Starbucks isn’t wrong to avoid tax, the law is wrong. A universal payment tax would fix it.

Tax avoidance is in the news a lot at the moment. Maybe that is partly because tax as it is now is seen to be unfair and unjust so people feel less bad about trying to avoid it.  In response, the idiots in charge of our taxing seem to think they should ask people and companies to pay taxes voluntarily.

Companies usually exist to make money, and it would be bad management to voluntarily pay more tax anywhere than is required by law. The world offers a wide range of tax regimes and of course a multinational corporation will do its best to exploit the different rates. But governments are meant to be in charge of law, that’s what they are for. It is their job to ensure that the law is fair and that everyone has to pay their share of taxes. But they aren’t doing that at all well. Governments are at fault, not companies or individuals that choose to pay the (creatively) legal minimum. The tax net may be full of holes, and companies are walking through them, but it is government that designed, made and maintains the net. 

Companies such as Starbucks can legally avoid paying UK tax by paying fees for licenses, use of the brand name and other intellectual property to overseas companies in low tax areas. The value and price of intellectual property can be set at pretty much any arbitrary level, and it can be moved around the world instantly so it is an especially useful tool for tax avoidance schemes. We have been in the information economy for decades now, and it is a reflection of competence and extreme sluggishness of the tax authorities that tax law hasn’t kept up. Starbucks have paid their due taxes, there is just a huge mismatch between what is due and what should be due in a competent tax regime.

It isn’t an impossible task to tax properly. There are lots of ways of taxing things so that all companies pay a fair contribution. The situation now is simply ridiculous and government should pick a mechanism and implement it quickly.

The most obvious perhaps is that the government could regulate that all companies must pay tax on the same proportion of their global profits as the proportion of their revenue that is earned in the UK. And that must include web sales and downloads, and most importantly, any intellectual property such as licenses. If Starbucks buys licenses to operate in their particular way, the license sellers would pay the appropriate taxes on the corresponding proportion of their global profits too.

Of course, that would get complicated if overseas suppliers could simply refuse to pay or even to surrender data on their accounts. But that can be solved by allowing accountants to offset purchases only from licensed companies. The responsibility to either pay the tax themselves, or buy from someone also paying tax here would then stay with Starbucks.

Another way of ensuring companies pay proper tax would be to demand payments based on an industry average cost pattern. This would be subject to arguments and would be more complex so would be more expensive to administer.

A third way is using a purchase tax in place of corporation tax. Every company would pay the purchase tax on everything they buy. If it appears as a cost on the UK balance sheet, purchase tax must be paid on it. What a company does overseas should be of no concern of the UK authorities, but if they want to put a UK operating license from a subsidiary or partner on their UK accounts, tax must be paid on it. If this tax is set at the right level so that the total government tax take stays the same overall, the economy should benefit through simplicity and administrative cost reduction.

It is possible to have different tax levels for different kinds of purchase, exceptions, special cases and so on, but each paragraph of extra regulation is another than can be interpreted and used by creative accountants and lawyers.

One of the implications of having a simple purchase tax is that there is a huge incentive to simplify the value chain into as few links as possible. If money is taxed each time it leaves a company, then having fewer company boundaries in the value chain would be cheaper. Keeping as much of the value chain in house as possible would reduce this, but there would be strong pressure to allow reclaiming of purchase taxes across boundaries in the value chain. Of course, that is getting quite close to what VAT is, and we are all familiar with that already. Companies collect VAT on their sales and claim back VAT on purchases. It therefore doesn’t discriminate against companies on the basis of value chain design. It just collects tax on the difference in value between the raw materials and finished products.

So, why not abolish corporation tax entirely and switch to a refined version of VAT, at a higher rate if need be? Why indeed. This refined VAT would be payable on all purchases, from anywhere, but we could modify it so it could still be reclaimed by businesses for purchase from other UK VAT paying suppliers. The important thing is notionally to seal the borders so that all purchases in the UK are taxed. I am not personally in favour of making this refined VAT reclaimable, I think that draws an unjustifiable distinction between companies and individuals that can then be exploited by company owners and is the source of much tax evasion even today. I think facilitating virtual companies and optimising end to end value chain design is the best approach.

Extending this approach, why not also replace income tax and national insurance by a sort of VAT on salary? That would amount to a flat tax, but people who get paid more would pay more tax too, and that in itself is already an improvement to today. If this VAT also was applied to payment of dividends, capital gains, bank interest, inheritance and all other forms of payments, then the person on the ordinary payroll would pay the same rate as the owner of the company, someone selling their shares, the shareholders, inheritors, everyone. What’s not to like? Rich people pay more, poor people pay less. Everything is simple, all loopholes removed. All outgoings from companies taxed at the same level, and all forms of income ditto. A single page of tax law to replace 18000 pages. People living off shore wouldn’t escape any more because their UK-sourced income is taxed at its UK point of payment. Their income from other countries is the affair of those other countries. Just like usually happens today, the money is taxed when coming into the company as a sale, and once when paid out to someone as wages or dividends. But twice would be a huge improvement on the hundreds of times money is taxed today via all the hidden taxes. This revised system would be far simpler and more transparent and if it is kept simple and transparent, with no added loopholes, people would see its fairness. The more secure net means that everyone would pay less tax except those who had previously been avoiding it.

A wannabe tax-avoiding ‘consultant’ might arrange to work for free in the UK, with no UK payments to be taxed, paid instead by an offshore company into an off-shore account, but to avoid tax, that money would need to have come from an overseas operation. If it came from UK profits, it would have been taxed when the money came into the company, and again when it was paid out to the overseas one. People paid by overseas companies out of overseas money are not the UK’s affair. As far as the UK is concerned, they are working for free.

Smarter people than I have calculated that we’d need to set the rate to take about 20% of each transaction. Just a bit more than VAT already is then (VAT adds 20% on so takes 20/120ths=16.67%). So, if that is right, and we seal all the holes and charge it on everything, we can all look forward to a country with no other taxes except a slightly refined form of VAT, that is paid on everything.

So it wouldn’t matter how you got your money. 20% would be paid when you are given it and on any interest the banks pay you on the remaining 80% from saving it. When you spend it, another 20% is gone, leaving 64% of actual value. This compares favourably with today where hundreds of taxes hide away unobserved. They should all go.

I am greatly in favour of the simplicity this offers, but it isn’t without problems. What about selling shares, or houses? If you have to pay 20% on the full cost every time you buy a new house that would greatly penalise people who move often. It also cripples the stock market if people pay 20% each time they swap shares. People would demand exceptions, but each time exceptions are created, new opportunities to avoid tax arise, that can be exploited by clever accountants. So any exceptions would have to be few and well designed with tax avoidance avoidance in mind.

Wind farm compensation claims undermine their investment potential.

I don’t make many recommendations on investments, but when something comes along that has clear effects, I sometimes do. I am not a financial adviser, and you aren’t paying for my advice, so I make my argument as a futurist and you make your own decision whether to take it on board or not. I take no responsibility for your financial decision, though please feel free to pass on any credit.

I have often advised against anything other than very short term investment in the green industry, and still do. It is volatile at best, with many bankruptcies already, and shows especially poor long term prospects as the poor quality science underpinning it is shown up for what it is – often worthless and counter-productive. This time it is even clearer to me. Avoid investing in wind farms, even more than yesterday.  Here’s why.

Finally there is a proper peer-reviewed scientific study proving what most people suspected already, that wind farms cause health problems and depression in people living near them. Easy-to-read summary of the key bits in the Telegraph: http://www.telegraph.co.uk/earth/energy/windpower/9653429/Wind-farm-noise-does-harm-sleep-and-health-say-scientists.html

The study’s finding were about sleep loss and increased depression, both of which were found to be much greater in communities close to wind turbines. However, these are both known to cause other serious health problems and reduce life expectancy. Suicide links with depression too, so there may also be a measurable impact on suicide rate near wind farms, another study waiting to be done. If as has been proven, wind farms cause loss of sleep and depression, it is therefore reasonable to expect a scientific study to prove a link between wind farms and serious health problems and even early death or suicide.

Separately, the industry has tried to bury and misrepresent the conclusions of a previous proper study that showed their negative effects on house prices. The results however remain valid, there is a proven effect. Erecting a wind farm lowers nearby property values.

Where people have their health or their financial state damaged by a company, and in this case often both, it surely can’t be long before class action suits follow for damages. Once the courts and claim companies get past dealing with the PPI mis-selling compensation claims, there will likely be another swathe based on loss of house value and damage to health attributed to proximity to wind farms.

What is less clear is whether the taxpayer will have to fork out instead. Since the proof of damage is recent, earlier ones could be except from reasonable blame. Since the farms have been commissioned by government, government might be considered to blame and the farm owners and manufacturers only liable for extras caused by specific circumstances or specific designs. Those who recommended, commissioned, housed, built and ran the farms, and who received all the financial benefits even in full knowledge of the harm they were causing, can be expected to deny any wrongdoing and to try to shift blame to avoid  facing the consequences. The taxpayer might well have to pick up much of the bill for damage done in spite of protesting loudly and being ignored all along. However, it will be a brave investor who ignores the risk that justice might actually work against the guilty parties. Justice happens sometimes.

My conclusion is simple: wind farms are now proven to cause damage to property value and health and large compensation claims are likely to follow sometime. Further scientific studies are likely to add weight to the evidence, making compensation payouts highly likely, and there is no provision for this in the tariff guarantees. In the extreme, farms could even be forced to close, eradicating future income (and related production-related tariffs) while leaving the up-front costs and there is no certainty that government will compensate farms for the loss. These prospects therefore obviously damage the value of investments in wind farms.

What do solar panels on your roof say about you?

I mostly work from home and since my office is just a short walk from the bedroom, lounge or kitchen, I have started going on short walks round the neighbourhood to avoid becoming fat. I noticed some of my neighbours have covered their south-facing roofs with solar panels.

What image did they convey? Here is a multiple choice:

a) I had some spare cash and wanted to get a big return on my investment and solar panels offer a fantastic return.

b) I had a guy come round promising me lots of cash if I let him put panels on my roof.

c) I hate paying big greedy companies for energy and paying too much taxes, so am very keen to take full advantage when there is a means to get my own back.

d) I really love technology and am keen to demonstrate it.

e) I want everyone to know what a nice person I am looking after the environment.

f) I want to do my bit for the environment and solar panels are a good way to reduce dependence on fossil fuels and reduce CO2 emissions.

g) I want my kids to live in a sustainable world and that is far more important than the appearance of my house.

I get the impression that each of the above would have some people ticking them. Some would tick several.

Well, I did have a guy come round offering me cash if he would let me stick panels on my roof too. I sent him away, mainly because I am a not an idiot. I had thought it through long before he came. Let me explain what image solar panels on a roof conjure up in my mind when I see them. And bear in mind that my full-time job is as a futurist and I think systemically about how people will behave over the longer term. Using the same tick list, with alternative answers:

a) I wanted a fantastic return on my investment and I don’t care at all that it is other people with less cash to invest who will pay that high return. So I am  greedy and selfish. As the recession lingers on, some people may be tempted to spray nasty messages on my door or run keys down my car doors or shame me on social networking sites, and maybe my family will live in fear or I will be forced to remove them. So I am an idiot too. I am a greedy selfish idiot.

b) I was fully taken in by a door to door salesman and didn’t understand that I could easily commission the panels myself so was happy to give most of the returns to a company who won’t have to suffer the drop in value of my home or the unsightliness, or the maintenance problems they will cause, or the hassle when I move or any other problems. So I am a first class idiot.

c) If energy companies can’t get as much from the energy they sell, they will try to increase the rental and maintenance and billing charges to maintain their revenue. And that means I will get less net profit from any energy I put back into the grid. So I probably won’t save much on what I buy and won’t make much on what I put back. And when I sell my house, even though I will get less for it because the panels make it look awful, I will probably lose heavily again in various admin fees to transfer the solar contracts over to the buyer, who probably won’t get the same deal, so won’t pay me much for it. So I am not as canny as I thought and my returns will be far less, so I am an idiot.

d) As long as I have the latest panels I will look cool and trendy. But they won’t be the latest panels for more than a few months, after which they will quickly start to look obsolete as well as unsightly, so I will have to either reinvest regularly or accept looking like a loser. So I am an idiot.

e) I care for the environment but not enough to do any basic reading and can’t think for myself anyway. I have been fully taken in by the anthropogenic global warming scam and as the global warming panic changes to global cooling panic I will increasingly be labelled as one of the idiots who went along with the AGW panic and just did what the environmentalists told me to do. I am a well-meaning idiot with little or no independent thought. Still an idiot though.

f) Solar panels will one day be an excellent way of reducing CO2 emissions, albeit in sunny countries. However, they are darker and absorb more of the sun’s energy than the roof did previously, so contribute directly to warming the earth, and manufacturing them creates loads of pollutants today, so it isn’t really quite as simple is it? And anyway, maybe we should have waited and put our panels in later, in the Sahara, and got far more energy for far lower costs, while helping poor African economies. And we now know for certain that the impact of CO2 has been greatly exaggerated and is fairly small compared to other impacts on global temperature. On the other hand, as global cooling sets in, we will welcome the extra heat absorption and I’ll be able to get my energy while helping warm the earth. But I didn’t expect it, so am a lucky idiot who landed in poo and came out smelling of roses.

g) I am holier than you are. You obviously don’t care about your kids and their future. I do, aren’t I wonderful? But I can’t think clearly so am happy to do make some ill-informed token gestures instead of things that actually help. So I am a sanctimonious idiot.

At the moment, public opinion hasn’t had time to catch up and many people are still influenced by AGW panic. But it will. Give it a while, and attitudes will migrate from the first list to the second.

I am all in favour of solar energy in the future in some sunny areas. It has an important role to play, but it isn’t as squeaky clean as it initially looks. It doesn’t need subsidised. When the technology is mature, it will be far cheaper than many other forms of energy, but it isn’t there yet. Since global warming has stopped for 15 years or more now, and it looks more and more like we are heading into a prolonged period of cooling, there is no economic or environmental justification for installing subsidised solar. If it indeed helps the environment overall, it will be far better to invest the same amount later, when we can buy more and help more. There is certainly no cause for panic based subsidies. In the short term they move money from the poor to the greedy, and in the longer term, even those people will lose out. Even the companies installing them can’t seem to survive because of the rapid technology evolution, making their investments in stock worthless and changes in subsidies undermining their business models. It really seems that there are no winners from early investment.

One day, in some places and circumstances, it may be a great idea, but for now, across the UK, rooftop solar power is for greedy, selfish, sanctimonious idiots.

Will Barclays become a Not-For-Profit company?

It has been interesting watching the protest by Barclays shareholders.  It made me think about what is happening here. I wonder if what we are seeing is the start of a new trend, or whether it has been going on for ages but I just never noticed it before. Anyway, a picture paints a thousand words.

Us and Them

Staff in many big companies (mentioning no names, but this is more widespread than it ought to be) will have experienced the feeling that the company thinks of them as a drain on resources. It feels to them that they are continuously made to work harder for less. Temporary staff and contractors may be treated even worse, as disposables even. It is sad because the staff are the ones who do the work, and they ought to be fully rewarded for doing a good job. Government and the tax man are well used to being treated as the enemy, but have big enough guns to fight their corner. Suppliers are well used to having to fight for every penny, but usually can demand a decent return because of their competitive position. Society is a big stakeholder in most companies, as is the environment, but mostly they have to put up with what they are given, with government and regulators supposedly protecting them from the worst abuses.

It has always looked a bit ‘Us and Them’, but the number in the Us camp is falling. Society was the first casualty. Boards realise that they can use globalisation and tax specialists to legally avoid tax, exploiting any holes in the system left by incompetent tax authorities. This problem makes daily news now, with company after company being shamed for hiding away from their tax duties in cracks in the rules. The rest of us have to pay more tax because some of the richest companies avoid paying theirs. Global companies search globally for the biggest cracks and set up there.

Customers, and savers in particular, used to be treated better too. Some banks have started using confusion marketing and other dirty tricks to reduce how much they pay to those who provide the money they need to rent to others. I am a long-standing customer with Barclays and have certainly noticed their policy to do all they can to avoid paying me interest any more. They rely on the fact that most of us won’t care enough to actually bother to move accounts. So at least as far as some big banks are concerned, customers have migrated gradually over decades out of the friends list and are now firmly in the ‘them’ camp.

The shareholder used to be the focus of corporate loyalty. Staff were forced to work harder to generate better shareholder returns. It seems that idea has been trumped in Barclays, but they aren’t the only one. I may only have noticed this new aspect of evolution, but now that I think about it, it is really only the latest extension of a long trend of paying higher and higher executive rewards, which I certainly have noticed. CEOs and directors have been overpaid for quite a while, as I have blogged about previously. A small number are worth what they are paid, the rest could easily be replaced by any number of people just below them with no noticeable loss to the company. But for boards to treat shareholders as competition for rewards seems new to me.

If a big company has previously been owned by a family, the small number of major shareholders are often board members themselves, or at least have good representation, so there is no problem. When a company has been listed for a long time, shareholders can be spread over a large population, so it is hard for them to defend their interests. The web makes it easier for them to organise protests, but it is still very difficult to mobilise enough to actually change anything. A few large pension funds or other investors may have some clout, but they may have a very hands off approach and may not be very interested in intervening. It is then that directors can start to manipulate the company as if it were their own. As directors often have directorships in a number of companies, they can act for their common interests, advising on high rewards for each other, until they end up taking the lion’s share of rewards for themselves and their friends, with shareholders pushed into second place. The ‘Us’ camp has been reduced to the board room. Everyone else is competition.

It isn’t quite so simple though, as a few other parties can demand high shares, even if they are not seen as friends. In big banks, the rewards have to be shared with experts, without whom there would simply be no rewards to share. This includes their own traders, tax consultants and a few others. Boards have to pay the going rates for them. They aren’t friends so much as partners. They have to be treated with respect simply because they can demand it.

If this trend were to continue a while longer, shareholders may end up with less and less. The more distributed the shareholder base becomes, the harder it is for them to mobilise their power, so the less effective power they hold. Boards can ignore them more and more easily. Customers will pay more, savers will be paid less, staff will be paid less and worked harder. Taxes will be minimised, risks passed as much as possible onto society and the taxpayer. The maximised profits and minimised risks will be directed as far as possible to the Us people running the company. It could essentially become a not-for profit organisation, with very highly paid board members and other key partners, low profits, and thus little left for dividends and taxes.

 

Capitalism 2.0

Introduction

I am trying to get a handle on how capitalism could be redesigned to make it appropriate for tomorrow’s world. I’ve argued in recent blogs that it won’t carry on working without change for much longer. It has developed lots of cracks already:

http://timeguide.wordpress.com/2010/10/26/socio-economic-conflict/

http://timeguide.wordpress.com/2011/10/17/polarisation-and-economic-recovery/

http://timeguide.wordpress.com/2012/01/04/we-need-to-rethink-capitalism/

and I have already considered a few areas I think we can improve on:

http://timeguide.wordpress.com/2012/01/27/simplifying-tax-and-welfare/

http://timeguide.wordpress.com/2012/01/25/social-security-and-social-proximity/

http://timeguide.wordpress.com/2011/12/12/do-we-need-banks/

http://timeguide.wordpress.com/2011/06/01/the-future-of-government/

So this blog entry is the next chapter in a long series (it will be reassembled, tweaked and published in my next book, so read it here free while you have the chance).

Now I find myself challenging some of the systems that make people wealthy even though I’ve accepted capitalism as perfectly normal and right all my life. With global change accelerating, in this period of global upheaval, the rise of new powers and decline of old ones, we have an opportunity to rethink it and perhaps make it better, or perhaps countries new to capitalism will make their own way and we will follow. If it is failing, it is time to look for ways to fix it or to change direction.

Some say futurists shouldn’t get involved in politics, but competent futurists see things on the road ahead that non-futurists generally don’t.  If some of those things challenge ideologies, it’s our role to inform those concerned. It doesn’t mean taking sides, but it should involve pointing out things that are going to be opportunities or problems.

The undeserving rich

Magistrates in Britain once had a duty to distinguish between the deserving poor, who were poor through no fault of their own, and the undeserving poor, who were simply idle. The former would get handouts while they needed them, the idle would get a kick in the pants and told to sort themselves out. This has disappeared from our welfare system, but the idea remains commonly held.

Looking at the other end of the spectrum, there are the deserving and undeserving rich. Some people worked hard to get their cash and deserve every penny, some worked less hard in highly overpaid jobs. Some inherited it from parents or ancestors even further back, and maybe they worked hard for it. Some stole it from others by thievery, trickery, or military conquest. Some got it by marrying someone. Some won it, some were compensated. There are lots of ways of getting rich. Money is worth the same whoever gives it to you,  but we have different attitudes to the rich depending on how they got their money. I think that will increase.

I don’t think there is anything wrong with being rich, nor in trying to become so. There are examples of people doing well not just for themselves and their families and friends, but also benefiting their entire host community. Only jealousy could motivate any resentment of their wealth. But the system should be designed in such a way that one person shouldn’t be able to become rich at the cost of other people’s misery. At the moment, in many countries, some people are gaining great wealth effectively by exploiting the poor. Few of us consider that to be desirable. It would be better if they could only become rich by doing well in a system that also protects other people. Let’s look at some of the problems with today’s capitalism.

Corruption

Corruption has to be one of the biggest problems in the world today. It has many facets, and some are so everyday we don’t even think of them as corruption any more.

As well as the blatant corruption, most of us would also include rule bending and loophole-seeking in the corruption category. Squeezing every last millimetre when bending the law may keep it just about legal, but it doesn’t make a behaviour creditable. When we see politicians bending rules and then using their political persuasiveness to argue that it is somehow OK for them, most of us feel a degree of natural revulsion. The same goes for big companies. It may be legal-ish, with a good enough lawyer arguing on your side, to re-label or to move money via a certain route that reduces the taxes required by law, but it doesn’t make it ethical. I’d put that in the corruption category.

Then of course it is possible to break the law and bribe your way out of trouble, or to bribe lawmakers to include a loophole that you want to exploit, or to make a contribution to party funds in order to increase the likelihood of getting a big contract later.

If you want to be a little less conspicuously corrupt, you might spend a bit to indulge in what is called lobbying. That essentially is paying in cash or in kind, via nice dinners or tickets or promised social favours, or just well-paid clever chitchat, to get an MP to help push the law in the general direction you favour. Maybe it isn’t technically corrupt, but it certainly isn’t true to the basic principles of democracy either, so it corrupts democracy.

So there are degrees of corruption, but they all have one thing in common. Using positions of power or buying influence to tilt the playing field in your favour to gain advantage.

Exploitation

Once someone starts bending the rules, it affects other behaviour. If you are happy exploiting the full flexibility of the letter of the law with little regard for others, you are also likely to be liable to engage exploiting other people, in asset stripping, or debt concealing, or how you negotiate and take advantage, or how you make people redundant because a machine is cheaper.

‘Companies aren’t charities, they exist to make money’, ‘business is business’. There are plenty of expressions that the less noble business people use to excuse bad behaviour and pretend it is somehow OK. There are degrees of badness of course. For some companies, some run by people hailed as business heroes, anything goes as long as it is legal or if the process of law can be diverted long enough to make it worthwhile ignoring it. While ‘legal’ depends on the size and quality of your legal team, there is gain to be made by stretching the law. It can even pay to blatantly disobey the law, if you can stretch the court process out enough so that you can use some of the profits gained to pay the fines, and keep the rest.

So corruption isn’t the only problem. Exploitation is its ugly sister.

The price of bad behaviour and loose values

A common problem here is that we don’t assign financial value to honourable behaviour, community or national well-being, honesty, integrity, fairness or staff morale. So these can safely be ignored in the pursuit of profit. Business is justified in this approach perhaps, because we don’t assign value to them. If a company exists to make profit, measured purely financially, those other factors don’t appear on the bottom line, so there is no reason to behave any better. In fact, they cost money, so a ruthless board can make more money by behaving badly. I think that is one thing that should change. If we as a society want businesses to run more ethically, then we have to make the system in such a way that ethical behaviour is rewarded. If we don’t explicitly recognise particular value sets, then businesses are really under no obligation to behave in any particular way.

As it is, I argue that society has value sets that are on something of a random walk.

http://timeguide.wordpress.com/2011/09/26/an-almost-random-walk-for-civilisation/

There is no fixed reference point, and values can flip completely in just a few decades. That is hardly a stable platform.

Stupidity

You might think that the people at the top would be the smartest, but they usually aren’t. I’ve blogged a few times on this. Briefly, we often pay board members far more than is necessary:

http://timeguide.wordpress.com/2010/01/13/boardroom-pay-policy-most-cxos-are-paid-too-much/

and we often put stupid people in charge:

http://timeguide.wordpress.com/2011/05/30/why-do-we-let-stupid-people-make-important-decisions/

Not a good combination, and it ultimately undermines the workings of the whole economy.

So with corruption, exploitation, loose values, no real incentives to behave well, and sheer stupidity all fighting against capitalism as we have it today, it is a miracle it works at all. But it does. If we address these existing problems and start to protect against the coming ones, we will be fine. Better than fine. We’d be flying. But there are some new problems coming too.

One really key problem is automation. It is good to automate, it adds the work of machines to that of humans. But if you get to a point where there is no work available for the humans to take, then that doesn’t work so well, overall effectiveness is reduced because you still have to finance the person you replaced somehow. We are reaching that point in some areas and industries now. Here is where I think we ought to look for the solution – re-evaluating ownership.

Ownership

Ownership is something we really need to look at. I believe it is the key to fair wealth distribution in an age of accelerating machine power. The world economy has changed dramatically over the last two decades, but we still think of ownership in much the same ways. This is where I believe the biggest changes need to be made to make capitalism sustainable. At the moment, of all the things needed to make a business profitable, capital investment is given far too great a share of control and of the output. There are many other hugely important inputs that are not so much hidden as simply ignored. We have become so used to thinking of the  financial investors owning the company that we don’t even see the others. So let me remind you of some of the things that the investors currently get given to them for free. I’ll start with the blindingly obvious and go on from there.

The right to do business and to keep the profits.

The law, protecting the company from having all its stuff stolen, its staff murdered, or its buildings burned down.

The full legal framework, all the rules and regulations that allow the business to trade on known terms,  and to agree contracts with the full backing of the law.

Ditto the political framework.

Workforce education – having staff that can read and write, and some with far higher level of education

Infrastructure – all the roads, electricity, water, gas and so on. Companies pay for ongoing costs, maintenance and ongoing development, but pay nothing towards the accumulated historical establishment of these.

Accumulated public intellectual property. It isn’t just access to infrastructure they get free, it is the invention of electricity, of plumbing, of water purification and sewage disposal techniques, and so on.

Human knowledge, science, technology knowhow. We all have access to these, but that doesn’t necessarily mean that there should be an automatic right for anyone to use them without due compensation to the rest of the community. We assume that as a right, but it wasn’t really ever explicitly agreed, ever. It has just evolved.  If someone invents something and patents it, we assume they have every right to profit from it. If they use an invention in common ownership, such as the wheel, why should they not pay the rest of society for the right to use it for personal commercial gain?

Think of it another way. If a village has a common, everyone has the right to let their animals feed off the grass. That works fine when there are only a few animals, but if everyone has a large herd, it soon breaks down. The common might be absorbed under council control, and rented out, returning due value to the community. So it could be for all other commonly held knowledge. And there is a lot of it. Thousands of years worth.

Culture is also taken for granted, including hand-me-down business culture, all the stuff that makes up an MBA, or even everyday knowledge about how businesses operate or are structured.

And language, and social structure that ensures that all the other supporting roles in society are somehow provided.

so.. should business pay for it, as it pays for capital and labour?

This all adds up to an enormous wealth of investment by thousands of generations of people. It is shared wealth but wealth nonetheless. When a company springs up now, it can access it all, take it all for granted. But that doesn’t mean it is without value. It is immensely valuable. So perhaps it is not unreasonable to equate it in importance to the provision of effort or finance.

Reward is essential, but fair’s fair

A business will not happen unless someone starts it, works hard at setting it up, getting it going, with all the stress and sacrifice that often needs. They need to be assured of a decent reward or they won’t bother. The same goes for capital providers, if they are needed. They also want something to show for the risk they have taken. That should always be retained in our thinking when we redesign. Without incentive, it won’t work. But it is also right to look at the parallel investment by the community in terms of all the things listed above. That should also be rewarded.

This already happens to some degree when companies and shareholders pay their taxes. They contribute to the ongoing functioning of the society and to the development to be handed on to the next generation. just like individuals. But they don’t explicitly pay any purchase price or rent for the social wealth they assumed when they started.

The amount that should be paid is endlessly debatable. But it does offer a way of tweaking capitalism that ensures that businesses develop and use new technology in such a way that it can be sustained. We want progress, but if all jobs were to be replaced by a smart machines, then we may have an amazingly efficient system, but if no-one has a job, and all are on low-level welfare, then they can’t afford to buy any of the products so it would seize up. Conventional taxes might not be enough to sustain it all. On the other hand, linking the level of payments from a company to the social capital they use when they deploy a new machine means that if they make lots of workers redundant by automation, and there are no new jobs for them to go to, then a greater payment would be incurred. While business overall is socially sustainable and ensures reasonably full employment, then the payments can remain zero or very low. But we have the makings of an evolution path that allows for fair balancing of the needs of society and business.

The assignation of due financial value to social wealth and accumulated knowledge ensures that there is a mechanism where money is returned to the society and not just the mill owner. With payment of the ‘social dividend’, government and ultimately people can then buy the goods. The owner should still be able to get wealthy, but the system is still able to work because the money can go around. But it also allows linking the payments from a business to the social sustainability of its employment practices. If a machine exists that can automate a job, it has only done so by the accumulated works of the society, so society should have some say in the use of that machine and a share of the rewards coming from it.

So we need to design the system, the rules and conditions, so that people are aware when they set up a business of the costs they will incur, under what conditions. and that if they change their employment via automation, then the payments for the assumed knowledge in the machines and systems will compensate for the social damage that is done by the redundancy if no replacement job exists. The design will be difficult, but at least there is a potential basis for the rules and equations.While, we’re looking at automation, we can use the same logic to address the other ethical issues surrounding business, such as corruption and exploitation, and factor those into our rules and penalties too.

There remains the question of distribution of the wealth from this social dividend. It could be divided equally of course, but some political parties would have their priority lists. I make no comment on what is right or wrong here.

Summarising, there are many problems holding business and society back today. Addressing them will make us all better off. Some of them can be addressed by a similar mechanism to that which I recommend for balancing automation against social interests. Automation is good, wealth is good, getting rich is good. I am not suggesting for a second that we should replace capitalism. I am just suggesting that it is now in need of a system update, some maintenance work. When we’ve done all that, we will have a capitalist system that rewards effort and wealth provision just as today, but also factors in the wider interests - and investment – of the whole community. We’ll all benefit, and it will be sustainable.

It’s time to invest in shale gas

There is much ado about shale gas at the moment. It is coming nicely into fashion. It is cheap, produces low-carbon dioxide compared to coal, is cleaner, and offers energy independence and security compared to current gas and oil suppliers. It is far cheaper and greener than current wind energy solutions such as turbine farms.

After many years of talk of global warming, it looks very like that has flattened off. With convincing new studies coming through every week, the warming we saw in the late 20th century looks more and more to me to have been mainly caused by natural cycles, with only a fairly small push by increasing CO2. Temperature has levelled off, with no increase in temperature for 15 years, strong evidence that  CO2 increases were not a primary cause, since CO2 levels have carried on increasing with no associated rise in temperature. Many astrophysicists and other scientists, (just about everyone except climate scientists whose jobs depended on warming and greens who were on the climate change bandwagon to push their own sociopolitical agendas), are now suggesting that we are heading into a long period of colder climate. I am happy now to accept that the alarmism was much overdone and I am no longer concerned about warming. I am far more concerned about the economic damage being done because of the mis-informed panic, especially in the UK and the rest of Europe. The CO2 problem hasn’t gone away, it is universally agreed that it does act as a greenhouse gas, but it has certainly been revised downwards as a problem, with evidence that it isn’t as strong a forcing agent as claimed, and we have several more decades at least to worry about solving it. As we move to better technologies anyway, it will solve itself.

As the climate cools, we will need more energy for heating. The cooling is expected by some scientists to last for decades, so this won’t be a short-lived market.

There are several up and coming new technologies that will offer us abundant energy. I am a big believer that photovoltaic solar will eventually come up trumps, but it needs a while yet. Nuclear power based on thorium is another big contender, offering nuclear without most of the problems. But it isn’t ready yet either. Wind energy is ludicrously expensive, requires scarce materials and needs backups anyway, either that or batteries also using scarce materials. Shale gas however is already coming on the market, the extraction technologies are charging ahead, supplies are being discovered, and once we have it out of the ground, it needs only ordinary gas power stations. Shale gas will therefore be an accelerating trend. Calls to develop it in the UK will get progressively louder, and companies involved in extracting it will profit greatly. While there are still many who remain convinced that warming is on the cards, the share prices are probably undervalued, so it is a good time to get in to gas extraction companies. Invest before the worst of the rush.

We need to rethink capitalism

Sometimes major trends can conceal less conspicuous ones, but sometimes these less conspicuous trends can build over time into enormous effects. I think that is the case now with automation versus economic turbulence. Global financial turmoil and re-levelling due to development are largely concealing another major trend towards automation. If we look at the consequences of developing technology, we can see an increasingly automated world as we head towards the far future. Most mechanical or mental jobs can be automated eventually, leaving those that rely on human emotional and interpersonal skills, but even these could eventually be largely automated. That would obviously have a huge effect on the nature of our economies.

Sometimes taking an extreme example is the best way to illustrate a point. In an ultra-automated pure capitalist world, a single person (or indeed even an AI) could set up a company and employ only AI or robotic staff and keep all the proceeds. Wealth would concentrate more and more with the people starting with it. There may not be any other employment, given that almost anything could be automated, so no-one else except other company owners would have any income source. If no-one else could afford to buy the products, their companies would die, and the economy couldn’t survive. This simplistic example nevertheless illustrates that pure capitalism isn’t sustainable in a truly high technology world. There would need to be some tweaking to distribute wealth effectively and make money go round a bit. Much more than current welfare state takes care of.

Some argue that we are already well on the way. Web developments that highly automate retailing have displaced many jobs and the same is true across many industries. There is no certainty that new technologies will create enough new jobs to replace the ones they displace.

We know from abundant evidence that communism doesn’t work. If capitalism won’t work much longer either, then we have some thinking to do. I believe that the free market is often the best way to accomplish things, but it doesn’t always deliver, and perhaps it can’t this time, and perhaps we shouldn’t just wait until entire industries have been eradicated before we start to ask which direction it should go.

So here is the key issue: Apart from short-term IP such as patents and copyright, the whole of humanity collectively owns the vast intellectual wealth accumulated via the efforts of thousands of generations.Yet traditionally, when a company is set up, no payment is made for the use of this intellectual property; it is assumed to be free. The effort and creativity of the founders, and the finance they provide, are assumed to be the full value, so they get control of the wealth generated (apart from taxes). 

Automated companies make use of this vast accumulated intellectual wealth when they deploy their automated systems. Why should ownership of a relatively small amount of capital and effort give the right to harness huge amounts of publicly owned intellectual wealth without any payment to the other owners, the rest of the people? Why should the rest of humanity not share in the use of their intellectual property to generate reward? I think this is where the rethinking should be focused. I see nothing wrong with people benefiting from their efforts, making profit, owning stuff, controlling it. But it surely is right that they should make proper payment to everyone else or jointly share profits according to the value of the shared intellectual property they use. With properly shared wealth generation, everyone would have income, and the system might work fine.

There are many ways this could be organised, and I haven’t designed anything worth writing about yet. Raising the issue is enough for this blog.

Do we need banks?

Every company should think often about the threats and opportunities facing it over the next few years. It is easy to be too narrowly focused, considering only how to protect or gain market share, so look sometimes at the big picture. What if changes mean your whole industry is in danger? When you next think through the future of your industry, one of the best questions you can ask is:

If it didn’t already exist, would we need to invent it?

If the answer is no, you shouldn’t be worrying about your market share, but about your escape plan.

Let’s address the question at banking, topical as The City is threatened by proposed changes in EU regulation and our government is rightfully fighting to protect the  income coming into the UK. Nevertheless, I think that if we didn’t already have the banks, we would have no need to invent them. Do we need banks? No.

Banking earns a lot of money, but ultimately it comes from other companies and individuals (though many are overseas). It is a drain on the rest of the economy, skimming off generous profits from everything it touches. Nice for bankers, but bad for everyone else. If we can find a way of providing banking services  without the high costs, most of us would be better off.

In fact it isn’t just banking but financial services generally that are affected. Banking, insurance, pensions and so on are all essential to today’s everyday life, but that doesn’t mean their current implementations are the best way to provide them. Financial services don’t directly add to overall global wealth, but they do facilitate many things that do.  They are valuable, even essential, but they could now be provided by alternative systems at much lower cost, so we could still get the services, but keep our money. With lower operating costs, the rest of the economy would benefit.

The UK is in a position that it benefits greatly from an industry that isn’t needed, but without which the world as a whole would be better off. The UK’s most cost effective (though selfish) strategy would be to delay its downfall and milk it while it lasts, while still encouraging its replacement within the UK.

All of the services that banks and other financial services provide today could be provided far more cheaply via social and business networks, transactions executed securely in the cloud. This ‘could’ is heading rapidly towards reality already with development of online payments, social networking sites, smartphones and expectation of secure connections.

With easy transfer of money or other financial tokens directly between devices, or across the cloud using Paypal or its descendants and competitors, we are on a good position now. Social networking allows communities to build for self banking or self insurance. It doesn’t take very much to add on the required security and integrate the electronic payments and databases. Secure social networks could then bypass banks for secure storage of money, record keeping, transactions, savings and investments. Linking people direct to others who can lend them cash is one thing, but someone needs to verify their trustworthiness. We should expect that such services will often be provided by the very fabric of the social network. If someone is a friend or a trusted friend of a friend, then you may be willing to take a risk on them. If you don’t know them, then this is a perfectly valid financial service that can be offered by freelance risk assessors and loss adjusters.

So we should watch out for social networks that are establishing networks that are based on trust and know identity. I wouldn’t consider lending to someone with an anonymous user ID. I need to know who they really are and how to get hold of them should anything go wrong. I suspect that in this role, derivatives of Google+ will fare far better than the likes of Facebook.

It won’t be easy to bypass the banks, but companies or web communities will find it easier and easier as the technology gradually develops over the next few years. Banks are in a good position for now, and there is no reason to leave them just for the sake of it. If they offer good service at reasonable price, some at least will probably stay in business. But complacency is never wise. They now do face real existential threats and should be preparing for new competition coming from outside their own community.

Whether we should protect banks or encourage companies to develop ways to bypass them is an interesting question. Competition doesn’t always deliver better services and no solution is ever without its problems. But although they may do a great job at least in some areas some of the time, banks do syphon off a great deal from the economy, and it is possible that we might be able to do something better with that cash. Personally, I really am not sure where the balance lies, but the possibilities are certainly intriguing.

Climategate 2.0

It is depressing watching what is happening in climate change science and even more the media and government responses to anything that develops. Any pretence that it is about science is long gone now. It is now a mess of politics, pseudo-science and pseudo-religious beliefs, with genuine scientists on all sides finding their voices drowned out by the roar of the crowd. The sad thing is that there is a lot of good science being done on both sides of the climate change debate, but it has little impact because many people refuse to hear the truth in climate science unless it aligns with their prior allegiance.

Everyone agrees that climate is changing, but not about why. Everyone also agrees that CO2 is one of the contributors, but not on how great its contribution is. What is known is that warming has stopped for 13 years now, and even some warmists are now accepting that we may see a few decades of cooling now because they have finally accepted that climate change is dominated by natural cycles, though coverage of such matters depends on which paper you read. The same facts can be ignored, glossed over, or even turned upside down depending on the prejudice of the author.

The new Climategate release is a perfect example. (A searchable list of what has been released this time is at http://foia2011.org/) Some papers have focused on what the emails reveal about the determination to drive the warmist agenda of some researchers, and their tendencies to hide or ignore any data that goes against it. Others have ignored the content because it goes against what they want to hear, and have instead focused on how awful it is that they were stolen and how much some climate scientists have to put up with. You buy your paper and you choose which bits of the truth you get.

The field is highly politicised and increasingly polarised along party lines now, with left wingers mostly claiming belief that mainly humans are causing climate change and right wingers mostly claiming that it is mostly natural changes with only a small human component. It has been hijacked as a tool by those who want to redistribute wealth via carbon levies, or to obtain huge subsidies for people investing in wind and solar energy, even as carbon dioxide is frequently shown by new studies to be less important in climate change than was once believed.

In the face of changed science and greatly lowered estimates of likely warming, if any, it is still more important for some politicians and newspapers to save face than to save taxpayers trillions of dollars wasted investment. The emails show that researchers have been encouraged to beef up the dangers, and some had been in support of their own agendas anyway. A lot of evidence has been destroyed, and a lot of papers produced by ignoring data that runs against the predetermined message. More emails have been deliberately deleted to stop the full truth from becoming known. It is quite sickening, and all the more so because some papers and TV companies are still trying to gloss over the filth, corruption and lies.

The result isn’t just that we will have our countryside ruined unnecessarily by wind farms. As a direct result of all the money thrown down the drain on wasteful ‘green’ energy schemes, many people will die needlessly because of fuel poverty, many companies will go out of business, and many economies will suffer, with reduction in quality of life for billions. But the environment won’t benefit, because environmental polices are very poorly thought out. Peat bogs and forest will still be cleared, corruption will still increase, money will migrate towards the greedy and the corrupt, and people still murdered to make land available for biofuels or solar farms.

It is morally wrong. It is overdue for us to have a new start on environmental policy, looking at the science and throwing out that which has been tarnished and corrupted. We will otherwise cripple economies, ruin lives and kill many people, and the environment will be far worse off than if we pursued good policies based on real science.

Apple’s Future

So Steve has left. Good luck to him, and I wish him a very happy retirement. I have owned an Apple every day since 1981 when I started work. I even used one until about 2 years ago when I finally decided that PCs had reached a usability level I could tolerate and the frustrations of using my Mac with Microsoft’s software finally got too much. It lives now as a guest room machine.

Apple has given us much, and in the last decade has pushed technology towards a point where all IT engineers knew it was going, but other manufacturers resisted until Apple forced them to play catch-up. It isn’t ideas Apple do, it is making them work adequately and prettily. They make technology meet us half way instead of forcing us to read manuals.

Concept-wise, there really is nothing new about the ipad. The staff on Star Trek walked round with such things decades earlier and even outside scifi, every half decent IT engineer since 1990 expected wafer thin, flexible, coffee table tablets to be one of the steps towards the eventual future (of full direct brain link, via the intermediate stage of thought recognition and direct retinal projection) – and even the ipad falls short of that still. It is still too fat, heavy, power hungry, delicate and slippery, but it is heading the right way. The iphone did much the same with mobile phones, even that copying much the same that approach that Magic Cap offered in the early 1990s. We all knew phones would go that way, it was only ever a matter of time, but Apple were the one to break down the door. What Apple have done is to make these ideas work and work well. They made them pretty and easy to use, getting all the stuff out of the way that you don’t really need. So, three cheers to Apple, and to Steve Jobs who offered the guidance. I don’t envy the chap having to fill his shoes.

But the last week or two have shown that Apple is showing interest in The Dark Side. Getting the new Samsung pad banned in Germany is not fair play. The ipad is pretty, but I repeat, it wasn’t a new idea. Apple did a lot for us, but they didn’t come up with the idea of an intuitive lightweight hand-held general purpose pad. Indeed, the future path towards the full direct brain link is already mapped out very well, and there will be precious few new ideas along the way to getting there other than clever ways of implementing stuff.

In patent speak, there is considerable prior art for the ipad, even if Roddenberry and his associates hadn’t come up with it for Star Trek. And in the context of everything else going on in the IT world, the pad design and technology needs would by now be blindingly obvious to anyone working in IT. Monopolies of the obvious should not be protected by courts. If Apple accomplish a particularly brilliant pad by using some clever and genuinely novel technology inside the box, then they should be able to protect that, but trying to get other pads banned because they also look like everyone’s view of what a pad should look like is just holding technology back by making unjust claims of ownership on ideas held by everyone.

If Apple use legal muscle to try to hold back technology or design that is obvious to anyone with a three figure IQ, they will certainly lose my admiration.

Jobs has gone. He did a good job but has left just as his company arrived at a fork in the road. Apple has to choose which path to take under its new leader. Either it can continue to smash down the doors and lead the industry through, and keep our respect and admiration, or it can try to use courts to close the doors behind it. If it does that, it will quickly lose the value Jobs built up. Hover your mouse pointer over the Sell button for the next few days. They will be critical.