Capitalism 101

by Prof Ryan Spox

Things that annoyed me today:

Mostly it was the realisation that the man in charge of the UK’s economy doesn’t seem to understand how Capitalism works. Poor Gideon Osborne, with his not entirely relevant degree in Modern History, has struggled for some time to get his head around the idea that successful capitalists invest in projects which make them money. Gideon apparently thinks that the idea of capitalism is to sell your assets off cheaply in order to let other people make money.

Landed by his predecessors with a 39% stake in Lloyds banking group, Gideon first demonstrated his inability to grasp simple sums when he announced that he would cheerfully start selling of that stake when the share price reached the heady level of 61p per share even though his disgruntled employers (the struggling British taxpayers) had forked out 73.6p to buy them in the first place. But, in that strange, scary place which is Gideon’s financial head, the sum (61-73.6) equals a nice positive number. We would like to think that a stock broker or similar financial guru who publicly lauded his plan to sell clients’ shares for about 80% of what they paid for them would not be handling their accounts for much longer. Sadly, Gideon’s clients are not allowed to actually sack him. Only his boss and top chum, wee Davey Camerloon ,can do that.

Matters have risen somewhat to a head in the last couple of days since, for the first time in living memory (well, of any five year olds) Lloyds has posted an interim profit. Boyed up by government cash and, through the simple expedient of charging its borrowers vastly more than it pays its lenders, it has successfully not made a substantial loss for the first time since 2008. As a result, at the time of writing, the share price is well above the magic 61p figure and almost up to what was paid five years ago. Clearly, to a man of Gideon’s financial acumen, this is the time to sell. Of course, a proper capitalist would actually hold off until the rising share price had just about peaked, thus maximising his profits. Indeed, we suspect that Gideon might go down this route if these were his own personal shares, or even the personal shares of a chum or proper business colleague. But, as Chancellor of the Exchequer, he has a sacred ideological duty to not make money for the government when he can dump assets at a loss-making price that then allows big corporations to reap the benefits, transfer the money to an overseas subsidiary and then pay no Corporation Tax on the profits.

Some folks might even hold onto the shares on the basis that the dividends they get from the – almost inevitable – future profits would help pay off the family’s (or in this case, nation’s) debts. We would tend to agree, but only if the income from retaining the shares is greater than the interest on the debt that could’ve been paid off by the sale of the shares. (This is basic family financial planning: if you owe £1000 on which you pay £50 interest a year then, should you inherit a spare £1000 which you can invest for a guaranteed income of, at today’s rates, about £5 a year, you are clearly better to use the capital to pay off the debt rather than using the income to pay the interest. Curiously, this is a basic sum that most people seem unable to grasp.)

Depending on how you do the sums, Lloyds quoted profits were either £2.1bn or £2.9bn. (The bank favours the latter figure as, the more profitable they appear, the higher the share price rises and the more likely it is that BritGov will dump its shares and piss off and leave them alone to get back to screwing their customers.) Now, as a fully privatised company, if they paid 20% corporation tax on that profit (which they won’t – no bank ever does) that would net BritGov between £0.4bn and £0.6bn in tax revenue. If, however, BritGov kept the shares and took a proportional 39% cut of the profits it would get pretty much double those figures. And that would go on for as long as the bank stayed in profit. And, if it started to lose money again, like any sensible capitalist investor, BritGov could quickly dump its shares and invest in a better run and more profitable business.

Sadly, Gideon’s desire to sell the shares has little to do with such thinking and more to do with the ideological position that Government has no business actually making money. Everyone knows that Government gets its income from tax. Anything else smacks of Communism. State owned businesses competing in a free market and paying their profits directly into State coffers? Heresy! Much better to sell the assets cheap and let “proper” capitalists benefit from the future profits the business makes.

And, if we’re lucky, Gideon might even get a modest percentage of those profits in the form of tax (typically lower than 10% once a bank’s accountants have worked their magic). So, in a sense, everybody wins. Although, in a more accurate sense, the vast majority of us lose substantially.

Still, that’s business!