Apple’s Irish problem and the end of the tech boom

The EU’s ruling on Apple’s Irish tax affairs is a sign of two different sets of change: the ending of the ICT boom, and the decline of globalisation

Silicon Valley seems surprised, and not for the first time, by the fact that the European Union has a different view of its business practices than it does. Apple is perplexed (even maddened) by the decision of the EU’s Competition Commissioner, Margrethe Vestager, that it should pay the same rate of corporation tax as other companies doing business in Ireland–and that it therefore owed €13 billion, perhaps more, in back taxes. Bloomberg explains the issue well.

Google, similarly, has been perplexed by the three separate anti-trust suits that the EU has filed against it. One relates to its advertising business; a second to its shopping service; the third is about whether Google has been giving preferential treatment to both Search and Chrome in its Android operating system.

So what’s going on here? Two separate things: first, it’s about the coming end of the ICT boom that has dominated innovation and culture since the mid-1970s; second, it’s about the limits of corporate power and influence as economic globalisation declines.

Patterns of innovation

I’m a fan of Carlota Perez’ model of the relationship between finance and technological innovation. She suggests that since the British industrial revolution, we’ve been through five technological “surges,” each lasting around 50-60 years, and following a similar pattern. There’s an “installation” phase, in which infrastructure investment is funded by finance capital. There’s a crash, when investment returns fall short of expectations. And then there’s a deployment phase, when companies with customers (“production capital”) pick up the pieces as the market moves from early adopter to mainstream, and make a fortune, before the market matures, the rate of growth cools, and the return on investment falls.

It’s a heuristic, not a law, and not everyone likes it (Paul Mason is particularly critical in PostCapitalism), but as a heuristic, it has quite a lot of explanatory power. Some of that explanatory power is about how dynamic economic sectors run out of steam.

‘Twilight of the golden age’

The characteristics of the market in the “maturity” phase of a technology surge are falling productivity and profitability, caused by the saturation of markets, maturing technologies and commoditisation. This underlying story is disguised, because there are still “shooting stars” (my phrase, not hers) with short life cycles, because they benefit from learning curves and launch into saturated markets. It is also disguised because, as Perez writes in Technological Revolutions and Financial Capital, “the signs of prosperity and success are all around.” [p54]

The companies that have prospered during the market acceleration phase are large enough to postpone the problem, whether through mergers, through acquiring smaller firms, or squeezing them out of the market, or diversifying into other sectors. [p82] The result? It “is the twilight of the golden age, though it shines with false splendor.” [p54]

In particular, it shines with false splendour because of the gap that has opened up between societies and corporations. “[U]nfulfilled promises had been piling up.” There “is an increasing socio-political split.” The social optimism of the early part of the technological surge started has not been realised. In making this point, Perez uses as examples the machine breaking and corn law protests of the early 19th century and the protests of 1968.

The dissatisfaction and frustration driving them both is of a fundamentally similar origin: capitalism had been making too many promises about social progress and not delivering enough, showing too much capacity for wealth creation and not distributing enough [p55].

Social and political costs

The dissatisfaction over corporate tax avoidance, and even the Google buses, perhaps represent elements of a similar mood now.

If that’s the big picture, the detail also changes. One of the things that creates this change in mood is that the social and political costs of the new technologies, the “externalities,” start to become clear. And as the businesses start to slow down, in terms of their accumulation or return on investment, so regulators and policy-makers, even politicians, start to catch up. They start imposing constraints to reduce these external costs.

A comparison with the last technology surge might help. In the UK, during the late 1950s and 60s, the final leg of the cars/auto technology surge, we saw the introduction of parking meters, and drink-driving limits. Seatbelts followed a few years later.

Pushing to extremes

In futures terms, borrowing from the McLuhan’s Tetrads, the gap between the policy-makers and the businesses is down to their mental models. The policy makers are worried about what the technology is “reversing into”: the Tetrad question here is, “What does it flip into when pushed to extremes?”. In other words, what it becomes when it saturates society. The businesses, in contrast, are still caught in their founding myths, captured in the Tetrad model by “retrieval”: “What does it retrieve that had been obsolesced earlier?” This question is about the metaphor that the technology has wrapped itself around.

And thus, for example, we have the frankly embarrasing sight of Mark Zuckerberg of Facebook hailing the anniversary of the World Wide Web, apparently on the wrong day, while his business does everything it can to subvert the principles of openness on which the Web was built.

So what do these different businesses reverse into? Google and Facebook make money by selling the network surplus created by the interactions of their billions of users on to advertisers. (“If you’re not paying, then you are the product.”) As revenues stutter, they have to find new information about them to sell, as Facebook is currently doing with WhatsApp. Or privilege certain advertisers, as Google is effectively alleged to have done by the EU.

‘You didn’t build that’

For Apple, which is still mostly a design and manufacturing company, with a content distribution business layered on, the argument is that “you didn’t build that“. Businesses are built on public assets, as Mariana Mazzucato argues in her book The Enterpreneurial State. She has a particular interest in the iPhone.

Of course, all of these businesses also largely rely on the public sector, in every market in which they operate, to educate their workforces, to keep them healthy, and to put in useful infrastructure such as road and rail, often sweetened with development grants or soft funding.

The limits of globalisation

And this takes on to the second aspect of the EU decision, which is about the limits of globalised businesses and their relationships with states. One of the more interesting aspects of the EU judgment is that it’s not a fine that would be collected by Brussels. Instead, the competition decision is that because Apple was allegedly given a different rate of tax in Ireland from other corporations, then this tax agreement represented a form of state aid that is illegal under EU rules. Therefore, Apple is obliged to pay to the Irish government €13 billion in unpaid taxes.

We’ll pass over the disingenuous special pleading that Tim Cook offers in his “message to the Apple community in Europe,” in which he walks through the history of Apple’s investment in Cork, even calling up the sainted Steve Jobs in support, as if it were an act of charity rather than because the company needed a manufacturing base in the EU and Ireland offered an educated English-speaking workforce in a relatively low-wage area with added inducements.

European landing stage

It’s not chance that it was Ireland that ended up in this position. In his book Ship of Fools, the Irish Times columnist Fintan O’Toole, of whom more shortly, observes that Ireland’s particular history means that by the 1990s it the country was part of a modern global economy but with a pre-modern political system. It has missed out on the messy modern stage where the norms and expectations of democratic government are created.

The way the Irish economy modernised over the last fifty years, in effect, was by being offered as a European landing stage to mostly American businesses, while offering the kind of crony deals that were the meat and drink of local Irish politics.

This had its upsides. As Fintan O’Toole notes this week in an article,

If Ireland has sold its soul to the corporations, it has arguably got a very good price for it – not just jobs and tax revenues but a relatively peaceful transition from conservative nationalism to global modernity.

New rules of engagement

After a couple of days of dithering Ireland’s government decided to appeal against the EU decision. But the country’s traditional ruling parties, whose hold on government has been fragile since the financial crisis, are squeezed two ways here. For one thing, citizens, and opposition parties, will have a view on whether the government should be helping Apple hold tight to €13 billion.

Perhaps more significantly, O’Toole reads the EU decision as another marker that the rules of engagement between states and corporations have changed.

The EU ruling is itself a symptom of a much bigger shift: amid a longterm crisis in global capitalism, massive corporate tax avoidance is becoming politically unsustainable. And a vision of Ireland that places the facilitation of that tax avoidance at its heart is therefore not sustainable either.

Other signs of this change: the OECD’s anti avoidance campaign and the leaking of the Panama Papers.

Taking the lid off tax

As Bloomberg columnist Justin Fox put it,

it seems pretty clear that the devices used by U.S. tech giants to shift their European income not just to low-tax jurisdictions but to nonexistent ones are proving to be a step too far.

And generally, you have to say that when US companies have lost the support of Bloomberg in a fight with the EU, they’re a long way out of step with opinion.

But as the European Commission diagram at the top shows, there’s also a bigger box that might be prised open. The opacity of Apple’s tax arrangements (and many other corporations) makes it hard to do the sums reliably. Correcting that problem leads quickly to country-by-country reporting, which tax justice campaigners have long advocated as part of the  route to greater tax transparency. If you’re a global multi-national, the squeeze is on.