price.

 

Market domination

 

The libertarian view that the market should be allowed to rule means that we abrogate our responsibilities. It is the role and duty of civil society (usually through Government) to judge where market rules and where other forms of decision-making are paramount.

 

We make those judgments continually. The right to be safe on the streets is, in most developed societies, made possible by laws which are enacted through general agreement by citizens. It is enforced, where needed, by legal systems and enforcement agencies – again, only there by the general agreement of civil society. In those countries where the market and price dominate, then the danger is that laws and police forces can be bought off. This is the case in many eastern European countries and many countries in Africa. Bribery and corruption rule through what may be called the market society – against the agreement of most of its citizens. As Sandel points out, this is against the best outcome for society – and by a long way.

 

Libertarians may argue that a legal system and an “open society” are the foundations for market economies to work, but the world is a global economy and it is no longer possible for one country to be cut off from the rest. The market domination into so many areas of life is a threat if basic norms do not exist.

 

The market versus societal norms

 

Sandel does not go too much into how society develops its norms – where market pricing should not intrude. We are in danger, of course, of taking on pricing into every form of our lives and there are plans to price our natural resources and to ensure that accounting incorporates aspects of social life into accounting rules – for example, through the Prince’s Accounting for Sustainability Project; through the Natural Capital Committee – which will report into the UK Government’s Economic Affairs Committee, chaired by the Chancellor of the Exchequor.

 

While this acknowledges the problem in one respect (i.e. we are not properly accounting for externalities like pollution, the loss of natural capital – our rivers, forests and such) it is perhaps giving up the struggle against the market society. By the very nature of accounting in terms of numbers for such “externalities”, we subscribe to the essential condition for market pricing of everything – the market society is allowed to dominate.

 

Our focus on GDP and numbers betrays a failing of society – our inability to see anything outside of numbers – so-called economic wealth. GDP, which rewards only that which can be measured, has been a poor simulation of real “wealth”. Our drive to economic success (measured by how many unnecessary items we make and buy) takes no account of what is really important. Ability to buy is all that “counts” – literally.

 

Societal norms are now up for sale. Instead of a rearguard action against the market society (as against market economics) where we defend those areas of society against pricing (as they should be beyond price), we succumb to pricing everything. This leads to everything having a price – an accounting-driven doctrine, a market society doctrine.

 

Beyond economics

 

Of course, this may be the price (!) we are paying for economic growth and relative economic success. As we become more economically successful and as the world derives basic economic success, maybe our brains are becoming hard-wired to numbers as the only register of what is successful. The left-hand side of the brain is assuming victory over the right.

 

There is no question that the discovery of numbers has made the human successful and to understand and control large areas of science. We have changed the world entirely. Our ability to count is now dominating our lives. Since the dawn of accounting (when we counted our grain), numbers now “account” for everything.

 

Where has been the debate to question the way we account? If numbers dominate everything we do, what outcomes do we envisage, what changes result? If all our successes depend on numbers, then what lives will we lead?

 

This is now beyond economics – which, as George Soros has recently outlined, http://www.georgesoros.com/interviews-speeches/entry/remarks_at_the_festival_of_economics_trento_italy/

has been shown to be terribly mistaken in its misunderstanding of the world. His analysis, that economics, in trying to copy the rules of science has travelled the wrong path. Economics is a social science and, as such, does not have definitive outcomes. But, the situation is worse than Soros makes out.  Macroeconomics is being subsumed beneath a torrent of numbers so that, worse than following a quasi-scientific path, we are now following an accounting outcome for everything.

 

Where are the norms for society? Who are the guardians?

 

The financial crash of 2008, which is still playing out in 2012, opened up severe cracks in our economic system. It is also opening up divisions in society between the very wealthy and the large swathe of middle-income earners who make up most of civil society. These divisions show how we are valuing society and show clearly that pricing is not working. The value given to bankers and bonuses (no risk activities for the individuals who can only lose their jobs, not their wealth and no risk activities for the banks, who are too big to fail) shows a dramatic failing in pricing – in which we apparently put all our trust.

 

Pricing mechanisms are not working successfully, yet we place more and more of our faith in pricing as the only arbiter of success.

 

We now price (or will soon be attempting to price) everything – from CO2 to education, from healthcare to shoes, from our rivers to our right to pollute – everything with a price.

 

Yet, macro-economics (the economics of society) is a social science – it is not based on rigid rules. It is (as Soros rightly states) bound up in decisions and thoughts of men and women.

 

Pricing is one outcome of a social science that is not unquestionably right in every case – it is actually, mostly wrong and most economists are only good at describing what has passed (i.e. rear view mirror gazers).

 

Accounting was originally a micro-based activity – to help regulate and tax individuals and firms. It is now being used to price everything.

 

Are there any alternatives to pricing everything?

 

Of course there are, but it is becoming tougher. The Bribery Act in the UK (following a mere 34 years after the Foreign Corrupt Practices Act in the US) is an example. Society has (at least in the UK) decided that winning contracts or influencing economic decisions should not be subject to corruption. In China, as Jonathan Fenby’s excellent “Tiger Head Snake Tails” so ably describes, bribery and corruption have existed for many years but (at least at home) it is not considered acceptable. In many other countries in the developing world, it is.

 

But, we know that price is in play throughout society. The best lawyers cost huge sums and only the wealthy can afford them – so, our legal system is subject to pricing. The best education is paid for; the best healthcare is paid for.

 

With wealth divisions becoming wider, pricing is everything. It is time for a real debate in society on how economics needs to be changed to reflect reality and how accounting for everything (and a price for anything) may not be the answer. The invisible hand of the market should not be allowed to grab everything.

The Moral Tax Maze – What Does Society Want ……

…..and General Anti-Avoidance Rules (GAAR)

Following on from the Aaronson report in November, 2011, George Osborne stated in his budget speech to Parliament this week that he has decided (no doubt after Liberal Democrat pressure) to adopt General Anti-Avoidance Tax Rules (GAAR) after due consultation. This is a major departure for the UK and has potentially huge benefits on a world-wide scale.

 

Osborne stated his abhorrence to excessive tax avoidance and this repeated, in effect, the Aaronson dictum that only excessive tax avoidance should be the subject of any GAAR. Any law should focus, it said, on excesses – where schemes were devised that provided for a “moderate rule” that does not penalize proper tax planning. This would, Aaronson said in November, 2011, not need elaborate clearance systems because it would be clear that centre ground tax avoidance was not likely to be the subject of HMRC wrath. Guidance (rather like that provided with the 2010 Bribery Act, no doubt) could be provided.

 

Tax and avoiding commitment

 

Taxation is not an exact science. In the rush to comment on George Osborne’s 2012 budget, the focus has been on how the proceeds of taxation are used by the State. The Moral Maze on Radio 4 this week highlighted this issue. The discussion was not that illuminating but revealed the continuing problem that society has in determining the mix between public and private sector, taxation and philanthropy in a democratic state.  The extremes were in good evidence – at least in the ‘conversation” between Richard Murphy (of Tax Research UK) and Melanie Phillips (Daily Mail).

 

In the US, the Tea Party and similar Republican and libertarian factions have called for minimum state intrusion in the private affairs of individuals and corporations: to allow them to make their profits and earn their income and spend it however they wish.  Reagan’s opinion that the State was “the problem” is reflected in rightist policy in the US. Here, entrepreneurial spirit takes precedence over the “so-called” needs of those who can’t make it economically or fail through ill-health (or, it is assumed, lack of opportunity – opportunity is what you make yourself). State spending should be for defence (and maybe policing) and little else. The private sector should be responsible for everything and pricing through demand and supply should be responsible for sharing out the needs of the population.

 

Opposite to this are state run economies – the failed economies of the Soviet Union, for example – which proved that state monopoly failed. The attempt to centralize pricing when the number of SKU’s (stock keeping units) may run into billions was seen to be a huge error. China has awoken to that reality and the market economy is now much more the norm.

 

So, market economics rules and pricing is, wherever possible, market driven by supply and demand.

 

The problem is that the “market” (Adam Smith’s “invisible hand”) is not always right and the drive of many individuals and other organisations (the market) coming together is often imperfect on timing, often leading to monopolies of supply and often the result of market imperfections. Of course, there are also wider social issues on which government develops obligations to intervene. Global Warming may be one; re-armament in the UK in 1939 is another – no market would supply the needed response (at least in the latter).

 

This leads to the need for some societal intervention beyond the market. However, as soon as one section is taken outside the market economy, then the economy is further driven in directions that are imperfect. The requirement for a nation (or city-state or whatever) to defend itself from potential invasion has, throughout civilization, meant that central government has needed to collect tithes or taxes from the population it is defending. Of course, ancient monarchies were defending the monarch rather than the people, but newer, democracies have a similar aspect. Until we reach the perfect state where no-one needs to defend themselves, defence spending will be “allowed” through taxation. This is a basic need and taxation results. Governments (that take on the responsibilities that society gives them through the democratic process) then extend that remit to tax and supply “needs” such as policing, a legal system, health, social security and market intervention. It also has the power to alter the direction that markets take through taxation or incentivisation – e.g. 100% capital allowances or allowances for R&D and geographical location.

 

The question is no longer whether market economies should exist but the degree of state (on behalf of society) intervention through taxation and the ability of society to accept that taxation and / or devise ways to minimize individual and corporate tax burdens (in the same way that computer hackers attempt to break down IT security defences).

 

The Moral Taxation Maze

 

If we believe that democratically elected governments have the right to raise finance through taxation based on the mandate they have been given by society, then it cannot be too far a push to agree that the collection of tax receipts should not be stymied. Tax evasion is a criminal activity; tax avoidance has long been seen as the right of the clever (and the wealthy) to find ways to minimize the tax they (individuals and companies) pay.

 

This “right” has pitched the seemingly able and spirited against  government bureaucrats and tax inspectors in a battle that the public seemed to want the former to win. After the banking and credit-induced damage inflicted in 2007/8, the “spin” has changed direction. It is no longer just bankers that have questionable business ethics. We are now engaged (world-wide) on a deleveraging project of austerity and public sector cut-backs. This is made much more difficult by those individuals / organisations who are engaged in tax avoidance and try to minimize the tax-take made by government. This impacts directly on the need to save even more public sector spending – impacting directly on those sectors of society that can least afford it.

 

The fact that tax avoiders inhabit the same off-shore jurisdictions as drug dealers, kleptocrats sending oil and energy wealth into their own accounts and organized crime is maybe a clue  that tax avoidance is not a wholly respectable activity – whether done by individuals or corporations. The debate seems to be changing and the world is now waking up to the debilitating impact of the “legal” flouting of tax laws through manipulative mechanisms and offshore tax havens. Ethical considerations are now allied to the deleveraging process.

 

Tax: Society’s writ, Government implementation

 

The moral tax maze may becoming a lot simpler to navigate. Taxation in each country should now be  based on a wide-ranging general anti-avoidance law, which should go further than the Aaronson proposals. While tax will continue to be a competitive issue between nations (within broad guidelines set by trading agreements), tax havens located where value does not arise should be outlawed and value-adding nations (where goods and services are produced, designed and /or sold) should have the sole rights to levy taxes and, through a broad-based anti-avoidance rule, collect those taxes from those operating there (with double taxation only operating between those signing up to the general provisions in operation).

 

George Osborne’s discomfort with the worst excesses of tax avoidance (based on Aaronson’s GAAR proposals) is a start. But, in a world, which will take a decade or more to rid itself of the excesses that began to unravel in 2007/8 and where economic strength will continue to be more broadly based internationally, governments (where properly representative of society and elected by that society) will need to ensure that society’s wishes are carried out. Taxation is a key to that (as it has always been).  As transparency grows and we know more about tax take and where it is spent (as Osborne is keen to provide information on – or so he stated in his budget speech), the ability of the wealthier and most powerful to manipulate their taxation burden must diminish or the outcry from society will become too loud. In the same budget that reduced the top income tax rate from 50% to 45% (because earners had been able to manipulate the tax take from an estimated £3bn to just £100m!), we are given some hope that the fight back is taking hold.

 

A few weeks ago, retrospective action was taken against Barclays Bank. Now the consultation is under way on general anti-avoidance rules on tax. Modern economies should not shy away from the essential need of society to see that the governments it elects carries out its wishes. Tax laws (and the ethics behind them) should be implemented and be seen to be implemented. This is an international requirement – the UK may be at the forefront of something transformational – if it does not get too scared by being out in front.