Tag Archives: Industry

The scam of scams


Andrew Haldane has argued that:

rapid credit expansion, often through the development of poorly understood financial instruments

has been a scam on investors. Investors were hoodwinked by by the faux certainties of the mathematical chimera which backed up the financial products which they were sold. But the scam goes deeper than that, we are emerging from a forty year financial bubble.

Financial risk has been subsidised by taxpayers, where the interest on business loans becomes tax deductible then the costs of  accessing finance is depressed. The risk/gain ratio is compromised, and ever greater leveraging is incentivised.

Had this been used for the generation of wealth, invested in the future, then there would have been some argument for these subsidies. Instead they led to ever greater inflation within the equities markets, supported by the tax payer.

But worse,  returns on investment were benchmarked against financial products, where obfuscation and subsidy led to expected returns of 7% per annum. All investments were deemed to be inefficient where they underperformed against the financial product standard.

The consolidation within the newspaper industry is a classic example of how this destroyed real value in the actual economy. Access to cheap cash, enormous leverage has, across the world, seen small local newspapers eaten alive by conglomerates funded by high powered finance.

These investments had to produce returns at 7%.  How do you develop such returns in a labour intensive industry?

Sell more papers (in an already competitive market)?        Too difficult.

Increase prices?      Not at 7% per annum.

Sell more advertising?     Not sufficient.

Cull staff, and reduce quality of the publications?      BINGO!!!


Well, it is easier than the alternatives. And it has destroyed the media. We live in an information environment where journalists are expected to produce 5, 6, or 7 articles every day. A new story, every hour or two, every day of the week, every week of the year, from every journalist. No journalist can produce a valuable product under such restraints. Stories have become commoditised.

Journalists rewrite, or reproduce, other people’s stories, other people’s press releases; but that isn’t journalist, it is just lazy sub-editing.

Journalism suffers. Society suffers. Democracy suffers. We all suffer. And suffer because that 7% had to be squeezed out of a valuable industry.

The expansion of growth through finance has been a scam, but the diversion of investment, the devaluation of industry, the inefficiencies of the financial sector, the destruction of wealth has been a terrible cost to bear, a generation of opportunity tragically lost.


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Manufacturing and Capitalism in Ireland

Manufacturing in Ireland has been characterized by three threads of development.

There are:

The State/Semi-State Sector.

The Indigenous Manufacturers

The Foreign Direct Investment Manufacturers

From the formation of the state Ireland has suffered from an industrial deficit. This situation has often been exacerbated by transformations in the global economy and inappropriate policy making at home.

Our first experiments in industrial development, 1927, were focused on developing our predominantly rural/agrarian economy. The Great depression, and the perceived failure in globalization, strengthened the position of those who called for self-sufficient nation.

A self-sufficient nation had to first feed its people, and then its industry; these were the foci of our State Industries. The state re-created the infrastructure needed to support the food and drink sector that had been destroyed during the Civil War.

We invested in the industries that supported this sector. But trade had collapsed with the great depression.

The Second World War further compounded this regression in trade. As a result, we, like the Easter Islanders, turned our backs upon the sea. The economic isolation we suffered as a result of our protectionist stance continued into the fifties.

Without trade, we lacked the capital to invest in the high-grade imports would allow us to produce quality exports. Our manufacturers produced Irish goods, for Irish people.

T.K. Whitaker saw the solution to our industrial deficit as the importation of capital. With Foreign Direct Investment we could leapfrog the time required to develop an indigenous industrial base. Barriers to trade were brought down and continued as we entered the European Economic Community.

This allowed us to market our goods abroad, but true to the Ricardian Model of trade, our exports expanded in two dimensions:

Foreign owned capital-intensive manufacturing

Locally owned, food and drink exports.

Local manufacturing had to compete with better foreign imports that had recourse to economies of scale far beyond Irish Industry.

With the Common Agricultural Policy supporting prices for our food production the Irish economy became one where we balanced our manufacturing imports against our exported butter.

With a surplus of labour and a deficit of local Capital we lacked the incentives and the resources to invest in our indigenous tradable sector.

Foreign Direct Investment could buy in the fruits of innovation from abroad this, combined with the agreeable tax environment made, us an efficient location for foreign capital – which would ultimately be repatriated.

For decades Irish Research and Development has been under capitalized, even the foreign industries which locate here fail to invest in Research and Development to the same extent that they do elsewhere.

As the ESRI has noted (Recovery Scenarios for Ireland, 2010) perhaps the greatest cost, associated with the recent collapse will be the opportunity cost of our poor use of capital.

The Irish people finally, in the 1990’s and the 2000’s, had access to capital.

But instead of developing a generation of capitalists who could invest wealth to create wealth, we forsook manufacturing and trade for the illusory solidity of bricks and mortar.

We Irish find ourselves again in an era of restricted capital; the lesson we must learn is how to differentiate between speculation and wealth creation.

Ours continues to be an immature economy.

We have been making the mistakes other countries learned two and three hundred years ago. We have to learn that what we borrow today, we steal from tomorrow.

If the fruit of our borrowing does not compensate for the losses we will experience tomorrow, then it is not an investment it is simply consumption.

Manufacturing requires us to be entrepreneurial capitalists not consuming speculators.

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