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How finance made us all livestock

How Big Finance came to believe that we are all livestock for munching on – a very slightly longer version of Scotsman article

Despite all the complexity of modern economic theory, in fact the basic purpose of the economy is pretty simple. It is a system for social provisioning; just a means of ensuring that a society has all the things it needs, that goods are made and that services are delivered. Ever since humans evolved beyond subsistence, finance became an important part of that system.

Beyond subsistence, inputs and outputs don’t always match up – sometimes you need to buy seeds long before you can profit from their harvest. If the productive economy had to resolve this alone it would save for a year and delay sowing. Finance helps the productive economy develop more quickly; in this model the long-term financial health of the customer is paramount to everyone.

Then, starting about 30 years ago, finance began to create a new, more glamorous mythology around itself. In this mythology finance could do the productive growing without the inconvenience of people actually making and doing things. And then, fatally, it came to believe its own mythology. Ever since finance invented this alternative universe it has diversified and proliferated, its ecosystem now made up not just of banks but of big legal consultancies, restructuring consultancies, policy consultancies, accountancy consultancies, IT consultancies and many more. None of which make anything productive.

But if finance grows wealth without the bother of helping customers to do things, what is the point of customers? Herein lies many of our current problems – if it’s the financiers that are now running the farm, the customers come to look awfully like livestock. What they might do in the long term becomes less important than what you can get from them now. They become assets to be exploited, not customers to be supported.

In this mythical world, manipulating Libor rates or mis-selling ‘financial products’ which harm your customers but benefits you are not only acceptable, they are necessary. Because you, not your customers, are the engines of the economy.

This mess can only be tidied up in London and today we are finally seeing signs that ignoring it is no longer an option. We can only hope that it is tackled head on and with intent, because this time it doesn’t matter whether you are a fervent advocate of capitalism or a passionate social justice campaigner, reform is in everyone’s interests.

But while Scotland is not in a position to do much to tackle the cause, the infection has reached us and it is time we addressed this head on as well. That infection takes the form of finance ‘farming’ businesses and individuals through the capture of parts of the public sector.

An example. A friend runs a solid and award-winning business in Glasgow but needed a short-term £10,000 cash-flow loan. Her bank administered a publicly-funded scheme and she was given £10,000, but on the proviso that she spent it on a consultant. The consultant concluded it was a good, solid business but needed a short-term £10,000 cash-flow loan. Unfortunately, because of the fees of the bank and the consultant there was no money left. She managed to get the loan elsewhere and is thriving five years on.

This process of farming individuals and enterprises in a way that makes money for the finance sector, often straight from the public purse, is routine. Financial interests – probably one of the big accountancy firms – will advise on the wisdom of public sector mergers. The mergers will then cost a lot of money in legal fees, accountancy fees, HR restructuring consultancy fees and so on. Most of this money will find its way straight into the network of finance and related service. And as Audit Scotland recently pointed out, these are the only identifiable beneficiaries since its study of six recent mergers was unable to identify credible efficiency gains or performance improvements. Have you wondered who will benefit most from the creation of a single Scottish police force? Or who advised on its wisdom?

Hundreds of thousands of pounds have already been spent seeking to make the case for Scottish Water – which makes a profit for taxpayers – to be privatised. Not only would finance form the consortium that would take over this prized asset, it will charge handsomely to ‘manage the transition’. Notoriously, the Scottish Arts Council became its own biggest client through expenditure on consultants and Scottish Enterprise was not much better. An architect will design social housing but by the time the houses are built they will be ten per cent smaller as consultants leach their share from the pot.

It is easy to forget the meaning of things in this surreal world. Everyone says small businesses are a key element in Scotland’s economic recovery. That is right – small businesses genuinely make and do things and they do it in Scotland’s real economy. They tend to take a long term view since few will expect to be the target of a lucrative buy-out. And they create a high proportion of jobs in relation to turnover and take modest amounts out in private profit. In other words, finance hates them. No assets to be stripped, few fees to be imposed, far too much patience is required and nobody gets really, really rich.

Big Finance is still trying to ‘make true’ the myth that it is responsible for Scotland’s productive growth. But since it isn’t, and since its global casino is no longer paying out, it needs something else to farm for profit. And so it has captured the upper echelons of Scotland’s public sector and is using it to convert us all into livestock – small businesses, the police, tenants, you, me, all just sources of profit.

The civil service has to develop the courage to make its own decisions and stop outsourcing its thinking to KPMG, Ernst and Young, Deloitte and PwC. If it requires legal advice it must have the capacity to produce it internally, independent of conflicts of interest. And there should be a strong presumption against ‘permanent financial revolution’ – no more mergers, no more restructuring, no giant IT projects, no more knocking down schools just to rebuild them again. Because if we keep letting them feed on us, they will continue to see us as livestock. These profits-for-nothing do little apart from allow big finance to live on in the shadow of its own mythology. That’s good for nobody.

Robin McAlpine