Richard Murphy has called for the end of the freedom of movement for capital
In a comment posted on his website on 30 December, academic and accountant Richard Murphy said that the UK vote in favour of leaving the EU has created an opportunity to control capital flows.
“The time has come then to make clear that it is restriction on the free movement of capital that will be needed if the return to labour is to improve in the UK,” he wrote.
Reforms suggested by Murphy include the end of the freedom of companies incorporated anywhere to trade in the UK; action to prevent payments to tax havens without tax being deducted first in the UK and restrictions on foreign takeovers of British firms.
“QE (quantitative easing) was only required in the UK because the EU barred direct lending from a central bank to its own treasury,” Murphy wrote. After the UK leaves the EU, the right of the central bank to create money on demand can be recognised, he argues.
The idea of reducing or even eliminating free capital movement is appealing to many seeking an alternative to conventional economic policies.
The main problem is that economists have no agreed definition of what capital is. In practice, they are obliged to use accounting conventions that count as capital any spending which is not on a current item (one that is deemed to be used up in 12 months or less).
Spending on food is treated as current spending because food is normally consumed in less than 12 months (though some canned and other food is unsold by shops after a year and counted as stock. It consequently can be listed on the balance sheet as an asset).
A laptop computer can be bought by a firm for cash but treated as only being partly used up at the end of a financial year. The “unused” part of the computer is valued and treated as an asset.
This approach makes sense to accountants but is unhelpful for economic management.
Economists prefer to refer to fixed capital investment: that is spending on durable, physical items like a machine or a factory. But this figure is heavily influenced by data collection and accounting conventions.
Often, what is counted as fixed capital investment is no such thing.
Economists like inward capital flows but know that short-term and speculative financial movements often involve no real value-creating investment in a country that receives them.
That’s why they focus on foreign direct investment (FDI): an inward capital movement that is deemed to be permanent or long-term. But here again, data collection is imperfect and FDI valuation is open to manipulation.
The problems become insuperable once corporations are allowed to treat intangibles as capital. This means they can list on their balance sheets items that have no physical characteristics – intellectual property for example.
Intellectual property is an enforceable claim allowed by law and validated by accounting rules.
These laws and rules can change over time as attitudes among intellectual property owners and users shift and the view of the legal system evolves.
Firms creating services that have no or little recognised intellectual property or other forms of intangible capital have been given increasing freedom to convert forecast revenue streams into a capital value.
The revenue forecasts used in such calculations are subjective. Cynics might say they are no more than the figments of corporate managers’ imagination and the fruit of wishful thinking by the accountants they employ.
More than 80 per cent of the assets on the balance sheets of the largest firms listed on the London Stock Exchange are now non-physical. That proportion is growing.
It means the majority of the capital of Britain’s largest businesses is subject to an unstable and contentious valuation process
In economies dominated by intangible commodity creation, capital is not a thing. It’s a social and psychological construct.
New measures to control intangible capital will be defeated unless action is taken to manage in detail the way social systems change and people think.
That’s an Orwellian prescription which is inhumanely authoritarian and impractical.
Managing the indefinable is impossible. Capital in most advanced economies is now effectively out of control.
But that is not true of the machinery through which corporations manufacture it.
That’s the legislation that allows them to enforce property rights over ideas and accounting codes that facilitate the capitalisation of things that don’t exist outside the minds of corporate managers.
No company should be allowed to convert forecast revenue streams into a balance sheet item. Other intellectually-invalid accounting manoeuvres should also be disallowed.
That’s just the start. It should be followed by a radical reduction in the scale and complexity of intellectual property laws.
If you want effective control over capital, firms should only be allowed to treat durable physical items as capital: mainly land, factories and machinery.
Since these can’t be quickly moved, revenue streams they produce can be easily identified – and taxed where appropriate.
That’s a challenging reform agenda and one that will be opposed by those with a vested interest in the status quo.
But it’s the only one that has any chance of delivering the results Murphy wants.