‘The Rise and Fall of Management’ highlights some issues as of particular importance to the current situation. For instance, the universal adoption of agency theory. Agency is a legal relationship where the agent acts on behalf of the principal who is bound by the agent’s actions, and the agent is bound to act, in his or her professional capacity, in the principal’s best interests. So much is not in doubt. Moreover, early examples of this legal relationship related to the commercial world, as in the old overseas trading companies where the ship’s captain acted as the agent of the ship’s owners. That origin too is not questioned.
Keynes recognised that the legislation protecting worker’s rights might lead to powerful trades unions, motivated by political ideals rather than the long term interests of their members, being the cause of wages led inflation damaging economic activity. His mistake was to argue that it was a political problem for governments, rather than a problem for economics. So no action was taken till the advent of the Thatcher government.
Today the boot is on the other foot. Free market fundamentalism is no less political than the unions were 30 years ago. The fervent ideological belief in private industry being good, public bad, regulation bad, and above all, the primacy of shareholder property rights and the purpose of industry being to maximise their value … all that is equally damaging to industry, perhaps even more so, than was unbridled union power.
Industry has always depended on credit. Without it we would not have had an industrial revolution. When Adam Smith described his pin factory which, through the division of labour, increased production from, at most, 20 pins per day per operative, to more than 48,000, all that was needed was a market for that massive increase in production. Markets had previously been small and localized affairs, requiring little in the way of transportation. Industrial markets required mass transportation which was first achieved with canals and turnpikes. But canals took many years to build before they could ever earn a penny return. That required a great deal of money and at that time money was scarce. Wealth was accrued in land and property rather than in spare cash. The only way such projects as canals could be financed was to get money from huge numbers of people whose repayment would come out of the future earnings of the projects themselves. The same applied to the later railways, and the whole industrialization process. So banks have always played a central role in the financing of industry.
Since the financial crash, and all the stuff about speculative financial markets, hedge funds, greedy bankers and their obscene bonuses for doing precious little of real worth, and then all the stuff about global warming, and BP’s poisoning the Gulf of Mexico … with all that going on it’s difficult to stand back and take a longer view of our situation. But it may be useful and instructive to try.
DNA scholars like, Spencer Wells (‘Pandora’s Seed: the unforeseen cost of civilization’), study human evolution from the genetic record stored in our DNA. Homo sapiens separated off as a distinct species around 195,000 years ago. Human population seems to have been relatively stable for around 115,000 years while people migrated from Ethiopia across Africa and the Middle East, it is presumed in search of food supplies to hunt and gather. Then population appears to have crashed, almost to extinction, around 70,000 years ago, probably as a result of climate changes reducing food supplies. Around 60,000 years ago population started to recover and spread across the globe. Then around 10,000 years ago, a watershed in man’s history, population started its continuous expansion from a few million to over 6 billion today, with a massive increase starting in the late eighteenth century. The change 10,000 years ago was caused by the conversion from hunter-gathering to farming and 250 years ago by industrialization.
A key tenet of the free market philosophy, elegantly expressed by Milton Friedman, was that businesses should focus exclusively on maximising shareholder value and not allow other considerations, apart from compliance with the law, to intrude on their business activities. That’s what Friedman stood for. And that’s what governments over the past 30 years have lived by. And that’s what still protects big business from having to pay for its own excesses. The speculative banks, the oil companies, the private equity and hedge funds, all steal from the tax payer with the total impunity provided by Friedman’s malign theory. Occasionally, there’s a coincidence of events hitting the headlines together, shouting out the criminal injustice of what is allowed to go on. Today, it’s BP’s destruction in the Gulf of Mexico, the 25 year late convictions over Union Carbide’s poisoning of Bophal residents, and the revelation of multi-billion pound additional decommissioning costs of old UK nuclear power plants. Despite BP’s disastrous poisoning from the Deepwater Horizon well, the company remains much exercised over its next multi-billion pound dividend hand out to shareholders. Friedman still rules.
As always, it’s the average Joe tax payer, who pays the real price, while the exploiters laugh all the way to their tax haven based banks. But the law, for example the 2006 Companies Act, charges company directors with the duty to care for the best long term interests of their company, having regard to the interests of all its stakeholders, not just its shareholders. In fact this has been the case since mid-nineteenth century when limited liability was first established. But Friedman’s rule has become so ubiquitous that company directors have come to believe it is their legal duty to make as much money as possible for shareholders ignoring any other social responsibility.
There will be no change in practice – and criminal pollution will continue – till that simplistic theory is dead and buried and Friedman discredited along with it. Academics might seek an alternative theory with which to replace it, but that is not necessary. Economic theories tend always to be over simplified as they apply to the real world. Rather than a new theory, all that is necessary is to impose existing law such as the Companies Act. That would require directors to act in the best long term interests of their company and all its stakeholders, which the law lists as including employees, suppliers and others specifically including the local community and the environment. Company directors who transgress, as those at BP, Union Carbide, RBS etc, etc, etc, should immediately face the full force of the law.
Economists, by whom we are all ruled (to quote Keynes), are themselves ruled by abstract theory, rather than by observation of anything which actually exists in the real world. They tend to focus on dichotomies defined by ideal types, such as socialism and capitalism, both easy to describe in their pure forms but non-existent in the real world. Or, another dichotomy: the means by which resources are allocated: central planning or market forces. In reality, resources are allocated by both means: some by market forces and some by planned decisions. The real world takes advantage of both means, but economists argue that there is a simple choice to be made between alternatives as the one best way.
Corporate governance is another simplistic dichotomy on which economics depends. Would companies be best controlled by shareholders or workers? Free market capitalists, including all the UK and US governments of the past thirty years, argue for investor control. That has seen many industries destroyed for the short term interests of their shareholders. Cadbury and Chloride are recent examples of UK companies threatened by this approach to governance. There have been few examples of successful worker controlled companies and there may be little reason to expect them to be more successful than those in investor control.
But the middle ground, where neither shareholders nor workers have absolute control, and where both share responsibility, may be more fertile for corporate success. Germany’s two tier board structure consolidates that joint responsibility and has served German manufacturing industries well. A pragmatic balance between the interests of stakeholders seems more likely to produce the best outcome for the company and therefore all its stakeholders. But it is less easy to make the case than the simplistic dichotomies of economic theory.