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Very few people create completely new industry, new adventures. For the majority, the only chance of adventure was to work for a pioneer. But by the same token, the majority could claim their own part in the self same, essentially free adventure. They too became pioneers and could become as much a part of that adventure as the originators of the industry. There are particular aspects of such adventure that need to be recognised. This is not a corporate thing, it is a very human aspect of the nature of a successful nation, that there must be adventurers who in turn, create the aiming point for everyone else, they create a shared adventure while remaining, essentially, free.
Today, investment is not targeted at the idea of creating a successful nation; led by adventurers at every level of society, but instead, is entirely targeted towards maximising profit for a very small group, banks. Banks of one form or another dominate the economy; yet they are simply a business trading money. They have no established responsibilities towards the nation and have no function other than to create profit for their shareholders. I was struck by a single sentence in the Richard Report to the Conservative party http://www.conservatives.com/pdf/doc...eport-2008.pdf about the state of the government small business advice service;
"the growth of major companies is fuelled by the acquisition of more innovative smaller ones", (Page 42 Appendix C).
In my humble opinion, that single sentence tells us why we no longer have a successful economy. Today, instead of arms length investment into essentially free companies, all investment is predicated towards sweeping any new company into the arms of a larger competitor by a process called Mergers and Acquisition, (M&A). In the process, creating large rewards linked to little responsibility for the chain of individuals involved. Every one of them, venture capitalist, private equity, linked, one way or another, to a bank.
Where are the savings institutions? Where is the debate about those longer term responsibilities to maintain arms length investment into an essentially free and successful society? I do not hear about this from any political party today; why is that so? Before I answer that, I want to share a small discovery I made recently. I have opened a debate with the UK Intellectual Property Office regarding the problems of the individual inventor, (the striking point for the spark that creates all new industry), when facing the payment of substantial patent application and renewal fees from their normal household income and had made a reference to German Landesbanks, who, by helping in the creation of a vast raft of independent businesses; underpin the success of Germany’s industrial economy. So I went on line to find something about them and found this statement on page 81 of the 2005 Annual report of one of them, LRP Landesbank Rheinland-Pfalz.
http://www.rlp-bank.de/imperia/md/co...P_GBe_2005.pdf
"The Bank continues to considerably promote the arts and sciences and to support humanitarian endeavours both directly and through a dedicated foundation established more than two decades ago. Beyond its entrepreneurial assignment, LRP’s social commitment is geared to strengthen the social fabric in Rheinland-Pfalz and to contribute to the supraregional reputation of this location. The Bank supports and promotes manifold initiatives recognizing that art and science, local traditions and forward-looking research, conservation and entrepreneurial creativity are all essential elements of a rich cultural life, for it is the culture of a country, which reflects the knowledge of its society. Preserving and increasing this knowledge is an integral part of our corporate culture. In addition, the LRP art collection comprises far more than 2,000 works of art focusing on Rheinland-Pfalz artists, in particular paintings, graphic arts, photographs and sculptures."
The answer to the earlier question becomes obvious; today, no one running the banking systems here in the UK and the USA takes such responsibilities to heart. Nothing could be further from the mind of the individuals in the M&A chain, than the preservation of the "essential elements of a rich cultural life". The consequence of that failure is profound, as it permeates throughout or own culture, and it is not just a failure of the banks, but also of our entire political system too. No one recognises any responsibility for our failed economic system. As a result, everything we hear today is all about how we can prop up this or that bank, bail out this or that part of the economy; but never once admit that the system is broken and unworkable. Too many have a vested interest in not admitting they have themselves played a considerable part in the failure.
How do we change direction? We must start with acceptable aiming points for new, essentially free, investment; and we need to define the essential elements for a rich cultural life, for everyone, not just a few bankers and their friends.
How much investment do we need, first to bring us back to where we were half a century ago and then, how much, year on year, is needed to maintain that success? The funds must come from savings and they must be invested, at arms length, by savings institutions that in turn, must learn to recognise their long term responsibilities. New well capitalised industrial employment needs something like 25K equity per job, so assuming we aim to migrate a substantial number of both the unemployed and unnecessary government employees back into productive employment, we can assume we need to capitalise say, six million jobs? That will require we save and invest 150 billion as equity and will probably need an additional 300 billion of working capital. Considering the investment banking industry has recently lost a corresponding amount; we would simply be replacing paper losses with completely new investment. Moreover, into real productive capacity on the ground, not vapour ware, the imaginary value of a piece of paper. From that point onwards, if we need to create another million new jobs per annum, then we will need to save and invest 25 billion every year from then onwards, with another 50 billion as working capital. That is new industry, not revamped, re-branded or deconstructed conglomerates, but completely new, essentially free, industry. So now we have an aiming point.
And yes, you are correct, the present banking system will say that is impossible; the answer any monopoly gives when faced with competition. But, if you look carefully at the self same organisations, you will discover they have the answer in their waste paper bins; all the essentially free investment opportunities they choose to ignore because they cannot make use of them within their own paradigm, M&A.
For every business plan invested in today, literally tens of thousands are thrown out for one reason or another. By far the majority, not because they would not be successful, (for they know full well that they can never answer that question with certainty before investment), but because they are too small, or too independent minded; refusing to be entrained into a similar system to human slavery, to be purchased and quickly sold on to the highest bidder with total loss of their essential freedom, to compete.
It is my contention that the core reason for the collapse of the present system is our failure to create a free marketplace for capital. And yes! The present system is not a free marketplace and exhibits all the elements of a monopolistic feudal system.
Let me show you how I have come to that conclusion.
There can be no argument that competition, particularly industrial and commercial competition; is seen as the fundamental foundation stone of a free society. My dictionary says competition is: "The action of competing with another or others for profit, prize, position or the necessities of life; rivalry – The rivalry between two or more businesses striving for the same customer or market: Competition tends to keep prices down"
Competition is a natural, honest, human concept; that lifts the most successful to the top of society and makes others strive and those that strive win and by winning, lead us all towards success. It is that fundamental rivalry that also keeps anyone from being in a position of too much power or influence. So it is this simple competitive mechanism that keeps us free, keeps us from falling into a feudal society where the free marketplace does not operate and where the accumulation of wealth or power has no checks or balances; where rivalry can be suppressed and competition is excluded. Feudal nations prevent the naturally successful from rising to the top and thus the best in the human society are prevented from leading their communities with their honest enterprise.
In such a feudal society, and here I also include communist, socialist as well as aristocratic and autocratic models, we always see a small group taking control of the many who in turn, are restricted by onerous rules and other mechanisms that exclude anyone outside of that group from competing. Lack of competition tends to mediocrity. Uncompetitive nations will always fail eventually.
So this is not simply a matter of an argument about profit; this is a matter that will profoundly affect the vitality of any nation, large or small. Once an uncompetitive business environment is established you will see visible signs of arrogance towards those less fortunate who in turn have to pay the over inflated fees and costs of a distorted market. Companies and individuals trading within an uncompetitive market are able to pay themselves grossly inflated fees and the basic costs of traded commodities go through the roof; become unstable.
Let us see a simple free market in action.
A free market is open to anyone. Naturally depresses the potential for excess. Always has change occurring as prices rise and fall according to demand. Never stops evolving as the natural competitive rivalry swings the balance of opportunity to and fro. Today’s winner is often tomorrow’s loser and vice versa.
A free market in anything demands that the seller can always get the best price of the day, most usually via an auction, where goods and services are sold in lots at the fall of a hammer. That sale price is determined by creating an opportunity for the maximum number of potential buyers to immediately bid based upon the perceived worth, (of their purchase), to them downstream from that purchase. We call that a marketplace. The moment the bid is accepted the sale takes place; payment is made and immediately the ownership of what is being sold changes.
This is important. If the seller retained ownership, the free market would not work as there would be an obligation upon the buyer that transferred value created by the buyer back to the seller beyond the power of the market to adjust.
The immediate transfer of ownership is thus a fundamental aspect of a free market.
The seller has to accept the price the market will deliver that day for the concept of the free market to work. The price paid must be the market price of that day. The buyer has priced his bid based upon their knowledge of the cost of whatever onward process they have in mind. The price to the final consumer is adjusted accordingly. If that buyer fails to sell on at their final market price, then they cannot afford to go back and buy more at that price and must adjust their bid accordingly.
This is the essential element. Paying too much to the original producer may secure the supply, but suppresses the onward sale of the finished product at the end marketplace. It is this natural check and balance that keeps the whole process of rivalry competitive. The only way to win over the long term is to keep your margins to the minimum that will secure a steady income. Raise prices too far and you are automatically excluded by another that prices below you. Reduce prices too much and you cannot continue to pay your way. Your money runs out before you can replace the original deal with another.
It is the decisions made at the time of purchase that make for viability downstream. You cannot gain an unfair advantage.
I charge that government has an absolute duty to see that at all times; a fully competitive marketplace is maintained for anything and everything that is traded in society. We all know the rules for a democracy but what is a free market? What should the rules say? Have you ever seen them writ large on a wall? I cannot find them so let us create some here and now.
1. A free market is any place where anything may be legitimately bought or sold.
2. No one who is a legitimate producer of product or service for sale, nor, anyone who is a legitimate user of the product or service, downstream of the sale; can be prevented from buying or selling goods or services.
"Sept. 3 (Bloomberg) -- Dot-coms? Done that. Property? Oil? Corn? Been there, got the T-shirt and nursed the losses, as well. One thing we know for sure about today's global economy is that there is always an investment bubble somewhere. If you get in early enough, you can make a fortune riding the boom." Five Places to Look for Next Investment Bubble: Matthew Lynn
http://www.bloomberg.com/apps/news?p...Rhk&refer=home
I believe this aspect of the misuse of a free marketplace is of particular interest. Today, speculative trades of financial instruments have reached astronomical levels and have deeply destabilised money markets. Similarly; the same applies to commodities such as food and oil. Non legitimate speculators make a mockery of a free marketplace and constantly drive the formation of new price bubbles in otherwise free markets.
4. Ownership must immediately pass to the purchaser.
5. No seller can be permitted to influence any transaction beyond the sale.
6. You cannot deal against the market outside of the market.
7. It is the duty of everyone associated with the creation of free markets to see that there are as many as possible legitimate independent producers of all goods and services provided to society.
8. Any restriction upon the number of legitimate independent producers of goods and services acts against the interests of a free society.
The seller has no further lien upon the potatoes. This is very significant.
We all know about such transactions. They repeat in our everyday lives. But it is important to recognise the basic principles. For a true free market to operate the legitimate seller of the goods must not:
· Retain ownership of that which was sold.
· Be able to in any other way influence the progress of the competitive process downstream of the original purchase.
A farmer buying a contract to supply corn, say, in a years time makes a trade where, ultimately, he is the supplier to a user who will manufacture a product, such as bread, also in that next year. But if you permit perhaps millions of trades by anyone who is not either the farmer or the final user, you introduce complex distortions to the final market price that are not predicated by the decisions of either the farmer or the final user.
The market is thus distorted by speculation.
Another good example of where these rules must apply is to money loans termed for less than repayment. By that I mean to describe a loan where it will take, say, 30 years to repay the loan in full, but the rate of interest paid changes downstream of the instant of the sale of the loan. After say, three or five years, the rate of interest changes to a higher rate; increasing the cost of the money loaned.
Changing the interest rate downstream of the sale of the loan denies all the precepts of a free market by permitting the seller to change the deal to suit their market conditions downstream of the sale. Thus the seller exerts undue influence downstream of the sale to control the market against the interests of the wider society, in particular, introducing financial instability.
I firmly believe that it is this specific action, changing the interest rate downstream of the sale of the loan; that lies at the very heart of most of our monetary problems today.
The practice distorts the free market, making it impossible for any purchaser to control their costs for the long term while at the same time permitting the seller of the loan to draw additional profit and income from the users’ legitimate use of the money.
This is no different to a car dealer asking for more money for the purchase of the car several years after the car was sold. This is not legitimate competition. Not a free market.
Competition, real, legitimate competition, not artificial speculation, not being able to change the deal against the interests of legitimate competition must be seen as being the fundamental foundation stone; the principle purpose of a free society. For that to occur you have to have as many as possible legitimately competing in that market; any market, all markets.
The more you artificially swamp legitimate competition with speculation, the more you eventually reduce the natural quality of your nation. The less competitive you become and the opportunity for anyone, from whatever background, to rise to the top and succeed consequentially reduces. Failure will become endemic.
In such an uncompetitive environment, it is an easy illusion to believe that the few that are succeeding are all that can succeed. This is the great delusion created by any feudal society designed specifically to keep the group at the top exclusively their own.
Feudalism is an economic system where the most powerful use their economic power to swamp and distort the legitimate free marketplace by false trades, speculation. Feudalism naturally excludes success for the majority. Keeps control of the marketplace in the hands of a few.
Now I show how a lack of a free marketplace effects the creation of new industry.
So what is it that has got me so engaged with the process of and the people involved with the creation of new industry and commerce?
It is that I believe that the way the process operates today serves to completely suppress rather than increase competition and in so doing is not acting in the best interests of a free competitive society. Job creators, inventors and the like simply do not have access to a free market for capital; particularly equity capital.
Let us look at the process of creating a new company; a new independent producer of goods or services. The company is founded by a competitive creative individual, or group of such individuals, who will capitalise the company to their own maximum ability from their household income. It is a commonplace that they are thus grossly under-capitalised from the outset.
So what should we look for in such a start up?
2. Market power. They have something new and attractive that will sell.
3. Courage. To take on the competition of even the mightiest company.
The last thing you want in a free market is for the successful to be in any way forced into the hands of a larger competitor. That route naturally suppresses competition. Instead, we need as many as possible new companies to remain totally independent and competitive; snapping at the heels of the mighty companies.
That is not happening today. What is happening is that from that first stage start up, the founders of the company do not have free access to a free market for the capital they need to grow. Instead, they are actively encouraged to approach what is described as a Venture Capitalist who has a quite different agenda; to turn their initial investment over by selling that business on to the highest bidder for that company; in as short a timescale as possible.
"In the U.S., Michels complains, investors want deals only when the possibility of acquisition exists, meaning that they anticipate their payoff by quickly selling the company. "No one is looking for the next big thing," Michels lamented -- an opening that just might be Europe's ticket for a high-tech future." (Fanning Innovation Euro-Style By Stephen H. Wildstrom, BusinessWeek online, June21, 2005).
"NESTA Making Innovation Flourish" Sic! "You must have a clear exit strategy and timeframes, which detail your valuation expectations at an exit and any comparable exits in the sector." Applying for funding; NESTA Ventures www.nesta.org.uk
The Venture Capitalist, (VC), takes their start-up funding as a loan from a bank which in turn creates a vested interest that is detrimental to the wider society. Why? Because the bank also owns the shares of the larger companies which in turn buy the investee business from the VC in as short a timescale as is possible.
So the very first thing the VC absolutely must achieve is total control over the company they invest into. There is no other way they can be certain that, at any time appropriate to the VC, they can sell on their ownership for the highest price available. From that moment, the founders lose control.
The competitive potential collapses.
This is not a free market creating free, adventurous, independent companies.
There is no imperative for the creation of free and independent companies that will compete against the major companies. But the debate about this first stage of the process acts as a smokescreen for the next stage; Mergers and Acquisition, (M&A).
Today, instead of a process that constantly creates a rolling wave of adventurous, innovative, free, independent companies; we have a process that, immediately the start up tries to expand and has to raise capital, they become entrained into a rolling wave of uncompetitive mergers and acquisition, M&A. The people that are driving this wave of M&A are employed as a division of the banks that fund the VC. Once the start up has been financed by a VC, they are automatically entrained into a process that is designed to make them fodder for the next stage, M&A. They are acquired, or merged with another company with which they would otherwise compete. Thus this whole process is anti competition and anti free market.
Just like a human slave, the slave business must be sold on for profit at the earliest opportunity. Large companies today own many slave companies.
The present system is a closed system that has no competition. The people involved can pay themselves huge bonuses for each merger or acquisition as there is no way for any outsider to gain a foothold to compete against them.
M&A is a classic demonstration of absolute market power. Total control!
The primary seller of the capital does not sell, but loans. The primary seller controls each stage of the downstream process; owns the M&A, controls the VC and through the VC, demands total control of the start up company. Because the VC must borrow the capital, the VC must also sell as soon as possible onwards to be able to earn a capital gain from the initial investment.
The only way the VC can satisfy the loan from the bank is to make a capital gain, turn the shares into cash as quickly as possible. To gain access to another tranche of new capital to invest, the VC in turn must play to the rules of the bank that needs the M&A activity to keep satisfied the bonus income needs of its subsidiary employees.
So, instead of many competing new businesses, created by what used to be described as "Arms Length investment", now you have a system designed to maximise the income for the banks, and to do that competition must be suppressed.
Even more important to society, no one considering founding any independent company, where they intend to remain free and independent can gain access to this capital market. No VC will go near them. As we can clearly see with NESTA above, the VC will not entertain investment when they cannot control the company and sell at their optimum timing. The VC has no interest in long term free enterprise, none whatever! Again, no VC will look to capitalise the smaller company either.
Here the argument will be that they will not become large enough, quickly enough, to make the short term investment worthwhile. In each case, the imperative is not to create as many as possible competing independent free market companies; instead, the imperative is to create as quickly as possible, a company to be sold on to an existing competitor.
A slave business for the slave marketplace.
This is a gigantic and totally uncompetitive feudal monstrosity that is now leaving vast swathes of society grossly under-capitalised and unable to compete. Countless thousands of grass roots individuals in the wider society are excluded from success by exclusion from access to the capital they will need to compete.
The majority do not have access to capital; particularly long term equity capital.
It must also be argued that these uncapitalised individuals are the very best people in any society.
Why?
For the simple reason that they see that it is their own natural imperative to compete as independent individuals in the wider society. They believe in free enterprise. They have accepted the challenge to create new adventures for the majority.
· To show how hard work makes for a free and successful life.
· Or they would have if they could have obtained the capital they need to compete.
I believe that lack of access to capital drives lawlessness and there is much lawlessness today.
What needs to be recognised is that the primary savings institutions, the institutional investors, have a profound duty to see that at all times, they are doing all they can to create a free and fully competitive society. They have to change the way they return the savings of the nation back to the nation as investment into new independent free enterprise companies.
Yes, they have direct access to the largest markets on the planet, the stock markets trading in the stock of the largest and thus the most stable companies. Yes, they are constrained by many rules imposed upon them.
But these institutional investors must now recognise that they have lost sight of the need to capitalise an essentially free, independent and competitive nation in a way that ensures the maximum competition; moreover, naturally competing against the very companies they have invested into themselves.
They must understand that they have to accept such competition against their investment; from these smaller, unlisted, and privately owned and totally free enterprise businesses. That they must not act in any way to prevent such competition. How do they do that? I believe that institutional investors must return to the basics of the free market and create a flow of capital back into society over which they relinquish control. They must return to "Arms Length" principles.
They must adhere to the rule that whatever they sell, they cannot at one and the same time, remain in control of. That title to the capital passes to the purchaser. They must recognise the need to maintain a free market reservoir of capital to service the needs of the wider society beneath them.
As I see it, all that is needed is that government ensures that multiple free markets are established for that flow of capital into the creation of the new, competitive free enterprise companies. I have set out in some detail my own view of what I call a Capital Spillway Trust,
http://www.chriscolesholdings.com/page3.html
This will serve to start the debate about the need for a free market for capital investment into free; independent, free market based new companies at the grass roots level.
From that moment, the power of the market will take back control. Those company founders that still wish to relinquish control for a sale onwards; into the hands of their competitor may still do so. But this time, all those independent company founders also have access to capital and are free to reject that route. That in turn will create a much higher level of competition.
The VC’s will find themselves in a very different environment where the independent company sector is now free to compete - on their own terms. To survive, the VC will have to provide a superior service. Their monopoly power vanishes.
M&A as we know it today will almost certainly stop. Why? Because the institutional investor will now recognise that they are not acting in the best interest of a fully free and competitive society by allowing the M&A market to continue as before. M&A will thus not be able to secure funding for anti competitive activity.
Further, any completely independent company can now always make its own deal outside of the existing M&A environment. They will own their own business, have proper access to a free market for capital and can deal with whoever they like. From this moment onwards, the M&A cartel will have to compete with a fully free market. Their market power vanishes. Competition wins.
The people running this uncompetitive feudal business environment will have to recognise that they are seen as the new Robber Barons numbering many thousands. They pay themselves bonuses as though they own the capital of the nation as their own fiefdom to use as they will.
http://news.bbc.co.uk/1/hi/business/7613509.stm
That is a contradiction that must be brought to an end and the sooner the better for everyone.
Legitimate competition must be established in every marketplace, particularly the markets that channel new investment into the wider society which is today starved of free enterprise investment, adventure and the essential freedoms that underpin a rich cultural life in a successful economy.
Freedom, as we all know, does not necessarily stem from democracy, it stems from free markets.
Chris Coles.
About the author:
Chris Coles started out in life working in many diverse occupations such as forestry or again as a highly skilled artisan in industry. Later still he became a businessman and entrepreneur and on again to become an intellectual adventurer. He combines his lifetime self education with a passion for physics, cosmology, current affairs, economics and turning his acute mind to everything from debating the working environment of the inventor and entrepreneur, to the fundamentals of the current malaise in the worlds banking and financial industries.
Today he is internationally recognised in a number of fields and has, in the past, been widely interviewed on television, radio and in numerous newspapers and periodicals in both the UK and abroad. He is highly accomplished, having considerable design and management experience in a number of disciplines. An inventor since the 1970’s, in the early 1980’s while working on establishing the concept of an Ideas and Resource Exchange, IREX, the UK government credited him with creating the most innovative computer based information distribution system they had seen up to that time with Kenneth Baker, Minister of State for Posts and Telecommunications opening the IREX London office. Later in the same decade the French government publicly acknowledged he had the same technological foresight as Gustav Eiffel through his participation in the centenary celebrations for the Eiffel Tower in Paris with his proposals for an orbiting Space Chronometer. More recently he has been granted several International patents in wireless telecommunications that make him the originating inventor of any portable transmitter combining an electronic camera and navigation such as the new wireless camera phones with GPS and he is the originator of the GPNS Corporation Video-911 personal security system. He is shortly to publish a new, very controversial book about gravity and profits from the sale of this book will be used to establish a public theme park; so that everyone may come and see gravity for themselves, plus a new, completely independent research centre; dedicated to research into gravity and new forms of alternative energy.
He will continue to promote his proposals for a Capital Spillway Trust to fund equity investment into the creation of new jobs at the grass roots of society.
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