Arabica Robusta's List: capitalist exploitation

• Ecuador proposed the idea in September 2013 after years of fighting Chevron who has refused Ecuadorean court judgments requiring the company to pay $18 billion in damages for massive environmental destruction and other harms to communities in the Ecuadorean Amazon. To avoid these payments, the company sued Ecuador for lost profits through “investor to state” dispute settlement provisions the country agreed to when it signed a bilateral investment treaty with the U.S. Such investor state provisions that grant corporations’ right to future profits over governments’ right to regulate are sadly common in free trade and investment treaties pushed by the U.S., including the current negotiations of the Trans Pacific Partnership (with Pacific Rim countries) and the Transatlantic Trade and Investment Partnership (with Europe). Civil society groups, including IATP, strongly oppose investor state provisions. 
• Such People’s initiatives are growing in number and strength—aided by the launch of the Stop Corporate Impunity Campaign at Rio Plus 20 summit in 2012. The Campaign had a week of mobilization here in Geneva to strengthen the global effort and has launched a People’s Treaty process that is intended to mobilize social movements and citizens to stand up and demand accountability from their governments and to present an alternative vision of governance. It will be a critical bottom up process while governments begin their own deliberations on a binding treaty. 

• Here again, he seems to be talking about physical volumes of capital, augmented year after year by profit and saving.
• The basic neoclassical theory holds that the rate of return on capital depends on its (marginal) productivity. In that case, we must be thinking of physical capital—and this (again) appears to be Piketty’s view. But the effort to build a theory of physical capital with a technological rate-of-return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s, notably Joan Robinson, Piero Sraffa, and Luigi Pasinetti.
• There is no reason to think that financial capitalization bears any close relationship to economic development. Most of the Asian countries, including Korea, Japan, and China, did very well for decades without financialization; so did continental Europe in the postwar years, and for that matter so did the United States before 1970.
• The empirical core of Piketty’s book is about the distribution of income as revealed by tax records in a handful of rich countries—mainly France and Britain but also the United States, Canada, Germany, Japan, Sweden, and some others. Its virtues lie in permitting a long view and in giving detailed attention to the income of elite groups, which other approaches to distribution often miss.

• Early on, Piketty makes a claim to be the sole living heir of Simon Kuznets, the great midcentury scholar of inequalities. He writes:

   

  Oddly, no one has ever systematically pursued Kuznets’s work, no doubt in part because the historical and statistical study of tax records falls into a sort of academic no-man’s land, too historical for economists and too economistic for historians. That is a pity, because the dynamics of income inequality can only be studied in a long-run perspective, which is possible only if one makes use of tax records.

   

  The statement is incorrect. Tax records are not the only available source of good inequality data. In research over twenty years, this reviewer has used payroll records to measure the long-run evolution of inequalities; in a paper published back in 1999, Thomas Ferguson and I tracked such measures for the United States to 1920—and we found roughly the same pattern as Piketty finds now.
• Under President Reagan, changes to U.S. tax law encouraged higher pay to corporate executives, the use of stock options, and (indirectly) the splitting of new technology firms into separately capitalized enterprises, which would eventually include Intel, Apple, Oracle, Microsoft, and the rest. Now, top incomes are no longer fixed salaries but instead closely track the stock market. This is the simple result of concentrated ownership, the flux in asset prices, and the use of capital funds for executive pay. During the tech boom, the correspondence between changing income inequality and the NASDAQ was exact, as Travis Hale and I show in a paper just published in the World Economic Review.
• The lay reader will not be surprised. Academics, though, have to contend with the conventionally dominant work of (among others) Claudia Goldin and Lawrence Katz, who argue that the pattern of changing income inequalities in America is the result of a “race between education and technology” when it comes to wages, with first one in the lead and then the other. (When education leads, inequality supposedly falls, and vice versa.) Piketty pays deference to this claim but he adds no evidence in favor, and his facts contradict it. The reality is that wage structures change far less than profit-based incomes, and most of increasing inequality comes from an increasing flow of profit income to the very rich.

• It is a book mainly about the valuation placed on tangible and financial assets, the distribution of those assets through time, and the inheritance of wealth from one generation to the next.

   

  Why is this interesting? Adam Smith wrote the definitive one-sentence treatment: “Wealth, as Mr. Hobbes says, is power.” Private financial valuation measures power, including political power, even if the holder plays no active economic role. Absentee landlords and the Koch brothers have power of this type. Piketty calls it “patrimonial capitalism”—in other words, not the real thing.
• With this passage he makes a distinction that he previously blurred: between wealth justified by “social utility” and the other kind. It is the old distinction between “profit” and “rent.” But Piketty has removed our ability to use the word “capital” in this normal sense, to refer to the factor input that yields a profit in the “productive” sector, and to distinguish it from the source of income of the “rentier.”
• Piketty’s further policy views come in two chapters to which the reader is bound to arrive, after almost five hundred pages, a bit worn out. These reveal him to be neither radical nor neoliberal, nor even distinctively European. Despite having made some disparaging remarks early on about the savagery of the United States, it turns out that Thomas Piketty is a garden-variety social welfare democrat in the mold, largely, of the American New Deal.
• But would it work to go back to that system now? Alas, it would not. By the 1960s and ’70s, those top marginal tax rates were loophole-ridden. Corporate chiefs could compensate for low salaries with big perks. The rates were hated most by the small numbers who earned large sums with (mostly) honest work and had to pay them: sports stars, movie actors, performers, marquee authors, and so forth.
• If the heart of the problem is a rate of return on private assets that is too high, the better solution is to lower that rate of return. How? Raise minimum wages! That lowers the return on capital that relies on low-wage labor. Support unions! Tax corporate profits and personal capital gains, including dividends! Lower the interest rate actually required of businesses! Do this by creating new public and cooperative lenders to replace today’s zombie mega-banks. And if one is concerned about the monopoly rights granted by law and trade agreements to Big Pharma, Big Media, lawyers, doctors, and so forth, there is always the possibility (as Dean Baker reminds us) of introducing more competition.
• In sum, Capital in the Twenty-First Century is a weighty book, replete with good information on the flows of income, transfers of wealth, and the distribution of financial resources in some of the world’s wealthiest countries. Piketty rightly argues, from the beginning, that good economics must begin—or at least include—a meticulous examination of the facts. Yet he does not provide a very sound guide to policy. And despite its great ambitions, his book is not the accomplished work of high theory that its title, length, and reception (so far) suggest.

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• As one read the first sections of the book, who wouldn’t have? I am an admirer and remain one. Here was an economist widely respected in the mainstream telling us point blank that the rich earned far more than they deserved, that economic theory regarding labor markets failed, that the most respected economists had little sense of the real world, and that inheritance was a source of persistent inequality.
• The empirical analysis in the new book went further. It showed that the equality that existed since World War II and began to reverse in the early 1980s had been an aberration. Capital usually grew faster than incomes throughout history. And it would likely continue to do so! Piketty found that this relation in which r, the rate of return on capital, exceeded g, the growth rate of the economy, seemed permanently etched into not merely history but the future.
• Early critics included James Galbaith and Dean Baker. Galbraith was perhaps the first to question his empirical findings, arguing that Piketty mixed up the price of capital with actual physical capital. Even if Piketty’s right about capital, he and Dean Baker argued early on that there were many other way was to keep capital from rising so fast than to levy taxes. These included financial regulations, anti-trust enforcement, and weakened copyright laws.
• It was exciting to find a strong refutation of the long-held mainstream view that the share of capital and the share of labor in GDP were stable. Workers and investors would split the economy’s bounty according to some unknown law of equality. Now Piketty was saying not so. Historically capital did much better. This is darned important.

• The simple question is: Why doesn’t r fall as returns necessarily diminish? Piketty’s mainstream answer is that new technologies, broadly defined, keep creating new profitable opportunities.

   

  This leaves me at a loss. Pure free markets create r that is always greater than the growth rate of GDP? Fortunately, Lance Taylor, formerly at MIT and now emeritus of the New School, shows pretty clearly that the capital proportion can rise, fall or persist under varying conditions.
• If a rising capital ratio is inevitable (as his history empirically suggests), and capital markets work the way the neoclassical models says they do, then taxes are the only tool available.
• In the long run, I think Piketty’s work will indeed prove seminal. It will force economists to deal with the remarkably wide range of issues he raises. But he hasn’t replaced Marx with a more well-founded model of capitalism’s unfairness. For me it is not capital that is power alone. Piketty’s persistently high r, a wonderful discovery, is likely a reflection of the power of wealth not of natural economic forces. With his empirical work we can begin to find solutions about how to constrain the power. But let’s follow his example in regard to income inequality and understand more fully the market failures in capital markets. A global tax would be a wonderful addition to the list of potential tools to bring down r. So let the arguments begin.

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• What Piketty does show statistically (and we should be indebted to him and his colleagues for this) is that capital has tended throughout its history to produce ever-greater levels of inequality. This is, for many of us, hardly news. It was, moreover, exactly Marx’s theoretical conclusion in Volume One of his version of Capital. Piketty fails to note this, which is not surprising since he has since claimed, in the face of accusations in the right wing press that he is a Marxist in disguise, not to have read Marx’s Capital.
• What Piketty does show statistically (and we should be indebted to him and his colleagues for this) is that capital has tended throughout its history to produce ever-greater levels of inequality. This is, for many of us, hardly news. It was, moreover, exactly Marx’s theoretical conclusion in Volume One of his version of Capital. Piketty fails to note this, which is not surprising since he has since claimed, in the face of accusations in the right wing press that he is a Marxist in disguise, not to have read Marx’s Capital.
• He demolishes the widely-held view that free market capitalism spreads the wealth around and that it is the great bulwark for the defense of individual liberties and freedoms. Free-market capitalism, in the absence of any major redistributive interventions on the part of the state, Piketty shows, produces anti-democratic oligarchies.
• And he gives a thoughtful defense of inheritance taxes, progressive taxation and a global wealth tax as possible (though almost certainly not politically viable) antidotes to the further concentration of wealth and power.
• The law is the law and that is that. Marx would obviously have attributed the existence of such a law to the imbalance of power between capital and labor. And that explanation still holds water.
• As Alan Budd, an economic advisor to Margaret Thatcher confessed in an unguarded moment, anti-inflation policies of the 1980s turned out to be “a very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes…what was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed capitalists to make high profits ever since.”
• “All told,” he writes, “over the period 1932-1980, nearly half a century, the top federal income tax in the United States averaged 81 percent.” And this did not in any way dampen growth (another piece of Piketty’s evidence that rebuts right wing beliefs).
• After 1980 top tax rates came down and capital gains – a major source of income for the ultra-wealthy – were taxed at a much lower rate in the US, hugely boosting the flow of wealth to the top one percent. But the impact on growth, Piketty shows, was negligible. So “trickle down” of benefits from the rich to the rest (another right wing favorite belief) does not work. None of this was dictated by any mathematical law. It was all about politics.
• Piketty’s formulation of the mathematical law disguises more than it reveals about the class politics involved. As Warren Buffett has noted, “sure there is class war, and it is my class, the rich, who are making it and we are winning.” One key measure of their victory is the growing disparities in wealth and income of the top one percent relative to everyone else.
• The whole of neo-classical economic thought (which is the basis of Piketty’s thinking) is founded on a tautology. The rate of return on capital depends crucially on the rate of growth because capital is valued by way of that which it produces and not by what went into its production. Its value is heavily influenced by speculative conditions and can be seriously warped by the famous “irrational exuberance” that Greenspan spotted as characteristic of stock and housing markets. If we subtract housing and real estate – to say nothing of the value of the art collections of the hedge funders – from the definition of capital (and the rationale for their inclusion is rather weak) then Piketty’s explanation for increasing disparities in wealth and income would fall flat on its face, though his descriptions of the state of past and present inequalities would still stand.
• Restricting the supply of capital to new investment (a phenomena we are now witnessing) ensures a high rate of return on that capital which is in circulation. The creation of such artificial scarcity is not only what the oil companies do to ensure their high rate of return: it is what all capital does when given the chance. This is what underpins the tendency for the rate of return on capital (no matter how it is defined and measured) to always exceed the rate of growth of income. This is how capital ensures its own reproduction, no matter how uncomfortable the consequences are for the rest of us. And this is how the capitalist class lives

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• Kemal Özkan, assistant general secretary of IndustriAll, said the deaths of 33 gold miners when a tunnel collapsed at a Rio joint venture mine in Indonesia last May could have been avoided.

• He claimed that the Indonesian human rights commission found that the operators of the Grasberg mine, owned with US company Freeport, "had the ability to prevent this from happening but didn't".

  "The lack of effort jeopardised the lives of others. The gravity of this case is serious," he quoted Indonesian human rights commissioner Natalius Pigai as saying in a report into the incident.
• But said Rio's board believed both safety and environmental issues would not be improved by the company pulling out of the operation in Papua.

• Perle Zafinandro, the leader of a community protest group against Rio's majority-owned coastal forest mine in Madagascar, accused the company of "land grabbing and environmental devastation".

  Sam Walsh, Rio's chief executive, apologised for poor communication and promised better engagement with local people. He said the level of compensation for people displaced by the QIT Madagascar Minerals mine was negoitated by the Madagscar government, which owns 20% of the mine, not Rio.

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• The World Bank promised and advised that to build a Public-Private Partnership hospital in the capital would cost no more than the old public hospital it replaced.
• It now costs Lesotho's govenrment $67 million per year, or at least three times the cost of the old public hospital. The hospital is reported by the IFC to be delivering better outcomes in some areas. But the biggest concern is that as costs escalate for the PPP hospital in the capital, fewer and fewer resources will be available to tackle serious and increasing health problems in rural areas where three quarters of the population live.
• And despite a significant body of evidence highlighting the high risks and costs associated with health PPPs in rich and poor countries alike, similar IFC-supported health PPPs are now well advanced in Nigeria, and in the pipeline in Benin.
• So why is the PPP so expensive? There are many reasons, as outlined in the new report and in a previous blog authored by Dr John Lister on this site. To some extent cost increases appear to be a result of bad advice given by the IFC. But other reasons for the expense seem inherent to health PPPs and raise serious questions about why the model was pursued in a low-income country. 

• It is accepted that borrowing capital via the private sector will always be more expensive than governments borrowing on their own account. The theoretical cost saving and value for money potential of PPP financing and delivery therefore lies in effective risk transfer to the private sector and, in turn, the effective management of that risk by the private sector in the form of improved performance and greater cost efficiency in its operations.

  In the case of Lesotho, this potential benefit has not been realised, and the costs are already escalating to unsustainable levels.

• As the country‘s health financing crisis escalates, the option of reintroducing and increasing user fees at clinics and hospitals has already been tabled for debate.

  Such a devastating and retrograde move in Lesotho would further exacerbate inequality and increase rather than reduce access to healthcare for the majority of the population. World Bank President, Jim Yong Kim, recently stated that user fees for healthcare are both unjust and unnecessary.

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• Mutiu Sunmonu, Managing Director of SPDC, said the divestment of his company’s assets was a deliberate measure to encourage indigenous participation in the upstream oil and gas industry.

   

  His words: “We want to create a new set of indigenous players in Nigeria’s oil and gas industry within the next 10 to 20 years from now, while the IOCs concentrate on more difficult issues and also allow us focus on material oil and gas fields.”

   

  The divestments are seen by some industry watchers as representing the single largest opportunity for Nigerian operators with the requisite expertise and capital to emerge as major upstream players.
• Akabogu added: “Local content in the oil industry is supposed to be a long term thing; it is supposed to be implemented in a gradual manner because the enabling environment is not there. The ideal thing would have been to retain the IOCs by addressing the issues that necessitated their divestment.” He said the IOCs were merely shifting their risks to the local operators who would now deal with issues of oil bunkering and theft.
• To renowned environmental expert and coordinator of Oil Watch International, Mr. Nnimmo Bassey, the development is hardly surprising. According to him, divestment is a business strategy by the IOCs to cut losses and maximize profits. “You will notice that they are divesting mostly from onshore and swamp fields that intersect with communities that they have massively polluted and abused. Their aged facilities in those locations will certainly bring on more resource ownership and social conflicts. So, if local companies are happy to step in and take the flak that means ‘good’ business for the IOCs,” he observed
• Bassey also said that on the other hand, the IOCs mostly divested to the extent of their equity holdings in such fields and production also activities. “They still own the pipelines and related facilities. What that means is that they are renovating their image, collecting rents from their facilities and generally smiling to the bank while the local companies will eventually take the beating for the pollutions, conflicts and other social disruptions. We see the divestment as a business strategy that benefits the IOCs and leaves the oil field communities and the environment at risk,” he told The Nation.
• Bassey noted, for instance, that although the PIB is a good first step, the document as packaged, is not as strong as it ought to be. According to him, the PIB does not have stringent pro-people and pro-environment provisions, as the country, despite the PIB, will still be having illegal routine gas flaring. He blamed the delay in passing the bill on what he described as ‘toxic politics’ and pressure from the IOCs who have openly said they would not accept laws that curb their excessive profits as well as wrong perception by some legislators that provision of funds for communities mean more money to the oil-bearing states.
• Nnimmo argued that although, the PIB makes the offer of money to oil-bearing communities on one hand, it takes it away on the other. “The PIB criminalises communities when it says that if oil facilities are tampered with then the communities, local government areas, and states would pay. Communities are not the policemen of oil facilities. The PIB speaks the old language of subsisting laws that free IOCs of responsibility where facilities are interfered with by third parties. That has made the claim of sabotage the favourite refrain of the oil companies even before incidents are investigated. The PIB fell into the same anti-people trap,” he explained.

• Bassey insisted that what Nigeria needs to do right now is to “massively increase oil revenues by halting oil theft. We are not talking about poor villagers scooping crude oil in buckets and jerry cans. Those also need to be stopped. We are talking about the industrial-scale oil theft going on in the oil sector. The official figure bandied by the Ministry of Finance as well as the National Assembly is that 400,000 barrels of crude oil are stolen everyday,” he said

   

  As for local operators, Bassey and other experts and stakeholders said the ability of local operators to hold their own would depend, to a very large extent, on better collaboration, better host community management, proper valuation and raising smart financing. They also require huge investment in knowledge, research and development (R&D).

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• The ICs take advantage of these differences in order to ‘divide and dictate’ to the DCs the terms of the climate change negotiations. What makes Africa vulnerable is its dependence on the West for the so-called ‘development aid’ and ‘technical experts’.
   
   One significant illustration of this is the manner in which the industrialised West has used money and ‘technical assistance’ as a means of ensuring an outcome at COP-16 in Cancun after they had failed to do so at COP-15. Europe and the US mounted a coordinated offensive to break the ranks of the countries of the South. Some of this was quite overt and open, for example, through the use of ‘development aid’ and other financial incentives. Others were covert and secretive, such as the use of US spy network – exposed, partially, by WikiLeaks (see Pambazuka issue 510, Dec 2010).
• The CDKN consortium includes PricewaterhouseCoopers (PWC), the Overseas Development Institute (ODI), Fundación Futuro Latinoamericano (FFLA), SouthSouthNorth, LEAD International and INTRAC. I know some of them well from previous interactions with them. The ODI, for example, advertises itself as an ‘independent think tank on international development and humanitarian issues’. From my knowledge of the ODI (on matters related to development aid, trade and EPA negotiations, for example) I can say without a moment’s hesitation that it is really an arm of British foreign policy. It is the ‘soft arm’ of British imperial diplomacy whose ‘strong arm’ comprises of instruments of force, including sanctions and war.
• This, in brief, is the first point. Africa is run by a global kleptocratic system, a system which enriches a minute number of economic and power elites in Africa and the global bankocrats and corporatocrats at the one end of the pole while impoverishing the masses of African people at the other. Economists call this ‘rent seeking’, but it is, bereft of linguistic and technical finesse, simply looting.
• What is significant about the Rwandese concept is its dual objective of saving the forests and also the ‘forest communities’. For the environmentalists forests are simply biomass that on the one hand provide fuel and on the other hand carbon dioxide absorbing ‘lungs’ as a counter against global warming. But besides the forests there are also forest dwellers. The challenge is to save the forests and the forest communities; the people as well as the environment.
• For the purposes of this conference, I wish to focus on just one lesson. And this is that Africa needs to be wary of the use of finance (or the so-called ‘development aid’) by the industrialised countries (ICs) to divide and rule the developing countries (DCs). Globally, if there is a near-clear North–South divide, it is on the question of climate change.
• It is in this light that I need to caution Africa against the processes being in put in place by several interested parties in the West to offer ‘technical advice’ to ‘poor’ African countries.

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• Conceiving of development in this way gives rise, however, to a fundamental paradox. The poor are to be forced to partake in an economic system that is based upon their exploitation and oppression. The way neo liberal and statist thinking gets round this paradox is to conceive of these exploitative and oppressive relations as developmental opportunities rather than impositions.

• To suggest that rising global wealth and global poverty are interrelated, and that the former is premised upon the latter, is not something that most players in international development want to do because it would reveal the sordid foundation of their vision of development.
• UN Millennium Project director Jeffrey Sachs defends sweated labour across the global South, saying the “sweatshops are the first rung on the ladder out of extreme poverty” (1).
• In this elitist conception of development, innovating entrepreneurs, supported by benign states, generate wealth through participation in capitalist markets, which then trickles down to the population, who should be grateful for the enhancement of their lives. This view rests on a paradox. The process of wealth creation, whether through incorporation into “free” markets, or through state-led generation and allocation of resources, requires the subordination of the working masses to the elite’s objectives — low wages, long hours and subjection to strict management discipline, denial of trade union rights and suppression of workers’ political actions.
• One of neoliberalism’s founding fathers, Friedrich Hayek, wrote: “I have not been able to find a single person even in much-maligned Chile who did not agree that personal freedom was much greater under Pinochet than it had been under [deposed former president] Allende” (3).
• Far from a ladder of opportunity, workers in globalised production networks are incorporated into economic systems that reproduce their poverty to sustain corporation profits. Arguments by liberals and statists for further global integration are based upon the expectation (and requirement) of the continued subordination of the working classes to the objectives of capital accumulation.
• Is there a way of changing the relationship between poverty and rising global wealth? A labour-centred concept of development would recognise that global wealth is based upon the working classes.
• It would note that improvements to workers’ livelihoods come about not by working for global capital, but through their own struggles for better wages and conditions, gender equality, access to land, and for political and economic democracy. The significant human development gains of the European working classes after the second world war were due not to the generosity of capitalists and states, but to the threat of mass unrest from below: “If you don’t give the people social reform, they will give you social revolution,” Quintin Hogg, a leading light in the Tory party, told the British parliament in 1943.
• In many of these factories, productivity, employment and wages increased as workers enjoyed an unprecedented degree of workplace democracy and, for the first time, a real incentive to collaborate to enhance their labour, as they were its direct beneficiaries.

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• Austerity has become the weapon of choice, an economic poison designed to punish the middle and working classes while making clear that casino capitalism will administer the most severe penalties to those who challenge its authority.
• The United States has moved from a market economy to a market society in which all vestiges of the social contract are under attack, and politics is ruled by the irrational notion that casino capitalism should govern not simply the economy but the entirety of social life.  With the return of the new Gilded Age, not only are democratic values and social protections at risk, but the civic and formative cultures that make such values and protections central to democratic life are in danger of disappearing altogether.
• Public education has become a site of pedagogical repression, robbing students of the ability to think critically as a result of the two political business parties’ emphasis on education as mainly a project of mindless testing, standardization and the de-skilling of teachers.

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