Monday, 26 August 2013

Information Pollution in Financial Capitalism

Reading John Lanchester's book 'Whoops' about the international financial crisis whilst on holiday (its a laugh out loud read, not many books about financial capitalism you can say that about). He writes about how banksters invented derivatives to outwit the financial regulators and create the impression of low risk for loans based on junk mortgages which they sold to all and sundry.

A brilliant metaphor he makes,  comparing the regulators to lifeguards who weren't asleep but trying to cope with swimmers who were pouring blood into the water because they thought a few sharks would make it more exciting!

All the Collatoralised Debt Obligations and Credit Default Swaps and even CDOs 'squared' (read the book for an explanation and to realise how we were all conned by these legalised crooks) created such a fog and confusion,  the whole banking system blocked up.  Money ceased to be reliable.

It made me think, In the 19th century the same process happened with industrial capitalism. Mills and factories created such pollution that they could not operate.  Water was too dirty to be used to wash wool in Bradford for example.  The already rich industrialists had to bang factory owners' heads together to impose the first environmental protection laws to control pollution.

The same happened with public health because they were running out of labour due to the high death and disability rates caused to the working class. Free laissez faire enterprise had to be controlled to prevent a clogging up of free enterprise.

They used physical resources.  21st century financial capitalism uses information as a resource.  CDOs and CDSs pollute the pool of information.  But whereas all industrial capitalists wanted a low pollution environment,  financial capitalists actively try to pollute the information environment. It's the way they create the tiny differences between buying and selling prices they exploit to make their profits in huge computerised purchases and sales many times a second.

So the financial regulators have a much tougher job than the 19th century equivalents.

What's this to do with coops? Lanchester speculates about business that exists to serve need rather than just to make money by any means. He suggests those days are over.  He also says financial capitalism is a near dead duck. It is irrecoverably polluted.  But he doesn't mention coops once.  Coops exist and survive only so long as they serve their member's needs.  And can survive when capitalism is so polluted by financial dodgy dealings it is having another in its series of heart attacks.

People laugh at Marx's belief that capitalism is its own grave digger. He didnt just think this would happen when labour organised, as people commonly believe.  He also predicted the suicidal dynamics of financier capitalism. He may still be proved right.

But capitalism is a master at cliff edge thrillers so what will they do next to protect their right to our wealth? Are the shocks coming so hard and fast that the financial doctors cannot keep the raddled body alive?

A few years ago (before the financial crash) I was at a reception in the House of Lords and heard the Tory MP for the City of London, Mark Field, say the party was over. The 150 year reign of the joint stock company (the corporate legal person) was coming to an end. It was no longer fit for purpose in an age of international computerised finance. (No one was listening in his own party.)  His solution?  Mutuals and Cooperatives which exist to serve and provide needs directly and not as a by product of uncontrollable corporations.

Wednesday, 19 June 2013

Financial Management for Worker Co-operatives - We Can Do Better Than This

My experience of talking to finance people in worker co-ops is that a fair bit of the orthodox methods of internal financial management and reporting are not right for worker co-ops where the priority is communicating with internal members, many of whom don’t understand these normal methods. 

Much financial management is designed to report financial performance and results to financially able senior managers and external funders and investors who can also call on expertise (or at least have a vested personal interest in learning how to read a balance sheet and P&L). 

There are accountants who say that normal financial management is actually a tool for control by higher management with vested interests in keeping control, rather than freeing up entrepreneurial behaviour; see BB seems more suitable for collectives to me than the normal methods.

We may have to abide by certain conventions in our external reporting but internally we can do whatever we think is appropriate. Even externally, conventional reporting underplays the financial and non-financial output benefits of worker co-ops. (Return On Capital Employed (ROCE) does not take into account profits distributed in premium wages and therefore under reports the financial performance of our better managed worker co-ops. Some of which are outperforming Apple in terms of the total financial outputs they are achieving.)

The American employee ownership literature is full of articles about how to engender an ‘ownership culture’ and much of that is 'How do you report financial results and forward plans in a way that ordinary employee owners can understand?'. So that is why this topic is of such interest to me. Money is the only undisputed common language inside our co-ops (much as I dislike that) but only some members can speak it with all the consequences that flow from that. 

The worst of which is that the finance people do their jobs and aren’t understood and other members blunder around in their financial ignorance, not aligned behind one understanding, not able to intelligently argue a common case. Result - too many co-ops which are just surviving against the odds with inadequate business and financial performance.

So, if we had forward planning or coordination of finances which all member could understand (the reason for) and could commit to and reporting of financial performance ditto, then we can have more collective understanding of the business and what members have to do to make it a success ( or just to survive).

It would help enormously with collective performance management ( because members would have their fingers on the pulse) and emergent business development ( where groups of members identify and develop good new business development without a CEO master plan) and contingency planning ( members would spot risks and react quicker if they had easy to understand financial metrics).

There's a project here for a radical accountant. Volunteers?