Shareholder tyranny in post-mature economies

A recent article in The Economist pointed out that Britain, the original industrialiser for long in relative economic decline, owned 45% of the world’s foreign direct investment in 1914, but now has substantially less than 10%. The United States’ foreign direct investment peaked at around 50% in 1967 and is now less than half that. Today China (including Hong Kong and Macau) has a share of just 6%, but is growing fast. Britain and the United States might best be described as in the post-mature phase of their economic development. Such characterisation is also confirmed by the Anglo-American emphasis on finance and wealth ownership, rather than technology, customers and wealth creation. Those latter are the concern of more dynamically positioned economies, such as China and India, which are in the early growth stages of their development.

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Business as Usual and Stuff the Planet

The desire to return to business as usual isn’t restricted to the obscenity of bankers’ bonuses. That same desire is shared by unemployed potters in Stoke on Trent, car workers in Detroit, and the governing politicians in London and Washington who are presiding over their people’s misery.

However, for the millions in China’s (not to mention India’s and Brazil’s) rural hinterland who have never lived much above the bread-line, some having experienced genuine famine, working on an iPad production line in Shanghai, or the like, may not pay much by Western standards, but it’s a huge improvement on business as usual.

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The Root Flaw in Economic Thinking

The idea of economic man, sometimes given a Latin nomenclature to increase its gravitas, is the real cause of economics’ more recent failures. Forty years ago it was referred to as a nineteenth century idea, as though the study of economics had moved on since that primitive Victorian era. But with Friedman’s shareholder primacy in the ascendancy with its supporting “theories” of agency, transaction costs and the market in corporate management, economic man resurged and is still dominant today, and wreaking its massive destruction.

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Unpicking Shareholder Primacy

The idea that companies, if not all economic activity, exists to maximise the wealth of shareholders or owners, dominates the world of corporate governance and much else. Bankers and traders believe it. Industrial managers have been led to accept it. Universities and business schools preach it. It is part of the free market ideology, often identified by its origins, as the Anglo-Saxon or Anglo-American approach. And its many adherents claim it is the only system that really works. Shareholder value is, for them, the acid test, all that matters. All this is despite clear evidence to the contrary from Germany, Japan, China, India and many other jurisdictions.

Much of the literature on corporate governance argues that these other approaches are in fact converging on the Anglo-American model and even assesses the level of their maturity in terms of how closely they comply with the Anglo-American line. It’s all nonsense.

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Don’t ask “Mr Moneybags” how to run the economy

As Nobel laureate Paul Krugman pointed out ‘a country is not a business’. So why, he asked, do politicians think it is sensible to ask a successful businessman for advice on running the country? Why, for example, is David Cameron asking Sir Philip Green for his input? His views are clear and predictable, and of no relevance to running a successful economy.

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