Linking today’s mess with economics, law, politics and finance


Breaking out of the subject silos to work out how we got to here

This is a blogpost – or one of a series, that Frances Coppola challenged me to write. It followed some exchanges we’d had over the influence of banking and finance on politics. I’m aiming to give some insights from a different angle to what she writes about, looking at some of the political and legal structures that politicians have created over the past few decades, as well as some of the things that might have influenced their decision-making.

Why you can’t just ‘leave things to the market’

The principle I take is this: Any legal functioning market for goods and services requires either a huge degree of trust, and/or a legal framework to underpin it. That legal framework will set out things like property and contractual rights – especially in the case of dispute resolution. That legal framework requires a political process to implement it into law. That requires the selection (whether by election, appointment or in some cases simply by being born into certain families – such as this lot) of politicians and political institutions to do this.

The assumptions on leaving things to the market

Now, there are a number of very strong concepts and assumptions with the above – ones that are seldom debated outside of mainstream politics. One of those is the concept of property rights – and the acceptance that law enforcement agencies have a legal duty to uphold the property rights of the property owners. Furthermore, this also brings into play a principle that what an individual does on and with their private property is none of the business of other people, nor of the state. Again, very strong principles – one which a number of people in far-left circles take issue with.

Market – legal framework – political process – political power

Now, if you are a profit-making organisation, in principle there are two main routes you can increase your profits. The first is short-term cost-cutting. The second is longer term and perhaps more risky investment in innovation and research. But there is a third way: Influencing the legal framework that underpins the market for your own benefit.  A very straight-forward example is with the music industry and copyright.

Extending copyright from 50 to 70 years

The choice record companies had in increasing their profits was either to cut short-term costs – i.e. staff numbers, salaries, terms and conditions etc, or invest in new albums, new artists and new concepts. Live performances now are money-spinners much more than in days gone by. Think of the very expensive mega-concerts put on. But there is a third alternative: Making more money from your existing back catalogue of veterans. But there’s a problem. The law (at the time) said copyright only lasted for 50 years. That meant the ability to make money from recordings from that time and before went out of the window. (It explains why some well-known pieces of classical music are used to advertise all manner of products and services). So what do you do if you are a record company? You lobby the politicians until you get your own way – which is what happened. Record companies could argue that the loss of revenue would restrict their ability to invest in new artists. On the other hand, keeping such revenue streams open might make firms more complacent, preferring to rely on a reliable revenue stream than investing in a new, more risky one.

Now, there’s nothing illegal about the above-case. It’s more a (very limited) analysis of what happened and why. But does the decision of politicians entrench the position of incumbent firms (guaranteeing them income streams for another 20 years) and reducing the chances that new entrants to the music market have in surviving? The ruling may have been ‘pro business’, but was it ‘pro-market’ and did it create or suppress incentives to invest in new music, new technology and new processes? Does innovation tend to come from large established entities or does it tend to come from smaller newer firms?

Bringing in banking, big business and outsourcing firms

Having set the context above, let’s now look at this in a sphere of big finance and big business. If you are running an outsourcing firm, clearly there is a financial incentive for you to lobby government to outsource as much as possible. In order to be effective on this, you can consider a whole host of tactics – whether hiring a political lobbying firm to do your bidding, formal policy responses to Whitehall consultations to making donations to political parties. Both Labour and the Conservatives (here) have been accused at various points of accepting cash for policies by their political opponents over the years. It’s one of the reasons why some (including myself) think that part of party reform needs to incorporate far greater transparency, as well as limits on individual donations and on donations from organisations.

The revolving door

One of the criticisms thrown at politicians – particularly ex-ministers – is that too many of them end up lobbying for the big interests in the policy areas that they were once responsible for. This can either be in the form of working for a lobbying firm itself or being taken on as a non-executive director for the firm or organisation that wants to influence policy. Because party politics and public policy is a very ‘social’ activity in itself. I should know – I’ve been to my fair share of receptions and events. And it’s like being in a different world compared to the streets of the towns and communities that the rest of us live in. I remember being dazzled by the whole thing in my early days in the civil service in the exciting times of the mid 2000s. I can see how people – even very bright and talented people – can be swept up by the whole thing. In one sense that was a sort of ‘fantasy’ I was almost living in during some of those days. Going to lots of events in very plush surroundings surrounded by intellectually bright people with a mindset of wanting to achieve something great – and being praised for it and also remunerated for it salary-wise. But where was all the money coming from?

The soft influencing

What I’m interested in are the structures, systems and processes as opposed to the lobbyists and their paymasters. I don’t have a problem with lobbying in principle – through Puffles I chase after MPs all the time. And with some success (see here). What is it about our systems and structures that mean it’s OK for firms to sponsor policy events? (Especially events where they have a direct or indirect commercial interest?)

There’s also the gap between trying to make Whitehall policy-making more transparent, and having essential things like the civil service code & ministerial codes. But the latter in particular can easily be circumvented by going through a party-political route rather than a Whitehall route.

The main messages in this rambling post?

  1. Economics as an academic subject is accepting too many basic assumptions as given, rather than questioning them
  2. Economics – especially basic macroeconomics needs to look at financial markets as a core pillar – and with a much more critical eye
  3. Economics as an academic subject needs to incorporate some basic legal concepts – including how laws are made and enforced
  4. Law as an academic subject needs to incorporate its impact on economics – and its links to politics & policy-making (rather than taking ‘laws’ as a given)
  5. Law as an academic subject needs to incorporate scrutiny of the political and policy-making process – especially any processes that could compromise the integrity of the rule of law as a concept

I’ll finish with a link to an interesting series of questions put by Frances in her blogpost A Question of Justice – see the questions in the bullet points at the end.


One thought on “Linking today’s mess with economics, law, politics and finance

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s