The Extractivist Era
“Extractivism” is not a word much bandied about today; “populism” is. But the latter is misnomer: the project that brought Trump to power in America and will not disappear now that Biden is President is a one fomented by ultra right wing billionaires in the USA like Robert Mercer and the Koch brothers. After all, Biden told a 100 or so wealthy donors before the Election that he wasn’t going to demonise the rich: “No one’s standard of living will change, nothing would fundamentally change”.
So-called populism exploits the disaffection of large sections of the populi and sets them against the supposed liberal elite but it has no intention of addressing their grievances. On the contrary, it intends to further lock in the growing inequality in societal wealth. That is the real greatest confidence trick in American history. And since the peak of relatively equitable income distribution in Britain in the 1970s, it too — in what had until then been a successful inclusive economy — began to yield to an extractivist model.
What do I mean by the terms inclusive and extractive? They stem from the ground-breaking study Why Nations Fail by Daron Acemoglu and James A. Robinson (2012). Garlanded with praise by its obvious forebears — Jared Diamond, Ian Morris, Niall Ferguson, Charles C Mann — the book succeeds in making great sense of the history of the modern era, from the 15–16th voyages of discovery to the present day.
The essential message is simple: that extractive or inclusive states constitute a binary model that encompasses most states in the world today. Extractive states are locked into a vicious circle of kleptocracy by a self-perpetuating oligarchy, with an accompanying suppression of technological innovation and economic and personal freedom. Consequently, most of them are extremely poor. Inclusive states have no single centre of power but are innovative and prosperous thanks to the jostling of competing interests under the rule of law and secure property rights.
The reason that inclusive states are far more successful than extractive ones is the concept popularised by Joseph Schumpeter: creative destruction. Of course totalitarian societies are good at destruction — the kulaks can be liquidated. But creative destruction means challenging vested interests to develop a better way of doing things. Extractivist states, on the other hand, work to preserve vested interests: that is their raison d’etre. Creative destruction means replacing canals with railways, steam engines with electric traction, typewriters with word processors, the telegraph with fibre-optic broadband and 5G mobile communications. It means that once-proud companies and sometimes whole industries go to the wall when the mode of the technology changes but the overall result has been, until recently, more widespread wealth.
The hero of Acemoglu and Robinson’s book is Britain: the pioneer inclusive state. Indeed, inclusive states virtually all stem from just two models: Britain and France. Together, they ensured that Western Europe would eventually become inclusive; British colonialism spawned inclusive states in North America and Australia. These are still pretty well the only such large states, with the exception of Japan, which began the process, by emulating the West, in the late 19th century and joined the club after the Second World War.
But the dirty secret of the inclusive states is that they were only ever inclusive at home: Acemoglu and Robinson mercilessly expose the viciously extractive economies European states instituted in their colonies and in the slave trade that they developed The current re-examination of the wealth extracted by European colonisers in the slave trade is revealing how deeply embedded extractivism is in what seemed to be inclusive societies. It’s no accident that as extractivism takes a deepening hold in Britain and America, those who practice it increasingly resort to justifications of past Imperialism and even a hankering for its return.
The most viciously extractive states in the world are those that were once colonies of European countries. There, when independence or revolution came, the new regime merely replicated the behaviour of the former colonial power but often in a more extreme form. The former colonisers wring their hands at the intense corruption involved but accept no blame for having taught it to their former subjects in the first place.
But current extractivism in the rich, formerly inclusive Britain (with the exception of its former Empire) involves battening on the public sector. In Britain, the reason that the Tory Right are so keen to get their privatising hands on the NHS is the failure of Thatcher’s supposed free market drive. Over 40 years, no new significant large new companies have emerged, bar one — the Cambridge computer chip firm ARM; that was sold off to Japan and is now up for sale again, to the US firm Nvidia. What happened instead was the transfer of state monopolies such as the energy utilities to private monopolies: crony capitalism.
The money thus extracted has poured and still pours into offshore accounts. Private equity and hedge funds rule. This is a sea change in British economic life and spells the end of the regime that made Britain a strong, technologically capable country that spread its wealth reasonably equitably.
The British model that was abandoned by Thatcher involved a broad-based economic system that carried out research in industry (rather than relying on universities to do it). Ownership was by the limited liability model in which majority shareholdings were not held by an oligarchical billionaire but by a broad shareholder base including the big pension funds. Differentials between the pay of CEOs and the workforce were modest.
The new extractive model began with what was then called asset stripping, with companies being taken over with no intention of developing them in any way other that to sweat their assets, break them up and realise a quick gain. Many good companies were destroyed in the process. The most dramatic examples in the UK were ICI and GEC, respective national leaders in chemicals and engineering. Neither company exists today. The classic example is the successor company to ICI: Ineos. The company is two-third owned by just one man, its founder, Jim Ratcliffe, now Sir Jim Ratcliffe, some time richest man in Britain and a tax exile in Monaco. ICI was at the forefront of technological development with many key patents; Ieos just makes the usual stuff.
Along with this came much purely financial engineering: private equity instead of the limited liability company, hedge funds, making profits not on actual activities but on gambling on future activities.
The result is a shrunken base of significant industries and an economy in which during Covid the principal engine, crippled by the virus, would seem to be the hospitality industry. Yesterday’s man Dominic Cummings could fantasize about creating trillion dollar companies in Britain like Apple and Google but 40 years of privatisation have achieved nothing like this and never will. Instead, Tories need a fat cow to carve up for their key funders, the hedge funds and private equity bosses, and the NHS is the biggest fat cow we have: our largest employer, with 1.4 million people. Covid has proved a fine opportunity to advance this smash and grab on our biggest public sector industry by outsourcing Test and Trace and PPE procurement to sweetheart contacts such as Serco and some instant deals with cronies who have no experience but are simply making deals on the fly.
Serco is the prime villain in this dismal scenario. Serco is a jack-of-all-trades-master-of-none company that pitches for and gets contracts for jobs it has no experience or expertise in whatsoever. It’s very name is almost an admission of its dubious credentials with its sinister Orwellian doublethink overtones. Orwell’s “Minipax” was the Ministry of War, so Serco is the “service company” that provides a service to the government but not the effective services it is ostensibly mandated to deliver.
Around ten few years ago, I took part in a symposium at the Defence Academy of the United Kingdom, Shrivenham, managed by Serco. Bizarrely, on the campus, a major effort was expended by Serco to remind anyone there that Serco owned every little bit of it. The room I stayed in had Serco tags attached to the table lamp, the kettle etc. It seemed shaming that the mess was in reality a Serco kitchen. No doubt, in the event of war, they’d be busy tagging equipment like this on the front line.
And now Serco is a prime beneficiary of Covid-19. It runs the disastrous UK Test and Trace system. Their website boasts “We deliver services on behalf of Central Government and a range of public sector bodies across Defence, Justice, Immigration, Healthcare and Transport, and with Local and Regional Government customers to deliver Citizen Services.” Currently a £3 billion plus company, at this rate it soon will be the government.
Like so much in contemporary life, the rhetoric of entrepreneurism, of Britannia unchained, of trillion-dollar companies, is really a front; what we get and will continue to get is just old-fashioned uncreative destruction: extractivism.