The primary causes of the GFC were not markets and capitalism. The primary causes of the GFC were monopolies and collusion.
(The GFC refers to the Global Financial Crisis — I am so used to the acronym in data, that the blank look I get sometimes when I use it, means I forget not everyone refers to the events of 2008 onwards — Lehman, Bear Sterns, U.S. / U.K. housing bubble — in the shorthand of ‘GFC’)
I have been examining data as an analyst for many years now, either within the walls of business or government, or publicly available data from semi- independent bodies (ABS, OECD, etc.).
I say semi-independent because they do have a ‘patron’ and that patron is people within their respective governments. So the independence of their data is possibly limited by the political masters who foot the bill for that data. By how you ask a question you define how you get the answer. As someone older and cynically wiser in these things from U.K. told me there are “only winners and losers”. Perhaps too true, but perhaps ideologically rather a ‘coal shaft’ statement — just try and find the canary there, let alone a ray of light out.
Causes of the Economic Crisis & GFC
So here’s my hypothesis. It was not shopkeepers and business owners who caused the global financial crisis. It was not mid-size companies or business-farmers (for farming is a business) on the land. And it was not even public servants (who are much maligned and duck for the exits every time an enquiry into their policies in a portfolio is announced, lest a sacrificial lamb be announced too).
Believe it or not some political advisers I have read / heard blame even the herd — for not consuming enough. Blaming the hoi polloi pre-dates the French revolution — and has the convenience of enabling you to extract a fee from those escaping blame. This was evident in the consumption driven recovery (and related Bernanke policies) which never eventuated in the U.S., but which financial analysts loved to talk about.
Sorry folks no independent data supports you in any of these biases in search of data. e.g. U.S. consumption led recovery in 2009-10 where? Agricultural over-supply depresses prices in an age of ethanol subsidies?
Monopolies / bureaucracies caused GFC.
What did act as the root cause of the global financial crisis, was simply this:
A powerful collusion of financial interests, and closing down of markets, which led to the evacuation of capital from productive uses.
The capital fled to government guarantees and safe havens (e.g. gold). Causing a reduction in money in the economy producing something, and funding innovation. Which was the topic of a PBS Newshour special segment during the height of the crisis (and an example of why some public goods like PBS/ABC/BBC can work, just as private goods e.g. Apple, Google work).
Monopoly capitalism is not capitalism.
What is less often commented though is that monopolies act like the worst excess of a controlling government. Monopolies control the price for goods and services, just as surely as government regulation, tariffs or other mercantilist tools.
A monopoly is a business that doesn’t act to maximize profit through operations, but other methods such as preventing market entrants or tax evasion. (There are valid reasons for a temporary or permanent monopoly, but these are fewer than supposed, and that is way too lengthy an issue to get in to here.)
So for example:
- Enron used financial chicanery. It did not make money out of electricity.
- Lehman made money out of money-shuffling not capital provision to the economy
- GM near failure made money out of finance, not vehicles
Businesses that do not serve a useful purpose to a customer (the market) should fail, but are too often propped up by many factors. Right now market darling Apple is not making the best hardware (arguably Nokia is), but Apple is making a ‘whole package’ that markets want.
It’s not that ‘business’ or ‘government’ are bad or good — for this is surely the most naive view of a sophomoric intellect. It is that excess bureaucracy — business and government — and tightly bound balls of string are bad. (Bureaucratic entities acts like tightly bound balls of string that just grow and grow, and when they unravel they tangle in with other bureaucracies).Worsening factor is that government bureaucracy tacitly tends to like to deal with business bureaucracy and business bureaucracy with government. So we have a very tangled web indeed.
When the 2 or more bureaucracies line up against the market to prevent competition (generally for some noble purpose) this is when markets fail. And when I say fail I mean economic under-performance like U.K., Australia or U.S.A. downturns of the past.
Yet ‘central policy’ and ‘co-ordination’ or ‘unity’ is often the proscribed solution of ‘experts’ in reports once you wade through to the final page. It won’t lead to innovation. It didn’t work for Harold Wilson, and Tony Blair’s centralist (and markedly incompetent) policies are partly responsible for the U.K.’s current mess.
Government can enable or disable innovation, but there is no central thermostat determining the ‘innovation economy’.
What’s next for the innovation economy?
There are threats to an Australian economy, and a potential U.S. economic resurgence that can be foreseen based on unemployment, resource usage, labor force, and other data.
But to achieve this success we must not look only at yesterday’s winners and say ‘how can we copy them’? For monopolies — be they government or business — fail. And if they don’t fail small and early, they fail too big.
The answer is innovation — and not some government funded lab. And the U.S.A. is already showing nascent signs of an innovation-led recovery, just like the internet boom or PC-boom or green revolution before it.
Which is why one starting point for many governments is independent and courageous tax reform, and other policy reform, which is so important to the economy.
But innovation is not (in most cases) the billion dollar project. It is far more affordable than that.
If you’d like to learn more about innovation in bureaucracies — with data, planning or training applied to your organization, to help create a process of change — contact 2thinknow
Keep innovating,
Christopher Hire
If you have questions about the innovation economy, ask me here or on twitter — @christopherhire . I’ll post my favorite questions here, and do my best to answer them.