Around 80% of publicly quoted shareholdings are now controlled by financial institutions, rather than the end shareholders. The traders acting for these institutions have quite different objectives from those of the ultimate shareholders. Members of a company pension scheme, for example, are likely to have a personal desire for the survival and longevity of their employing company. However, unbeknown to them, the investment decisions made on their behalf for their pension fund, are made on the basis of short term gains, which may well be best served by the acquisition and break up of that same company and the redundancy of most of its employees. But it is worse than that.
The question really is what good did economics ever do that isn’t readily available from common sense? Economics has real world impact (“we are ruled by little else” as Keynes famously said), but where it leads to an impact which is distinctive from one which would result from applied common sense, the impact appears to be invariably bad. Of course, definitions of bad may be subjective. It could have two quite separate meanings: bad in the sense that it is counterproductive in its own terms, most usually this would mean damaging to economic growth; or bad in that it does more harm than good in such dimensions as fairness and justice. Examples of bad impacts might include free market economics resulting in great injustice and inequality as well as the creation of inevitably bursting bubbles.
The Economist, an increasingly dogmatic apologist for the free market ideology, invited for its current issue, six academic economists to identify how they thought the financial crisis had changed the subject of economics. The answer is not a lot. So far as methods of teaching and research are concerned, nothing has changed, or is likely to change any time soon.
David Cameron’s special advisory committee of ten on economic strategy includes five business graduates, five knights of the realm, three retailers, three asset strippers, two accountants, a banker, a lord, an advertising exec, a publishing exec, and Sir James Dyson. Only the last named has a background in manufacturing and is likely to have got his hands dirty at work.
The forthcoming Oslo conference of the International Monetary Fund (IMF) and International Labour Organisation (ILO) is to discuss ways of dealing with unemployment arising from the 2007-8 credit crunch. As noted elsewhere on this site, the question is one of emphasis between, on the one hand, repaying the public indebtedness which was rashly incurred as a result of private greed, and on the other hand, the protection and regeneration of employment, particularly for the most vulnerable.
The Hayek / Mises argument that any small step to the left leads inevitably to full on totalitarian socialism, might have had something going for it when the world was beset by Hitler, Stalin, and the fascist governments of Spain, Portugal and Southern America. And later, when national-socialism and fascism had become history, but communism seemed to be prospering under leadership from the Chinese as well as the Soviets, fear of centrally planned totalitarian socialism was not wholly unreasonable. But since the collapse of communism, there seems to be a rather limited rationale for fearing any initiative which might betoken even the slightest move to the left. Centrally planned totalitarian government really is not inevitable, or even feasible.
Since Adam Smith’s example of the pin factory, economists have never been able to produce a satisfactory theory of the industrial firm. They’ve thought of it as a black box, expressed it as a production function involving such illuminating variables as price and quantity, and they’ve reduced it to the agency relationship falsely claiming managers to be the agents of shareholders (see other postings on this site). This inadequacy may be part of the reason why, despite Adam Smith, mainstream economists give markets pride of place over the firm.
Belief in the extreme power of market forces, so long as they were free from regulation or any other form of interference, led to the curious belief that the market could produce any item at some cost: the costs of transactions in the market. Only if a firm could produce cheaper than the cost of market transactions, would the firm be justified in production. This fertile thread of economic theory, originated in an article by Coase in 1937, but was developed in the 1960s by a group led by Williamson – last year’s joint Nobel laureate. It challenged the legitimacy of managerial decision makers, arguing the power of market forces to decide.
Almost every empirical study of the value of takeovers indicates that overall there is no gain; the acquirer doesn’t benefit and the overall economy usually loses out. The only ones who gain are the shareholders of the acquired company, and in cases like the Tomkins sell out currently going through, its top management whose pay off is really nothing more or less than a bribe. This is in contrast with ordinary employees who usually face an immediate cull as well as a long term loss.
Nowhere in British or United States law are directors (and/or managers) of the incorporated limited liability company, claimed to be the agents of shareholders. The principal, for which directors act as agent, is the company itself. And as agents of the company, directors have a legal duty to act in its best interests at all times. But the business, academic and media worlds have bought the theoretical economists’ lie that company directors are the agents of shareholders and must act in their interests, which are interpreted as solely short term financial, even if it means selling the company down the river.
“The directors of … companies, being the managers of other people’s money rather than their own, it cannot well be expected, that they should watch over it with the same anxious vigilance … Negligence and profusion must always prevail … in the management of the affairs of such a company.” So wrote Adam Smith 250 years ago. And that remains a core concept in the right wing free market fundamentalism that drives us today.
Fighting for Fairness by Remaking the Real Economy 