The high cost of neoliberalism

Financial liberalisation undermines democracy, handing power to a “virtual senate” that acts on beha

In the contemporary world of state-capitalist nations, loss of sovereignty can lead to a diminution of democracy, and a decline in the ability of states to conduct social and economic policy on their own terms. History shows that, more often than not, loss of sovereignty leads to liberalisation imposed in the interests of the powerful. In recent years, the regime thus imposed has been called "neoliberalism". It is not a very good term, as the social-economic regime in question is not new; nor is it liberal, at least as the concept was understood by classical liberals. The very design of neoliberal principles is a direct attack on democracy.

The central doctrine of neoliberalism is financial liberalisation, which took off in the early 1970s. Some of its effects are well known. With the increase in speculative capital flows, countries were forced to set aside much larger reserves to protect their currencies from attack. It is striking that countries which maintained capital controls - among them India and China - avoided the worst of the Asian financial crisis of 1997-98.

In the United States, meanwhile, the share of the financial sector in corporate profit rose from just a few per cent in the 1960s to over 30 per cent in 2004. Concentration also increased sharply, thanks largely to the deregulatory zeal of the Clinton administration. By 2009, the share of banking industry assets held by the 20 largest institutions stood at 70 per cent.

Among the consequences of financialisation is the creation of what an analysis by the investment bank Citigroup calls "plutonomy". The bank's analysts describe a world that is dividing into two blocs: the plutonomy and the rest. The US, UK and Canada are the key plutonomies: economies in which growth is powered by - and largely consumed by - the wealthy few. In plutonomies, these rich consumers take a disproportionately large slice of the national pie. Two-thirds of the world's economic growth is driven by consumption, primarily in the pluto­nomies, which monopolise profits as well.

The virtual senate

Citigroup's "plutonomy stock basket" has far outperformed the world index of developed markets since 1985, when the Reagan-Thatcher programmes for enriching the very wealthy were taking off. This is a substantial extension of the "80-20 rule" that is taught in business schools: 20 per cent of your customers provide 80 per cent of the profits, and you may be better off without the other 80 per cent. Corporations recognised years ago that modern information technology allows them to identify profitable customers to whom they can provide grand treatment, while deliberately offering skimpy services to the rest, creating a form of "consumer apartheid".

Financial liberalisation also creates what some international economists have called a "virtual senate" of investors and lenders, who "conduct moment-by-moment referendums" on government policies. If the virtual senate determines that those policies are irrational - meaning that they are designed to benefit people, not profit - then it can exercise its "veto power" by capital flight, attacks on currency and other means. Take one recent example: after Hugo Chávez was elected president of Venezuela, capital flight escalated to the point where assets held abroad by wealthy Venezuelans equalled a fifth of the country's GDP. With capital flow liberalised, governments face a "dual constituency": voters and the virtual senate. And even in the richest countries, the private constituency tends to prevail.

The Bretton Woods system put in place at the end of the Second World War was designed on the understanding that capital controls and regulated currencies would create a space for government action responding to public will - for some measure of democracy, that is. Keynes considered the most important achievement of Bretton Woods to be the establishment of the right of governments to restrict capital movement. In dramatic contrast, in the neoliberal phase that followed, the US treasury department came to regard free capital mobility as a "fundamental right", unlike such alleged rights as those guaranteed by the United Nations Universal Declaration of 1948: to health, education, decent employment and security - entitlements that the Reagan and Bush administrations dismissed as "preposterous", "letters to Santa Claus", mere "myths".

In earlier years, the public had not been much of a problem. In his definitive history of the international monetary system, the economist Barry Eichengreen observes that, in the 19th century, governments had not yet been "politicised by universal male suffrage and the rise of trade unionism and parliamentary labour parties". This meant that the severe costs imposed by the virtual senate of lenders and investors could be transferred to the general population.

But with the radicalisation of the general public during the Great Depression and the anti-fascist war that followed, this luxury was no longer available to private power and wealth. Hence, in the Bretton Woods system, Eichengreen writes, "limits on capital mobility sub­stituted for limits on democracy as a source of insulation from market pressures". It is only necessary to add the obvious corollary: with the dismantling of that system from the 1970s on, functioning democracy was restricted.

Real choices

In Latin America, specialists and polling organisations have, for some time, observed that the extension of formal democracy was accompanied by an increasing disillusionment about democracy and a lack of faith in democratic institutions. A persuasive explanation for these disturbing tendencies was given by the Argentinian political scientist Atilio Boron, who pointed out that the new wave of democratisation in Latin America coincided with neoliberal economic "reforms", which undermine effective democracy. The phenomenon extends worldwide, although it appears that the tendency may have reversed in recent years, with departures from neoliberal orthodoxy.

The annual polls on Latin American opinion by the Chilean polling agency Latinobaró­metro, and their reception in the west, are interesting in this respect. Few elements of the reigning western orthodoxy are upheld with more fervour than the view that Chávez is a tyrant dedicated to the destruction of democracy. The polls are therefore a serious annoyance that have to be overcome by the usual device: suppression.

The November 2007 poll had the same irritating results as in the preceding few years: Venezuela ranked second behind Uruguay in satisfaction with democracy and third in satisfaction with leaders. It ranked first in the assessment of the current and future economic situation, equality and justice, and education standards. True, it ranked only 11th in favouring a market economy but, even with this flaw, overall it ranked highest in Latin America on matters of democracy, justice and optimism, far above the US favourites Colombia, Peru, Mexico and Chile.

The Latin America analyst Mark Turner has written of an "almost total English-speaking blackout about the results of this important snapshot of [Latin American] views and opinions". He also found the usual exception: there were reports of the finding that Chávez is about as unpopular as Bush in Latin America, a fact that will come as little surprise to those who are familiar with the bitterly hostile coverage to which the Venezuelan president is subjected in the media, not least (and this is an odd feature of this putative dictatorship) in his country.

In the US, faith in institutions has been declining steadily. It is interesting to compare recent presidential elections in the richest country in the world and the poorest country in South America, Bolivia. In the 2004 US presidential election, voters had a choice between two men born to wealth and privilege, who attended the same elite university, joined the same secret society where privileged young men are trained to take their place in the ruling class, and were able to run in the election because they were supported by pretty much the same conglomerations of private power. Their announced programmes were similar, consistent with the needs of their primary constituency: wealth and privilege.

By contrast, in the December 2005 election in Bolivia, voters were familiar with the issues: control of resources, cultural rights for the indigenous majority, problems of justice in a complex multi-ethnic society and many others. They eventually chose Evo Morales, someone from their own ranks, and not a representative of narrow sectors of privilege. There was real participation, extending over years of intense struggle and organisation.

Election day was not just a brief interlude for pushing a lever and then retreating to passivity and private concerns, but one phase in ongoing participation in the workings of the society. The comparison, and it is not the only one, raises some questions about where democracy promotion is most needed.

Latin America has real choices, for the first time in its history. The usual modalities of imperial control - violence and economic strangulation - are much more limited than before. There are lively and vibrant popular organisations providing the essential basis for meaningful democracy. Latin American and other former colonies have enormous internal problems and there are sure to be many setbacks, but there are promising developments as well. It is in these parts of the world that today's democratic wave finds its basis and its home. That is why the World Social Forum has met in Porto Alegre, Mumbai, Caracas, Nairobi, not in northern cities, though by now the global forum has spawned many regional and local offshoots, doing valuable work geared to problems of significance in their own regions.

The former colonies, in Latin America in particular, have a better chance than ever before to overcome centuries of subjugation, violence and foreign intervention, which they have so far survived as dependencies with islands of luxury in a sea of misery. These are exciting prospects for Latin America, and if the hopes can be realised, even partially, the results cannot fail to have a large-scale global impact as well.

Extracted from "Hopes and Prospects" by Noam Chomsky (Hamish Hamilton, £18.99)
© Noam Chomsky 2010 penguin.co.uk

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Are smart toys spying on children?

If you thought stepping on a Lego was bad, consider the new ways in which toys can hurt and harm families.

In January 1999, the president of Tiger Electronics, Roger Shiffman, was forced to issue a statement clearing the name of the company’s hottest new toy. “Furby is not a spy,” he announced to the waiting world.

Shiffman was speaking out after America’s National Security Agency (NSA) banned the toy from its premises. The ban was its response to a playground rumour that Furbies could be taught to speak, and therefore could record and repeat human speech. “The NSA did not do their homework,” said Shiffman at the time.

But if America’s security agencies are still in the habit of banning toys that can record, spy, and store private information, then the list of contraband items must be getting exceptionally long. Nearly 18 years after TE were forced to deny Furby’s secret agent credentials, EU and US consumer watchdogs are filing complaints about a number of WiFi and Bluetooth connected interactive toys, also known as smart toys, which have hit the shelves. Equipped with microphones and an internet connection, many have the power to invade both children’s and adults’ private lives.

***

“We wanted a smart toy that could learn and grow with a child,” says JP Benini, the co-founder of the CogniToys “Dino”, an interactive WiFi-enabled plastic dinosaur that can hold conversations with children and answer their questions. Benini and his team won the 2014 Watson Mobile Developer Challenge, allowing them to use the question-answering software IBM Watson to develop the Dino. As such, unlike the “interactive” toys of the Nineties and Noughties, Dino doesn’t simply reiterate a host of pre-recorded stock phrases, but has real, organic conversations. “We grew it from something that was like a Siri for kids to something that was more conversational in nature.”

In order for this to work, Dino has a speaker in one nostril and a microphone in the other, and once a child presses the button on his belly, everything they say is processed by the internet-connected toy. The audio files are turned into statistical data and transcripts, which are then anonymised and encrypted. Most of this data is, in Benini’s words, “tossed out”, but his company, Elemental Path, which owns CogniToys, do store statistical data about a child, which they call “Play Data”. “We keep pieces from the interaction, not the full interaction itself,” he tells me.

“Play Data” are things like a child’s favourite colour or sport, which are used to make a profile of the child. This data is then available for the company to view, use, and pass on to third parties, and for parents to see on a “Parental Panel”. For example, if a child tells Dino their favourite colour is “red”, their mother or father will be able to see this on their app, and Elemental Path will be able to use this information to, Benini says, “make a better toy”.

Currently, the company has no plans to use the data with any external marketers, though it is becoming more and more common for smart toys to store and sell data about how they are played with. “This isn’t meant to be just another monitoring device that's using the information that it gathers to sell it back to its user,” says Benini.

Sometimes, however, Elemental Path does save, store, and use the raw audio files of what a child has said to the toy. “If the Dino is asked a question that it doesn’t know, we take that question and separate it from the actual child that’s asking it and it goes into this giant bucket of unresolved questions and we can analyse that over time,” says Benini. It is worth noting, however, that Amazon reviews of the toy claim it is frequently unable to answer questions, meaning there is potentially an abundance of audio saved, rather than it being an occasional occurrence.

CogniToys have a relatively transparent Privacy Policy on their website, and it is clear that Benini has considered privacy at length. He admits that the company has been back and forth about how much data to store, originally offering parents the opportunity to see full transcripts of what their child had been saying, until many fed back that they found this “creepy”. Dino is not the first smart toy to be criticised in this way.

Hello Barbie is the world’s first interactive Barbie doll, and when it was released by Mattel in 2015, it was met with scorn by parents’ rights groups and privacy campaigners. Like Dino, the doll holds conversations with children and stores data about them which it passes back to the parents, and articles expressing concerns about the toy featured on CNN, the Guardian, and the New York Times. Despite Dino’s similarities, however, Benini’s toy received almost no negative attention, while Hello Barbie won the Campaign for a Commercial-Free Childhood’s prize for worst toy of the year 2015.

“We were lucky with that one,” he says, “Like the whole story of the early bird gets the worm but the second worm doesn’t get eaten. Coming second on all of this allowed us to be prepared to address the privacy concerns in greater depth.”

Nonetheless, Dino is in many ways essentially the same as Hello Barbie. Both toys allow companies and parents to spy on children’s private playtimes, and while the former might seem more troubling, the latter is not without its problems. A feature on the Parental Panel of the Dino also allows parents to see the exact wording of questions children have asked about certain difficult topics, such as sex or bullying. In many ways, this is the modern equivalent of a parent reading their child's diary. 

“Giving parents the opportunity to side-step their basic responsibility of talking to, engaging with, encouraging and reassuring their child is a terrifying glimpse into a society where plastic dinosaurs rule and humans are little more than machines providing the babies for the reptile robots to nurture,” says Renate Samson, the chief executive of privacy campaign group Big Brother Watch. “We are used to technology providing convenience in our lives to the detriment of our privacy, but allowing your child to be taught, consoled and even told to meditate by a WiFi connected talking dinosaur really is a step in the wrong direction.”

***

Toy companies and parents are one thing, however, and to many it might seem trivial for a child’s privacy to be comprised in this way. Yet many smart toys are also vulnerable to hackers, meaning security and privacy are under threat in a much more direct way. Ken Munro, of Pen Test Partners, is an ethical hacker who exposed security flaws in the interactive smart toy “My Friend Cayla” by making her say, among other things, “Calm down or I will kick the shit out of you.”

“We just thought ‘Wow’, the opportunity to get a talking doll to swear was too good,” he says. “It was the kid in me. But there were deeper concerns.”

Munro explains that any device could connect to the doll over Bluetooth, provided it was in range, as the set-up didn’t require a pin or password. He also found issues with the encryption processes used by the company. “You can say anything to a child through the doll because there's no security,” he says. “That means you've got a device that can potentially be used to groom a child and that's really creepy.”

Pen Test Partners tells companies about the flaws they find with their products in a process they call “responsible disclosure”. Most of the time, companies are grateful for the information, and work through ways to fix the problem. Munro feels that Vivid Toy Group, the company behind Cayla, did a “poor job” at fixing the issue. “All they did was put one more step in the process of getting it to swear for us.”

It is one thing for a hacker to speak to a child through a toy and another for them to hear them. Early this year, a hack on baby monitors ignited such concerns. But any toy with speech recognition that is connected to the internet is also vulnerable to being hacked. The data that is stored about how children play with smart toys is also under threat, as Fisher Price found out this year when a security company managed to obtain the names, ages, birthdays, and genders of children who had played with its smart toys. In 2015, VTech also admitted that five million of its customers had their data breached in a hack.

“The idea that your child shares their playtime with a device which could potentially be hacked, leaving your child’s inane or maybe intimate and revealing questions exposed is profoundly worrying,” says Samson. Today, the US Electronic Privacy Information Center (EPIC) said in a statement that smart toys “pose an imminent and immediate threat to the safety and security of children in the United States”. 

Munro says big brands are usually great at tackling these issues, but warns about smaller, cheaper brands who have less to lose than companies like Disney or Fisher Price. “I’m not saying they get it right but if someone does find a problem they’ve got a huge incentive to get it right subsequently,” he says of larger companies. Thankfully, Munro says that he found Dino to be secure. “I would be happy for my kids to play with it,” he says. “We did find a couple of bugs but we had a chat with them and they’re a good bunch. They aren’t perfect but I think they’ve done a hell of a lot of a better job than some other smart toy vendors.”

Benini appears alert to security and the credibility it gives his company. “We took the security very, very seriously,” he says. “We were still building our systems whilst these horror stories were coming about so I already set pipelines and parameters in place. With a lot of devices out there it seems that security takes a backseat to the idea, which is really unfortunate when you’re inviting these devices into your home.”

As well as being wary of smaller brands, Munro advises that parents should look out for Bluetooth toys without a secure pairing process (ie. any device can pair with the toy if near enough), and to think twice about which toys you connect to your WiFi. He also advises to use unique passwords for toys and their corresponding apps.

“You might think ‘It's just a toy, so I can use the same password I put in everything else’ – dog’s name, football club, whatever – but actually if that ever got hacked you’d end up getting all your accounts that use that same password hacked,” he says.

Despite his security advice, Munro describes himself as “on the fence” about internet-connected smart toys as a whole. “Most internet of things devices can be hacked in one way or another,” he says. “I would urge caution.”

***

Is all of this legal? Companies might not be doing enough ethically to protect the privacy of children, but are they acting responsibly within the confines of the law?

Benini explains that Dino complies with the United States Children's Online Privacy Protection Act (COPPA) of which there is no real equivalent in the UK. COPPA says that companies must have parental permission to collect personal information over the internet about children under 13 years of age. “We’ve tried to go above and beyond the original layout of COPPA,” says Benini, when describing CogniToys transparent privacy documents. Parents give their consent for Elemental Path to collect their children’s data when they download the app that pairs with the toy.

Dino bears a striking similarity to Amazon Echo and Google Home, smart speakers that listen out for commands and questions in your home. Everything that is said to Amazon Echo is recorded and sent to the cloud, and an investigation by the Guardian earlier this year discovered that this does not comply with COPPA. We are therefore now in a strange position whereby many internet of things home devices are legally considered a threat to a child’s privacy, whereas toys with the same capabilities are not. This is an issue because many parents may not actually be aware that they are handing over their children’s data when installing a new toy.

As of today, EU consumer rights groups are also launching complaints against certain smart toys, claiming they breach the EU Unfair Contract Terms Directive and the EU Data Protection Directive, as well as potentially the Toy Safety Directive. Though smart toys may be better regulated in Europe, there are no signs that the problem is being tackled in the UK. 

At a time when the UK government are implementing unprecedented measures to survey its citizens on the internet and Jeremy Hunt wants companies to scour teens’ phones for sexts, it seems unlikely that any legislation will be enacted that protects children’s privacy from being violated by toy companies. Indeed, many internet of things companies – including Elemental Path – admit they will hand over your data to government and law enforcement officials when asked.

***

As smart toys develop, the threat they pose to children only becomes greater. The inclusion of sensors and cameras means even more data can be collected about children, and their privacy can and will be compromised in worrying ways.

Companies, hackers, and even parents are denying children their individual right to privacy and private play. “Children need to feel that they can play in their own place,” says Samson. It is worrying to set a precedent where children get used to surveillance early on. All of this is to say nothing of the educational problems of owning a toy that will tell you (rather than teach you) how to spell “space” and figure out “5+8”.

In a 1999 episode of The Simpsons, “Grift of the Magi”, a toy company takes over Springfield Elementary and spies on children in order to create the perfect toy, Funzo. It is designed to destroy all other toys, just in time for Christmas. Many at the time criticised the plot for being absurd. Like the show's prediction of President Trump, however, it seems that we are living in a world where satire slowly becomes reality.

Amelia Tait is a technology and digital culture writer at the New Statesman.