Intellectual Property and Corporate Power

One of the key components of my 'dissident' approach to economic science [or political economy] is my assertion that all ownable things - assets - come in four categories:

1. Keyn. anything in the category that J M Keynes described as chartalist in his definitive Treatise on Money. These are all the immaterial creations of the human mind that can be claimed as the possession of the person who invented them, or of the person who was able to capture such command over them as would be recognised in a court of law. Thus people and corporate entities [governments, local government, institutions, companies etc] come to be the 'owners' of control of the land, and owners of shares, stocks, bank deposits, patents, copyrights, brand names, trademarks etc. Most defined keyns can be sold . The most massively increasing category of keyns in the contemporary economy are items of intellectual property [or 'intellectual keyns' shown as ik in my text].

2. Quon. A material asset whose price includes both the costs of assembling the material thing and a charge for the intellectual property that the owner of the object is able to enjoy with the material thing. The owner of the ik sells the user a right to enjoy the benefits of their brand, and the intellectual property that inheres in the object.

3. Jev. A material asset whose price when resold is determined by its perceived rarity and aesthetic quality, rather than by its cost of production or its contemporary usefulness in any material sense to the owner. Thus this category covers antiques, works or art etc; which can be bought and sold and which - over time - often appreciate in retain price, so they can be assets of increasing inventory 'value'.

4. Marcom. These are commodities which are sold at prices that equal, or are close to, the cost of production and delivery [allowing for a reasonable return on capital to the producers and distributors], with no premium for any ik such as occurs in the price of a quon.

There are huge implications that arise from this differentiation of assets. I refer to two today.

A. Firms that are licensed and regulated as 'banks' have huge privileges. In particular, because they manage keynic money for natural and corporate persons they get special guarantees from the state. The most extreme version of this protection was the 'rescue' of the banking system in 2007-9, whose effects are still affecting everybody in the advanced economies. Despite the huge direct and indirect cost of 'saving' the banks, governments and their agents, the central banks [e.g. the Bank of England] have done nothing that definitively separates the socially-necessary and economically-indispensable banking functions of the huge complex firms that include banking divisions from the parts of the firm that trade in stocks and shares, bonds, investment advice, creating and trading in derivatives and futures and other speculative keyns. Thus the entire western world remains at risk from rogue trading or sheer incompetence in these pampered businesses. This remains one of the biggest risks to civilisation; even allowing for jihadism, rogue states, cybercrime, plague and famine.

B. Hundreds of thousands of people and firms own ik that has become increasingly desired by more and more people over the past twenty years. Computer games, films and records and all accessed from cyberspace, and social media have become massive foci of consumption; and although the ownership of such assets is widely diffused, a small number of points of access are used by the vast preponderance of users. Thus Google, Alibaba, Facebook and a few other leading points in the cyberworld are absolutely dominant. The creators of these platforms have established their intellectual property with immense rigour, and are constantly extending their [patented] means of checking on their customers so that they can increasingly tailor 'special offers' that will tempt them to spend their money and their time at the profitable direction of the ik owner. This gives more power over the consumers and their world to a small number of firms than has ever been held by firms that control material commodities. Economic models have not even begun to cope with it: the Econocracy have been content to monopolise their fantasies while Silicon Valley has established a much firmer hegemony than the professors can comprehend. Politicians are increasingly exercised by the new sort of power that is held by the dominant holders of the ik that shapes hundreds of millions of consumer's lifestyle; and don't know what to do about it. They can't even work out how to tax the massive cash flow that they receive.

My basic taxonomy of economic assets forms a basis on which public control, exercised by the political system of the state, can properly be established over the cybernauts within a sensible structure of political economy. One small step for man?

Economic Blindness

The start of 2013 has brought more mild, cloudy and [here in the Peak District] drizzly weather. Just a dawn on which to take the BBC's TODAY Programme with the morning tea.
One of several depressing items was a discussion by Economists about the phenomenon that is thrown up by British economic statistics. Employment is at its highest level in recent decades: but perceived productivity has declined and the national product is not increasing significantly [indeed, it may just have 'flatlined' over the whole of 2012].
Wages are increasing overall at less than the government's indexed figure for 'inflation', and a high percentage of the workforce are attending their workplaces for less than the 35 hours a week that sensibly can be classified as full-time employment. Some firms have put reliable, trained employees on 'short time' to keep them on-side in case business improves; but the majority of part-timers are engaged on that basis. Many of the part-timers receive only the statutory minimum wage per hour; and for the majority there is no pension provision. The new catch-all pensions legislation will draw many such people into basic schemes: which implies that a further deduction will be taken from their wages and put into a pot with a promised yield in retirement that will be derisorily small. The loss of even a couple of percent of an exiguous wage will have a depressing effect on overall 'cansumer demand' in the economy, when multiplied by millions of affected individuals; but the sums gathered for investment by the pension providers will not be sufficient to create investments that will absorb significant numbers of the unemployed into new jobs and thus increase demand through their enhanced spending.
Wage-earners are still buying imports on an heroic scale: everything from East African fruit, veg and flowers to web using technology from the Far East.
Any increase in the real wages of empoyed people, or in the number of employed people, would most likely increase the deficit on the balance of payments: so in a seriously depressing sense the government is contributing to its target of deficit reduction by keeping a pretty tight cap on incomes.

This is the context in which the Economists this morning discussed these recent economic data. One of them had recently publiched a Paper with a mind-blowingly complex title, replete with pseudo-scientific terminology adding up to zero usefulness. They spoke of productivity as if there was no qualitative difference between the various categories of output: as if it did not matter what was the level of notional value-added by different firms' plant. This is in line with the textbook assumption that all output is of widgets: it is almost impossible for non-Economists to understand the primitivism of this lack of thinking.

To say that "the productivity of the British economy is declining" is to say that products and services are sold for a declining number of money-units per unit of output. This means that prices of goods made in British factories are falling. This does not necessarily mean that fewer units of output are being sold; it can equally mean that goods are being sold for lower 'factory gate prices'. How could such a thing occur?
A] It could mean that global competition is forcing factory owners to lower the prices at which they sell their branded goods Or
B] it could mean that firms have been bought by foreign owners who buy the output as being part-processed [though it is physically complete] and then ship it to the export markets where it will be sold, and the magic transformation by which a pile of coats or a cartoon feature film becomes a branded commodity [in the terms of my own analysis, a quon] takes place outside the UK - it may even notionally be reinported to the UK as a quon - so that the final, most significant 'addition of value' is ascribed not to the UK factory but to the corporate owner's success in transfer pricing the product offshore. Or
C] it could mean that rising wages and other industrial costs in China are making it viable to start or restart or increase the output of basic industrial products in the UK; which only have modest price tags such that an increasing proportion of British factory output is of modestly  priced goods [what I describe as marcoms].

All those three possibilities point to a sharp decline in the profitability of British industry, and in the taxes that firms can pay to the state, and the level of wages they can pay to employees: all of which presage declining investment, declining public and social services, and diminishing real wages.

The policy options that are being presented to the government, and to the opposition, and to the Bank of England display the economic ignorance of Economists.

Hard times are ahead of us: and mitigation will only become feasible when the proven principles of Political Economy are reinstated as the basis of policy.

Back to Basics: Political Economy 2: Maribou Weed

The Maribou weed was introduced to Cuba for use as a hedgerow plant: to mark the boundaries of fields and gardens. The plant thrived excessively, it has spread wildly over the landscape. It is a very hardy growth with woody stems: and it has proved very hard to eradicate. The story has been unrelievedly depressing for several decades.

However, very recently, researchers from the University of Strathclyde [in Glasgow] have found that when it has been burned to produce charcoal the wood forms an amazing form of carbon. On early examination it appears to have the capacity to store electricity more effectively than Lithium batteries - at a fraction of the cost. The discovery will take a considerable time to verify, and applications can be developed only step-by-step; but it is so far an extremely promising concept. A huge range of applications, not least more practicable electrically-powered vehicles, can quickly be envisaged for new cheap super-batteries and by exploiting the carbon's high conductivity. .

Such an example shows that no possibility should be ignored in looking for uses for the most unattractive forms of waste and for the most damaging weeds [a weed having been described as any plant that is in the wrong place]. Innovative experimentalists must be allowed - and, where feasible, funded - to pursue hunches. For many centuries British innovators [often solitary part-time inventors] have produced new products and concepts in profusion: yet nowadays only a very small proportion of the new ideas are funded in a way that enables the product to be sold to the world as a British-made quon [defined in my book, PPE, accessible via the link] that purchasing managers all over the world will need to buy. Many new concepts are stillborn because the inventor lacks capital to implement them. In other cases inventors and their families and friends invest in the development of the product but do not generate enough revenue and publicity to fund viable growth so that their investment is lost, the idea is shelved and the family and friends are worse off than they were when the business was started. Not infrequently, bold risk-takers lose the homes that they have pledged against business loans. Almost equally dispiriting from the perspective of the national economy are instances where a new concept attracts sufficient publicity to interest overseas investors who buy the intellectual property vested in the concept: which takes the potential profits into another state's balance of payments. Athough the inventor  who sells her patents may be left with a pot of money to spend within their home economy the major part of the benefit from the invention is lost; and demand may develop so that importing the product becomes another strain on the national blance of payments.

The political class frequently say that they have got the message: that investment in new products must be encouraged. Modest tax concessions are offered for investors in start-up businesses. But the prospect of some future tax relief might not be enough to encourage an innovator to risk his family's comfort by depositing his house deeds with a capricious bank in order to secure a short-term business loan. Attempts by politicians to force banks to lend money to small and start-up enterprises invariably fail, because the banks' responsibility to avoid excessively risky lending is paramount in the perception of the bank's owners and of its regulators. This inhibition applies especially in the current circumstances when all banks have been ordered to build up secure reserves to meet  tightening regulatory standards. In addition to that general limitation on banks' lending there is the structural factor that banks no longer employ authoritative local managers who could make lending decisions on the basis of the family history, career record and reputation of customers requesting business loans. The majority of lending to small and medium-sized businesses in Britain in recent years has been to roll forward existing loans to firms that have shown themselves reliable in servicing their debt, often from a lacklustre but solid performance in distributing imported brands or in providing entertainment, catering and other leisure services.

The discoveries about Maribou weed by the Strathclyde team have relatively good chances of attracting investment, compared to inventions or discoveries by English individuals, for a clutch of special reasons. The University in question is a mature and respected research institution with special strength in applied sciences and engineering: and as such it is geared up for providing 'seed corn' funding for promising innovations. Universities are also sufficiently media-savvy  to publicise discoveries, after the crucial itellectual property has been secured. Secondly the Scottish government is willing to use its powers to provide extra resources for Scottish innovation, over and above those that are available for regional development throughout the UK. The essential task facing the university is to create some product or process that can quickly become the subject of a patent application. The wood is found in Cuba, and other countries but not the UK. Therefore the way a British academic team can turn the discovery into a marketable asset is by creating intellectual property in the means of converting the raw material into desirable products that can be protected from competitors.Thus there is going to be a period of stressful competition between scientific teams trying to capture the potentially huge value of the patents that may be capable of development.

What has this tale to do with the basic facts of Political Economy?

As has been stated often in this series of blogs, one of the two Laws of Political Economy is the Iron Law of  Wages: the proposition that a nation cannot distribute for consumption more than the net output of the economy, after allowing appropriately for capital investment and the legitimate costs of government. Imports must be balanced by exports. If the country owes debts accrued in past years, these must be repaid and the cost of doing that is automatically deducted from the amount of wealth that is available for distribution to the population in the years while repayment is going on. If the country cuts investment in order to maintain or increase consumption that inescapably results  in the national product being lower than it should have been in subsequent years.

Higher technology products and  highly fashionable brands earn the most income to the companies that supply them, compared to the material costs incurred in producing the goods. So a country that exports highly priced goods and services, and imports only cheap commodities and products, is most likely to be able to repay debts [or to avoid becoming indebted] to foreigners. The potential earning power of technologies exploiting maribou carbon is immense, and could give a significant fillip to the balance of payments of a country that was able to enforce the exclusivity of its ownership of the relevant ik or intellectual property. A constant flow of highly valued inventions was the basis on which Britain gained global economic leadership between 1780 and 1850: since 1870 there has been a pattern of relative decline that has now reached its nadir. 1870 was the marker year for the replacement of Political Economy by Economics, which marked the beginning of the obfuscation of the basic truths that formed the core of the older [and sounder] subject. The truth must now be confronted, as the central concept on which economic recovery can be based; and opportunities such as may be offered by maribou carbon must be optimised. By such means, real economic growth can be consolidated.