By David J. Webb
Located as I am in “rip-off Britain”, it is a worthy question indeed whether capitalism is, in the final analysis, just fraud. Businesses should try to sell their goods for the maximum price in the market—doesn’t that make it likely that the free market is just a conduit for deception? Libertarians are generally left with vague comments along the lines of caveat emptor that ignore the fact that good value and good service are hard to find in the market, whoever one buys from. So I think the question apposite and worth considering.
Take the example of Chinese fake pharmaceuticals. I suppose you could say it is a case of caveat emptor—you should know that the drugs that you purchase may be fake. But how can you tell, and why should you know? In some ways China appears more capitalist than us because of its willingness to sell shoddy products, including “drugs” that have no pharmaceutical content. Chinese people in China try to avoid buying Chinese-produced drugs. If you are prescribed Amoxicillin, for example, it is a good idea to look for a Japanese-produced packet or another imported variant, or else you are likely to be left consuming an “Amoxicillin” tablet with no Amoxicillin in it. Isn’t this capitalism? Isn’t this how capitalism is meant to work?
Fraudulent financial services
The “fairness” of the operation of the free market has become a major political issue in the UK. Take for example the Conduct of Business Sourcebook (COBS) that applies to all firms regulated by the FSA (or its successor). This states that “a firm must pay due regard to the interests of its customers and treat them fairly” and that “a firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client”. You will notice straightaway that this wording, if it means anything, conflicts with the free-market ‘principle’ that you should try to rip your customers off. Apparently, the COBS is now legally part of any contract, and failure to adhere to COBS may be actionable as breach of contract. (However, the general nature of the wording probably makes it hard to tell what any given judge will make of it.)
Should firms, including financial services firms and others, treat their customers “fairly”? As the reader can see, this intrudes a moral agenda into the operation of the free market, and yet somehow the fraudulent nature of much of what passes for the free market has called this intrusive regulation into being in order to prevent the entire edifice of the free market from becoming increasingly tarnished, with an impact on consumer confidence.
This issue affects the entire range of products and services sold in the UK (and elsewhere) today, but seeing as we have mentioned the financial services industry, I will briefly discuss the nature of that industry’s products first. A general concern that a large range of products sold by the financial services industry are fraudulent, and routinely so, has led to a number of investigations into “misselling”. Insurance protection that cannot be claimed upon was, it is claimed, given the “hard sell” in years past. Customers taking out loans were required also to take out interest-rate swaps, complex financial instruments that aimed to protect the bank (not the customer) against future variations in interest rates, with banks, it is claimed, making wild and unsupportable statements about them to small retail customers. Customers whose investments were held with Equitable Life—which claimed to offer safer investments—have called for full compensation following the collapse of that company’s investment products.
“Investments”, if you can call them that, have often been subject to hidden “trail commission” where an adviser who advised you decades ago has continued to leech from your investments ever since. While the capital gains have often been paltry, or negative, the financial services industry finds these financial products very lucrative. Mortgages are accompanied by bizarre “arrangement fees”—aren’t bank workers already paid for doing their jobs? What is the arrangement fee for then?—and even when you have paid a mortgage off completely there is a further sizeable exit fee, whose only purpose seems to be to sting the customer one final time. Pensions are one of the most fraudulent “investment” products about—and it is a disgrace that the government is encouraging people to invest in long-term products that tie up their savings for decades—with some estimates showing that “fees” take up one-third or more of any investment gains. Interestingly, fund managers whose investments fail still pay themselves large bonuses and charge annual management fees. What is a risk for the consumer is a one-way bet for the industry.
Even ordinary current accounts are beset by a bewildering range of fees, none of which seems connected to the likely cost of the “service” provided. For example, if you have £5 in your account and no overdraft facility in place and a regular direct debit for £20 is presented to the account, the bank may choose not to pay it, and then charge you for having had a direct debit payment declined, with such charges often around the £30 mark. This would leave the account £25 in debit, and could then attract “unauthorised overdraft fees”, in some cases daily fees levied until the account is put back into credit. It seems a clear case of fraud for the bank to choose in such cases not to pay the direct debit—because where the direct debit is for a lower value than the bank’s returned direct debit charge, paying it would have left the account less deeply in the red than if the direct debit had bounced.
It is difficult to avoid the conclusion that the financial services industry has become addicted to “fees for nothing” in a way that is hard to present as a mature industry with a good public reputation providing a vital service. But still we come back to the question, aren’t “fees for nothing” just capitalism? Aren’t investment management fees for failing investments just capitalism? Isn’t the misselling of insurance products just capitalism? The caveat emptor principle can be dismissed immediately: there are no financial services companies that operate in a different manner to that outlined above. No matter how cautious a consumer is, he cannot purchase non-fraudulent financial products, because these are not sold in the market.
I am not at all sure that the FSA or any successor organisation has a role to play in this. The FSA allows public-sector workers to piggy-back on the fraudulent nature of the entire gamut of financial services, but does so in a way that fails to do anything about the fraud that is standard business practice in all banks in the UK today. Certainly, reading that the FSA is trying to bring in current-account charges for accounts in credit is hard to reconcile with the view that the FSA is protecting the consumer: if an account is in credit, then you are lending the bank money to lend out and make money on, and if there is any fee involved, it should be the bank that pays it to the customer, who would be, in this case, the bank’s creditor. If banks choose not to lend much, as is the case today, I do not think it right for them to be able to survive on a “revenue-clipping” basis, i.e., by charging such high fees for nothing that there is no need for them to take risks by lending money out—but the wider question is the role of the FSA, which seems to me to be encouraging fraud in the banking sector in the form of “fees for accounts in credit”.
The fraudulent conduct of utility companies
There is nothing unusual about the financial services, as most companies, and in particular those providing utility services, are engaged in similar sharp practices in what is allegedly a free market. Take lettings agencies: the bewildering range of fees charged often have little connection to any work involved, including items such as “drawing up an inventory”, £75 for a credit-reference check (which costs £2 to obtain), and fees for some services that are double-charged to landlord and tenant. In fact, some fraudulent lettings agencies seek a further large fee for a renewal of an existing contract when the initial shorthold tenancy expires, amounting to a “fee for nothing”. But isn’t this just admirable entrepreneurialism in action? Don’t libertarians have a sneaky admiration for fraudulent business practices, which are, after all, just the market in action?
Fraudulent business practices, often connected with what I call “small print fraud”, are a cancer in the British economy today, threatening to call into being even more regulatory agencies and pile ever higher companies’ compliance duties. It is amazing to think that utility companies charge “standing charges” and “line rental fees”. Doing so they are able to ensure that, for example, people who barely use their telephone are paying well over £100 a year to have a phone, instead of pennies for their real usage. I suppose you could argue this is a cross-subsidy for large families, but I don’t wish to cross-subsidise anyone else. As for “line rentals”, if a phone company has installed a phone in my home, should it not be paying me to rent space in my brickwork? Once again, companies like BT engage in outright “legalised” fraud, with regulatory bodies smirking in the background, but making a good living from claiming to regulate the sector.
Amazingly, energy companies offer low tariffs to vulnerable customers, thus forcing me to cross-subsidise them, when, if any social help is rendered to such people, it should be done through the benefits system, and thus form part of the political debate at election time. Anyway who can’t pay his electricity bill may have his home forcibly invaded for the purpose of the installation of a meter “to help him manage his payments better”, but here too rip-off Britain is at it again: such customers pay much higher unit tariffs despite their non-payment never again being an issue for the energy company. It’s difficult to understand why on the one hand such companies provide low tariffs to vulnerable consumers, and on the other charge the highest unit tariffs to the most financially pressed consumers.
Anyone who has an “unlimited use” broadband facility in his home will notice that if he starts downloading large files, the connection is just switched off, requiring him to reset the wireless hub in his home. This can happen once every five minutes. There is certainly no requirement for a company offering an unlimited broadband service to provide the service being paid for. This is probably accounted for in their “small print”.
Estate agents and solicitors are another happy hunting ground for what I would regard as fraudulent business practices. Why do estate agents charge a percentage of the sales value of a home? It costs no more to put up a sign in their window for an expensive house than it does for a modest house. It is also difficult to understand how solicitors arrive at their charges, other than that as all solicitors charge inflated fees, they are all benefiting from that, and see a large downside for them by engaging in some kind of “price war”.
Essential services defeat the principle of competition
It is hard to avoid noticing that most of the worst business practices are found in essential services, including financial services, real-estate services and utilities. There is no way to avoid buying these services. It is not at all the same thing as the surprisingly expensive prices for many goods in the shops—where you can simply refuse to buy them, or look for alternatives on the Internet. We need to bank somewhere. We need gas and electricity, and telecommunications. We need to buy property or rent property. Consequently, although these industries are all “free-market”, they are operating in an area where they know they have the consumer cornered. You cannot live without them, and there appears to be no real competitive urge in these industries to compete on price.
The privatised railways are another egregious example of a slightly different phenomenon, that of continual high annual increases in ticket prices, based on the presumption the passengers have no choice other than to pay up. I think the railway ticket prices are based more on the threat of industrial action, where unions in privatised industries retain the public-sector mentality, as they know they can hold the entire country hostage. Finally, council tax and the TV licence represent another form that rip-off Britain takes, as the public sector defrauds the public and turns public services into a business whose main purpose is to provide a good living to the public-sector workers. While such state exactions are not specifically relevant to a discussion of whether capitalism is fraud, the public spending they enable provides support for shockingly high nursing home fees charged by companies ostensibly in the private sector, simply because the operators know that the taxpayer is “willing” (apparently) to pay them. Once again, property-related fraud is involved with “upwards-only” rent review contracts.
Leaving the public sector and publicly funded private-sector services to one side, however, it is clear that many of the essential services provided by companies operating in the free market are fraudulent. Essential services seem cartelised with a large range of anti-competitive practices. This is partly why it is argued that we need regulatory bodies for such oligopolistic industries.
A culture of fraud?
It is difficult to avoid the conclusion that we live in a society where fraud has become engrained as part of the culture. I am not using the legal definition of fraud here—legal definitions are largely drawn up in such a way as to legalise sharp practices in the financial services and other industries—I am using the plain, everyday English-language meaning of the term. We come back to my initial question: is capitalism just fraud?
It seems to me that the free market alone is missing some vital factor that enables capitalism not to be just fraud and cheating. Hilaire Belloc’s brilliant work The Mercy of Allah, gives an interesting view of Arabian civilisation, with each story describing the conning or cheating of others, with the cheater making off before he is discovered and ascribing his successful frauds to the “Mercy of Allah”. A similar account is given by the former US consul, Ralph Townsend, in his 1934 work on China, Ways that are Dark: the Truth about China: this book is not available for free download on the Internet, but also gives an account of the cheating that is the norm in Chinese culture.
By contrast, European cultures have generally been characterised by a higher degree of trust of strangers, and this has been cited by Francis Fukuyama as an important ingredient in the West’s success. While the Christian religion is of limited interest to most people in the West nowadays, it did create a good society with a high degree of trust between strangers and some degree of concern for the welfare of those we don’t know. The Christian concept of agape, translated as “love”, or, much better, as “charity”, has nothing to do with love for loved ones or loved for those who will reciprocate, and would be a surprising concept in the Arabian or Chinese cultural contexts.
It is true that operators in the free market have always sought to con their customers, but at one time bankers were regarded as people with a certain moral standing in society, and the current practice of sending junk mail through the post to offer credit would have been regarded askance by bank managers at any point before the 1970s. There have always been a range of charges for nothing, but never so blatant as in the recent boom that preceded our current bust. It is likely that some of the worst practices emerged only over the last decade or so, aided of course by the computerisation and telephonisation of many of the services that would once have been provided face to face and with a personal decision by a manager concerned after scrutinising the details of the deal. The situation where poor service can only be addressed by long and fruitless conversations with call centres in India also contrasts sharply with the way that businesses once put great effort into defending the reputation of their products and their after-sales services. Finally, the situation with “line rental charges” and the like is also a little different from before, in that telecommunications charges were expensive once, and the standing charge may have allowed companies to lower the charges per call, whereas now that telecommunications cost a fraction of what they once did, the companies are trying to recoup their costs via the standing charge, thus forcing a cross-subsidy on those who make few calls.
Within the overall context where businesses are trying to make money out of their customers, it seems to me that some moral sense in a society is vital to avoid capitalism sliding into outright fraud. We seem to have lost most of our moral sensibilities around the time that Christianity became a standing joke, and what we have left is a society where nurses can’t be bothered to answer the calls of their patients while they drink tea and where established businesses openly con their customers. This is a problem for libertarians who claim that the untrammelled free market would improve services. It strikes me as much more likely that privatising education and healthcare would result in a sharp increase in the cost of such services as a percentage of GDP, as the professionals in charge took the chance to implement further increases in their salaries, with huge insurance payments crippling workers even more than the current fiscal exactions do. If you look at nursery fees, judge for yourself what price privatised primary schools would charge for their services.
Many libertarians are restricted to giving trite and disingenous answers to these questions. Caveat emptor comes nowhere as an answer in the absence of a strong moral conscience in society today, and we risk failing to give an adequate response to those who see state regulation as a defence of the vulnerable against those who monopolise the supposedly free market in essential services we can’t do without.
Let me state straightaway that the regulatory bodies should go. Their existence is another type of fraud, a public-sector one, conning the taxpaying public who are looking to them to ensure good business practices. In fact, no regulatory bodies can ensure good business practice, as all such bodies will be captured by the interests of the industries concerned. The codes of conduct, including the COBS referred to above, also need to be junked: they are not detailed in primary legislation, and so have no legitimate place in English Common Law. The free market needs to be a self-operating system, with no government supervision, other than the Royal Courts of Justice.
However, this is not to say that there should be no law. Any laws that do exist need to be in the form of primary legislation—not regulations, Statutory Instruments or voluntary codes of conduct, but Acts of Parliament. This is not to say that there should be a deluge of such Acts. I would like to see Parliament meet for only a few weeks a year—there would be no need for MPs to have salaries or expenses if Parliament met for only a week in each quarter—and this would also limit the quantity of legislation pushed through the legislature. However, there do need to be some laws that govern how businesses behave, particularly in the context where the moral sense has atrophied, with little likelihood of its coming back. Such laws would be enforced by the consumer in the small claims courts, and not by regulatory bodies.
First of all, consumers should not be receiving compensation for “missold” insurance products. I am not entitled to any such refunds, as I realised in the 1990s that such products were fraudulent—and if realised it, then everyone else could have too, and so making the banks pay money to people who chose to sign contracts for such products penalises people like me, as banks will have to try to recoup this money through higher general charges. I would prefer a single Act of Parliament to clear up the main abuses, including the outlawing of the selling of “payment protection insurance” at the same time as another financial product, but the key point is that such behaviour should be outlawed from now on. This approach would have avoided the need for massive (fraudulent) compensation payments to those who freely bought such products in the past. Taking a from-now-on approach would avoid huge negative financial repercussions on the banks that we all need to recover if the British economy is to recover.
This one Act of Parliament to clear up abuses should also criminalise the attempt to charge for current accounts in credit. That is a fee for nothing and ought to be fraud. The Equitable Life investors should get nothing—no bank can guarantee the success of its investments—but there should be no management fee on investment products with a negative rate of return. Financial services must not be a one-way bet for workers in the financial services industry, with huge bonuses for failure. Fees on pension products should be severely limited by law, as they are in other countries. Mortgage arrangement fees, mortgage exit fees, early redemption charges and the like should all go, as these are just a way of making the property market a one-way bet for the banks. The taxpayer should write off its investment in the banks and sell off its shares in them at a huge discount. Basically, any fit and proper organisation that was willing to take the Royal Bank of Scotland off the state’s hands for £1 should be allowed to do so, but a full split between retail and investment banking should be imposed, and the banks should be clearly told that once the state has divested, there will be no bailouts of the banks—even if the entire financial services system collapses.
And in order that we never have to have a zombie financial services industry or zombie consumers again, we should make it clear that any full collapse of a bank or of the financial services industry will be accompanied by compulsory writedowns of mortgage loans. This would be in order, as in Iceland, to force the deleveraging in the banking sector onto bank shareholders and bondholders. After a financial collapse, the whole economy ought not to continue decade after decade to struggle with very historic large debts; the deleveraging should happen at once, aided by the protection of retail banking arms, with the aim, hopefully, of producing Icelandic-style recoveries from financial collapses in the future. We have also seen in countries like Argentina that sovereign defaults have been succeeded by economic booms, showing that sometimes the debt needs to be spurned and the financial services industry screwed so that the whole of society can move on. With the threat of that hanging over them, the banks would be likely to be more circumspect in their activity, but laws preventing charges for current accounts in credit would be designed to force them into some risky lending, as a bank that will not take risks is not really in business.
I note Sean Gabb’s recent article defending loan sharks, but I would apply my from now on principle: such debts would stand, but I personally would like a legal limit on the maximum rate of interest for future loans. It is quite true that in a free society people can undertake whatever obligations they choose to, but that does not mean that the whole of the economy should be geared to the interests of one parasitical industry, charging the highest interest to the poorest consumers, and thus preventing private consumption spending from revving up in a way that would allow GDP growth to recover.
As far as letting agencies are concerned, there does need to be a limit on the range of fees charged. Inventory fees and contract renewal fees are just fraud. The parasitism of estate agents should be combated by laws encouraging private listing of properties: e.g. websites such as Rightmove should be encouraged to take individual listings from sellers not operating through an estate agent. The law needs to be opened up to challenge the monopoly of barristers and solicitors, and the compensation fraud where solicitors working on behalf of “claims management companies” and people with worthless cases funded by Legal Aid brought to an end.
Utility standing charges and line rental fees should be illegal. People should be charged on their own real usage, with no “low social tariffs” for the vulnerable. Socially-motivated cross-subsidies should be illegal. This includes the situation in care homes where care homes charge privately-paying residents more than council-funded residents in a forced cross-subsidy. If I ever end up in a care home, I will only want to pay for my own care, not someone else’s. Higher tariffs for energy customers with key meters should be illegal, and I don’t know why the law should not require each energy company to charge all residential users the same tariff. This would make comparisons easier and eliminate cross-subsidies.
Handling education and healthcare privatisation
Similarly, if education and healthcare are privatised, the government would need to handle the privatisation very carefully in order to avoid sending a green light to fraud in those industries. We have seen how in the US, ambulance-chasing lawyers have pushed up insurance premiums for everyone. While people who have been rendered quadriplegic as a result of medical mistakes need compensation packages that cover their long-term care, it should not be a routine assumption that all medical mistakes lead to a cash payout. We have seen recently how family members of elderly patients treated badly by nurses before their deaths have received cash payments—despite the fact that the people involved are now dead! This sort of thing has got to stop. All medical interventions involve some level of risk, and any patient has to accept that. Other than in cases, as mentioned, where someone has been paralysed as a result of an operation gone wrong, I see no valid case for compensation payments at all, and would like to see a huge scaling back of such payments. Legislation privatising the NHS needs to forbid such payments and thus legally restrict the involvement of lawyers in healthcare compensation cases. This would prevent skyrocketing fees, as parasitical industries, including lawyers, took the country to the cleaners even more than they do now.
I would like to see healthcare professionals held to account for their behaviour, but not via cash payments. Where, for instance, a patient has been left without access to water for days, as occurred in one case where the patient dialled 999, the police attended, but were sent away by the nurses, and the patient died of dehydration, the relatives should sue, not for cash, but for the sacking of the nurses involved, and their line managers, and the cancellation of the pensions of all involved, with nurses and doctors liable for murder or manslaughter charges for the way they treat their patients.
There should be some attempt to find a well-managed hospital, work out what percentage of its costs are allocated to administration and to general salaries, and then to lay down a legal maximum to be adhered to following privatisation. For example, if a well-managed hospital spent 10% of its revenue on administration, and 50% on salaries, including those of non-administration workers, then all hospitals would be required to keep within those limits, preventing a shocking increase in self-serving bureaucratic bills following privatisation. Some kind of limit on insurance premiums should also be in place. For example, if there were Gold, Silver and Bronze packages, they would each be subject to limits defined as a percentage of the average annual salary in the country, with possibly an uncapped Platinum service for people of truly extensive financial means. To do otherwise, based on “libertarian” principles, would simply lead to escalating levels of fraud and the doubling or trebling of healthcare as a percentage of GDP, with no improvement in services.
In the case of education, once again, there must be a limit to most of the possible fees. Poor education ought to be held to account, but once again not by cash compensation, but by suing the schools in the courts and forcing the sacking of the teachers involved. Schools ought to be legally prohibited from taking out insurance against such suits (which cost money to defend), as otherwise they will simply take out large insurance packages and pass the cost on in higher fees.
Libertarianism and fraud
I think it likely that the Libertarian Alliance would oppose the general thrust of my argument here, but this article is submitted for the purpose of generating discussion. I think the fraudulent nature of what passes for the market has got to be addressed by libertarians in some way. We can no longer assume that the market will heal all ills, but the way I see it is that one or two Acts of Parliament—not constant legislation, and certainly not regulatory bodies—should be used to define good business practice, with the courts doing the rest of the work.
It seems to me that there is nothing in libertarianism, or in English Common Law, that opposes the principle that there do need to be some laws limiting corporate behaviour. Part of the problem is that we have lost our moral compass, and that makes the operation of the free market tend towards Chinese or Arab models. Why should the whole of society exist purely for the benefit of a few parasitical industries?