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The Bottom Line

Evan Davis gets to the heart of the big finance stories at The Bottom Line.

Creativity is central to the human condition and gives rise to innovation and entrepreneurship in a range of domains and activities. Human beings are also deeply territorial – constantly creating and deconstructing homelands in a Phoenix-like dance through time. In Anthony Powell’s masterly opus on what it is to be English, A Dance to the Music of Time, the participants tread and re-tread over the same spaces as they attempt to make sense of their existence. In the Star Trek world of ‘boldly going’ it was claimed that space was the final frontier, but in its geographical and temporal senses, space is the first frontier we attempt to account for and create around, however unwittingly. In our dance to the current mood music, creative accounting and how we manage, operate and occupy our work spaces are pertinent. The frontiers of what is efficacious in the two areas appear to be cyclical and not particularly structural. Enron became synonymous with everything that is destructive about accounting, and the de-humanising environment of call centres with the zeitgeist of work organisation.

The Enron sign.
Picture © STANANDLOU, used under Creative Commons licence.

Accounting is a framework for evaluating resource allocation and management in organisations. It is not objective reality, whose methodologies and methods lead to optimal and efficient outcomes. This would only be the case if we lived in a world of efficient markets in which all prices equated to values. This world would correspond to the Arrow-Debreu Theorem, named after the two Nobel prize-winning economists, in which all market exchanges are matched by underlying contingent commodities within a general equilibrium framework. Differences in time and place, and thus transaction costs, are not a consideration within this framework, so the accounting profession is stuck between the Charybdis of efficiently measuring values of organisational assets and the Scylla of differences in the time and place in the transactions of these values through market exchange.

Some siren voices may claim that the profession deserves everything it gets given scandals like Enron and the recent financial crisis, as well as the tax avoidance schemes which reached their zenith in the UK in the 1970s. However, accounting isn’t the agency of these outcomes, it’s the result of unintended consequences and perverse outcomes of the structure of regulation and regulatory changes. The ingenuity of ways in which regulations can be bypassed and turned into market opportunities is manifold and legion, but you cannot regulate away creativity and innovation, unless one starts to distinguish between good and bad parts of this human condition. So, what is the distinction between good and bad creative accounting? The length of a piece of string or when the ‘perps’ get caught? As for tax avoidance schemes, well we could ‘eat the rich’, and then send the accountants and other ‘creatives’ like management consultants and advertising agencies to another galaxy on the pretext of the earth exploding, but then financial products would be created on the transactions in human flesh and ‘marked to market’ at, say, Smithfield, the meat market in London. Getting rid of one form of accounting and its creative variants would then just generate others. The creative frontiers for accounting are set by the statute and international standards. These frontiers are really thresholds, the negotiation of which can lead to deviant behaviour – which is perhaps also one of the properties of the human condition.

The question of organisational deviancy is one that arises from why firms appear to spend so much time, energy and resources in managing property. The fundamental reason is that land is both a fixed and variable form of capital and gives rise to a set of uses and values, and most of our net worth is tied to property. At the philosophical level, John Locke developed the genesis of the idea of property rights as the foundation of the modern liberty. In the hands of the Peruvian economist Hernando de Soto, these rights are the basis of sustainable economic development. So property matters.

There is also the issue of power and prestige concerning property. The management of a mutual society may look down in pride on their provincial locale as they survey it from the heights of their new building. No self-respecting bank in 1980s London was complete without occupying a building with an atrium and an internal galleria. The question of architecture has external and internal dimensions. Externally, the need for signature architecture with a Gehry, Foster or Pei designed building seems central to corporate image. Internally the complex socio-psychological relationships of workers to their spaces cuts across the human resource management, finance and estate management functions. For the latter, maximising personnel in minimum space is rational, but the ebb and flow of movement and work patterns means that open plan or Dilbert-like booths are not optimal solutions. The way in which workers seek to humanise their work spaces suggest that the deep territoriality in all of us isn’t restricted to the home, but the challenge is to manage the challenge that status being often linked to a spatial hierarchy. Many firms claim that employees are their most valuable asset, but if they don’t creatively account for and put their spatial resources where their mouth is, this claim will not stand scrutiny. If you want to stifle workers’ creativity and innovation in solving business problems, then housing them as automatons in a single open space will suffice and no amount of virtual working will change this. There are creative solutions, but these are not cheap as the frontiers between private and public spaces in the workplace are constantly crossed and re-crossed.

At the banal level, accounting for the creative frontiers of managing financial and work space resources is a question of races and riders. The bottom or winning line, however, will only reached when it is recognised that these organisational imperatives are part of complex systems in which creative spaces develop and thrive.

Find out more

Does business have a problem with ethics?

Ethics Bites on Business Ethics

OU courses

Study accountancy and finance with The Open University

About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

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Thinking Allowed

The BBC Radio 4 soap, The Archers, which was set up after the second world war to provide public information to provide advice and guidance to rural communities and farmers, has recently featured a big story on fraud. It’s chance, although I wouldn’t bet on it, because, unlike some of the poker playing Archers’ characters who are involved in the current narrative, I’m not a betting person, but the current storyline coincides with Radio 4’s series on 'White-Collar Crime' on Thinking Allowed.

This is white-collar crime: it involves a £5million fraud case

This is white-collar crime: it involves a £5million fraud case. The main protagonist, businessman and wheeler dealer Matt Crawford, has a chequered past and has come up the hard way, unlike his clearly middle-class partner, Lillian, who is not involved in the case, except through her emotional relationship with him. Lillian is a member of the eponymous, largely affluent, Archer family of local farmers, who also mostly occupy the moral high ground, as well as owning much of it: she is also the widow of a wealthy man. Matt has struggled and, whilst on the right side of the law, was tolerated by the local land consortium, Borsetshire Land, but having transgressed, or at least been caught, he is marginalised. In spite of Lillian’s hopes for leniency, he has been sent to prison; ‘Take them down!’ said the judge and listeners were faced with the speed of sentencing and its finality, however well-off the offender.

Matt and his business partner at TWJ bank, Stephen Chalkman (Chalky), receive custodial sentences, and Lillian is left weeping loudly. Matt not only has the reassurance of her fidelity, but also that of earlier storylines, where characters with much more clearly working-class credentials have been reinstated into the community following release from prison. For example, Susan Carter was imprisoned as a result of protecting her brother, the infamous Clive Horrobin, armed robber and hostage-taker, at an armed raid on the Ambridge village shop. Susan currently manages the shop and post office and plays a key role in the community. However, such stories are haunted by class. Matt was never quite accepted; Susan is just the best of a rough family, a fragile step away from social exclusion.

Soaps often engage with social issues, usually with dramatic hyperbole but The Archers offers some more nuanced, complex coverage. The programme, which has a tradition of dealing with big issues: from racism, the rural economy and economic recession to dementia, family breakdown and sibling rivalry, does not limit itself to rural or agricultural matters. It deals with big issues (Woodward, 2009), such as class, family, kinship, place, diversity and inequality, which intersect in different ways, through the lens of personal experience.

Soap opera can do something to engage with the detail and affect of social phenomena

Soap opera can do something to engage with the detail and affect of social phenomena like white-collar crime in complex ways. As the sociologist C.Wight Mills argued (The Sociological Imagination), this is what sociology does; it demonstrates the powerful interconnections between private troubles and public issues through the sociological imagination. This is an everyday story of the personal and the public and political which has wider resonance and demonstrates, albeit inadvertently, the power of thinking sociologically.

Find out more

• The Big Issues, by Kath Woodward, Routledge, 2009
• The Sociological Imagination, by C Wright Mills, Harmondsworth, Penguin (1970), 1st edition 1959
• Get The Archers podcast
• Serious Fraud Office help The Archers with their inquiries
• Join the discussion on white-collar crime

About the author

Kath Woodward is Profesor of Sociology at the Open University, focusing on gendered identities. She has recently completed research into anti-racist organisations in sport.

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The Bottom Line

Evan Davis gets to the heart of the big finance stories at The Bottom Line.

A number of years ago, the sociologist Richard Sennett pondered on why it was, that in a so-called digital or virtual age, global financial and business services still crowded into the world’s leading cities. The answer to his question and that of why firms cluster near each other is rooted in the concept of agglomeration economies, of which there are three types:

• Localisation economies: which refer to the advantages accruing to firms in the same activity which result from their joint location;

• Urbanisation economies: which are concerned with the range of advantages to the individual firm which result from the joint location of firms in different and unrelated activities;

• Activity-complex economies: these refer to economies that emerge from the joint location of unalike activities which have substantial trading links with one another. In the case of manufacturing, such economies typically occur within industrial complexes.

 The City of London is a classic example of activity-complex economies at play. Financial firms and associated business services crowd together in the Square Mile and its environs in order to benefit from external and internal economies of scale and scope. Economies of scale that are internal to the firm include spreading a larger output over existing productive capacity, and differentiation of products or services from existing production platforms. External economies of scale and scope include the ability of firms to draw on specialised pools of local labour; and, to exploit different markets because of transport and technology infrastructure. Agglomeration economies are thus at the heart of the dreaded ‘c’ word – clusters – one of the topics of the latest BBC/Open University broadcast of The Bottom Line. The other topic is the future of television.

It’s reasonable to ask, “What on earth has the clustering of firms in the same locale got to do with the future of television?” Well, for many commentators the future of broadcast media is multi-platform. The advantage of multi-platform production, as in any industry, is the ability to exploit external and internal economies of scale and scope; in other words, the capacity to create activity-complex economies. Whether they’re in Euclidean space, cloud computing or cloud cuckoo land makes no difference; clustering concerns the co-location of business activities. The paradox is that in this supposed age of the ‘death of distance’, the dominance of clustering in real geographical space prevails.

The most frequently cited example of a cluster is Silicon Valley in California, the heartland of web-based companies and venture capitalists from where two of the guests of the current programme were drawn. In the 1980s, it was ‘Third Italy’, the region of Emilia Romagna in which small textile firms co-located and gave rise to the Benneton phenomenon, among others. Clusters are nothing new and the academic literature is informed by reference to the work on ‘industrial districts’ of the economist Alfred Marshall, who examined the characteristics of industries in 19th Century England, in particular their locational advantages. The conflating of clusters with industrial districts does a serious disservice to Marshall and his disciples. The celebrity academics and management consultants who have been significantly advantaged by their promotion of an increasingly elastic concept overlook one key fact. Many firms in the same sector are often blithely unaware of the immediate location of competitors, as countless surveys have demonstrated. This is especially true of small and medium sized enterprises: the basis of Marshall’s original ‘industrial districts’. It is the very elasticity of the concept of clusters and the lack of empirical evidence that weakens its claims as the universal panacea for economic development, as the economic geographers, Ron Martin and Peter Sunley perceptively note, “The cluster literature is a patchy constellation of ideas, some of which are important to contemporary economic development some of which are either banal or misleading.” One important issue that’s overlooked in the discussions of clusters is the bounty of nature. London became a global financial centre because its topography allowed it to be become a port; Hollywood initially attracted film makers because of its natural light. Similarly, the bounty of technology has created the television and Internet ages, but what sustains different forms of clusters is their underwriting by the state.

The question of the future of the televisual age is an important one, but one that can lead to debates that are both banal and misleading. Almost since the day John Logie Baird first demonstrated his new device, the television has been the hearth in the home that families cluster around. Whether that connected cluster we commonly know as the Web will change the locale of our emotional and social hearths and heimats is a future question but one that has contemporary resonance. For many, the Internet will replace television as the dominant medium of choice, but as the Chief Executive of the UK-based Channel 5, the other guest of the programme, pointed out, the two are complements and not substitutes. The most ubiquitous contemporary technology is the mobile phone, which has a visual function that allows the user to access television programmes. The Internet and associated technologies may be the medium of transmission but they are not the message.

In the present day, television has become a product and a process that generates its own cluster of activities because technology and social (and business) practices create external and internal economies of scale and scope: a basic condition for the development of clusters. The multi-platform of broadcast media has joined the pantheon of activity-complex economies and agglomeration around a hearth is no longer restricted to family viewing of the Billy Cotton Band Show or Strictly Come Dancing on a Saturday evening. In 1979, the Tubes sang “I really love my television” on the track ‘TV is King’ and, like geography, reports of its death have been very premature. Clusters have been around much longer than television but the future of these connected and networked phenomena is still assured as their natural and technological bounties lead us through the millennium.

Find out more

The following Open University courses will help you explore these subjects in greater depth:

Managing 1: Organisations and People

Understanding Cities

Understanding Media

Film and Television History

About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

Subscribe to Leslie Budd's posts

 

Blogging about

The Bottom Line

Evan Davis gets to the heart of the big finance stories at The Bottom Line.

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way."

The most well-known passage of Charles Dickens’s novel, A Tale of Two Cities, seems an appropriate starting point to discuss private equity, one of the topics of the latest BBC/Open University The Bottom Line broadcast. Belief and incredulity appear to characterise our present epoch of financial booms and crashes, during which private equity firms are painted as the pantomime villain in capitalism’s triumph and fall: asset strippers in name and deed.

The relationship of Dickens’s tale of London and Paris, at the time of the French Revolution, to the financial centre of the City of London seems metaphorical and real. Joseph Addison had described London as an “Emporium for the whole earth” a century earlier, and in the emporium that is the global financial entrepôt of today, private equity firms are as much a part of its landscape as the trader of the 17th century. In the late 20th century, the leitmotif of the City of the furled umbrella and the bowler hat gave way to the yuppie and the mobile phone; the gentleman giving way to the player. For some commentators, these changes represented a revolution whose genesis rested on private equity firms and their ilk.

Businessmen shaking hands.
photo © copyright Jupiterimages Corporation

Private equity firms operate on the basis of buying and selling a portfolio of companies to extract returns of 20 per cent on their investment over a three-to-seven-year period. They institute cost cutting and disposal of parts of companies in order to sweat the assets they have invested in. For defenders of private equity firms, they create long-term value. For critics, they are the manifestation of the UK-based asset strippers of the 1970s; Jim Slater, John Bentley and ‘Tiny’ Rowland amongst others, whose activities were called the “unpleasant and unacceptable face of capitalism” by the then Prime Minister, Edward Heath. The language of private equity activities are, in this view: a climate of fear; downsizing; the casualisation of work and so on. This litany is universal to these firms, whether expressed in the English or any other linguistic form. For the famous economist Joseph Schumpeter, entrepreneurship represents the revolutionising of the economic structure which enables new activities to be born, phoenix-like, from the ashes through the process of “creative destruction”.

It is the important question of language that formed the second topic of The Bottom Line discussion. English is claimed to be the universal language of business, with its own cross–national dialects, so that knowledge of other languages is deemed not to be as important as it once was. But language is like football, the rules of the game may be pretty much the same but the variants are as numerous as the array of cities in the world. It is a linguistic truism to say that language affects the way in which one thinks. Knowledge of local customs may be useful upon introduction to a client, but knowledge of the rudiments of the local language is an important part of business engagement and sustainability. For example, in China, saying yes to a question does not signal agreement but rather that the speaker has been heard. These are important considerations for companies that engage in international transactions. It can be argued that globalisation will only be completed if the law of one price operates. That is, all prices in the world converge with the only differences being accounted for by transport and administration costs. Similarly, if English became the first language of everyone in the world it would become truly global.

Capitalism, as Schumpeter and others remind us, is a revolutionary system in which “all that is solid melts into air, all that is holy is profaned…” Private equity is part of that system and provides a vehicle for “revolutionising the conditions of production.” A single global language would be part of that revolution, and if that is not generally understood then change does need to be made. Blaming private equity firms and hedge funds for the financial crisis is a bit like Canute blaming the Moon for his failure to control the tides. There are compensations with more than two cities and more than one language in the world which makes us all richer, whether materially or culturally. The globalists, in whatever guise, make us all poorer as heterogeneity is sacrificed for homogeneity.

Find out more

Sovereign wealth to the rescue

Faith in fakes? Travels in hyper-mobility

OU courses

Financial strategy

Making a difference

Capacities for managing development

Beginners’ Chinese

About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

Subscribe to Leslie Budd's posts

 

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Thinking Allowed

Sport might appear to be all about fair play, but it is also all about winning and losing; and some of the rewards for success are rich indeed. Consequently, there are powerful temptations to bend, or even break, the rules to secure the rich prizes that are available to the winners. To some extent sport makes its own rules, although decision making is increasingly subject to public appraisal and the sponsors of sport and its regulatory bodies must abide by the rules of the wider society. Sport has its own governing bodies that regulate the bodies that take part.

Sport is fun and entertainment, but it is also highly competitive and profitable.

Although sport is big business, and constituted by media, sponsorship and commercial networks as well as its practitioners, at all levels, it is also a particular social world, which seems to operate outside the parameters of convention in an uneasy relationship between promoting competition and elite outcomes, at the same time as widening participation and creating greater equality and cohesion. Sport is fun and entertainment, but it is also highly competitive and profitable (for some).

Sport is not outside debates about corruption and unfair, even illegal practices, although what is categorised as corruption in sport often centres on revelations of drug abuse and performance enhancement by individual athletes. Doping and match fixing affect the results of sporting events, which undermine the basic principles of sport, and implicate participants, organising bodies and promoters. Ideals of fair play and amateurism underpinned the Olympic movement; the modern Games were based on a movement with stated ideals, some of which seem less relevant today, like the amateur ideal and requirement that athletes be amateurs and not professionals.

Marc Hodler revealled corruption in the International Olympic Committee
[Image from Wikimedia: available under GNU Free Documentation Licence]

The Games have a long history of corruption, especially in relation to the bidding processes

Ideas about democratic participation and fair play remain a powerful part of Olympic rhetoric and governance, although what counts as social exclusion or social inclusion in sport varies according to time and place. These ideals not only seem incompatible with corruption, they also serve to conceal it; rather like white-collar crime. It’s not what convention leads us to expect, whatever the current furore about bankers and politicians, so it passes unnoticed. The Games have a long history of corruption, especially in relation to the bidding processes that precede success in being the host city. As Andrew Jennings has demonstrated, corrupt practices have been rife within the IOC (International Olympic Committee), and came to a head with the 2002 Games in Salt Lake City, when Marc Hodler, an IOC member, broke ranks and revealed that agents had been bribed to vote for cities bidding for the right to host the Games. This blew the lid on systematic malpractice within the IOC, and an internal enquiry found clear evidence that up to 20 of the 110 IOC members had been bribed to vote for Salt Lake. It didn’t stop in 2002, though, and there continue to be claims of corruption in the bidding process in the lead-up to 2012. 

The 2012 website may be counting off the days, but news stories also show some of the tensions and difficulties that beset the staging of any such mega sporting event and, indeed, sport in general. Like all sporting activities, the Games involve both winning and losing, success and failure, equalities and inequalities. The Olympic democratic ideals, global reach and wide range of sports and participation mean that the Games lend themselves more powerfully to such a politics of inclusion than most other sports, especially those which are dominated by commercial concerns.

Corruption in the Games, as across sport, can be seen as the outcome of a failure of governance as Sunder Katwala has argued. This failure can be seen in part as dependent upon the inequalities that permeate the organisation of sport, and not the more corporeal inequalities or differences in skill and competence that are displayed on the field. Corruption in sport may be primarily economic and financial but it is also social and cultural and draws on social inequalities that are not entirely dependent on athletic competence.

If some of the lessons learned from critiques of white-collar crime mean drawing attention to the privileges of class, gender and ethnicity that can be obscured by ever growing bureaucratic regulatory bodies, then this concept has some purchase in understanding the slow pace of change in the governance of sport.

Find out more

• OpenLearn: Influences on corporate governance – free learning material from The Open University
• The great Olympic illusion

Further reading

• 'Embodied Sporting Practices: Regulating and Regulatory Bodies', by Kath Woodward, Palgrave Macmillan
• 'Dishonored Games: Corruption, Money and Greed at the Olympics', by Viv Simpson and Andrew Jennings, SPI Books (US)

About the author

Kath Woodward is Profesor of Sociology at the Open University, focusing on gendered identities. She has recently completed research into anti-racist organisations in sport.

Subscribe to Kath Woodward's posts

 

Quasi-autonomous non-Governmental Organisations (QUANGOS) have been part of the UK public sector for many decades and there are often robust political and managerial debates about the usefulness (or otherwise) of these public bodies. This has been brought into focus recently by the atrocious state of Government finances in the UK and the need for the next Government (whoever it may be) to make real terms reductions of public expenditure in excess of £100 billion.

Not surprisingly when there are threats to front line pubic services such as schools and hospitals many will question whether we really need the large range of QUANGOS which currently exist and also whether we can afford them in the current economic and fiscal climate.

A well-researched document recently produced by the Taxpayers Alliance claimed that in the UK there were a total of 1162 QUANGOS and other agencies which cost the taxpayer a total of £63.5 billion. These figures seem to chime with similar figures used by David Cameron in a recent speech but differ markedly from other claims which put total QUANGO expenditure at £14 billion.

This brings us to the first issue of what do we really mean by a QUANGO. For example, the figure of £124 billion includes in its list of QUANGOS all of the NHS Trusts in the UK which deliver hospital and community services. Few would regard NHS Trusts as being QUANGOS in the usual meaning of the world. Even the TPA report includes in its list of QUANGOS the following organisations:-

• The British Museum
• The BBC
• Kew Gardens
• The National Library for Wales

I am not sure many people would regard since high profile and well known organisations as QUANGOS.

Perhaps QUANGOS can be considered in four main groups:-

• Service providers – some QUANGOS such as the British Museum provide services directly to the general public.
• Funders – some QUANGOS distribute public funds to relevant external organisations. Thus the Arts Councils distribute funds to arts projects and the Higher education Funding Council for England (HEFCE) distributes funds to universities for teaching and research. So it is misleading (as the TPA report does) to claim that HEFCE spends £7billion per annum. The vast bulk of that money, with the exception of £20million for internal administrative costs, is distributed to universities for teaching and research. Also in this category might be included Regional Development Agencies.
• Regulators and Inspectors – some QUANGOS are charged with inspecting and regulating public sector service providers. Thus OFSTED inspects schools and the Healthcare commission inspects hospitals. The Audit Commission audits and inspects a range of public bodies. Also in this category might be included QUANGOS such as the Equalities commission.
• Advisors – there are a myriad of bodies of varying size which provide advisory services to various parts of Government.

There are many questions which will continue to be asked about QUANGOS. These include:-

• What benefit do they actually produce? For example, have schools really improved as a result of OFSTED? Have inequalities really reduced as a consequence of the Equalities Commission? The evidence is often thin. Also the activities of such inspection QUANGOS often place great burdens on the public bodies being inspected.
• Could their work be done by other existing organisations? For example, many of the roles of the Learning and Skills Council (LSC) in funding post-16 education used to be done by local authorities. Also, much economic work is done by local authorities as well as RDAs. Do we therefore need these QUANGOS when local authorities might do the same work for less?
• What public accountability is there for the work of QUANGOS? The Boards of QUANGOS are not elected but appointed by Ministers who seem to closely control what they do in some detail.
• Why are so many QUANGOS based in London when their wok could be just as easily done in other parts of the UK?
• Are there too many QUANGOS? For example do we need a QUANGO to fund higher education (HEFCE) and a QUANGO to fund post 16 education (LSC)?
• Are QUANGOS just devices for Ministers to reduce civil service head count and to avoid direct responsibility?

Overall, the future of QUANGOS probably depends on how much time and energy Ministers can devote to the issue given the vast problems which will face the next Government. Some savings can probably be squeezed out of the QUANGO system but it is probably much less than currently imagined.

Find out more

Malcolm appeared on BBC One's The Politics Show talking about QUANGOs on November 8th

Get under the skin of questions of private and public finance with The Open University Business School

Blogging about

Thinking Allowed

Edward Sutherland’s original definition of white-collar crime still holds resonance: white-collar crime is ‘a crime committed by a person of high respectability and high social status in the course of his (or her) occupation’. (Note the use of the word ‘high’ on two occasions.) This relic of my old sociology days in Ponders End Polytechnic was rediscovered this week, after I was invited to say a few words about white-collar crime for the new BBC-OU Thinking Allowed series.

The problem with white-collar crime is that it is seldom black or white, and a significant minority of it is far from petty. It is all around us and it is a rather complex phenomenon. It appears to be far more tolerated in society than other forms of crime.

Sutherland’s 1947 definition could, I believe, be applied to two actions, in their different ways both criminal, that have generated some of the worst carnage in the history of the world – the 1984 Bhopal disaster in India, and the invasion of Iraq. For, however we define it, white-collar crime seems to be a particularly grubby, devious and, at times, sinister and nasty activity, which often has extremely damaging human, and far-reaching societal impacts.

White-collar crime is ‘a crime committed by a person of high respectability and high social status in the course of his (or her) occupation'.

Many white-collar criminals escape punishment, and more often than not, their misguided gains are not redeemed. Where justice does follow white-collar criminals – as in the recent US prosecution of Bernie Madoff for fraud – it seems the exception rather than the rule; mainly because the costs of prosecuting are so prohibitive, and the justification for prosecuting is often so complex and morally dense, very few legislators bother.

There is an old saying: where there is money to be made, fraud is not far behind, like bees to honey. White-collar crime is enormously costly for society. In the UK, a report from the Association of Chief Police Officers revealed that, in 2007, fraud, for example, was costing the UK a huge sum – between £14bn and £20bn each year, equivalent to a loss of £330 for every UK inhabitant every year. So in the last three years, white-collar fraudsters have done me, and you, out of approximately £2,000! And mostly got away with it!

White-collar criminals are in the main sentenced, punished and perceived by the public differently to other types of criminals. The length of criminal penalties tend to be related to the degree of physical force or violence involved in a crime – rather than to the amount of monetary loss – though this does not always mean that the punishment fits the crime, as one of my examples might reveal.

For many, too, the opportunity for fraud, bribery, insider trading, embezzlement, identity theft, illegal waste dumping, forgery, fiddling expenses (all MPs note) are activities differentially distributed in society. In the age of new technologies, more and more of us are at it, and in increasingly more sophisticated and difficult to detect ways. Who has not illegally downloaded music or a movie, for example? But there are contradictions.

Some people are more vulnerable to prosecution than others. For example, each year over 700 people, mostly women, are imprisoned for not paying their TV licence fee, while our prisons remain relatively free of tax evaders. Most are living offshore anyway. In the US, in 2007, the latest figures I could find revealed that Americans owed, in tax, the equivalent of 14 per cent of federal revenues – $345bn.

In the UK, our Serious Fraud Office (SFO) has a deplorable history of failed prosecutions. And yet, in UK society, benefit fraudsters are far more likely than income tax evaders to face justice, while individuals indulging in occupational crime are more likely to face justice than corporations acting criminally, and prosecutions for state-sponsored corporate crime are very rare indeed.

Justice is still chasing those responsible for the world’s worst industrial environmental disaster – the Bhopal gas leak in India – which killed over 7,000 people, poisoned a further 500,000 and the impacts of which are still being felt today. The Indian Government estimate that a further 15,000 people have since died, and that each month 15 more people die because of the fatal legacy of toxic contamination.

In June 2009, The Congress of the United States wrote to the Chief Executive Officer of Dow Chemical Company (Dow now own Union Carbide who ran the Bhopal site at the time of the 1984 disaster):

This coming December marks the twenty-fifth anniversary of the chemical disaster in Bhopal, India. It is with urgency that we write to urge Dow Chemical Company – which wholly owns Union Carbide – to immediately take steps towards remediation and redress. We request that Dow ensures that a representative appear in the ongoing legal cases in India regarding Bhopal, that Dow meets the demands of the survivors for medical and economic rehabilitation, and cleans up the soil and groundwater contamination in and around the factory site …

Despite repeated public requests and protests around the world, Union Carbide has refused to appear before the Bhopal District Court to face the criminal charges pending against it for the disaster. Union Carbide was served with a summons to appear in Bhopal District Court in 1992 and publicly stated it would not respond to the summons. Although Dow Chemical set aside $2.2 billion in 2002 to put towards Union Carbide's pending asbestos liabilities in the United States, it has continued to evade the liabilities it inherited from Bhopal.

So it seems the innocent victims of the worst of corporate excess imaginable can still find justice elusive.

Of course, one reason for prevarication and lack of action is that more benign treatment is possible because it is difficult to assign blame, and because prosecuting corporations can be damaging to innocent employees and shareholders, who play no part in events that could result in prosecution.

In the UK, those institutions established to protect us from white-collar crime, however mundane, have rather blemished track records. The SFO’s authority was further undermined when Tony Blair controversially decided to terminate its investigations into BAE, thus ensuring that any allegations about corporate bribery and corruption between BAE and Saudi princes could not be substantiated in law. You might want to consider this, while assessing whether you think Tony Blair is a fit and proper person when it comes to the Presidency of the European Union; he does have what might be called ‘white-collar baggage’. Even the Premier League in football seems to have more rigorous ‘fit and proper person’ tests, though even these can be circumscribed.

I was thinking about Sutherland’s definition and Tony Blair’s rumoured bid for the European Presidency afresh today, when I read about how protestors in the Medway area had defaced British Legion Poppy Appeal posters.

The poster shows Ms Wright, from Mansfield, Nottinghamshire, who became one of the public faces of the Poppy Appeal after her husband, Damian, died in a roadside explosion in Afghanistan in 2007, aged 23. Of course, the nation is divided on whether Britain should be conducting a war in Afghanistan, and in this instance the message ‘prosecute Blair’ might have been better employed in reference to the invasion of Iraq – an invasion which, lacking any UN Security Council mandate, had no strict legal justification. It was not an invasion of self-defence, no matter how hard Blair tried to fudge the weapons of mass destruction issue. No weapons of mass destruction have ever been found, and the subsequent deaths, of between 100,000 and a million people (so far), is a very high price to pay for regime change. Six years after the invasion, the scars still plague the Iraqi people.

On October 26th, Foreign Secretary David Milliband, backing Blair for EU President, said the EU needed a President who was ‘a big hitter who could stop the traffic’. Blair’s role in the invasion of Iraq certainly exhibited big hitting and it did stop the traffic in many places. The bombs still destroy lives and stop the traffic across Iraq. Over 700 people were killed this week in the Green Zone in Baghdad. The traffic was not so much stopped as blown to smithereens.

Within the UK, there are, as yet, no means for bringing charges against Blair, even if a strong case could be made on legal grounds for the Iraq invasion. Yes, Blair will be called to testify at the public inquiry into the war, which begins on November 24th this year, but he will not face any retribution. In 2006, the Law Lords decided that international crimes of aggression had not been enshrined in our domestic laws

The higher your social status...the more likely you are to get away with it

But Blair would run the risk of arrest in those countries that have now incorporated international crimes of aggression under their domestic laws. So far within the EU, two countries, Latvia and Estonia, have done so. Given the cloud that still surrounds the reasons for going to war in Iraq, it might be rather risky to elect a person as President of the European Union, who could be vulnerable to prosecution within member states. Perhaps Blair should stick to being Middle East envoy, where he has made little progress, and where, after all, there is far more important work to do.

So, thinking aloud about white-collar crime can take you on a long and difficult journey, from Bhopal to Iraq, and you might conclude, like me, that not only does the punishment seldom fit the crime, but that the higher your social status, no matter how heinous the act, the more likely you are to get away with it. I mean look at Blair’s only definite ally for President among European leaders, Italy’s Silvio Berlusconi…no don’t tempt me.

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Richard Skellington edits Society Matters for the Faculty of Social Sciences at the Open University. He’s an administrator who manages the Environment, Development and International Studies programme.

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The Bottom Line

Evan Davis gets to the heart of the big finance stories at The Bottom Line.

In the turbulent 20th Century, you could start a riot with a piece of paper – it just had to be printed with revolutionary slogans and handed out to disgruntled crowds. In the atmospherically obsessed 21st, the same mayhem can be triggered by rolling it up and smoking it, yet soon there’ll be a bigger sin than lighting a cigarette in the building; bringing out a banknote at the checkout. Paying by cash is fast becoming a form of anti-social behaviour – the point-of-sale equivalent of wearing safety-pin jewellery, watching Jonathan Ross or window-shopping with a brick.

Seasoned users of ‘ready’ money may already be noticing a backlash against cash. While cardholders swipe and type, cash customers must ride the glare of chafing chip-and-pins, maddened by the mutual fumbling over miniaturised coins. Travellers’ only rescue from a ticket queue longer than their journey is a machine which laps up plastic, but chokes on all but the most freshly-ironed banknotes and gives no change. Sales are shifting at double-digit rates to an internet which recognises Mastercard, Visa and PayPal infallibility, but sees no virtue in any non-virtual token.

Paper profits

Not long ago, people in power loved paper money. It was a commercial invention, devised to circumvent the physical inconvenience of gold and silver. Instead of issuing invoices which then had to be swapped for precious metal, buyers and sellers started trading the bits of paper, only rarely visiting the bank to withdraw the underlying riches. Private debt had become a convenient form of currency, fulfilling the traditional requirement of storing value and speeding up exchange. This also had immense political advantages, freeing rulers from the fiscal inconvenience of scarce and theft-prone bullion.

Governments could now print notes to represent their official reserves, keeping these locked in suitably fortified central banks, and once people trusted the paper currency, more could be issued – an especially useful tactic for rulers struggling to squeeze subscriptions from their nobility, or keener to raise an army than the accompanying tax. Medieval kings and emperors could only expand the money supply this way by clipping the gold and silver coins, or smuggling base metals into the mint. Their modern successors have the happier option of issuing public debt, spending more now while passing the bill to taxpayers still too young to vote.

Issuing more public debt than private investors want to hold – today’s innocuous sounding ‘quantitative easing’ – is traditionally condemned by monetarists as cruelly clawing-back the handouts through a hidden inflation tax, but this is an occasional public indulgence in a practice that’s second nature to commercial banks. They routinely make loans that are a multiple of customer deposits, pushing assets (and corresponding liabilities) far above what is actually held in reserve. Indeed, governments only rush to quantitatively ease when banks are on their collective knees because their credit has ceased to flow.

Paper money enables the same capital to be put to work in many places simultaneously. Productivity is multiplied by turning each asset into collateral for another, and re-lending many times the wealth that used to sit idly in a vault. Securitised debt may recently have stalled the world economy, but it’s only an extension of the forces that previously drove it. That’s why governments splashed the blank cheques to redeem the chequered banks.

A bullet through the wallet

If paper money opened all these doors, why is its future in any danger? For the same reason that an abstract axe hangs over the Royal Mail, printed newspapers and music on disc. Just as we could get value from precious metal without minting it, we can now get value from an invoice without printing it. Once money’s more manageable as an electronic pulse, suspicion surrounds those who still want it in physical form.

The problem with paper money is that it leaves no ‘paper trail’. Governments have long resented the way cash transactions enable legal traders to sidestep taxes, and illegal traders to launder their profits into regular circulation. The growing skill of forgers also challenges the most jealously guarded monopoly of sovereigns, who aren’t flattered when their likeness runs off someone else’s printing press.

More influentially, big retailers and manufacturers curse cash deals that fall outside their customer databases, so it can’t then be ‘mined’ for appropriately personal marketing ploys. They also regret needing a fleet of armour-plated couriers to empty and fill their cash-heavy tills. Finance directors declare war on the ‘off card’ transaction, which lets executives scupper the expense tracking system with improbable taxi fares and budget-busting bar bills.

Cash stands accused of causing banks to crash and civilisations to clash. Lenin famously viewed debauching the currency as the quickest way to undermine capitalism. Hitler came close to putting such pecuniary subversion into effect, with a wartime scheme to bomb Britain with banknotes, a road to ruin via rampant inflation. Guy Fawkes’s belated knighthood, for services to the global firework industry, is obstructed by his financially illiterate choice of tactics. Instead of lighting the blue touch-paper, he should have been faking the banknote paper and causing an unsustainable credit explosion.

Governments seeking faster, cheaper and more visible transactions are keen to kill the dollar bill – and its counter-clogging counterparts in the euro, yen and sterling zones. Corporations are equally concerned to stamp out logistically wasteful, electronically untraceable cash flows. To meet their demands, innovators who once promised a licence to print money now offer grand designs for making it vanish. Amid a general dearth of political visions, that of cashless society stands out like a viable mortgage in a sea of sub-prime debt.

Why cook the books when they can be vaporised?

In the brave new banknote-free world, cards will rule even at the bus stop and corner store, with mobile phones as an alternative means of payment. The mobile internet will move against cash by spreading direct transfers that have already shot down the once-mighty cheque. Formerly well-thumbed Adam Smith, Charles Darwin and Elizabeth Fry will be banished to the portrait gallery, while royal heads retreat to the postage stamp.

If robbed of officially sanctioned cash, won’t people just invent their own? Economies that ran short of legal tender were famously quick to adopt a replacement, from cigarettes in prisoner-of-war camps to elaborate IOUs in post-Soviet Russia.

However, the death of cash means only the de-materialisation of money, not its disappearance. Indeed, the biggest danger is that paperless money be further detached from underlying wealth, drowning us in devalued riches. Air Miles already rival the world’s major currencies in terms of quantity and acceptability, but so many have been created that running flights for them all would fry the world before a fraction of the holders could fly round it. Second Life is shielded from excess of virtual currency only by the infinite expandability of online real estate.

Prophets of the cashless economy promise that risks of monetary excess will be reduced, with every deposit and withdrawal electronically matched. New regulatory schemes to avert further meltdowns, including a giant register of to check that banks’ balance sheet assumptions really add up, underline the faith in data-based trading to guarantee transparency and monetary stability.

What of those who can’t afford a plastic card, aren’t online and don’t carry a mobile? Cashless commerce will compound an already serious digital divide. Those barred from the virtual marketplace may have to form their own cash-trading communities, until connections to new networks are as ubiquitous and affordable as those of the savings banks and post offices they replace. Pulling out a banknote could soon be an act of solidarity with the socially excluded, but you’ll still have to swap them on windy street corners, after the tobacco smoke has cleared.

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Alan Shipman is lecturer in economics at the Open University, and a former financial journalist. His books include The Globalization Myth, The Market Revolution, and Transcending Transaction. He is involved in OU's new courses on personal finance, and research on insurance pools, 'chaos pricing' and Eastern Europe.

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Evan Davis gets to the heart of the big finance stories at The Bottom Line.

The latest broadcast of The Bottom Line discusses the role of money and the relationship of the poor to contemporary capitalism, with guests drawn from the well-known companies Poundland, Cisco Systems and Barclaycard. In many ways, the discussion is a reprise of the debates about the promise of digital or cyber money at the end of the last millennium, yet despite the seductive appeal of virtual transactions, the material realities of the societies we inhabit remain. The poor, like climate change, will always be with us and no amount of cyber technologies will change that, unless of course, the dystopian visions of John Carpenter’s film Escape From New York is a means of managing the digital underclass.

At the beginning of the 21st century, the seductive delights and trappings of the digital age and the virtual universe were apparently transforming the way in which we viewed and organised our lives and relationships to each other. The networked firm and society, the virtual organisation, the virtual city, teleworking, e-business, the opening up of new private and public cyberspaces suggested that new social transformations would sweep away the old conservative forces of materialism.

The universalisation of information and its communications media seems to promise a new democratisation that cannot be easily contained or institutionalized. The brave new digital world is now extending into prospects for different private cybermonies. Resisting the rhetoric and hype, we find this age carries with it its own exclusivity, its own marginality and peripherality. In the case of money, the confusion between form and content in digital transfers of all financial assets does not cloak an important historical fact. Money is an abstraction from real relations of production, exchange and distribution and as such bestows social power. In other words, money has always been virtual and the source of marginality and peripherality in the kind of societies we inhabit.

The evolution of banks – from crude coinage to plastic money, financial globalization, the implications of technology and money futures – constitutes the narrative of digital transformation. In re-telling the narrative of money, the standard textbook classification of money remains a constant:

• a generally acceptable means of exchange for goods and services;
• an effective store of value;
• a unit of account.

Money can also be said to be “at rest” and “in motion”. In a cyber age, money at rest is where its store of value is held in computer disks or electronically formatted cards. Money in motion occurs where there is a transfer of liabilities between individuals and / or organisations. Electronic transfers speed things up and reduce periods of free credit (or “float”). Money is created through the generation of deposits by banking institutions (not necessarily banks per se) underwritten by reserves held in central banks. Borrowers or lenders are paid through the central bank creating a new deposit (a liability), but the key question is, can we really create our own e-money? We merely transfer the form in which money is held from a conventional one to an ethereal one, but it is the e-money issuers, not us, that do the money creating, backed by official money, which we have entrusted to them. If it is not backed by official money e-money becomes no different from Monopoly money or Second Life, bounded by the internal rules of a particular game.

There is also a regulatory implication that is analogous to the “black economy,” within which transactions are only conducted with cash; still a common experience of most large metropolises around the globe, namely that if agents increasingly circulate money outside the official system, the banking system’s share of money declines. This situation is related to the problems of estimating its size and impact where, in certain places, large sums of cash (and therefore officially underwritten) never touch the banking system. Indeed, the “black economy” is the lifeblood of many communities, who neither have the infrastructure nor the aspiration for their exchange to become wired or networked. Thus, the de-materialisation and re-materialisation of money is not a recent or cyber phenomenon.

A number of years ago, two Irish economists, then working at the European Investment Bank, suggested that the complete electronic transmission of money would kill off inflation. They forgot one fundamental law of economics, which is that money bestows purchasing power. Furthermore, the different magnitudes of purchasing power come out of the struggle over the distribution of the social product. Clearly, they hadn’t told a former Governor of the Bank of England nor the citizens of Britain’s northern cities, upset at his statement that “unemployment in the North is a price well worth paying for controlling inflation in the South”. Eighty years before John Maynard Keynes's Treatise on Money, Karl Marx anticipated the former’s view that: “we cannot get rid of money even by abolishing gold and silver and legal tender instruments.” Again, the possibilities of e-money and cyber money do not change this elemental fact. Money can only be digital if it still remains money – complete with its conventional functions and its relationship to the production of commodities.

Inflation has been temporarily conquered because of the global recession and also because governments have intervened to sustain the fractional reserve system. Without this intervention, a number of economies may have collapsed and the ability to produce, exchange and consume goods and services could have been undermined. There does not seem to be a digital solution to this material problem – unless of course, we all become avatars in a cyborg world.

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About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

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