Financial Times Europe - 05.08.2019

16 ★ FINANCIAL TIMES Monday5 August 2019

Deep relationship with animals comes to light Thanks to John Gapper for “Wall Street wags its tail at pet projects” (August 1). The thriving animal companion market is evidence that animals are increasingly regarded as cherished and respected family members instead of property, commodities or objects. Yet another sign of society’s changing views is evident in Mr Gapper’s use of the phrase “companion animals”. In Defense of Animals has long championed the use of “animal companion” instead of “pet”. Where animals are diminished in language as commodities or property instead of individual beings, their exploitation and abuse is ignored, rationalised and even justified. It is not so long ago in human history that women, children and others were seen, in legal terms, as mere property. Views change over time and every so often society calls for a language facelift. As more people use the updated terms “animal companion” instead of “pet”, and “guardian” instead of “owner”, our culture’s deep personal relationship with dogs, cats and other animals comes to light. Our evolving language and deepening pockets provide hope that we are ready to acknowledge that animals are worth a lot more than their price tag. Fleur Dawes Communications Director, In Defense of Animals, San Rafael, CA, US

Role of directors

calls for comment “Woodford scandal exposes the flawed cog in the machine” (FTfm, July 29) was a most helpful article on the role of the authorised corporate director and the interaction of it, the sponsor and the regulator. The scope for conflicts of interest and miscommunication is clear. I have been surprised that nowhere has the role of the directors of the fund itself been commented on. Surely it is the fund’s board that is ultimately responsible for the fund’s investments, and is that not where the “listing” of the unquoted investments on the Guernsey stock exchange should have been challenged? It is not satisfactory simply to state that European rules treat such a manoeuvre as a listing if the market is not active or liquid. Douglas Paterson Pinner, Middx, UK

Clarifying commas make an important difference I would agree with Henry Mance that punctuation is often a matter of taste rather than clarity (“Coming to blows over the rules of punctuation”, August 2). But sometimes it really does make an important difference by averting unnecessary confusion. Take the opening sentence of Herman Melville’sMoby-Dick. There’s a world of difference between “Call me Ishmael” and “Call me, Ishmael”. How, without a clarifying comma or lack thereof, is the reader supposed to tell whether the narrator’s name is Ishmael, or whether he’s reaching out to his friend Ishmael? Sharon Footerman London NW4, UK

Warren’s Act should be

applauded — and copied Mark Vandevelde (On Wall Street, July 27) describes the opposition of private equity firms toSenator Elizabeth Warren’s proposalto rein in leveraged buyouts. This is absolutely justified given the disasters that such buyouts have imposed on perfectly profitable enterprises. The use of debt to finance such buyouts as well as mergers and acquisitions have wreaked havoc around the world, not least in the UK — perhaps the most outrageous examples being the Kraft buyout of Cadbury’s and the Glazers’ purchase of Manchester United. There should be a statutory limit as to the amount of debt (much less than 50 per cent of the purchase offer) that

can be used for such buyouts, and the acquiring company should be responsible for the debt and not load it on to the target and usually profitable business. Whatever the problems of the WarrenStop Wall Street Looting Act with regard to limited liability, its main aim — to control this debt-loading tactic — should be welcomed, applauded and copied elsewhere, especially in the UK. Tony Mayer Haydon Wick, Wilts, UK

Narrowing the gap

Jonathan Ford makes no mention of the serious tax breaks given to the carried interest of promoters of private equity investment (“Warren is right to worry about dangers of private equity looting”, Inside Business, July 29). Hopefully, the removal of those should enable the gap between the Haves and the Have Nots to be narrowed. J M L Stone London W1, UK

What a gas

Using the numbers quoted by Nathalie Thomas in “Hydrogen rises as clean fossil fuel alternative” ( July 30), if all petrol was replaced by hydrogen for road transport and all the CO2 made as a byproduct for forming the hydrogen was used in fizzy drinks, each person in the UK would have to drink about 10 gallons of fizzy drink a day to keep supply and demand in balance. Michael Kelly Prince Philip Professor of Technology, University of Cambridge, UK

Leo Lewis decries the huge statue of a yellow Sony Walkman in the heart of Tokyo’s Ginza district as nostalgia for a bygone era (“bygone era (“bygone era (“Japan’s reverence for theJapan’s reverence for the Sony Walkman is a deadweight”, To k y o Notebook, July 31). Surely the Japanese are right to celebrate the contribution of their engineers, craftsmen and assembly line workers to this once ubiquitous device. A giant Walkman is no different to the magnificent forging press erected outside Terni Railway Station in Umbria, or the more prosaic stationary steam engines exhibited under glass beside Hull Marina in East Yorkshire and in Bolton town centre in Lancashire. They are reminders of past technical efforts and triumphs. A giant Sony Walkman offers two

lessons for today’s practitioners, one overt and one more subtle. The obvious lesson is that few technologies are permanent — they all need to evolve and are likely to be replaced in the face of new consumer demands, social pressures or technical developments. This is the process Joseph Schumpeter called “creative destruction” at work. The Walkman gave way to the iPlayer, and the iPlayer fell victim to streaming from mobile phones. The Walkman statue highlights the imperative of constant innovation, even in stable industries. The subtle lesson is that the Walkman survived so long, and rebuffed technically successful challengers such as MiniDisc players, through a process of continual

improvement. Better materials for tape cassettes, improved cassette design and better precision engineering of the cassette player itself are some of the factors that prolonged the life of a world-beating technology. The moral is that we should study the history of technology and engineering more closely for the lessons it offers current businesses. There is no one formula for success, but history offers many object lessons as a guide to innovation strategy. Far from nostalgia, past engineering triumphs are object lessons for today’s innovators. Dr Jonathan Aylen The Newcomen Society, The Science Museum, London SW7, UK

Past triumphs guide the innovators of today

Letters

MONDAY5 AUGUST 2019

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There are, generally speaking, two camps on the subject of how to define economics. The first sees the discipline as defined by its approach to measuring the world: methodological individualism, instrumental rationality and mathematical modelling. The second believes it is defined by its subject matter: how goods and services are produced and distributed. In this book, Cambridge academic Jonathan Aldred has the first camp in mind. “Many economists proudly see themselves as unsentimental, straight talking and brutally honest,” he writes. “For decades, the default starting point of mainstream economists has been to assume that selfishness is the natural, dominant determinant of human behaviour.” It was not always so, he adds.Adam Smith, whose bookTheWealth of Nationsis hailed as the founding text of economics, also wroteThe Theory of Moral Sentiments,which sought to ground ethics in our human sympathy for one another. This means modern economics that claims to be a return to traditional “classical” theories is anything but, Aldred argues. The subject is timely. After a long period during which economics sought to present itself as a neutral science, interest is rising in what it has to say about morality and how economic factors affect our behaviour. The current incarnation of Britain’s Labour party, for example, takes inspiration from Margaret Thatcher’s dictum that “economics are the method; the object

is to change the heart and soul”. They look tothe work of Karl Polanyi,a 20th century Austrian economist, who examined how the spread of capitalism in the early 19th century clashed with existing ideas of solidarity and fairness and inspired a “counter movement” to try to preserve these institutions. Unfortunately there is little of this here. The book works best when you substitute the word “economics” in its provocative subtitle for “neoliberalism” — although the author dislikes the term, which he calls vague. It is really an account of how a group of rightwing economists persuaded policymakers, particularly in the governments of Thatcher in the UK and Ronald Reagan in the US, to adopt their ideas. He gives no evidence that these theories had an influence on general standards of behaviour. Aldred focuses on microeconomic theories of behaviour popularised by researchers often connected to the Chicago school and the Rand Corporation. These include the macroeconomistMilton Friedman, who argued corporations only had a duty to maximise profits; Gary Becker, who applied the tools of rational optimisation to areas such as the family and discrimination; and the game theory pioneer John Nash. Readers familiar with the topic will find little new. Aldred opens the book with an account of the Austrian economist Friedrich Hayek and the creation of the Mont Pelerin Society, which aimed to counter government

invention in the economy. He moves on to the creation of the Institute of Economic Affairs, an economically liberal think-tank, which would introduce Hayek to Thatcher. In a later chapter, the story of the origins of the Laffer curve, as a sketch on a napkin, makes an appearance. All have been told at length elsewhere. When Aldred has a particularly egregious set of assumptions between his teeth the book can be stimulating. He makes a persuasive argument against the view that we can, and should, pay people to do what we want. Money can crowd out other motives and payments work best when they flatter our self-image. Overall the book already feels dated. Most of the thinkers Aldred focuses on are dead and the economics profession is moving on. Politics has too: many date the end of the neoliberal era to the 2008 financial crisis, or the Brexit referendum and the election of Donald Trump in 2016. Economists are not in charge any more, if they ever were. Among academics, the pendulum is swinging back to those who define the discipline by subject matter rather than an assumption ofrational self- interested agents. Ideas that were consigned to the margins are finding their way back into the mainstream. Aldred devotes little space to the flaws in recent trends, such asttthe increasinghe increasing focus on data rather than models. Economics may redeem itself yet.

The reviewer is the FT’s economics reporter

Examining the

flaws of the

neoliberal model

Book review

Gavin Jackson

Licence to be Bad: HowLicence to be Bad: How Economics Corrupted Us by Jonathan Aldred Allen Lane, £

Opinion ON FT.COM Anita Charlesworth Johnson’s pledges on NHS investment need a full examination http://www.ft.com/opinion

Sports Direct is a company that would test the forbearance of even the most stoical auditor. Grant Thornton appears finally to have lost patience. On the day of its annual results pres- entation last month, the retailerdelayed an announcementffforor much of the day as it explained to its audit firm a significant eleventh-hour tax liability. Grant Thornton has now told the Financial Reporting Council, the regulator, that itintends to quitas Sports Direct’s auditor after Septem- ber’s annual meeting. In considering the mandate, other auditors have shown all the enthusi- asm of nudists invited to study a hor- nets’ nest. One by one, they have ruled themselves out, citing, variously, conflicts of interest, reputational risk, or governance concerns. Sports Direct, the idiosyncratic creation of mercurial chief executive Mike Ashley, is a dysfunctional special case. But it is unlikely to be the only UK listed company to find itself snookered in its search for a new auditor. This raises the question of whether the audit market is on the brink of failure, even before the implementation ofreforms to the sector. The aim is to improve the quality of audit, reduce the potential for conflict with more lucrative consulting man- dates, and encourage challenger firms such as Grant Thornton to compete with the Big Four of EY, PwC, Deloitte and KPMG. Proposals include a legal split of audit and non-audit work, the appointment of joint auditors to large companies, and the FRC’s replacement by a more muscular watchdog. Audit fees have risen to meet these new demands, but fines and compli- ance costs have risen faster. Public, political and media scrutiny of auditors has also escalated. The largest UK accountants have responded by reviewing existing audit relationships.

They could stop working for companies if they believe the risk to their rep- utation or profitability seems too great. The accountants protest too much. They may even be trying to throw sand in the gears of common sense reforms aimed at ending the current trust crisis. All companies should receive the audit they deserve, in the interest of investors and the public. In the short term, the business secretary has the power to appoint auditors if a company fails to do so. Using this power is bound to revive discussion of whether the regulator should be more closely involved in auditor appointments. Non-executive directors have more intimate knowledge of a company’s requirements than any independent body would have. Shareholders seem to prefer the status quo. When con- sulted, only one challenger firm — Grant Thornton, as it happens — self- interestedlychampioned such a plan. As a result, in its review of the sector, the Competition and Markets Author- ity preferred to enhance scrutiny of audit committees. An independent appointments process — advised by the audit committee — would alleviate two concerns, however. It would remove the suspicion that auditors pitch their services to the managers whose homework they are paid to mark, and it would allow the regulator to ensure audits were prop- erly funded and resourced. When a UK parliamentary select committeeexamined the ideaof independent appointment of auditors, it concluded such a “radical reform” would amount to “an admission that a broken sector is beyond being fixed by the market”. It is not yet time to con- cede that market forces cannot repair audit. The shunning of Sports Direct suggests, though, that it will not be long before more sweeping solutions need to be reconsidered.

Independent appointment of auditors merits new consideration

Ensure companies get

the audit they deserve

Hopes for a breakthrough in the US- China trade talks in Shanghai last week were faint after a bout ofpugnacious tweetsfrom US president Donald Trump. His subsequent announce- ment of plans to impose 10 per cent tariffs on theremaining $300bnof Chi- nese imports from September 1 have extinguished them. This latesttariffs will cover consumer goods for the first time. With growing data pointing to the slowing of the global economy, Mr Trump’s efforts to isolate China from global trade are creating a ripple effect. The trade war is moving into ever more uncharted waters. Mr Trump’s assumption that China would buckle has been shown to be little more than wishful thinking. Instead, Beijing has dug in its heels and removed the pros- pect of immediate concessions. With- out a softening of stances, the trade war will only rumble on, dragging down the world economy in its wake. Mr Trump’s latest tariffs speak to a breakdown of trust between the spar- ring powers.Only a few months ago, there had been hopes that a trade deal was within sight, partly based on the decent working relationship between Mr Trump and Chinese president Xi Jinping. But this is no Manhattan real estate negotiation. It now involves a fundamental reappraisal of the relationship between an incumbent superpower and a rising rival. Both Mr Trump and Mr Xi have had less political room for manoeuvre as their differences have become more stark. Mr Trump finds himself out- flanked by the Democrats on trade. On Nafta, his aggressive America First approach led to some concessions within a rebranded US-Mexico-Canada Agreement. China is a problem of a different order. With presidential elec- tions just over a year away, Mr Trump seesDemocrats doubling down on his

protectionist rhetoric. In China, Mr Xi faces down anincreasingly ardent nationalismwhich at times he has been happy to stoke. Sometimes cast as China’s strongest leader since Mao, Mr Xi may not be quite so immune to chal- lenge as observers may think. The terms of debate about China as a rising power has taken a turn for the worse in the US. There is loose talk of a new cold war, focused on the arms race in areas such as artificial intelligence. This winner-takes-all approach is dangerous. Cooler heads should be thinking about new rules of the road on cyber security and cyber-arms. Those in Beijing who think that they can simply wait for Mr Trump to leave office underestimate how deep these sentiments run in the business com- munity as well as policymakers. Mr Trump, whether wittingly or not, has unleashed forces he will struggle to control. There may be a temptation in Wash- ington to believe that the US economy will ultimately prevail in the tariff war. This may be true in the medium term, but the cost will be high. Separating China from trade supply chains will hurt Beijing butsplinter technology. The domestic labour market, which added164,000 jobsin July may be resilient, with the unemployment rate falling to a49-year lowin April. But the woes of theUS manufacturing sector, which has now contracted for two con- secutive quarters, are indisputable. Returning to a status quoante bellum looks difficult. Both sides need to re- evaluate their positions. Mr Trump should modify his aggressive unilater- alism and work with others to pressure China. Mr Xi should commit to limited concessions around the treatment of foreign investors and intellectual property rights. Movement is vital. The hardening of positions will lead to fall- out across the world.

Viewing trade as a winner-takes-all system will cause global damage

A dangerous escalation

in US-China relations

Moby-Dick: how else is the reader supposed to tell?— Dreamstime

Court’s implicit rejection of basic EU tenet would

give cause for concern

A fundamental attack on the EU is implied in your report “German constitutional court to rule on ECB bond buying” ( July 31). If the Karlsruhe judges decide quantitative easing constitutes “monetary financing”, explicitly forbidden by EU law and the European Central Bank statute, then the legality of the ECB’s efforts to stimulate the flagging European economy with QE would, once again, depend on the European Court of Justice reversing the German court. Doubts about the ECB’s ability to “do whatever it takes” to boost economic growth, occurring around the time that the British government may be heading toward a hard Brexit, might well discourage both financial markets and economic growth. Even more worrying would be the German court’s implicit rejection of the basic tenet of the EU, confirmed by decades of European judicial decisions: that EU law takes precedence over national legislation, even Germany’s basic law. Given the rising tide of nationalist populism in Europe, it is all too easy to visualise a German court decision against the ECB and implied rejection of the primacy of EU law, reinforcing the anti-EU movement and hamstringing efforts by Chancellor Angela Merkel and French president Emmanuel Macron to strengthen European integration. Paul Horne Alexandria, VA, US

BP’s bioethanol ambitions

are sadly misguided Major oil and gas companies, with their expertise and investment in new technologies, have an essential role in the transition to a lower carbon future. In this context, it was disheartening to see BP’s advertisement in your July 27 issue. A sugar cane plant illustrates BP Bunge Bioenergia’s ambition of “producing more than 2bn litres a year of bioethanol, a renewable alternative to ordinary fuels”. Unfortunately this proposition loses credibility when one realises that such production (equivalent to 1.5m tonnes of oil) would represent less than 0.5 per cent of BP’s annual fossil fuel ouput, would be achieved by converting a product normally used for human consumption (sugar) — whose production cycle itself consumes substantial energy (in planting, harvesting, processing) — and would be largely sourced in Brazil, where it would contribute to additional deforestation and loss of biodiversity. BP, like the other “majors”, has a duty to provide credible information to the public. Failing this, it will forfeit the respect it craves — and which it deserves if it makes a genuine contribution to the fight against climate change. Pierre-Rene Bauquis Paris, France Former Professor of Oil and Gas Economics, French Petroleum Institute

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Financial Times Europe - 05.08.2019

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