Simplistic Economics

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.

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