Up until approximately 1890, economists understood that a key part of the economic system is what are known as rents, or ‘free lunches’. This means unearned income or excess profits. They recognised that a key goal of economics should be to eliminate rents. Recent economic theory does not talk about rents very much – there is an incorrect assumption that all income is earned. The people and companies who receive excess wealth from rents are usually described by the media as wealth-creators, but this is partly propaganda. Many of them are ‘rent-seekers’ (also known as rentiers) – people who know how to take money from the system because they understand how it is rigged.
The current system is now dominated by rents. This includes monopoly profits, offloading costs onto others (externalities), asset-price inflation; crime, a rigged international system, tax manipulation, resource extraction; regulatory capture; and power imbalances allowing for exploitation of staff, customers and suppliers. This article will focus on one particularly important rent: government subsidies.
The Biggest Welfare Scroungers are Big Business
A subsidy is when a government provides some assistance to a business. This can take many forms. Giving a company a tax-break is a subsidy. If a government does not charge tax on aviation fuel, this is a subsidy to the airline industry. Purchases of weapons by the government subsidise many high-tech industries. Sending your soldiers to protect oil pipelines is a subsidy to the oil industry. When the U.S. and British Governments lend money to poor countries and insist that it has to be spent on exports from U.S. or British companies, this is a subsidy to those companies. Government spending on research which leads to profitable products sold by private companies is a huge subsidy.
It is estimated that the British Government gives out over £90 billion each year in corporate subsidies, and the U.S. Government spends at least $800 billion subsidising the biggest U.S. corporations each year. This has helped to finance the development of the aerospace, biotech, nuclear, electronics, synthetics, space communications, mineral exploration and many other industries. The Government, and therefore the taxpayer, covers much of the costs and takes many of the risks, then hands the profits to private companies. Many of the recipients of these subsidies dominate their industries, make big profits and pay large amounts to shareholders and senior executives. America’s oil, gas and mining corporations are among the most profitable in the world, yet they receive tax breaks and other subsidies worth billions of dollars. The big agricultural companies, particularly rice, wheat, corn, cotton and soybeans, receive some of the biggest subsidies, totaling approximately $30 billion each year in the U.S. One-tenth of the farms, usually the biggest, get three-quarters of the subsidies. Similarly, studies of European farming show that most of the subsidies go to a small number of the biggest farms.
In Britain, a 2013 report entitled “The Great Train Robbery” showed how private rail companies took big subsidies from the Government and paid substantial amounts to executives and shareholders. The billionaire Richard Branson received almost £3 billion in subsidies for the West Coast Line between 1997 and 2012. Shareholders took over £500 million in dividends. Without the subsidies, the companies would have lost money. In fact, there were additional, hidden subsidies, that amounted to £30 billion for all of the train companies.
Most advanced nations have similar systems of government support for big business. They have subsidised almost every major corporation at some point, and many of the world’s biggest businesses would have gone bust in the past if they had not been bailed out by their government. The academic, Noam Chomsky, uses the expression “really existing capitalism” to describe this system based on government support for big business. Others use the term ‘crony capitalism’, or ‘socialism for the rich’.
Business as an Extension of Government
The connection between governments and some of the biggest corporations is so strong that it can sometimes be hard to know where one ends and the other begins. Many personnel move seamlessly between business and government, in a system known as ‘revolving doors’. The software that enables Google to search through trillions of items on the internet is the same technology that enables the U.S. spy agency, the NSA, to illegally analyse trillions of items of electronic communications. The U.S. government provides huge assistance with research to help make U.S. companies dominant, and government-to-government lobbying to enable them to gain a foothold in other countries. Many big companies obtain guaranteed contracts with the government. Noam Chomsky has explained that these contracts are yet another form of government subsidy. This even involves funding things for which there is initially no demand, such as early electronic components, like transistors after World War Two. This is particularly noticeable with military contracts, aeroplanes and technology companies. Governments often overpay for these contracts by large amounts.
Chomsky has been writing and speaking about the role of government in supporting big business for many years, but has been mostly ignored by the mainstream. However, Mariana Mazzucato wrote a book in 2013 called “The Entrepreneurial State”, which has attracted mainstream attention. In it, she debunks the myth that private business is the source of most innovation, pointing out, for example, that in the U.S., 75% of new drugs come from state-funded investment and research.
Crony Capitalism is destroying the U.S., Britain and Many Other Countries
The close relationship between government and corporations can take many forms. If governments choose to use their power to limit the worst excesses of business, then business can be forced to operate in a way that primarily benefits society. This has been the case for many years in some European countries, and perhaps Britain and the U.S. were closer to this system during the years 1945-1970. This might be described as a mild form of capitalism.
At the other extreme is crony capitalism, where government can be ‘captured’ by business, through revolving doors, campaign financing, lobbying and corruption. The key aspects of this system are as follows:
- Huge global companies pursue their own profits, irrespective of the downsides to society.
- They have too much influence over politics and regulation, so the government helps them extract ever more wealth from the economy.
- They have the power to exploit customers, suppliers, staff, governments and the environment.
- They effectively operate outside the law. They are able to commit crimes with no punishment worse than a fine.
The U.S. and Britain in the 21st Century are examples of this type of extreme system, and some other advanced nations are heading in this direction. U.S. presidents and their corporate cronies openly rig the economy to benefit themselves. In Britain in 2020, there was widespread evidence of corruption in the awarding of contracts for personal protective equipment. The more extreme this system becomes – the more government is captured by big business – the more wealth the rich are able to extract, and the more problems we see. For example, millions of people were already using food banks before 2020, and that number has increased hugely during the coronavirus lockdowns.
Even mainstream commentators, such as the former Governor of the Bank of England, Mark Carney, have commented on how the relationship between the Government and big business has changed for the worse. Crony capitalism is destroying our societies.
What Should We Do?
Executives and shareholders of the biggest companies want you to believe that big companies are dynamic risk-takers who deserve immense rewards if they are successful. Once we recognise that these risks are removed or reduced because of government support on a huge scale, we then have to question whether these companies really do deserve big profits.
Recent research has indicated that many millionaires are created in industries that receive big subsidies from government, so we must also question whether executives or shareholders really deserve their immense rewards.
Those who say they believe in markets might say that the government should have no role in choosing which parts of the economy to support. Our policies should therefore be to end all subsidies to big business, or at least to aim for the minimum system of subsidies, as part of a group of policies that aim to minimise rents.
However, such a simplistic approach ignores the positive contribution that government support for business has provided to society. The U.S. might not have the technology dominance that it has today without its history of Government investment in technology. In situations where subsidies provide large benefits to society, perhaps we should keep them, but find ways to ensure that no-one is able to extract enormous wealth from this system. In future articles we will look at possible solutions in specific industries where subsidies play a huge role, such as banking and pharmaceuticals.
We also need to recognise that subsidies are just one aspect of a more complex relationship between business and government, and that this relationship is highly corrupting. Changing it requires much deeper reform. We would have to try to end, or at least minimise the effects of corporate lobbying, corporate funding of political parties and elections, regulatory capture and revolving doors. We would also have to make substantial changes to the legal system to stop big companies getting away with committing crimes. If we do nothing, corporate lawyers and lobbyists will continue to gradually change the system more and more in favour of big companies. I don’t think there is a ‘magic bullet’ solution, just lots of changes to remove the rents that big companies currently receive. If you have any ideas that might bring about substantial improvement, let us know.
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You only have to look at which companies benefited hugely from the lockdowns/restrictions and which ones were negatively affected to see the corruption:
Big Pharma; Big Tech; Amazon; other on-line retailers and delivery companies all accumulated vast profits
Small private businesses; hospitality; high street sole traders and the self-employed were absolutely hammered.
And taxpayers have now been handed the bill. In German, the word is “rechnung” and goodness knows, we need a reckoning with the people who did this. But we’re powerless and they know it.
To be fair to Amazon, they were a lifeline for many of the locked down who were unable to go out shopping due to lockdown.
Where else could I have ordered all manner of items that were required, including over-the-counter medication, necessary kitchen utensils, hygiene supplies and all kinds of other necessities, sometimes ordered Saturday evening and delivered by Sunday lunchtime, all at highly competitive prices?
The Davos people call it public-private partnership.
The solution is simple but hard: massively shrink the state.
The reason big business “partners” with the state is because the state has massive amount of of power and resources.
The role of the state needs to be reduced. It has no business telling us what we can and cannot say online, what medical treatments we must follow, what form of money we must use, what type of car we must drive or how we must heat our houses.
As long as we as a population insist on looking to the state to solve what some of us think are problems, the state will take the power and corporations will exploit that power.
And we need to cut off its money supply, or severely restrict it (i.e.our taxes) and force the state to operate under the rules of financial discipline that every family in Britain is subject to. It can’t spend more than it earns or the consequences will be serious.
To put it very crudely, the state is like an authoritarian, violent head of family who is incompetent, screws everything up, is badly in debt and lets its friends abuse his children. I don’t know about anyone else but I’m sick of having to put up with it.
“force the state to operate under the rules of financial discipline that every family in Britain is subject to. It can’t spend more than it earns or the consequences will be serious.”
I have spouted this logic all my adult life and faced the nonsense that ‘national finances’ fall under different financial rules, yabba, yabba, yabba. NO, they do not.
Surplus national cash does not come from a few extra shifts on the printing presses. I know this, many on here know this, but somehow our “elites” know better than us although their attempts at explanation fall to the oft repeated nonsense of some Carney style logic. This is the essence of the public-private partnership.
The state i.e the public side of the nation requires ever more tax payers money to feed the insatiable appetite of the private sector. The biggest private sector companies, feeding as they do off a nation’s public companies are in reality just third party agents of taxation hiding behind government contracts written allegedly for the public’s benefit.
The revolving door between government and “private business” laid bare.
A very cosy, very profitable arrangement for a few but now hurtling to its inevitable demise as its unsustainability is confirmed.
‘But who would build the roads?!’
I agree with you; except that you forgot to add that the head of the family was off their heads on cocaine as well.
The author equates subsidies to rents and paints rents in a negative way. I think this is misguided.
Every person who aspires to not have to work until the day they drop will need to rely on rents. Rents is what will keeps us going after retirement.
Now it needn’t be that way. If there was zero inflation and we knew that one thousand pounds we put away today would be worth one thousand pounds in twenty or thirty years then we could just work out how much we felt we needed and save for it.
But because the value of money is highly unstable (mostly thanks to the profligacy of the state which is incompetent and so needs to cheat and print too much money all the time), we are all forced to become rent seeking investors. Either ourselves directly and/or handing the job over to the state who needs to run a state pension fund, typically very badly, with no guarantees or commitments beyond the certainty that it will be worse than you hope, never better.
Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades. In this revolution, research has become central; it also becomes more formalized, complex, and costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal government.
Today, the solitary inventor, tinkering in his shop, has been overshadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity….
The prospect of domination of the nation’s scholars by Federal employment, project allocations, and the power of money is ever present and is gravely to be regarded.
Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific/ technological elite.
Eisenhower, Farewell Speech as President 1961
See? There’s nothing new under the sun.
The author spoils his case by over stating it. If the state is to provide security it must provide it for all of the country’s interests which is a reason companies pay tax as well as individuals. The armed forces need equipment and it is not a subsidy to buy them from a manufacturer.
The relationship between arms producers and the state shows just how completely corrupt the public-private “partnership” is.
The state is the single buyer and the producers are several. That should in theory give the state enormous buying power. And that should translate into suppliers margins being squeezed very low and the single buyer getting an amazing deal.
In fact, in this case, for reasons that can only really be explained by massive corruption, the opposite is the case. Arms manufacturers make phenomenal profits and all you hear are instances of absurd overpayment by the state.
Society seems to have accepted that government arms contracts are licences for the companies winning the contracts to mint money.
It’s all for our protection…
Tax breaks and subsidies are not the same! The former is taking less of what has been earned, the latter is giving (public money) to that which is not earned, usually to bolster a political narrative regardless of the recipient’s value to the economy.
Corporatism is alive, prospering and nutured by the Not-the-Conservative Party.
Like the thirty-seven billion pounds – more than the quarterly turnover of Microsoft, enough to build three nuclear power stations, more than the cost of the Channel Tunnel and Crossrail put together or build a dozen aircraft carriers, donated to Dido Harding to commission a bugridden smartphone app that any GCSE IT student could have knocked up over the weekend, coupled to a back end database that could be bought off the shelf for a few hundred thousand and is now admitted not to have sold a single life, do you mean?
When is someone going to look into that ultra-rip off?