The FT has an editorial today on the taxation of private equity and hedge funds. It comes in response to the review of capital gains tax, whose findings were announced last week. In the editorial the FT says:
Industry executives on both sides of the Atlantic have been quick to warn that any tax rises would be bad for business. In the UK, they have suggested they would be a body blow to the country's start-up scene and penalise entrepreneurship. The argument has some validity, but as it relates to private equity, it is tangential at best. It is in a nation's interest to foster entrepreneurship – but carried interest is not entrepreneurship.
The last point is what I wish to focus on. That is because in no small part the statement made is capable of massive expansion.
It is entirely true that the vast majority of the activities of hedge funds do not represent entrepreneurship, largely because those who claim that this is the case actually have almost none of their own personal money at stake in the enterprises that they manage. The FT makes this point. But when it comes to a discussion of entrepreneurship, the same is also true of almost all financial capitalism, which is about exploitation rather than value creation, and so is not entrepreneurship. And it is also true of almost all those who are called entrepreneurs in big business, almost none of them have ever experienced any real risk with regard to the returns that they make, because they have always enjoyed a secure salary paid at the end of every month throughout their entire careers.
The simple fact is that entrepreneurship is something that the vast majority of those who actually espouse its virtues have never partaken in, whether those espousing be most right-wing politicians, or the leaders of large business, or those who work for organisations dedicated to this promotional activity, such as the CBI. Right-wing think tank staff almost universally fall into the same category. Almost without exception none of these have created businesses. They do not know the risks involved, and so do not understand the issues that a genuine entrepreneur has to face.
In contrast, I know quite a lot about entrepreneurship. I created a firm of accountants at the age of 26. I advise many entrepreneurial companies. I was a director of a number along the way, and sometimes invested my own money. Since 2003 (the years at City, University of London excepted) I have been a social entrepreneur, taking not dissimilar risks to create ideas that I believe of social advantage. And what all that experience tells me is that what is essential for entrepreneurship to flourish is a strong, enforced, and fair tax system that creates a level playing field where each contributes according to their ability to pay.
That is not what we have in the UK at present. The highest marginal rate of tax in the UK at this time is paid by those on below average pay.
The lowest marginal rates of tax are frequently paid by those with the highest earnings who can divert their income into capital gains or corporate entities.
The tax system is stacked with opportunities for tax mitigation, and sometimes avoidance, by those with wealth.
And who pays the price for all this? Those on lowest pay.
And at the same time those who have never taken a risk claim a status that they should not enjoy and a reward for having it that they should not be entitled to.
There is real entrepreneurship in this country, but most of it is evidenced by those who have to struggle with a variety of sources of income, whilst also juggling family responsibilities, all the time just seeking to make ends meet. We really have misunderstood where the real abilities in managing risk are in this country, because the vast majority of those who have them are not to be found amongst those who claim they should be paid for skills they do but have and for risks that they have not taken.
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You make a very good point about ‘financial capitalism’, because we have now reached the stage in the personally connected, communications-driven 21st century, it is moving to the point where it either controls or destroys every other form of capitalism; remember, it virtually destroyed an outstanding mutual fund industry in banking and pensions in Britain, in the 1980s-90s.
Post crash 2007-8, in Britain ,given the competitive opportunity everyone with the least sense would have moved their respect, their confidence and their money from the banking sector into the mutual sector, if it had still substantively existed at scale (save for the lifebelt of total Government protection wrapped round the culpable institutions – irrespective of cost please note, or a proper quantum of what they were rescuing or commiting the country to cover: a ‘magic money tree’ on steroids); instead of which we rescued the culpable and have left them free to hoover up the world, in return for a few weak, cheap regulations.
The problem is the term you use for ‘financial capitalism’, which I submit requires to be replaced by something more effective and crisp; that better exposes its egregious nature: ‘financial capitalism’ teeters uneasily on the edge of being an oxymoron.
Indeed…
Perhaps we should seek to distinguish rigorously between ‘rentier capitalism’ and something better described as ‘entrpreneurial’, or perhaps better, ‘creative capitalism’, or resource creating capitalism. Perhaps someone can do better with the appropriate terminology?
It would be good….
Very well said. I well remember Sir John Harvey-Jones saying that in the whole of the Footsie 100 there were no entrepreneurs.
Ha-Joon Chang developed this theme in his ” 23 Things they don’t tell you about capitalism ”
Thing 15
People in poor countries are more entrepreneurial than people in rich countries
He makes the damning point that people in poor countries HAVE to be just to survive using their ingenuity & entrepreneurship to sell everything you can think of & things that you did not know could be bought
I am a big fan of Ha-Joon Change and always enjoy his company.
I’d also recommend Duflo and Bannerjee’s Poor Economics which makes similar points. Their latest book Good Economics for Hard Times is also excellent as they apply their thinking to so called ‘developed’ economies.
Richard, I am halfway through the Deficit Myth and fascinating though it is – as well as your blog of course – I cannot understand why the simple logic of MMT is so resisted by most economists. Could it be that general acceptance of the theory would damage the interests of ‘financial capitalism’ as you have outlined above?
Most economists have enormous personal capital (intellectual mainly) invested in their careers, and that conflicts with MMT
Admitti9ng tat much if what they have done is wrong is hard
Sp they won’t do it
Hello Richard.
After reading this blog post and the comments underneath, it occurs to me that although I’ve seen, or heard, the term financial capitalism many times, I’ve no real understanding of what falls within its scope.
John S. Warren says it either “controls or destroys every other form of capitalism”. That’s pretty influential for something so vague to me.
Would it be possible for you to find the time to blog on what financial capitalism is, it’s reach and it’s relationship to other forms of capitalism? Or something similar to these themes.
I read your blog every day, and try and draw attention to it with the guys I work with, with varying degrees of success.
Gordon
Just filmed, at your request
Should be out tomorrow
Sorry for the delay
Richard