Menu Close

The Panama Papers and neoliberal capitalism

The Panama Papers and neoliberal capitalism – Alan Ecob

The Panama Papers. What an incredible exposé! Eleven and a half million documents! If committed to paper, a line of pantechnicons would be required to move them. They show that more than 200,000 companies, trusts and other entities took advantage of Mossack Fonseca’s tax avoidance services through the last forty years, with 140 international celebrities, prime ministers and so on named for having been involved. And with not just millions, but billions of dollars switched from public to other purposes. Yet all is argued to have been ‘perfectly legal’.

This last is what many find difficult to understand. Have governments become powerless? Not really. In our democracies, they still have command of the armed forces. But the practices of tax avoidance, as their ‘legality’ has become demonstrated, at times in Court judgements and partly through the sheer complexity of the avoidance processes adopted, are growing apace, both in terms of the number of professional services on offer and the moneys being diverted. The practical conclusion is that we have a global problem, in which governments presently are not its cure, but are part of it.

The question becomes – what may we, the population generally, do about it? The first step is to become aware of the changed relation between government and ‘big’ business that has become established from the early 1980s; since Maggie Thatcher as the ex. grocer’s daughter and Ronald Reagan as the ex movie actor decided that the way forward for humankind was for what was becoming the financial sector of the global economy to be freed from virtually all control. What resulted was Neoliberal Capitalism (NC).

As described by Harvard economist David Kotz in his 2015 The Rise and Fall of Neoliberal Capitalism, it’s a system in which market relations and forces operate relatively freely and play the predominant role in the economy. It has superseded Regulated Capitalism, in which non-market institutions such as government services and trades unions played a major role in regulating economic activity, restricting market relations and forces to a lesser role in the economy. If you’d like more detail, refer to Kotz’ excellent half page (p.42) Table 2.1 The Ideas and Institutions of Neoliberal Capitalism. The one thing that could be added to his line 3(h) under The Role of Government – Tax cuts for business and the rich – is ‘as justified by the trickle-down theory’.

Federal Government support for this was recently stated in a campaign address by our Federal Minister for Small Business, the Hon. Kelly O’Dwyer MP. The essential idea is that extra funds provided to business and the rich by the tax cuts become invested in business expansion, yielding more jobs and income for workers, yielding benefits for all. Yet as Ian Verrender made clear in a recent ABC article, it’s difficult to take this seriously. Certainly when 80% of what an accountant may see as ‘big’ business profits are being remitted overseas, partly because that’s where most of the invested funds came from, and partly from tax avoidance.

Actually the initial expression of the idea may be found in Adam Smith’s 1776 The Wealth of Nations. It didn’t get much of a run until 1890 when Alfred Marshall’s Principles of Economics, featuring his Marshallian Cross, focussing professional interest on the interplay between supply and demand through statistics and mathematics, eliminated commercial profit from being a central issue. But Marshall, and no doubt his wife, Mary Paley Marshall, his ‘tutelary deity’, felt some need to discount the continuing social interest in it. The solution – wheel in Adam Smith with the trickle-down theory from 114 years earlier. As Marshall was wont to say when pressed for detail “It’s all in Adam Smith”. He knew his core support to be the burgeoning British business interest, and that they didn’t want their securing of profits to become a social issue. Schumpeter describes the outcome as follows: “The Principles were received with a universal clapping of hands, and the newspapers, which previously had been rather cold to the Wealth, now vied with one another in complimentary full-dress reviews of the Principles”.

And so matters have continued for a further 126 years. Which brings us to Kotz’s account as to NC’s rise and fall. He explains these in terms of Social structure and accumulation theory.

NC’s initial rise resulted from its promotion of a social structure of profit-making, leading to the attainment of a stable capital accumulation process. This enabled societies that adopted it to economically out-perform those that relied on the processes of regulated capitalism. From the 1980s on, NC increasingly became the dominant global system.

Why then the fall? As Kotz explains: “After one or several decades, the (established) structure turns into an obstacle to further progress, ushering in a period of economic crisis. The crisis lasts until a new social structure of accumulation is constructed, able to assure growing markets for the output of an expanding capitalist society.”

“Two questions emerge from this explanation. The obvious one is – how may one hope to have an ever-expand- ing global economy in our finite world? The second is the fascinating one of – how may an established social structure turn into an obstacle to its own further progress? The following accounting view was first put to an economic ‘think- tank’ in 1983 as being a systemic problem within a whole capitalist economy (as is our world today):

Within the context of enterprises as a whole making profits, then if any of the yield of the increase in capital investment generated in the previous period is to become represented by an increased level of consumer goods sold now or in the future to consumers as such, then consumers must be given additional purchasing power to pay for them.”

The initial response of the economist selected to determine the matter was that ‘it looked very interesting’. But his considered view, based on a minimal modelled island economy, was that it was ‘a lemon’, being not generally the case. However when a hole was shot in this view, based on his non-recognition of depreciation, he refused to further consider the matter and said that “it’s an accounting matter, of no interest to busy economists”. And that was that.

But, may not refusal to provide additional purchasing power to consumers, preventing a necessary increase in consumer demand, prove to be the obstacle to which Kotz refers – leading to crisis? Tax on profits and income gains which could/should be applied to consumer needs, being instead given back to businesses and the rich. The result – the trickle down effect which does not trickle. Is this not beginning to happen to us now in Australia, partly as government policy, and partly from tax avoidance with such as Mossack Fonseca?

Which brings us back to the Panama Papers. Or, more precisely, to the four page manifesto provided by source ‘John Doe’ in early May. As he there introduces his argument: “Income inequality is one of the defining issues of our time”. Is this not an outcome of the systemic accounting problem stated above? After all, with proper national accounting, additional income from prior periods does not disappear or evaporate. Ultimately, because companies etc. are only intermediaries, it is received by consumers or by capitalists. If consumers receive too much, then capitalists receive too little. But if consumers receive too little, then capitalists receive too much, and that becomes income inequality. It becomes an issue of distributional fairness.

A recent US article reported by the ABC caught my attention. The staff support- ers for the three major candidates for Presidency, and the candidates them- selves, have reportedly been flabbergasted by the extent to which young white Americans see income inequality as being the major issue of our time.

John Doe could perhaps be one of them. Could the Trump phenomenon in the USA be a precursor to, as Doe says, the emergence of a digital revolution building through the social media?

Alan Ecob is an ERA member living in NSW

Leave a Reply