What the Huawei debacle demonstrates

Nice Guardian column by Larry Elliott in which he focusses on an interesting (and under-discussed) aspect of the Huawei controversy: why a country (the UK) that emerged from the second world war with a technological edge in computers and electronics should require the assistance of what is still classified as an emerging economy to construct a crucial piece of national infrastructure. It’s a sign, he argues, of how diminished Britain is as a manufacturing force that the only rivals to Huawei are not the great names of the past such as Marconi and Plessey, but Finland’s Nokia and Sweden’s Ericsson.

The Huawei affair should help to puncture a few myths. In the early years of China’s rapid industrialisation, the UK took comfort from the fact that it was only low-cost manufacturing that was migrating east. Developed countries like Britain, it was said, would do all the clever, high-end, profitable stuff, while the Chinese would have to be content with churning out cheap toys and clothes.

It seemed highly complacent to assume that China – a country which was making technological breakthroughs while Europe was stuck in the dark ages – would be content with being an assembly plant for western consumer goods, and so it has proved. China is now one of the world leaders in artificial intelligence and solar panels. When the government wanted to build a new nuclear power station at Hinkley Point, the Chinese got the contract.

A second myth that China has well and truly busted is that all will be well provided market forces are not hampered by state interference. China has had an industrial strategy over many decades, and has stuck to it, while during the same period Britain has seen the state’s role wane and manufacturing become an ever smaller part of the economy.

Britain’s mid-20th century edge in computing, jet engines and radar was a direct consequence of putting the economy on a war footing between 1939 and 1945. What’s more, the reason the UK retains a global presence in aerospace and pharmaceuticals is that companies have been able to rely on the state – in the form of the Ministry of Defence and the NHS – being an important customer.

Interestingly, Huawei is now trying to persuade the residents of Sawston — a village just down the road from me — that they should be relaxed about the company’s plans to build a new factory on its outskirts.

The madness of neoliberalism

This is from the front page of today’s Financial Times. It’s a vivid demonstration of what happens to governments when they have imbided an ideology that says that when there is a choice between the state providing a service or outsourcing it to a private company, then it’s always best to do the latter.

Here’s the nub of this particular act of folly:

As a result, fire services at 69 RAF bases will be outsourced to the riskiest company available.

Confirms my definition of ideology as “what determines how you think when you don’t know you’re thinking”.

‘Complexity’: ontology or just an epistemological tactic?

I’m reading Philip Mirowski’s Never Let A Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown. In Chapter 1 he reflects on the curious fact that nothing much changed as a result. “The strangest thing”, he writes,

was that instead of leading to a collapse of the right-wing neoliberalism that had enabled the catastrophe to happen, the crisis actually seemed to strengthen the Right. It took a rare degree of self-confidence or fortitude not to gasp dumbfounded at the roaring resurgence of the right so soon after the most catastrophic global economic collapse after the Great Depression of the 1930s. “Incongruity” seems too polite a term to describe the unfolding of events; “contradiction” seems too outmoded. Austerity became the watchword in almost every country; governments everywhere became the scapegoats for dissatisfaction of every stripe, including that provoked by austerity. In the name of probity, the working class was attacked from all sides, even by nominal “socialist” parties… The pervasive dominance of neoliberal doctrines and right-wing parties worldwide from Europe to North America to Asia has flummoxed left parties that, just a few short years ago, had been confident they had been finally making headway after decades of neoliberal encroachment. Brazenly, in many cases parties on the left were unceremoniously voted out because they had struggled to contain the worst fallout from the crisis. By contrast, the financial institutions that had precipitated the crisis and had been rescued by governmental action were doing just fine — nay, prospering at pre-crisis rates — and in a bald display of uninflected ingratitude, were intently bankrolling the resurgent right. Indeed, the astounding recovery of corporate profits practically guaranteed the luxuriant post-crisis exfoliation of Think Tank Pontification. nationalist proto-fascist movements sprouted in the most unlikely places, and propounded arguments bereft of a scintilla of sense. “Nightmare” did not register as hyperbolic; it was the banjax of the vanities.

That’s just about the most succinct expression of the bewilderment that most of us felt — or certainly that I felt as I watched the UK post-crisis, Tory-led coalition government blaming the populace (or its Labour predecessor) for the debacle, and imposing ‘austerity’ as the punishment for popular irresponsibility rather than as the price of forcing the public to shoulder the costs of bankers’ greed and recklessness. And it’s why I always thought that, eventually, the penny would drop with electorates, and why the current ways of populist anger towards ‘elites’ comes as no surprise. In fact the only surprising thing about it is that it took so long to materialise.

Mirowski also picks up the strange inability of the left to pin the blame where it belonged: the financial services industry and the feeble regulatory regimes under which the madness and greed of the sector burgeoned. Here, for example, is Ezra Klein reviewing Inside Job, a documentary that made an admirable stab at naming names and fingering culprits. What made the financial crisis so scary, Klein wrote, was that

The complexity of the system far exceeded the capacity of the participants, experts and watchdogs. Even after the crisis happened, it was devilishly hard to understand what was going on. Some people managed to connect the right dots, in the right ways and at the right times, but not so many; and not through such reproducible methods, that it’s clear how we can make their success the norm. But it is clear that our key systems are going to continue growing more complex, and we’re not getting any smarter.

The fact that (as Mirowski points out) some commentators normally seen as left-of-centre felt obliged to attack the documentary is itself significant. It’s a symptom of how far the ice of neoliberalism has penetrated the radical soul. Less abstractly, it confirms my own working definition of ‘ideology’ as the force that determines how you think even when you don’t know you’re thinking. Klein’s hapless defeatism also echoes the feeble answer eventually provided by the British Academy to the question posed by the Queen to the luminaries of the LSE at the height of the crisis: why had none of those besuited, learned gents in the receiving line seen the catastrophe coming?

But against those who warned, most were convinced that banks knew what they were doing. They believed that the financial wizards had found new and clever ways of managing risks. Indeed, some claimed to have so dispersed them through an array of novel financial instruments that they had virtually removed them. It is difficult to recall a greater example of wishful thinking combined with hubris. There was a firm belief, too, that financial markets had changed. And politicians of all types were charmed by the market. These views were abetted by financial and economic models that were good at predicting the short-term and small risks, but few were equipped to say what would happen when things went wrong as they have. People trusted the banks whose boards and senior executives were packed with globally recruited talent and their non-executive directors included those with proven track records in public life. Nobody wanted to believe that their judgement could be faulty or that they were unable competently to scrutinise the risks in the organisations that they managed. A generation of bankers and financiers deceived themselves and those who thought that they were the pace-making engineers of advanced economies.

All this exposed the difficulties of slowing the progression of such developments in the presence of a general ‘feel-good’ factor. Households benefited from low unemployment, cheap consumer goods and ready credit. Businesses benefited from lower borrowing costs. Bankers were earning bumper bonuses and expanding their business around the world. The government benefited from high tax revenues enabling them to increase public spending on schools and hospitals. This was bound to create a psychology of denial. It was a cycle fuelled, in significant measure, not by virtue but by delusion.

Among the authorities charged with managing these risks, there were difficulties too. Some say that their job should have been ‘to take away the punch bowl when the party was in full swing’. But that assumes that they had the instruments needed to do this. General pressure was for more lax regulation – a light touch. The City of London (and the Financial Services Authority) was praised as a paragon of global financial regulation for this reason.

Translation: It was all very complex, Ma’am. QED.

This is the resort to ‘complexity’ as an epistemological or ideological device. It’s a way of saying that some things are beyond analysis or explanation. Sometimes this is true: complex systems exist and they are inherently unpredictable and sometimes intrinsically incomprehensible. But a banking system run as a racket does not fall into that category.

Intellectual imperialism and the behavioural turn in economics

Further to the decision of the Nobel committee to give Richard Thaler this year’s prize for economics (about which I bloggeda few days ago), Frank Pasquale pointed me to an interesting critique by Juan Pablo Pardo-Guerra, who picks out “three problems in economics and its relation to the ‘real world’ it inhabits”.

Firstly, it skates over the fact that what Thaler is being rewarded for — realising “that people can be influenced by (mostly social) prompts to alter their behavior” — was, well, rather old-hat in other social science disciplines. So the Swedish recognition of behavioural economics is really just “a legitimation of economic imperialism: a finding is only truly relevant if published by an economist (corollary: being an economist from Chicago helps).” Ouch!

Secondly, though Thaler’s contribution might make economics “more human—and real”, the behavioural turn “doesn’t make away with the ontological commitments of discipline, privileging market processes and individual action as the fundamental sources of virtue.” Take the metaphor of the ‘nudge’, as articulated by Thaler and Sunstein. “Rather than questioning the economics of general equilibrium”, says Pardo-Guerra, “‘nudging’ is a proposal in calculated engineering: we can build policies that create outcomes similar to those of theory by gently walking slightly irrational, bounded economic agents through the correct ‘architectures of choice’”. But who conceptualises those architectures? And within what ideological constraints?

And finally, this year’s prize confirms that to win a Nobel prize in economics, it really helps to be male and white. To date, only one woman — Elinor Ostrom — has been recognised, and Amaryta Sen is the only non-white laureate so far. I don’t know much about the overall demographics of the economics discipline, but if the Nobel list is representative then one can see why it might be more problematic than the Swedes recognise.

Apple, Ireland and neoliberal delusions

Imagine this scenario: an International authority decides that a transnational company has deprived a sovereign state of anything up to €19B in back taxes plus interest over 25 years. The company, naturally enough, screams blue murder and declares its intention to appeal the judgment. The ruling, says its CEO, is “total political crap”. So what does the sovereign state decide to do? Why, it’s going to appeal the ruling and stand shoulder-to-shoulder with the transnational company. If you wanted a case study in how power has shifted from states to corporations, then this, surely is it.

The country in question is the Republic of Ireland, and the company is Apple. The ruling that so enrages both comes from the European Commission, which has decided that that Ireland must recoup the sum of up to €13 billion in unpaid taxes (plus interest, which could bring it closer to €19B) from Apple because the deal the country struck with the company 25 years ago amounts to illegal state aid to a corporation. The commission said the deal allowed Apple to pay a maximum tax rate of just 1%. In 2014, the firm paid tax at just 0.005%. The usual rate of corporation tax in Ireland is 12.5%.

Now Ireland is a small country which, despite the hype to the contrary, is not in great economic shape. There has been a much-vaunted ‘recovery’ from the devastation caused by the collapse of its major banks and the bursting on an insane property bubble, but that recovery is largely an illusion, and confined mainly to Dublin, the capital city. Last year, the Fine Gael government called a general election and campaigned under the slogan “Keep the Recovery Going”. Outside of Dublin the electorate replied “er, what recovery?”, with the result that neither of the two main political parties was able to form a government, and now an uneasy coalition rules with the assistance of five independent members of Parliament.

Ireland’s health service, for example, is in very poor shape. Likewise its social services. So €19B is a very significant sum for a country in such conditions. It would, for example, be enough to run the health service for an whole year. You’d have thought, therefore, that the European Commission’s ruling would be seen as manna from heaven. But that is not how the country’s benighted government views it.

To understand why, you need to know a bit of modern Irish history. The Republic gained its independence from British rule in 1923, and for the first 50 years of its independence it was a poor, backward, inward-looking, priest-ridden country dominated by Eamon de Valera and his Fianna Fail party. Its main industry was agriculture and its biggest export was its young people, who left in their hundreds of thousands to seek better lives in the UK, the US and Australia. At one stage in the 1930s, ‘Dev’ waged an “economic war” with Britain under slogans like “Burn everything British except their coal”. But eventually, in 1959, Dev stood down from the premiership and became the (non-executive) President, and was replaced by his son-in-law, Sean Lemass, a technocrat who realised that the country had to become outward-looking in order to survive. Along with a visionary senior civil servant, Dr T.K. ‘Ken’ Whitaker, Lemass concluded that the country’s salvation — given that it had no natural resources, lay in attracting inward investment from foreign — mainly American — companies. The vehicle Lemass charged with making this happen was the country’s only truly dynamic government agency — the Industrial Development Authority — which had the mission of attracting overseas investment to Ireland.

In this, the IDA was spectacularly successful. Foreign corporations came to Ireland in droves, and in the process began the transformation of the country, creating jobs and bringing wealth on an unprecedented scale. The companies were lured with all kinds of incentives, including planning and infrastructure provision and exceedingly generous tax holidays. The resulting turnaround was then given a spectacular boost in 1973, when Ireland joined the European Community (as it then was), which led to a massive infusion of development funds from Brussels, much of which were sensibly spent on infrastructure and reviving the moribund rural economy.

The deal which brought Apple to Ireland conformed exactly to the IDA template. The company set up a manufacturing plant in Cork, Ireland’s second city, and eventually located its European HQ in Ireland. The taxation deal which so exercises the European Commission dates from this period. And it explains the strange reluctance of the current government to refuse the windfall that the Commission has now bestowed upon it.

As the Irish Times columnist, Fintan O’Toole, puts it,

Since the Whitaker/Lemass revolution, the unspoken rule of all Irish policy has been – don’t do anything that in any way threatens to upset the huge, mostly US-based corporations whose investments shape both the economy and a remarkably enduring political consensus. This is not mere cravenness. If Ireland has sold its soul to the corporations, it has arguably got a very good price for it – not just jobs and tax revenues but a relatively peaceful transition from conservative nationalism to global modernity. It is not surprising that the entire Establishment is of one mind on the Apple ruling – there must not be the width of an ultra-thin sheet of silicon between Apple and Ireland on this. The tricolour has an Apple logo in the centre and we will all rally behind it to ensure that the tax bite out of the apple is as tiny as the corporation wants it to be.

O’Toole, who is Ireland’s most perceptive and trenchant columnist, is strongly of the opinion that the government should take the windfall and put it to imaginative use. It could be used, for example, to

  • Build 50 new hospitals
  • Build an extension to Dublin’s Luas rapid transit system that is needed to ease the traffic congestion that is choking the capital’s social and economic life
  • Boost the supply of sorely-needed social housing
  • Fast-track the construction of a metro system in the capital
  • Abolish the country’s crippling property taxes
  • Provide a break from the additional Universal Service Charge levied to pay for the bail-out of the country’s zombie banks
  • And encourage the formation of a sovereign wealth fund.

The decision to ignore these necessary measures and appeal the European Commission’s ruling therefore represents a clear strategic decision by the government. Or, more precisely, it suggests that the country’s ruling elites are not interested in funding the measures needed to reduce inequality and improve the country’s provision of social services. This mindset believes, O’Toole argues, that

even this vast windfall might in fact be a booby prize. If we take this money from Apple, we will make the corporations angry. When the government talks of ‘reputational damage’ it ostensibly means damage to Ireland’s reputation from the EU ruling’s implication that the State was being used as a tax haven. But the reputational damage it actually fears is quite the opposite – damage to our well-earned reputation among corporations for facilitating tax avoidance on a global scale.

He’s right. Ireland has become the world centre for corporate tax avoidance. The decision to appeal the ruling suggests that neoliberal ideology rules OK in the Emerald Isle. And it shows that the Irish state has actually given up on the idea of sovereignty. It ignores the fact that

amid a longterm crisis in global capitalism, massive corporate tax avoidance is becoming politically unsustainable. And a vision of Ireland that places the facilitation of that tax avoidance at its heart is therefore not sustainable either.

In that sense, the Irish government has deliberately chosen to put the country on the wrong side of history. Or, as Yeats might have said, my countrymen have disgraced themselves — again.

Algorithmic-driven markets and the future

This morning’s Observer column:

‘When a true genius appears,” wrote Jonathan Swift, “you can know him by this sign: that all the dunces are in a confederacy against him.” We need to update this for our age: whenever a really new technology arrives, you can tell it by the fact that most right-thinking people think it’s a scam.

Thus, to the average person the idea of a “cryptocurrency” like Bitcoin seems daft. I mean to say: a “currency” that was invented by a geek; is not backed by any bank or government; has no central authority; and operates on the basis of a public ledger that is secured by arcane cryptography. It has to be a scam, doesn’t it? Well, actually it doesn’t – but it would take more space than is available here to explain why. The point is that most people can’t see the point of cryptocurrencies, which, paradoxically, is why they are interesting.

On the other hand, most people – non-geeks as well as geeks – can see the point of Uber, the cab-hailing service that is causing such turmoil on the other side of the Channel (and occasionally over here too). You download an app to your smartphone. When you need a cab you launch the app and it shows you on a map where the nearest available cars are, and you hail the nearest one. Within three to five minutes it shows up. And when you arrive at your destination, you don’t pay the driver: the fare is charged to your credit card. QED.

Compared with currencies, therefore, Uber seems pretty comprehensible…

Read on

Quote of the Day

Thomas Piketty on the cynicism implicit in neoliberal dismissal of the capabilities of the state:

“We are told constantly that states can’t do anything, that it’s impossible to regulate the Cayman islands and the other tax havens because they are too powerful, and all of a sudden we send a million soldiers 10,000km from home to allow the emir of Kuwait to keep his oil.”

Financial Times, 27/28 June, 2015.

Technology and Inequality

This morning’s Observer column:

Someone once observed that the difference between Tony Blair and Margaret Thatcher was that whereas Thatcher believed that she was always right, Blair believed not only that he was right but also that he was good. Visitors to the big technology companies in California come away with the feeling that they have been talking to tech-savvy analogues of Blair. They are fired with a zealous conviction that they are doing great stuff for the world, and proud of the fact that they work insanely hard in the furtherance of that goal. The fact that they are richly rewarded for their dedication is, one is given to believe, incidental.

The guys (and they are mostly guys) who manage these good folk are properly respectful of their high-IQ charges. Chief among them is Eric Schmidt, the executive chairman of Google, and a man who takes his responsibilities seriously. So seriously, in fact, that he co-authored a book with his colleague Jonathan Rosenberg on the care and maintenance of these precious beings. Dr Schmidt objects to the demeaning term – “knowledge workers” – that economists have devised for them. Google employees, he tells us, are much, much more impressive than mere knowledge workers: they are “smart creatives”.

In the opinion of their chairman, these wunderkinder are very special indeed…

Read on