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.
A few weeks ago a happy group photograph was published to accompany the announcement of Bob Diamond’s appointment as the new CEO of Barclays bank. The picture showed outgoing CEO John Varley and Diamond himself, both apparently chortling with delight, while chairman Marcus Agius offered a slightly more discreet smile of approval. What were they laughing about?
Continue reading What are they Laughing About?
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.
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.
The hero of the free market philosophy is surely the entrepreneur, the one who has the entrepreneurial spirit to start from small beginnings and build something not only with their own sweat, blood and creativity, but also by putting their own money at risk. They control and own. Most of them fail but a few succeed and go on to greater things, giving employment to large numbers and addressing some want or need in a uniquely satisfying way which assures their success. That is the free market hero; and socialism’s arch villain.
“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.