Nothing excites neoliberals like the notion of a free market. But they're fans of the state when it's convenient...
A photographer recently captured something on the floor of Johnson’s car: Britannia Unchained, a publication co-authored in 2012 by five members of the party’s Thatcherite-leaning Free Enterprise Group.
All of them are now key allies in Johnson’s government: Kwasi Kwarteng, Priti Patel, Dominic Raab, Chris Skidmore and Liz Truss.
The ‘free market’ right hold the reins under Johnson. But what does the phrase mean in practice?
The phrase is contested – but at its core is the belief in a system of exchange where the price of goods and services is determined by supply and demand.
In this idealised system everyone is a price-taker and no one is a price-maker. There are no barriers to entry or exit and goods/services are distributed without any intervention from the state, regulatory bodies or monopolies.
But the finance sector shows that free markets are an ideological mirage: capital is devoted to mobilising the state.
Finance and the myth of free markets
The finance industry is the supposed bastion of the free market and a major beneficiary of the 1980s deregulation under Thatcher.
It has wreaked havoc on ordinary people – using its market power to rip-off consumers by mis-selling endowment mortgages, investment bonds, split-capital investment trusts, precipice bonds, interest rate swaps, self-invested personal pensions, payment protection insurance, pensions, and much more.
Consumers did not demand any of the fraudulent practices. And only interventions by the state persuaded the industry to curb some of its rapacious practices.
In the period leading to the 2007-08 financial crash, banks engaged in reckless risk taking. Such practices had the potential to destroy the finance industry and sink innocent people’s savings and pensions. Markets did not protect innocent people or rescue the banks from their own follies. That task fell to the state, and it provided around £1,162 of support to bail-out the banks. The cost has been borne by every household in the form of austerity, wage freezes, loss of welfare rights and higher taxes.
Free marketers assign a negative role to the state but without it the finance industry would not be able to survive.
In the decade after the 2007-08 banking crash, the Bank of England’s quantitative easing programme pumped around £435bn into banks to enable them to boost their balance sheets.
The state is the lender of the last resort and ever ready to prop-up banks. The deposit-taking licence enables banks to trade. This is an essential element of confidence and legitimacy of a bank. And in the event of default, the Financial Services Compensation Scheme protects £85,000 of the deposits made by a customer. Under certain circumstances deposits leading to high balances of £1 million are also protected. Such protections instil confidence and stability in banking.
The state bolsters the customer base, and thus the ability of banks to sell services, of banks by insisting that pensions and social security payments are made through them.
Since 2009, the Bank of England has operated a policy of low interest rates which has resulted in huge wealth transfers from ordinary people to banks. In March 2009, the base rate was fixed at 0.5 per cent, reduced to 0.25 per cent in August 2016, and is currently at 0.75%. This decimated the returns on pension annuities and savings, but has given banks cash, their basic raw material, virtually free.
Accounting for failure
The colonisation of the state has been the making of the accounting firms. There are no state guaranteed markets for engineers, scientists or mathematicians – but the state requires that company accounts be audited by accountants belonging to select few trade associations.
In turn, the accounting firms have long used the statutory audit as a stall for selling lucrative consultancy services. In a free market, suppliers of faulty goods/services are supposedly driven out of business, but that is rarely the case in the auditing industry which routinely produces duff audits. It is hard to think of any stakeholder group which routinely demands duff audits.
Accounting firms can enter almost any other business but have persuaded the state to erect barriers for others to enter the audit industry. The UK and the EU rules require that any organisation offering statutory auditing service must be under the control/ownership of accountants who are licenced to carry out audits. This is akin to saying that only pilots can own airlines, only pharmacists can own pharmaceutical companies or only chefs should own food businesses.
Accountancy firms have successfully mobilised the state to prevent new entrants from increasing supply of audit or introducing new technologies. This barrier enables auditing firms to earn excessive economic rents even when they continue to deliver poor audits.
It is not just the finance and accounting industries, but numerous others have also mobilised the state to erect barriers and collect economic rents. The rhetoric of free markets is primarily used to oppose social responsibility and public accountability.
Citizens have every right to demand the end of the state’s protections for exploitative industries – and that the recipients prioritise social welfare above their narrow economic interests.
Prem Sikka is a Professor of Accounting at University of Sheffield, and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor for Left Foot Forward and tweets here.
Like this article? Left Foot Forward relies on support from readers to sustain our progressive journalism. Can you become a supporter for £5 a month?
Leave a Reply
You must be logged in to post a comment.