Mutt and Jeff

A personal note today, far away from politics and economics and world travel.  I have started to wear a hearing aid.

I’ve been pretty deaf in my left ear since a mastoid operation at the age of 10.  It was a path-breaking operation at the time – until recently, surgeons had left a large scar behind the ear.  My doctor used a new technique that involved operating through the ear drum: I remember as a kid lines of medical students queuing up to look approvingly in my ear.  “Mmmm, nice”.   I missed my 11+ because I was in hospital, and took it late in a hall where almost everyone else was a polio victim – this was 1955.  There were 4,000 cases of polio that year, and Birmingham City’s full-back Jeff Hall died of it.  My memory is that the exam room clanked with crutches and sticks.   The Salk vaccine came in that year, and for anyone who says that science takes away the mystery of life … yes, well, as the comedian Robin Ince says, try life without it.

So I’ve always been a bit mutt-and-jeff.  It’s never bothered me much, though sometimes ignoring people can be awkward or wrongly interpreted.  And all hearing is selective.  When I was a college Principal, my colleagues reckoned I could hear the college budget when it was being discussed at three hundred yards.  The main irritation – and people with bigger hearing problems than me find it infuriating – is when you ask people to repeat what they’ve just said.  My wife is patient and kind, but other people tend to assume you’re rather stupid, and need things explained slowly and in a very simple way.  Aaaargh !  No, I don’t want a re-interpretation, I don’t want the version for the dim: just bloody repeat what you said.  So, the time has come as age took away the sharpness from my good ear, I finally decided to get some electrical help.

Most people know that deafness is not a question of losing the volume control.  What happens is that you lose frequencies, usually the higher ones.  I love radio, but at home and in my car, the treble is turned up to maximum, and the bass to minimum, to try to compensate.  I can’t hear the upstairs phone ring.  But now, a new world has opened for me.  The obvious things are good – going to the theatre last night and hearing every word, having a dinner party conversation with friends – but the striking sounds are the ones you haven’t heard for a while.  I actually crinkle supermarket plastic bags, because they sound such fun; and so does turning the pages of a newspaper.  When I was a kid, the family word for male urination  was ‘having a tinkle’: and I am now reminded of why that was.

The child of a close friend has just had a cochlear implant, and will have the unit turned on in a week or so.  That must be an extraordinary business.  He has started to blog the experience, and I will follow with interest.  Fancy hearing consonants for the first time in your life !   All that is far, far more remarkable and life changing than my minor gadget, but for the moment, I am just having fun listen to my keyboard clatter.

Competition – the new theology

One belief that is held by our politicians (or both sides, lamentably) and the newspaper columnists in the heavier press is a theological belief in the benefits of competition.  Recent contributions by apparently bright and otherwise sensible people – Dominic Lawson in the Times (arguing that it was right to tender Olympic security out to a private provider who made a pig’s ear of it) and Matthew Parris.  To argue that competition and choice is somehow not the answer to all life’s problems seems a very minority activity.  But here goes.

Life as a whole does not exist in a froth of competition.  People’s home and social life involves little competition apart from the odd pub quiz.  Thinking about it, most people’s experience at work does not involve competition.  I am not just talking of the wicked public sector, where police officers, teachers and nurses knowingly connive to collaborate with their colleagues.  It’s also true of much of commercial life.  Of course there are competitive elements – but once (for example) a civil engineering company has won the contract to build a bridge, the actual work involves collaboration and teamwork between a large group, and often with other commercial entities – the firm that supplies the steel or cement or local labour.  Such collaboration is common in the business world.  My Jaguar car has a floor pan that comes from a Ford.  In fact there are a large number of employees whose work life involves no competition at all.  Backroom staff in the private sector – personnel officers or accountants, cleaners or safety officers – are not in daily competition, nor (whatever the market position  of their industry) are the actual production staff making paint, or bread, or shoes, designing computer chips, driving lorries or piloting planes, digging trenches and so on.  The actual proportion of the workforce out there facing the opposition that is felt to be needed to sharpen up their performance is actually quite small.

This is just as well for most people do not like being in competition.  Orwell noted this when reviewing Hayek’s “Road to Serfdom”:

“He does not see, or will not admit, that … ‘free competition’ means for the mass of people a tyranny far worse, because more irresponsible, than that of the State.  The trouble with competitions is that somebody wins them[1]

People are not dolts or cowards for preferring friendship, cooperation and team work.  I don’t like competition.  This did not lead to inferior performance in my career.  I led a successful enough life as a college lecturer and manager.  But my motivation was not to beat other schools and colleges, but to work with colleagues to get the best outcome for the students and communities and employers I worked with.  In education, competition with other schools and colleges generally ends up with unprincipled admissions practice: expanding by recruiting students onto courses that don’t suit them (let’s see what happens to universities now they depend on fee income), or “raising standards” by making a play for the able youngsters who make your league table results look good.  One should not simply assert that competition is good, but subject that assertion to evidence.  It has been done.  The LSE looked at every primary school in London, and found no evidence to support the idea that competition raises standards: the study quoted pages of research that had come to the same conclusion.  Again, a look at inspection reports shows how well isolated schools and colleges often do[2].  Some of the most outstanding colleges in England have no rival in commuting distance.  I guess this is because, freed of the nonsense of marketing and manoeuvring, they can get on with providing a great education for a community they know.  They teach the whole ability range, and, in passing, offer those students real choice.  Where there is institutional rivalry, where you can study English and History “A” level everywhere, numbers are diluted and so you will be able to study Latin and Music nowhere[3].

In sport, we are told that competition will make our young people “winners”. Lord knows what that means: sport is the original zero-sum game, with as many losers as winners: in golf and tennis, athletics and motor sport, far more.  In fact, teamwork in sport matters more than competition.  Listen to the testimony of the World Cup winning 2003 England Rugby team – they look back on their achievement not as dishing the Aussies, but as being part of a remarkable group of men with an extraordinary leader.  I recently met the sixth formers of my old school, 50 years later. Some were successes, others less so: there was no correlation between sporting success and life success at all.

Politics suffers from being seen as a competitive activity.  Ministers do not build on the ideas and achievements of their predecessors, do not create continuity with their opponents.  They have to create their own brand, which leads to nursery vouchers being launched and then trashed, to City Technology Colleges being attacked then mimicked.  You could argue that Gordon Brown did not lose his job because of Tory rivalry, but because he was unable to orchestrate[4] a group of collaborative colleagues, to create the image of a successful team player.  His outlook was one of competition, briefing against colleagues and hectoring opponents: it led reasonably rapidly to his being an ex-Prime Minister.

The government’s enthusiasm for competition and markets – which work in many commercial settings – has been extended to areas where it is plainly inappropriate.  Competitive markets are splendid ways to produce many goods, but not all.  If they are to work, they need clear information, real choices, ethical businesses unable to rig prices, and to be part of a process where consumers can assess value because they make regular purchases.  Not true in railways (one company for most journeys); not true in healthcare (consumers don’t know best treatment, and competitive systems require excessive administrative expenditures); not true in pensions or mortgages (financiers rip off locked-in savers); not true in schools (where competition creates sink schools for less able); not true for exam boards (where competition lowers standards); not true in food (where profit maximising companies conspire to avoid reform of their fatty, salty, sugary products).   Yet over the past thirty years, politicians have been trying to introduce the market to education: as far as I am aware (I am now senior visiting fellow at a respectable university, so this is not an un-evidenced rant) there is no real evidence that competition and choice raise standards – and, Lord knows, people have looked. It is truly extraordinary that journalists and commentators have not been told, or have not listened to, the evidence of researchers on these issues (though, to be fair, The Economist does usually admit the data is flaky as it pens yet another bloody article espousing competition and independence for schools).

Curiously, during this period the politicians have gone easy on commercial competition.  Can you remember a large commercial merger being declined on competition grounds in the past five, ten, fifteen years ?  Hospitals and schools were given lectures on the benefits of choice and competition whilst all five London airports were run by the same firm, rail firms acted with no rivals and the banking sector became ever more cartel-like.  Aware that they are not working in a real competitive position, Government agencies try to create shadow markets, letting contracts for training the young unemployed or preparing educational material or undergoing research or policing the Olympics to private companies, who often take a slice of the money for ‘management’ before sub-contracting to someone who subcontracts to someone who knows somebody who knows what they are doing.  I have a friend who is at the fifth level of sub-contracting for a Department of Education research contract: my wife works for a media company which is at the fourth level of such a contract.  Local authorities recruit well-paid managers to manage out-sourced contracts with vast performance specification documents and reviews that never seem to involve genuine excellence.  The alternative (see the NHS) is for market driven companies to do the easy work (hips and knees) and hand problematic patients back to the real NHS when things go wrong.

This is not a religious belief –  some things need market (food, manufactures), others we don’t know (education), things that don’t (banking – see Canada – health care (US costs and life expectancy), energy (where alleged competition has not brought down prices at all) and things where it can work with regulation (phones). I will return to this.

[1]  It is easy for clever rich people to support competition.  They usually win, and don’t suffer if they lose.  Compare (for example) the experience of local authority cleaners when their work is put out to contract.

[2]  This assertion is based on a project in which I read every single college inspection report for England.  Nearly 400 of ‘em.  Sad man.

[3]  Example: you cannot study three languages at “A” level in any South London public sector school or college.

[4]  The word ‘orchestrate’ is itself a tribute to the importance of teamwork.  Does Simon Rattle walk into a rehearsal thinking “today I have to beat the Los Angeles Philharmonic” ?

Wow ! That’s incredible !

Some countries put considerable effort into saving the purity of their language.  The Welsh and Gaelic speaking Scots have their own TV channels, and the Irish insist that their schoolchildren spend hours learning the language of their great grandparents.  I once gave a speech to a conference of Welsh head-teachers, all of whom I am sure spoke fluent English, yet was simultaneously translated.  The French, of course, have an Academie which arbitrates on, and finds alternatives to, English neologisms.  Software becomes logiciel, e-mail is courriel and so on.  It’s a bit of a losing battle, given the coolness of American English in France: it is pretty impossible to stand anywhere in urban France and not see English in some form, even if it is incorrect.  TV makeover shows, for example, feature ‘relooking’, a word that does not exist in English.

The English are more relaxed about their language – apart from the occasional correspondent to the Telegraph, pointing out what words such as ‘disinterested’, ‘prestigious’ or ‘refute’ actually mean (or used to).  It’s a mongrel tongue anyway, words have always changed their meaning, and some of the neologisms are good fun.  American friends have introduced ‘wine o’clock’ into our daily usage, for example.  I also like ‘cyberchondria’ – seeking symptoms on the web to prove that you’re really ill.  This does not, however, mean that we give up the struggle for shape and meaning in our daily language.  It is under serious threat from a number of sources.

An obvious one is political language.  Orwell’s essay Politics and the English Language is a magnificent place to start the debate.  Language mattered to Orwell – the tyranny of Nineteen Eighty Four used Newspeak and doublethink to show the connection between ugly and careless expression, and ugly and careless government.  We are lucky not to live in a country where state murder is called ‘liquidation’ or ‘elimination of disloyal elements’, but there is still plenty of clichéd and thoughtless political language.  Politicians continue to construct speeches, in Orwell’s words, ‘like a prefabricated shed’ – from preformed phrases such as ‘zero tolerance’, ‘tough decisions’, ‘exciting challenges’, ‘sending a clear message’, ‘XX is not an option’.   Words that are never used in real conversation – ‘slur’, ‘pledge’ – come easily to the front-bencher.  The curious expression ‘delivering on’ has entered the language: there as a time when pallets were the only thing that products were delivered on.  It’s striking to see that Orwell himself, in 1947, mocked politicians who promise to ‘lay the foundations’ or ‘achieve radical transformations’, phrases still in widespread use.  Management speak has added ‘vision’, ‘obsession’ ‘passion’, ‘focus’.  Government spending is always referred to as ‘investment’, private price rises as ‘revised tariffs’.  There are even real world examples of Newspeak or doublethink. The Olympic Games, tendered for at £2bn, cost £11bn, yet was delivered ‘under budget’.  The last Labour administration claimed to ‘safeguard’ adult education by freezing – that is, in real terms, cutting – its budget.  Our current Prime Minister explains he is introducing efficiency not austerity.

Politicians are not alone.  The press joins in the pollution of language with tired phrases – postcode prescribing, Frankenstein foods – that cut off serious debate about local flexibility or GM foods.  The egregious Americanism “of all time” is now everywhere.  This expression usually totally redundant.  The greatest athlete or worst disaster are just that – no need to add the ‘of all time’ as some sort of verbal vitamin supplement.  Other words are not allowed out on their own, and have to be accompanied by a bodyguard: fatally flawed, top model*, essential services, absolutely free, much vaunted.

Corporate cant also contributes.  I may be a cold fish, but cannot believe that so many products, services and appointments are ‘exciting’.  The proliferating number of awards ceremonies keeps hotels in business, and pays the mortgage of many a second rate comedian; that probably explains why so many products and services are ‘award winning’.  This is, to be fair, international: try buying a bottle of wine in France that doesn’t have a medal on it.  Firms promise to stay with us ‘every step of the way’ – corporate stalking ? – so that we can be sure that we have something  ‘that’s right for you’ on your ‘journey’.  They offer us expensive insurance cover to give us ‘peace of mind’ as if we live in a froth of worry that our kettle or iron will break down and destroy social cohesion.  The overall effect is simply to create an impression of boring dishonesty – think of the advertisements that say (usually with a gentle Scots burr that surveys have said we trust more than any other accent) “that’s why we at XXX  (fill in as appropriate)”.

And underlying it all, is the true widespread awfulness of ‘incredible’.  A grumpy pedant like me sometimes passes the time during radio interviews with people who know little about the topic in hand by counting the number of times ‘incredible’ is used – even ‘truly incredible’.  It’s not just the fall back of breathless athletes asked ‘how do you feel’.  Contemplative people can be infected: Ian Bostridge’s Desert Island Discs became unlistenable because of this.  There are many adjectives that could convey meaning better – substantial, astounding, surprising, remarkable, unprecedented – but maybe that would involve thought and invade our ‘peace of mind’.

The battle is not forlorn.  One of the great pleasures is listening to people who talk well, and do not fall back to the chicken-shack construction.  Salman Rushdie, Clive James, Alfred Brendel, Simon Callow, Jonathan Miller: an entertainment and a delight.

Time to go to bed.

*  A friend claims to have heard a radio interview with “one of Sheffield’s top tree surgeons”

Everything’s coming up rosé

Did I mention that my wife is a trend-setter ?  I could start an embarrassing list of things Liz has been the first to spot (see November 8th post) or wear, but it would be a little too long.  But I can write a post about stuff she drinks.  Well, we drink.  Because we started the boom for rosé wines.

You may remember when rosé wine was only drunk by people whose taste-buds, in the words of Tom Lehrer, were shot off in the war.  The big seller was Mateus, a Portuguese rosé that was, well, vaguely drinkable, and had the bonus of providing a candle holder for student flats after use.  But it was not a serious tipple.   Determined wine-lovers – and there were few more determined than us – stuck to red or white.  But then we found that red wine, even in moderate quantities, could lead to very unpleasant hangovers: this seems to be a sign of ageing, as it has been reported by friends too. Even the lightest Beaujolais was a route to migraine central.

So, if dining out, rosé it had to be.  There we were, ten years ago, sitting in a Breton restaurant and sadly ordering the Rosé d’Anjou.  We knew it was a bit like pop, but there we were.  At this point, however, the owner – podgy, moustachioed, with that acquired air of grumpiness that is compulsory for all French restaurateurs – looked at us pityingly, and so we asked his advice.  “Tavel” he said.

And, boy, he was right. Tavel is the only appellation controlée which is restricted to rosé alone.  It is a Rhône valley wine – if you get a low-cost flight to Nîmes and then drive towards Avignon, you pass through it.  You probably know that it’s a pretty formidable wine area for peppery reds, the Côtes du Rhône.  In a matter of minutes you are passing through Châteauneuf du Pape, Costieres de Nîmes, Gigondas, Vacqueras and Lirac.  There are some lovely rosés there – such as Luberon.  But Tavel is top of the heap – amber and vanilla, bone dry and full-bodied.  It’s not easy to get in the UK – Waitrose sometimes stock it, and there is a good brand available from Le Bon Vin.

Give it a try, and you’ll never touch Anjou or Touraine pinks again.  Or maybe you will.  A friend who knows about such things tells me that good Loire valley rosé can be found in small producers.  Coteaux du vendomois is a favourite (costs about €4 a bottle in France), and Fresnau, though a tiny producer, is consistently good.  I’m told that Garnier – another small producer – is a favourite of those in the know.

Bordeaux rosé wines may not be as celebrated as the claret, but can be really good.  But go down the Dordogne a bit, and to the east, and try the wines of the Bergerac area.  There is an eccentric wine maker and poet called Pierre Sadoux who we think makes a cracking Bergerac rosé called Château Petite Borie.  We’ve been there, and a château it isn’t, but we weren’t there for the architecture.  He also makes some interesting dry and sweet whites, but that’s for another day.  Waitrose also do a decent Bergerac rosé called Le Bois du Rubis.

Generally, if, like us, you like your rosé a little dry and muscular, Southern French rosé wines are good and increasingly available.  Try the Hérault, for example.  And then there are the rosés from round Avignon and Aix-en-Provence.  Wander down to the Med, and taste Bandol, which is wonderful.  And if you pop over the Pyrenees, you’ll find that Rioja rosé (yep, sounds odd I know, but it exists) is part of that movement to non-poppy rosé.  Even the Portuguese are exorcising the ghost of Mateus with some good value wines from the Alentejo region (sounds mysterious, but just means “over the Tagus”).

Anyway, back to trend-setting. Sales of rosé  are now the fastest growing wine, making up about 12% of the off-licence sales.  It would be nice to think that this was because of the growing excellence and subtlety of the product, but I am afraid the evidence is against us on that.  Much of the rosé sales are to new wine drinkers.  Half the pink wines in this country come from California, including the execrable Zinfandel Blush.  I have been on a wine tour in California, and even they are embarrassed about it.  As are the people who bring the bloody stuff to our parties, because it is always left unopened at the end.  Paul Masson is still a big seller, as is Blossom Hill.  And on this side of the pond, Mateus still does good business.  Oh, well.  More of the good stuff for us, I guess.

Lucky numbers

It has often been noticed that people are happy to admit they are bad at maths.  There could be an interesting study into the difference between things where people are happy to confess incompetence and those where their reputation must be unstained.  In category one, you will find dancing (both Michael Portillo and Danny Baker have confessed to having two left feet” in the past week), speaking in public (a surprisingly common feature of nightmares) and cooking (“I can burn cornflakes, me”).  Category two will include driving ability, sense of humour (in both of these, we are lucky that the entire population is above average) and love-making.  In this latter category, our smirking Lothario will tell us “I’ve had no complaints”.  Well, maybe not, but it isn’t an area where a sophisticated independent quality assurance feed-back system has been developed.

What do we mean when people say they’re bad at maths, and does it matter ?  Surely it cannot be a matter of mental arithmetic ?  It may be useful for the dart player to know straight off that you can get a 144 finish with a treble 18, double 20 and bull, but is that skill needed when we move away from the oche ?  In today’s world, we have an array of calculators and spreadsheets to check calculations.  I can remember a comic hero – was it Dennis the Menace or Lord Snooty ? – who took a magical calculator into an exam on his wrist.  It seemed science fiction then, but now, that facility is in most phones.  No-one these days would calculate the stresses on a bridge, or the costs of a project, on the back of an envelope.  OK, splitting a restaurant bill is no time for calculating to the second decimal place, but it is worth doing a digital check even for things as simple as ordering floor tiles or sharing holiday costs.

I am inclined to feel that arithmetical accuracy from mental calculation is not the most important matter. What matters is having a good understanding of approximations and relativities.  If you can get a rough idea of how great a sum is, or its relation to other comparable magnitudes, you are close to the truth.  It will tell also you whether your use of a calculator or spreadsheet is right (and stop you ordering 40 sq metres of vinyl floor for the shower room).  But it is also a help when looking at news items and policy decisions.

Take the lazy connection made that allegedly explains inequality by the fact that its natural – just as some people are cleverer or taller than others.  The problem with this genetic explanation of inequality lies in the proportions. Genes certainly have a role in determining matters like height and intelligence.  A professional basketball player is about 50% taller than someone with restricted growth; someone with learning difficulties has an IQ maybe half that of a genius.  Yet chief executives now earn about 120 times more than ordinary workers: difficult to attribute this to DNA.  For those who want an amusing but devastating explanation of this, see Jan Pen’s parade.

And then there is the almost routine confusion of millions and billions.  It maybe this isn’t that important: clear errors rarely are.  The newsreader who looks solemn as she announces a monthly government deficit of £1.7 millions is just reading a misprint.  It’s a simple cock-up when today’s Times converts the $5bn US spending on drones as £3.14m .  Anyone interested will see that this is out by a factor of a million.  Probably the bigger offence here is the spurious accuracy, another feature of everyday media innumeracy.  I doubt the US spends precisely $5bn, so converting to the second decimal place is rather silly.  A related nonsense is ascribing precise values as being the effect of specific events or policies.  Nicholas Taleb’s first book, Fooled By Randomness, rightly jeered at media reports like “Wall Street was down five points on fears about the Japanese yen”, when the movement is so small that it is just noise.  Think of that the next time a charity says how many deaths would be avoided by following their advice, or how hours the nation spends on a particular activity.  On other occasions, governments just make silly claims because they sound good.  In the Times (3rd March 2012) the government claimed to have increased a 90% tax return rate by 15 %, which gives support to their earlier worries about Britain’s standards of numeracy (Times 2nd March 2012).

Being a sad man, I sometimes check the calculations for project costs given by news outlets (often straight from the PR sheets of the beneficiary organization).  Here’s a recent one.  The South Yorkshire Police tells us (and so the BBC repeats) that it has to charge charities for support at their events because it was forced to spent £500,000 policing two marches by the extreme right.  Well, £500,000 at £20 an hour buys 25,000 hours of police time, which if each demo lasts 5 hours gives them 5,000 police personnel on duty.  Er, really ? The whole force has less than 3,000 officers.  This sort of conflation is not rare.  The Blair Government launched a childcare initiative to great enthusiasm from a media who seemed unable to work out that the proposed subsidy came to 30p per hour.

And then there is statistical illiteracy.  This is rarely as bizarre as the claim that no college (Ed Balls at the Association of Colleges conference) or police force (Phillip Collins in Times 16th November 2012) should be allowed below average performance.  There are (and have been) books to be written on how we understand or misunderstand statistics – good and bad – and how the public do not understand risk, for example.  There’s even a Professor for the Public Understanding of Risk at Cambridge University, but to little effect.  Did you know that more people were killed after 9/11 by their decision to travel by (risky) road rather than (safe) air, than actually died in the Trade Centre atrocity on the day itself ?  The distribution of rare events can easily be misunderstood.  Fatal traffic accidents fall at a junction where a safety camera is installed, but they fall also in the ones where they are not. They happen in clusters and almost randomly, and after a clutch of them in one place, there is likely to be a period where none happen.

Sometimes, when there is enough information in an article, you can see that the interpretation being put upon it is wrong.  In December 2009, The Times published an article headlined “extra billions fail to raise school standards”: it featured a diagram which showed results and attendance are now 35% better than in 1996.  The extra spending plainly has raised standards.  It was true that productivity (that is, output per unit of input) has not risen – but that’s a different thing.  If we have smaller class sizes and better paid teachers productivity falls – just as it does in the NHS when we have more nurses on a ward.

Maybe the problem overall is that people rarely look at any kind of evidence when forming their social or economic views.  If you like low taxes, then they improve the economy.  If you like high public spending, then that will pull us out of the recession.  Agree with capital punishment and it deters murderers: disagree with it, and it has no effect.  The government established NICE some years ago, to make calm assessments of the effectiveness of medical treatments.  Maybe we need similar bodies in economics, crime, and social policy.

p.s.  A couple of sources of sense about maths and stats: More Or Less, from BBC radio 4 (also available on World Service), and The Joy Of Stats on BBC tv – cheesy name, fine programme.  Paul Krugman, a Nobel Prize winner, has recently penned an article about how much maths you need to be a top flight economist.  His view is, er, not a lot.  Which is a relief to me, as I gave up reading economics journals when they started with the word “If” followed by a page of equations, and then the word “Then”: I think it was the algebraic mob who declared that a collapse of US house prices was less plausible than a planetary collision.

Wealth creation ?

I rambled in my October 11th posting about the disconnection between what the financial industry does, and what the real economy needs.  This wasn’t, I confess, one of my more piercingly original thoughts.  The writings of Will Hutton before the crash and John Lanchester afterwards, follow the same line.  When the Labour Party leader Ed Miliband suggested that it was important to distinguish between good capitalist enterprises, and bad ones, he was attacked for a brief period before the pause when people realised he was … er … right.  To take a simple example: it doesn’t take a genius to note that the purposes of a bank are basically threefold:

  1. To provide a safe home for deposits, and provide a reasonable return for savers – both of which they have failed to do in recent years. The banks would have collapsed without government support (read Alistair Darling’s account for the grisly details).  And they are still paying insultingly low rates of interest on deposits rates that have fallen since the Bank Of England has given them access to low cost funds (and removed their obligation to compete for real savings from real people).
  2. To offer funds to business to allow them to expand – which they have failed to do in recent years. Project Merlin was a damp squib, so that now the banks are bribed with cheap funds to lend on, with the effect mentioned above.
  3. To maintain and grow the shareholder value of the company, representing a decent investment for shareholders, which they have failed to do in recent years. Bank shares have fallen in value, and were pretty humdrum performers even before the crash.  Here’s an insight about the value of the stock market showing the true value of companies – the bank with the soundest base (HSBC) was one of the poorer performers against the adventurists.

The reasons for these failings come down to two reasons.  Most obviously, the executives have been generously paid anyway: their packages seem unconnected with these three core activities.  Secondly, there has been an alternative form of lucrative activity that seems to justify the term ‘casino capitalism’.

With this in mind, turn to yesterday’s Sunday Times business section, and weep.

  • Front page story – Royal Mail is now profitable, so it must be sold off (and if it was poorly run, of course, it would need to be sold off, too).
  • A hedge fund is shorting the stock of Ocado (who do Waitrose deliveries amongst other things) to make money when its shares fall. Exactly what value does this add to the economy ? This is a giant game of poker, with the difference that corporate reporting rules mean you can see your opponent’s hand.  It adds next to nothing to the economy.
  • The firm that owns amusement arcades, casinos and tanning companies paid £109m in dividends to an offshore company owned by the (British) founder. Which is sadder – how they make their money, or where they send it ?
  • The only noteworthy aspect of the business record of the new Chief Executive of a mining company appears to be that he sacked 12,000 striking African miners.
  • Page 3 – the characters who made money out of Comet collapsing move their attention to a company which has already undertaken one ‘pre-pack’. This is a way to declare your company insolvent, and then open up again.  The article describes this as “dumping £18m of debt”, a more elegant way of describing defaulting on your creditors than it deserves.  My wife was left unpaid for consultancy work and lost several thousand pounds on a similar scam financial restructuring recently.
  • Page 4 – the chief executive of Flybe airline explains how it is the tax system that is depressing his company results, alongside a story about the growing profits of easyJet, who I suspect pay the exact same taxes.
  • The first hospital to be privatized as part of the dynamic new way of running the NHS “appears to be in poor financial health” (page 11), rather like the hospitals that entered into public-private partnership finance deals.
  • Page 5 looks at executive rewards and notes “what appears to be lacking is a strong relationship between pay and returns to shareholders”.

I’m not sure what to do about all this, but I am sure what it shows – namely that the finance industry is not part of the solution, but part of the problem, and we should not listen to those who ask us (like the last and later disgraced chief of Barclays) to move on as ‘the time for remorse and apology is at an end’ (© Bob Diamond, 2011).

* footnote for nerds.  Economic theory was based on the idea that firms were profit maximising, because that was what their owners would want.  This motivation was an important driver in the superiority of the capitalist system – because maximising profit meant that costs would be trimmed and new markets discovered. If you’ve done “A” level Economics, you’ll even remember the diagram that shows where profit is maximised where marginal revenue = marginal cost, and which proves that competitive markets produce at the most efficient level possible.   However, in the 1940s some writers (Burnham, Berle and Means) noticed that companies were run by the managers, not the owners.  The shareholders who technically owned the company may have wished for maximum returns, but they had little or no power – they were part of millions of small holdings, or owned the company at a distance via pension funds and insurance companies.  Managers were a different class, had different interests, and were on the job all day and all week.  Why trim costs when you can get a million dollar bonus and a chauffeur driven car ?  Sad that the columnists of our major newspapers have not caught up with sixty year old insights.