When governments fail to defend the economic realm, citizens revolt

The subordination of society to self-regulating international markets is the reason why British workers and industries so often fall prey to predatory financiers, writes Ann Pettifor. It is also a fundamental cause of current political crises throughout the west – just as Karl Polanyi described almost 80 years ago.

‘I would rather see Finance less proud and Industry more content.’ Winston Churchill fretting about a return to the gold standard, in a memorandum to Sir Otto Niemeyer, 22 February 1925

As this article goes to press, the British government finds itself onthe defensive and virtually helpless in the face of two potential global ‘megadeals’ that may lead to substantial job losses. The first is the failed US $143 billion takeover bid for Unilever by Kraft Heinz and its cost-cutting partner 3G Capital – a private equity company owned by Jorge Paulo Lemann, a Brazilian billionaire. Unilever has 7,500 staff employed in the UK. While the threat of a takeover appears to have been averted for six months, 3G Capital has mobilised up to $15 billion for the next megadeal, and still has Unilever in its sights. 3G was behind the Kraft–Heinz merger, finalised in 2015, after which 13,000 jobs were shed. As Warren Buffett says of his partner 3G, their joint investments have been highly profitable, but 3G specialises in ‘eliminating many unnecessary costs… very promptly’.1

The second threat is General Motors’ sale of its European arm, Opel, to the company behind Peugeot, PSA. Because Vauxhall is part of the Opel company, the jobs of 4,500 workers – building Vauxhall’s Astra cars in Ellesmere Port and Vivaro vans in Luton – are at risk. Furthermore, more than 20,000 people work in Vauxhall’s retail network, and 7,000 people work in its wider UK supply chain.2 Vauxhall is particularly vulnerable because the UK’s lax labour laws makes it easier for PSA to cut costs by firing workers and closing plants in the UK than it would be in, for example, France or Germany.

Mrs Thatcher’s anti-union stance, inherited by successive Conservative and Labour governments, has exposed not only British workers to predatory behaviour by an unregulated finance sector, but also British industry. Unlike Churchill, Thatcher and her successors were content to see finance proud, and industry vulnerable.

The latest ‘fire sales’ and intensified ‘asset-stripping’ of healthy British companies by big, global, tax-dodging finance corporations can be explained in several ways. The first is the prospect of Brexit, and the fear that British firms will lose access to the single market. The second is also explained by the Brexit vote: the 17 per cent fall in sterling, which makes companies – and indeed all British assets – cheaper for foreign buyers. The third is that global private equity firms have strong appetites for acquiring healthy firms, and then financing takeover deals with taxpayer-subsidised debt. These subsidies represent substantial foregone tax revenues for the governments concerned – foregone revenues that will rise as a share of GDP as interest rates rise. Indeed, what appeared to gall the Unilever board most was ‘the idea that it was expected to cover the bill on credit – by having debt raised against its own pristine balance sheet’.3

Presiding over the fire-sale

Like parasites, private equity firms do not kill their hosts, as this would cut off the supply of rent (in the form of debt payments) gouged from healthy firms for many years into the future. Making a company pay for its own takeover by sacking employees, stripping assets and then systematically bleeding it of future revenues is capitalism at its most barbaric.

The prime minister seems to understand this, but also appears impotent in the face of globalised finance. In her speech to the 2016 Conservative party conference she said, ‘Our economy should work for everyone’.4 But hers are empty words as she oversees the systematic culling of nationally significant British firms like ARM, the UK’s largest tech firm, taken over in 2016 by Japan’s SoftBank.5 In this sense the British government, unlike most European governments, fails at its most important duty: that of defending the economic realm to ensure the security of its citizens.

And it is this failure of regulatory democracy to defend the livelihoods and living standards of its citizens that, I believe, lies behind the Brexit vote, support for Donald Trump, and the rising popularity of France’s far-right Front National. If democratically elected governments are not capable of defending citizens from voracious, parasitic capital, then citizens revolt. Rather than turning to social democrats perceived to be colluding with global, liberalised finance (or ‘globalisation’), they turn instead to a ‘strongman’ or -woman who promises to ‘build walls’ or exit the EU, and defend them from freewheeling, self-regulating markets in capital, trade and labour.

Grounding the ‘almost planetary’ economy

Karl Polanyi, author of The Great Transformation, explained this phenomenon in a series of lectures delivered in 1940, reproduced recently by PRIME economics.6

‘Within national frontiers representative democracy had been safe-guarding a regime of liberty, and the national well-being of all civilized nations had been immeasurably increased under the sway of liberal capitalism; the balance of power had secured a comparative freedom from long and devastating wars, while the gold standard had become the solid foundation of a vast system of economic cooperation on an almost planetary scale. Although the world was far from perfect, it seemed well on the way towards perfection. Suddenly this unique edifice collapsed. The very conditions under which our society existed passed forever.’7

The gold standard, he explained ‘had become the basis of a world economy which embraced capital markets, currency markets and commodity markets on an international scale’. The apparently simple proposition that all factors of production must have free markets implies in practice that the whole of society must be subordinated to the needs of the global market system, Polanyi argued. This subordination of society to self-regulating international markets, and the detachment of this ‘almost planetary’ economy from the policymaking boundaries of a national democracy ‘developed into a catastrophic internal situation’ in the 1930s and was ‘the critical state of affairs out of which the fascist revolutions sprang’.8

History, of course, does not repeat itself, and because of the rise of new technology and other developments, today’s democratic governments face challenges different to those faced by governments in the 1920s and 1930s. Nevertheless, Polanyi’s analysis of the impact of self-regulating international markets on democratic governments appears extraordinarily relevant to today’s events.

This piece was written for the IPPR journal Juncture

• 1  Gapper J (2017) ‘Warren Buffett needs a new recipe for investing’, Financial Times, 22 February 2017. https://www.ft.com/content/e76558cc-f834-11e6-bd4e-68d53499ed71
• 2  Blagg H (2017) ‘“Speedy changes” concerns: Unite GS to press case to PSA boss’, UNITE live blog, 23 February 2017. http://unitelive.org/speedy-changes-concerns/
• 3  Vincent M (2017) ‘Who wrote the chat-up lines in Kraft’s clumsy courtship?’, Financial Times, 20 Feb 2017
• 4  May T (2016) ‘Theresa May’s keynote speech at Tory conference in full’, Independent, 5 October 2016. 
http://www.independent.co.uk/news/uk/politics/theresa-may-speech-tory-conference-2016-in-full- 
transcript-a7346171.html
• 5  Farrell S and Kollewe J (2016) ‘ARM shareholders approve SoftBank takeover’, Guardian, 30 August 2016. 
https://www.theguardian.com/business/2016/aug/30/arm-shareholders-softbank-takeover-tech-lord-myners