On the Old Yarn About How Back in the Old Days Government Intervention Wasn't Evil

On Crooked Timber they're reviewing Hacker and Pierson's new book, American Amnesia.  Their thesis, as I understand it, is that the government has relinquished its role as both a guide for and countervailing power against the free market.  And they explore why.

I think it might be fruitful to flesh out these two ideas with some empirics. 

In the post-war years, the expansion of mega-size public corporations (which, by definition, are not attributes commonly associated with the “Adam Smith” style free market — Ronald Coase recognized this decades ago) were accepted, finally, as a necessary — if not evil — compromise if we wanted to pursue a certain level of economic growth. They survived the trust-busting of late-19th century and matured into a settled part of our economic landscape after the New Deal. 

But then the 1970s came. For whatever reason (history of course is overdetermined!) — free trade, overseas competition, etc. — our corporations were seen to have become less profitable. They weren’t pulling their weight, weren’t justifying their existence by serving as the motors of our national wealth. But at the same time, CEOs were seen as power-grabbers, merging and growing and gobbling up the market to aggrandize personal ambition.

And so government stepped in to act like the countervailing power it has always been. It empowered finance to hold corporations accountable, to serve their social purpose, viz., to generate economic growth. Here, Katharina Pistor’s legal theory of finance is particularly instructive, but anyone familiar with the discourse surrounding the hostile takeovers of the 1980s will be familiar. Who better to make CEOs and boards accountable and responsible than the shareholders who elect them?

The solution, while pragmatic, is of course in hindsight drastically flawed. Quis custodiet ipsos custodes?

At the same time, government is fulfilling its “guide” role by encouraging the development of a comparative advantage in a service industry (finance). Like it subsidized and encouraged railroads. Like it created a national central bank back in post-revolutionary days.

My own question remains: what makes people think that “finance,” an essentially *legal* phenomenon, is an example of a “free market”? And why do people anthropomorphize the giant corporation, pretending it really *is* the black box that neoclassical economics only pretend that it is? 

Scott Bowman has a wonderful history of intellectual thought on the corporation, and I also recommend Dalia Tsuk Mitchell’s work on this.

Shareholder Activism and Procedural Democratic Party Politics

Recently, a bipartisan Congress deigned to roast Bill Ackman, the silver fox of Pershing Square Capital, on the evils of ostensibly short-termist hedge-fund activism. The consequences of such activism, presuming they're true, are indeed the stuff of ire. For if their behavior destroyed the town of Brokaw, or extorted hospitals and patients by hiking up drug prices, they seem to present a net minus on the success of contemporary corporate capitalism. All this, despite their rhetorical flourishes of "shareholder democracy" against tyrannical "management entrenchment." 

Maybe.  I want to argue that these guys are doing exactly what they're supposed to do. What is mucking things up is not so much their involvement in governance, but the generally undemocratic governance structure of corporations in general. Ironically, the more activist they get, the worse this democratic deficit becomes.

If we can, for a moment, analogize the corporation with the state (Landemore & Ferreras 2015), we can see these activists representing a certain "political" constituency, one that shares certain material interests. Here, that material interest is, arguably, short term shareholder value. Or, stated more simply, an interest in corporate activity that raises earnings per share, dividends per share, or other such desiderata that increase stock price -- like hiking up drug prices and liquidating company towns.  

It is no surprise that shareholders actually do desire such things, and that they would form a coalition, or - still analogizing - a party to pursue this material interest. Classic sociological accounts of party formation in political science literature routinely analyze regular politics this way (e.g., Lipset & Rokkan 1967). They find class and ethnic cleavages and then map them onto political groups and actors. For example, workers form and join labor parties. Catholics join Catholic parties. Capitalists (shareholders?) join business friendly parties. More recent institutionalist literature (e.g., Przeworski and Sprague 1986) focuses instead upon the role of entrepreneuring elites mobilizing a (shareholder?) constituency by appealing to these same interests. 

This is Ackman (and dare I say, Larry Fink?) par excellence -- an elite party leader mobilizing shareholder support with appeals and policy recommendations to form a powerful intra-corporate political organization. (I shall set aside the question, for now, of their actual responsiveness to voters shareholder beneficiaries). The campaign motto runs as follows: "Support me! I'll put more money in your pockets!"  I dare anyone to find a politician who does not make the same appeal.

The point is that the mobilization of activists is not, at face value, a terrible thing for corporations or corporate democracy. They are doing what parties are supposed to do, at least if one embraces a procedural theory of democracy. 

The problem is that they are the only game in town. The only "party," if you will.  As anyone familiar with a one-party state will realize immediately -- the outcomes tend not to turn out too well for most people involved. For notorious one-party states include the USSR, Syria, Mussolini's Italy... 

A party represents, by definition, partisan interests. The problem is that the stronger any single party grows, the more it dominates politics. And the more it dominates politics, the less democratic the polity becomes.  Herein lies the democratic deficit of shareholder activism.

What makes party democracy work is competition from other parties. This is how leaders are held accountable -- we can throw the bums out in favor of an alternative credible candidate. (Schumpeter 1934). Imagine Bill Ackman is successful in revamping a corporate board. Who is to hold these new folks to account? 

This is also how social choices better reflect a more diverse and complete array of citizen interests. (Dahl 1973) This is how we achieve centrist policies. This is the material from which we induce the widely-used spacial voting models that identity the politician's most valued prize, the "median voter." 

Perhaps most importantly, this is how we avoid tyranny and disruptive - violent? - changes that obey the laws of force and power rather than the laws of constitutional procedure. (Urbinati & Saffron 2013) Regularized power sharing, and realistic hope for change without drastic action, can stabilize the corporate polity. Without fear of strikes, liquidating takeovers, and other disruptive events, it can grow and invest and do all the things that we want it to do to keep our economy humming. 

But from what I can tell, the only group serving as a proxy for a competitive party is the board itself. They are tasked by corporate governance literature to man the bastion protecting stakeholder (non-shareholder) interests. This is a conceptual mistake. The board is the institution of power over which parties fight. It is like arguing that Pol Pot's legislature is meant to compete against Pol Pot's party. Of course it will become a tin-can legislature (Useem 1993), an instrument of the ruling party. And thus we see the seismic changes in organizational governance attributed to "shareholder value." (Id.) 

The problem with activists is therefore not that their interests are illegitimate, or evil, or Bad for America. The problem is that activists need an opposition party or two. 

A worker's party? A long-term shareholders' party? A creditor's party? A consumer's party? 

Of course, there are very important questions of efficiency to be handled. Can a corporation governing by an unwieldy, diverse array of interests make the kind of quick decisions necessary to compete in the market? There is, furthermore, a question of principal and agency. Is it fair to analogize the firm with the state, when the firm and its employees are popularly held to be the agents of shareholding principals? 

But if the corporation can be made to work for all these constituencies, it certainly would be playing its part to enhance our economic development. And it might also have a fighting chance of doing so with some kind of legitimacy.

Then we can really start to talk about "shareholder democracy" honestly, not rhetorically.

The Courts' Pig-Latin Logic on Cell Phone Privacy

A new Circuit Court opinion on the legality of warrantless searching of cell phone records:

The ruling also gave a nod to the way in which fast-moving technological advances have challenged age-old laws on privacy. Consumers today may want privacy over location records, the court acknowledged: “But the recourse for these desires is in the market or the political process: in demanding that service providers do away with such records (or anonymize them) or in lobbying elected representatives to enact statutory protections.”

Court's logic: we must be free and democratic; accordingly anything the government does is perfectly free and democratic

Normal logic: if we approve a law as a voting public under conditions of free and equal franchise, then we can call ourselves free and democratic

Furthermore - I don't know why people keep insisting that we "choose" boilerplate contracts.  With the ubiquitous nature of cell phones (including, for many, use that is required for work), opting out isn't really an option.  This is the same logic as "who cares about policing sanitary conditions in bread factories.  People can choose not to eat bread after all."  Well yeah, I suppose we might.  But what kind of "free" world is that?  It's not a real choice that's offered.

We may never experience a universe where we can accurately balance the repercussions, externalities, and latent costs of all the choices that we face as individuals.  Indeed, it may prove impossible, as we all weigh costs and repercussions differently to some extent.  And if we can't include these costs when measuring the availability of certain choices, then it's difficult to talk confidently about some unfettered liberty of contract.

Yet to completely ignore those costs while still insisting on the existence of complete freedom to choose is nothing short of infantile.

And so we come back to "we didn't vote a new law to outlaw this stuff."  Other than this being a classic bate-and-switch - leveraging our collective guilt about not going to the polls as much as we think we should - it also

(1) ignores what some call the costs and inefficiencies associated with "collective action;" perhaps we don't like the law, but not sufficiently to overcome the (often gigantic) hurdle of political action, especially in this day and age of political corruption, special interest politics, and corporate money.  That we have not yet acted to undo the law is no kind of democratic consent; democracy shouldn't be so costly to us so as to undermine democratic action.  And that's before we get to the fact that the government's activities aren't exactly sufficiently transparent to allow us to react.

(2) ignores the fact that approval/disapproval of something after the fact is democracy by acclamation, not real democracy.  This is especially disturbing when it comes to something really important like 4th amendment rights, as opposed to, oh, say, the specific executive implementation of welfare benefits that, generally speaking, were already democratically approved in spirit, if not in detail.

In fact, I don't really see the difference between this and Hugo Chavez undertaking nationalization and then announcing later it's "the people's will."

Privatizing Justice: Free to Lose Alone?

One of my intellectual tasks is to peel open and pin down the democracy that we have.  And then to lay it down next to what liberal democracy was supposed to look like when we decided it had rules and norms that we thought were worth organizing our society around.

"Liberal" theories of politics, with their focus on individual freedoms, tend to applaud the outsourcing of government tasks, the explicit or implicit delegation of state action to "private" actors.  Once based on moral nuggets like "natural rights," we hear now, especially after Friedman and the neoclassical revolution, arguments that are primarily in economic terms.  Citizens become market participants; individual freedom becomes "efficient allocation of resources." The fullness of human existence, at least as  contemplated by JS Mill, compartmentalizes into discrete yes/no choices in a rigid rat maze whose construction none of us had anything to do with.

It is neither irony nor a surprise, I think, that the Chicago school had a sort of hair-of-the-dog moment when Bloom - that particularly trenchant and romantic moral conservative - started panicking about the hyper moral relativism (or perhaps more accurately, the misplaced moral judgement) of his colleagues.  He pined about lost love, vapid teenage rock songs, and family disintegration.  If he couldn't look for meaning in politics, perhaps he could find it in marriage.  You can hardly blame him.

But that debate - what's important about liberalism and why - is not the only debate we're having now.  Another debate we're having is about liberalism of any kind vs..... what Sheldon Wolin described as "Inverted Totalitarianism."  I might rather call it coming full circle; once you start talking about liberalism's utilitarianism and achieving the best kind of social ends, as opposed to inalienable rights that we hold to no matter what, we open ourselves to some top-down anti-democratic arguments.  If we value freedom because it makes us more rich, then we are told to value anything that (ostensibly) makes us more rich.  Anything.

Today I was very kindly sent a letter written by lefty journalist Greg Palast encouraging Travyon Martin's father to sue the shirt off the back of George Zimmerman.  He makes an argument that we lawyers hear so often - when government lets us down, we Americans have the (very unique) recourse to private litigation; we can be our own regulatory agency.  While progressives like Palast likely think that civil suits are a second-best solution, many others believe that private litigation ought to replace the entire DOJ.  Individual market actors, after all, do it best; the DOJ is a rest stop on the Road to Serfdom.

Well, be that as it may.  But no matter which form of liberalism you pick, what's going on with justice today is anything but liberal.  Rules and laws meant to curb, prevent, minimize private litigation abound.  From the PSLRA (constraining securities fraud) to the toughening class action rules; the Phenomenon that is Private Arbitration boilerplate clauses peppering every contract you'll ever sign (click?) during your life (part of that take-it-or-leave-it rat maze).  After we broke unions of workers at the bargaining table, we are now breaking unions of consumers and citizens in lawsuits.  Why are we doing this? To make us all richer.  That, at least, is the justification that is proffered.  

So much for freedom of association.  For free "market participants" deciding on their own to form a cooperative venture to pursue their individual, but shared, desires.

Ask yourself to whom you are ceding your freedom.  And ask yourself whether that looks anything like a manifestation of individual rights - whether of the traditional or Chicago-school variety.

On Crow

Well, Krugman's a NKE - "mostly."   Per a recent blog post, problems with aggregate demand had more to do with the pain of deleveraging created by financial deregulation, and not by income inequality - which is an (American) euphemism for a increasingly capital-heavy balance in the wage-capital relationship.

Neoliberalism: Turning "Baked-In" problems of robustness into benefits

One criticism of neoliberalism is that because it has a tendency to boil down all human action into deliberate, rational calculations, it may neglect to account for a number things that aren't easily quantifiable.  In other words, neoliberalism doesn't account for "partitives" like cultural ideologies, morals, sentiments.  When neoliberalism doesn't account for such things, it fails to accurately describe human behavior -- let alone give us a guide for our future actions.

For example, when making an "investment" in marriage (a la Gary Baker), how does one weigh the risks and potential payoffs of the special emotional status marriage has in our culture, as opposed to the material, measurable rewards?

But its blindness can also be a good thing, allowing us to exclude from our calculations cultural phenomena that would otherwise have a pernicious influence on those calculations.  For example, to the extent that things like racism improperly enhance criminal punishments, a "neoliberal" understanding of crime may lead us to more equitable arrangements -- so long as we stick to the rules.  If we can understand crime not as some sort of moral corruption, but in neoliberalism's utilitarian light, as a cold calculation of payoff and risk, we can eliminate from our legal judgments the kind of mushy moral stigma wherein things like racism can hide.

One can see something like this going on in financial crime vs. drug crime.  Our legal system seems to consider financial crimes (insider trading, securities fraud, etc etc) more as "rational" decisions that just happen to have unfortunate side effects (that we often do not measure accurately or sufficiently account for -- but that's another point altogether).  So the sentences are shorter (although the fancy lawyers the perps can afford do tend to help out).  On the other hand, we load up drug crimes with a morass of sticky moral characteristics like irresponsibility, racism, fear, etc.  But if we looked at drug crime more like we look at financial crime, perhaps our prison populations would dwindle a bit.

At the end of the day, then, perhaps it's not that a neoliberal understanding is always terrible; it can be a useful way to keep us honest when we go about fulfilling our stated intentions.  If we mean crime to be X, a neoliberal calculation can make sure Y doesn't enter the picture surreptitiously.

I'd note here that Schumpeter makes a similar - if broader- point in his Capitalism, Socialism, and Democracy.  It is capitalistic (rationalistic) values that engendered things like an inclination for social welfare and feminism.  Capitalism's emphasis on hard numbers, on understanding life through the costs and revenues of a balance sheet, caused us to discount our more "mystical," traditional ideologies, to use ruthless utilitarianism to undermine our cultural justifications for hierarchical class structures.

The problem is, if we should/want to have Y enter the picture, neoliberalism (and capitalistic rationality, in Schumpeter's schematic) stands on much weaker ground.  It's at this point we need to pick up a few essays and novels and let that squishier stuff in.

In other words,  we can, in certain situations, turn neoliberalism's inherent lack of robustness into a benefit.  Just, like any other sword, is has a double-edge.  Which edge appears sharper  -- it's a matter of opinion and its historical application.

Where's Ricardo?

From Krugman's blog today:

And the growth of international trade in manufactured goods needs, perhaps, to be seen as something more special and less generic than often imagined. It’s not that there’s some inexorable force leading to stuff rattling around the globe; it’s that the combination of containerization and trade liberalization has made it possible to break up the value chain to take advantage of international wage differences.

If we take gains from comparative advantage out of the picture (and it appears Dr. Krugman has, given his description of "wage arbitrage" above), it seems the net long-term impact of globalization is that unless we develop a replacement industry that pays good wages -- wages equal to those paid for the jobs that were globalized -- consumer demand will fall, and our economy will shrink, and even more jobs will be lost.

Thing is - we need things like unions and a growing economy to keep wages high.

We perhaps won't see in the short run a net reduction in consumption (stuff made abroad is cheaper -- and plus all the consumer credit that (was) available), but in the long run.... good thing we'll all be dead.

Eating Crow

It looks like the Saltwaters are on board with PKE - at least when some schmuck starts agitating for a lower minimum wage again....and when we're in a liquidity trap.

More! More!

Articulating the Exercise of Power: Rent-Seeking

Economist Joe Stiglitz, in his column today, makes some good points about the political and economic repercussions of our intellectual property regime.

As in his book, The Price of Inequality, Stiglitz makes use of a concept called "rent-seeking," i.e.,

some of the most iniquitous aspects of inequality creation within our economic system are a result of “rent-seeking”: profits, and inequality, generated by manipulating social or political conditions to get a larger share of the economic pie, rather than increasing the size of that pie.

We should first note that "rent-seeking" requires one to reject supply-side economics, at least in some circumstances.  Namely, that rents "extracted" from one pie can be added to another, re-invested, and used productively to make something even better (this, in fact, is the view of the patent-holders and, might I add, Schumpeter).   The reasons I reject this supply-side view include:

(1) losses resulting from the anticompetitive behavior (using not free competition but market/political power to distribute resources) often outweigh the gains from any renewed investment.  For example, Stiglitz points out that patents in genomes actually hampered continued research and innovation while making life-saving healthcare unaffordable to many.  There's a good argument that whatever "new" investment enabled by the patents (extraction of rents) is small beans compared to these losses; 

(2) to the extent that the profits are not reinvested into new technology/industry, but instead used to play the speculation game on wall street, it's a dead weight loss;

(3)  I've not seen evidence that the significant size of the rents extracted is absolutely necessary to encourage an optimal level of re-investment.  Maybe we can give investors a bit of a boost - but I have a feeling what they're getting is mostly icing on the cake.

But the larger point that I want to make is the extent to which "rent-seeking" resembles the capital/labor struggle for power so well articulated by many economists.  To illustrate using the "m" word: entrepreneurs can leverage workers' inferior bargaining position and capital-friendly laws to extract "surplus" value from the product of wage labor.  In other words, the exertion of power to usurp value from one party to give it to another.  This sure sounds a lot like Stiglitz is talking about, and it reveals to us that power can manifest through economic coercion, the manipulation of laws and regulations, or the exploitation of social convention.

(In fact, I wonder to what extent "rent-seeking" may serve as a euphemism for....ideas that McCarthy wanted to send us to jail for talking about.  Of course, Adam Smith talks about it too.  And also has a rudimentary labor theory of value.  So.)

At any rate, I'd argue that any manipulation of the "rules of the game," whether we call those rules in our every day conversations "economic," "political," or "social," is an exercise of power over people.  And, at the end of the day, *all* behavior is either enabled, encouraged, or prohibited by law - and therefore, at some point, by our social conventions.  For example, we can make contracts because the law enforces them and permits them.  To call the terms of a contract a simple manifestation of private "market actors" acting freely, divorced from the talk of power, is a canard.

In other words, to divide "power" into three different concepts takes off the table real issues worthy of political attention.

This is not to say there isn't a "sliding scale."  Not every contract is the product of exploitation - sometimes parties come to the table standing on equal ground.

But more and more today, the cards are stacked.  To camouflage the inequalities by calling it a "market" phenomenon is to pass the buck on our civic responsibilities.

A Keynesian Take on the Role of Wages and Finance in Growth and Corporate Governance

A wonderful new journal, The Review of Keynesian Economics, offers some much-needed scholarly research as an alternative to the neoclassical and neokeynesian variety offered in the American mainstream.  Created by, among others, Dr. Thomas Palley - a hero of mine - in 2012, ROKE, I hope, will give us a new way to think about economic policy in general and corporate governance in particular.

As a brief aside - and risking any conceptual confusion that might result from (1) a non-economist attempting to summarize economics; and (2) the offering of summaries in general by someone with an agenda - I thought it might be useful to differentiate what you'll see in ROKE versus from, e.g., Paul Krugman, Brad DeLong, Mark Thoma, etc.

One difference between "Post" Keynesian economics ("PKE") and "neokeynesian" economics ("NKE") - of the variety you see with Paul Krugman - is that PKE advocates policies that assume that wages have an effect on aggregate demand and therefore drive growth.   NKE, on the other hand, accepts a sort of "Say's Law" take on demand, wages and investment (a legacy of the Hicks ISLM model), i.e., that growth and jobs rely more on business investment than on distributing higher wages.  Still, NKEs acknowledge the impact of fiscal stimulus as a way to drive demand.  It seems like splitting hairs at first glance - but the repercussions can be enormous.  For example, if the PKEs are right, we suddenly have a purely economic reason to raise the minimum wage to $20 and to fire Scott Walker.

Anyway, this post will summarize (as best as this non-economist is able) an article from the Autumn 2012 volume by Aldo Barba (Universita di Napoli Federico II, Italy) and Massimo Pivetti (Universita di Roma La Sapienza, Italy) entitled Distribution and Accumlation in Post-1980 Advanced Capitalism (free download available here).

In a nutshell, the article first describes growth levels both pre- and post- 1980, noting that (1) growth was much less in the latter period; and (2) the latter period is characterized by a change from manufacturing to service and technology industries.  The article acknowledges that while "computerization" suggests the loss of jobs, it also argues that because the turnover of capital equipment in tech is much quicker than in "normal" industry, the impact on jobs shouldn't have been so severe, and income inequality shouldn't have become so egregious.  So what gives?

The authors finger the usual culprits - globalization, lack of unions, and the explosion of finance.  But they put it into a perspective, and add a causal mechanism, that you won't find in the Wall Street Journal.    It's a story of bargaining power and the key role played by consumer demand (fueled by wages) in keeping our economy churning.

Specifically:

(1) when the economy transitioned to service and technology, it transitioned to a work force that lacked any sort of union cohesion and, therefore, had less bargaining power;  

(2) Globalization further lowered domestic workers' bargaining power both in the old manufacturing industry and the burgeoning tech/services industry; 

(3) As a result, wages stagnated, reducing consumer demand. 

(4) Meanwhile, privatization (and now, austerity) further weakened consumer demand by (a) cutting benefits and (b) decreasing relative payouts to the consuming public as a "cut" now had to be given to "privatized" government services as profit.

Under PKE, the reduced consumer demand, resulting from an overall relative reduction in wages to profits, discouraged business investment (this is the common sense conclusion - why invest in a few factory if no one is around to buy the products?)

Here is where the circle gets even more vicious:

(1) The lower levels of business investment mean increased worker competition, leading to... you named it, lower wages and even weaker demand; 

(2) Meanwhile, people with money to invest are looking for profitable alternatives, since there's not enough consumer demand to fuel investment in the real economy.  Enter the financial markets; 

(3) Liberalized capital control rules (free trade across borders), Alan Greenspan's cheap money policy (and disregard of employment) and deregulation further encourage investment in financial products;

(4) as a result, workers enjoy even less bargaining power vis a vis a robust and hungry capital market... leading to, ultimately, lower demand and therefore lower growth and higher unemployment.

The authors point out that we were able to dodge the inevitable for a while -- the growing financial markets also permitted consumers to finance their consumption with debt for a time.  But, well, the bubble burst and here we are.

I'd note at this point, too, that the authors give us a different story about the benefit of equity markets from the one we corporate lawyers usually tell.  We learn in law school that hedge funds and KKR and other such entities are good for growth because they discipline management to spend company money wisely.  To quit buying golden toilets and avoid million-dollar executive-office-suit renovation.  So, activist investors load up companies with debt and distribute the company's cash to shareholders.  The shareholders then re-circulate the cash back into the real economy by funding other business ventures, leading to growth, new jobs, and all others sorts of good stuff.  The reader will note that this is supply-side (Say's Law) economics.  But sadly this is the "golden rule" taught to every law student as a Law of Nature....still.  Thus, this is the "economic" justification for shareholder rights.  The more power shareholders have in a company, the more they can do this kind of "house-cleaning."

But there's another version, as pointed out by the authors: the money extracted by activists does not go to build new plants or fund the next silicon valley start-up; rather, much of it remains in the financial market, used to buy and sell other companies.  In other words, it's not used to create jobs and fund new investments.  It's used to speculate.  It's like monopoly, except that instead of building houses and hotels, you trade for someone else's that's already built.

Thus, overall, at least a portion of that money serves as a dead loss to the economy.  Or Joe Stiglitz's "rent-seeking" loss.

This story makes even more sense when you recognize that given the lackluster consumer demand, there's no where else for the money to go.....

If you accept this PKE version of events, we suddenly have an economic (rather than just moral or political) reason to give "stakeholders" more of a voice regarding the distribution of corporate profits.

Or, that maybe Dodge v. Ford Motor should have gone the other way.

In the Fishbowl of Corporate Governance Intelligentsia - Part I: What is "Long Term"?

There are a lot of smart, well-meaning people in corporate governance.  But, like any academic topic, corporate governance perhaps suffers from the occasional ill effects of hyper-specialization.  Sometimes, it might be useful, as least as far as we are able, to peer outside the fishbowl.  The new perspective might help us figure out if we're missing something.  That is what I shall attempt to do here, in this blog.

So... for starters: I'm going to address what's considered "long-term" in the fishbowl.

The New York Times' Deal Professor - Steven Davidoff - recenty had a piece challenging arguments that hold that shareholders' interests force, in one way or another, companies to embrace short-term outlooks that are ultimately bad for growth and for general prosperity.

One of his arguments is fairly simple: even ostensibly short-term shareholders aren't all that short term.  Accordingly, any influence they have on corporate leadership is likewise not short term.

He cites some empirical evidence: hedge funds holding positions for 20 months.  And a paper by Prof. Lucian Bebchuk that addresses shareholders holding for two and up to....even 5 whole years.

Now, 2-5 years sounds like an eternity when compared to the milisecond-long-ownerhip of High Frequency Traders (HFTs), with their algorithms and their willingness to spend dough to get information 2 seconds ahead of everyone else.  But... for the rest of us in the real economy?

Stepping back -- one has to wonder whether Milton Hershey thought a 20month-5 year time frame was "long."  Whether he anticipated building his theme park, his Milton Hershey school, only to dismantle it 5 years later.

Moreover, what is "long-term" for an institutional investor is not the same "long term" for everyone else.  The long term position of....what, exactly? Share price? Worker salaries? Technological improvement?  It's not always the case that a share price acts as an accurate proxy measure of other sources of company value.  In fact, there is a growing consensus that it does not.  Otherwise, there wouldn't be share-price-inflating mechanisms like stock buy-backs; shareholders would be content just to buy, to hold, and to sell.  And analysts regularly add premiums to company values calculated from discount cash flows - to, for example, account for an owner's ability to do things like give itself buybacks.  So the "long-term" maintenance of a share price point does not necessarily mean the "long-term" maintenance of the corporate entity as a whole has been maintained with just as much robustness.

This, of course, is before we get to the "externalities" of firm behavior apart from the well-being of legally recognized and compensated corporate constituents.  What is the "long-term" view of the surrounding communities, the company's contractual partners, the U.S. Treasury Department...?  We might willingly accept a 5-year-long lifetime for an individual company, but what happens 50 years down the road if all of our companies are geared in such a manner? I have visions of Ross Perot's "giant sucking sound."  Yes, that's your jobs going down the toilet.  As well as the necessary consumer demand to keep our economy churning along.

But let's presume that share price is an adequate (if rough) approximation of firm wealth for the moment.  That being so, firms can't discount the present overmuch.  We have to account for the forces of capitalism.  Obviously, no company will survive if it neglects the 2-5 year time frame only to concentrate 10-20 years into the future.

One cannot help but wonder what kinds of risks one would take if one only had 5 years to live.  Call it a "hedge fund bucket list."  We might expect to see saving and investment habits... similar to that of everyday Americans leading up to the housing bubble bust.  I.e., none.  This might work in an environment of easy credit.  But when the carousel stops turning...??  During my time as a litigator, I knew of not a few companies entering bankruptcy shortly after a going-private transaction initiated by a cost-cutting activist.

Thus, there needs to be at least a realistic expectation that the firm will continue indefinitely.  Else corporate America might start looking like Columbia's campus after finals: all the coeds have chucked their cheap dorm furniture onto the sidewalk for starving grad students to scavenge.

Davidoff recognizes the different emphasis on acceptable risk that is implied by the existence of an activist shareholder, but insists that the risk is *good* for company growth.  But what does he cite as evidence? Share prices.  First, this is like measuring the length of your hand....with your hand.  Shareholder activism is meant to inflate stock prices.  That stock prices are, in fact, inflated.... is just as easily evidence of unfruitful shareholder activism as it is of responsible long-term investment.  Arbs may be betting on a merger; the market may be waiting for a one-time big dividend payoff or stock buy-back.... None of these alternatives enhances the long-term chances of the firm.

And even setting aside for the moment the social utility of shareholder activists: that stock prices are riding high right now may not even be a direct result of their "contribution."  Rather, one might point to the Fed's quantitative easing and credit facility.  Wall street sure has a lot of free money right now to buy, buy, buy.  And we all know the law of supply and demand.  It may not be a coincidence that the 5-year ride of relatively high or stable stock prices cited by Davidoff lines up with the duration of the Fed's easy money policy.

So, the fact that Apple distributed $45million to its shareholders is not - as it is for Davidoff - conclusive evidence of healthy firm growth strategy, but instead perhaps a boon to shareholders.  Where that $45million goes, nobody knows.  But it's not going to develop iPhone 235, and it's certainly not going to the improvement of Apple's occasionally feeble supply-chain oversight mechanism.

Atlas Shrugged...and Nietzsche Fell Out

Just wanted to point out a (controversial) but nevertheless enjoyable and challenging article by Corey Robin in the Nation.  Crooked Timber has some great follow up.

In a nutshell, the point I find the most interesting - Friedrich Hayek perhaps didn't value laissez-faire freedom so much for its own sake, but so the "supermen" of society would have room to do their awesome thing -- making us all better off.

An instrumental definition of freedom from the father of neoliberalism....!  So long John Locke.

Lean, Mean Privatization.. Is Bloating the Parts of Government We Aren't Supposed to Trust

We seem to accept the privatization of state action for a few reasons.  First, whatever democratic legitimization enjoyed, however tenuously, by bureaucracy is amply replaced by "market" and "neoliberal" (laissez-faire) legitimacy. Uunder the aegis of the (neo)liberal paradigm, market actors are what the state is supposed to protect.  They, as individuals or as amalgamations of individuals, are the source of state legitimation - it is their votes that make us accept state power.  So to the extent that they can perform (for themselves?) what the state was otherwise doing , it's a good thing.

Second, giving as much freedom to market actors as possible is supposed to enhance the wealth of society in general.  In other words, markets are good -quite apart from democracy, rights and liberalism - insofar as they make us all materially better off.  Thus, privatizing defense, medical, penal, military and other services encourages the kind of growth that "lifts all boats."

Finally, privatization is supposed to be cheaper.  Cheaper means more tax dollars saved, which means more personal freedom for tax-paying citizens to do what they want with their own material resources.  This too, in addition to enabling liberty, also has a utilitarian function: it helps growth.

But if we drill down a little, we begin to see the slippery logic.  If government responsibilities are delegated to some, but not to all, individuals, we're in a position where the few are making decisions for the many.  This invokes the inherent paradox of democracy - how can, in situations where our desires are not unanimous, we justify government in a truly liberal society that values individual freedom above all other things?  (see, e.g., Kelsen)  Viewed in this light, privatizing certain functions of the welfare state (as they do here in New York City) appears no more legitimate than letting "some unelected government bureaucrat" do it.   Or, more simply - the undemocratic exertion of power is made no more democratic through delegation to a private actor.  At least with the 4th branch of government, we can vote yay or nay to congressmen who promise to oversee the bureaucracies.  With companies, we're not even allowed to know who owns them, nevermind how they run their business.  In fact, it's been argued that Vice President Cheney wanted to privatize certain defense activities precisely to keep them secret and away from public oversight.

Secondly, the logic does not account for the fact that the companies to which we delegate government functions are themselves not "individuals," but instead organizations structured through centers of command and control.  "This is not a democracy!" are words spat out by many a boss.  

The legitimacy of corporate action, therefore, depends entirely on whatever "market" legitimacy they might have.  In other words, their ability to encourage growth and to put money back in the pockets of taxpayers is their only saving grace.

Of course, research is emerging that shows that privatization isn't always cheaper.  Reference the recent debates in healthcare.

Regardless, another (perhaps more important question) is whether market legitimacy outweighs our other values.  Or, more specifically, to what extent is market legitimation inherently (and practically) incompatible with those values?  Recent debates regarding the privatization of intelligence, national security, and prisons seems to indicate that privatization might actually bloat, not slimline, the kinds of state action that the Bill of Rights was supposed to put the kybash on.  How could anyone realistically doubt that adding the profit motive to the national security apparatus would inevitably encourage that apparatus to spy on us at an heretofore unimaginable scale?  Or that accepting for-profit prisons might have had something to do with the fact that we have more prisoners than ever, and more so than any other western country?

Privatization and liberty may prove to be fundamentally incompatible.

Schumpeter, the State, and Funding Economic Evolution

In Schumpeter's Capitalism, Socialism and Democracy, we are presented with a vindication of sorts for certain forms of "anticompetitive behavior."  Unless firms can leverage their market power (e.g., to set rather than to accept prices) to extract profits, they will not be able to make the kind of investments necessary to bring about meaningful economic evolution.  Ultimately, it is not the "micro" level price-competition that yields the technological innovation that keeps the economy growing (and therefore improving everyone's living conditions), but rather the monopolistic/oligopolistic buying up of patents, bundling, etc. that funds things like trains, electricity, and the internet.

In the end, then, this kind of behavior is not, for Shumpeter, "social waste," but absolutely necessary for capitalism to work as we want it to.  To make us all better off, at least materially speaking.

Setting aside for the moment that "social waste" can be fairly attributed to situations where capitalists (and their employees) are spending their blood, sweat and tears working tirelessly, endlessly, and desperately -- to prepare for the day the next Facebook, Apple, or whatever comes along to put everyone out of business -- even in conditions of perfect competition and economic equilibria...

And setting aside for the moment that (as Schumpeter recognizes but then dismisses) firms can seek funding from sources other than retained earnings (bank loans, bonds, equity markets, for example)

And also setting aside the fact that I don't know of any evidence that firms couldn't save the requisite funds to invest in new technology if they were forced to do business on more competitive terms....

And further setting aside for the moment that supply-side economics is not exactly uncontested (see, e.g., Keynesianism, or Apple's stock buy-back and dividend programs)

A new paper from EPI points out that it is the government, using tax dollars, and not price-setting business enterprise, that often creates the kind of transformative technology that triggers growth.

So, I suppose I shouldn't cry over the judgment against Apple for fixing the prices of eBooks.

And maybe we don't need companies like Apple to Fund the Future.

Finding Hobbes in Adam Smith -- and the Stylized Neoclassical World View

A wonderful little debate (and here and here ) is currently taking place (and thanks to Prof. Mark Thoma for broadcasting it) among some greats of the History of Economic Thought.  Profs. Brad DeLong (Berkeley), Jeff Weintraub (Penn) and Gavin Kennedy (UCL) consider the impact of Adam Smith's purported failure (Weintraub) to incorporate into his seminal economic theory the fact that human beings do not, in fact, inevitably arrange their behavior according to self-interested exchange relationships.

Of the three stylized classifications of social organization offered by Smith in the Wealth of Nations (exchange relationships, charity, and command-and-control-style power), Smith primarily analyzes economic growth (and political economy generally) in terms of free market "equilibria"(and the impact of state action/collusive group behavior) on that equilibria, rather than the possibility that we might form other sorts of productive arrangements.   The implications are profound -- what might we have missed, over the past 250 years, had Adam Smith suggested that we might do something else - and do it not because it's the "right" thing to do, but because we're naturally rigged to do so?

I want to comment here on a single point that was brought up - that, in the context of exchange relationships, modern economists view themselves as "Lockeans" rather than "Hobbesians."  For example, Prof. Delong writes:

As I wrote back in 2012, your average economist is not a "Hobbesian" believing that humans are motivated by self-interest, but rather a "Lockeian", respecting others and their spheres of autonomy and eager to enter into reciprocal gift-exchange relationships, both one-offs mediated by cash alone and longer-run ones as well:

First, your standard economist is not "Hobbesian". He does not enter a butcher's shop only when armed cap-a-pie and only with armed guards, fearing--as a Hobbesian would--that the butcher will not sell him meat for money but will rather:

*knock him unconscious, * take his money, * slaughter him, * smoke him, and * sell him as long pig.

A Hobbesian does not buy and sell goods and services in mutually-beneficial Pareto-improving exchange relationships. A Hobbesian finds the biggest bad-ass in the neighborhood, and swears liege homage to that bad-ass in return for that bad-ass's promising not to kill him.

Your standard economist is, rather, a "Lockeian"--presumes that there is an underlying order of property and ownership that is largely self-enforcing, that requires only a "night watchman" to keep it stable and secure.

Now it is true that your standard economist is a largely-unreflective Lockeian: does not inquire why one trades rather than takes, affects the tough-guy pose that it is only the repeated-game nature of economic interactions that keep us from always winding up in the bad cell of the prisoner's dilemma, and adopts the reductio that humans are narrowly self-interested only in material acquisition (in order to strengthen the case that the social apparatus of voluntary market exchange produces good outcomes--to make the point that even private vices produce public benefits if they are constrained by the market). But that the standard economist is a largely-unreflective Lockeian does not mean that they are a Hobbesian.

I don't know if I agree that Hobbes can be written off so completely within economic thought - If the various human relationships stylized by Smith as exchange, charity, and command-and-conrol can be understood as standing on a sliding scale (and I do think there is evidence for this in Smith's text - e.g., his reference to the collusion of guilds, differential bargaining power between entrepreneurs and workers, corporations, etc., all of which incorporate elements of command-and-control within exchange relationships), then economics begins to incorporate elements of Hobbes. 

Under a Hobbesian viewpoint, people use the power they find to hand to get what they want. Sometimes all the "power" they have is to convince another an exchange is in their self interest. Sometimes...more is available. It's just that within organized political bodies (unlike Hobbes' state of nature) robbery is not *always* the smartest option. Nevertheless, human beings, with their self interest being what it is, sill seek "power after power" using the tools available, making a judgment call about what kind of power can best be used to accomplish their aims.  Indeed, Hobbes postulated the very formation of a state based on rationality - his absolute monarch was the product of his own kind of cost-benefit analysis: we get more from agreeing to a police state than from battling it out among ourselves. The "rule of reason" suggests that we do so.  So, there is no reason to expect that, under Hobbes' line of thinking, we wouldn't (shouldn't) make the same kind of calculation on a more micro scale.  Regardless, we still, in Hobbes' state, put locks on our doors -- in the event someone still think it's worth the risk to steal from us.   And I haven't noticed recently that anyone is removing the deadbolts from their apartment doors here in Manhattan.

 It's thus not obvious that non (physically) violent exchange enters a realm different from what Hobbes would anticipate. In other words -- if we can understand "power" as including, among other things, our ability to acquire an item that someone else wants and to convince them that exchange is beneficial, then Hobbes slips in quite easily in, for example, situations of unequal bargaining power.

One (of several) problems we now see within economics, I'd argue, is that economists fail to recognize just how very Hobbesian they are. If they called a duck a duck, they would recognize that certain "anticompetitive" behavior (such as, for example, the kind vindicated by Schumpeter, i.e., price fixing, long term contracts, buying up of patents, etc) is not just a manifestation of Smithian/Lockean exchange, but also mixed up with social and market power. That is Hobbes. 

To say it is not Hobbes, I suspect, may work to prevent an honest discussion about what our world really looks like and whether it is something we really want. We start thinking in terms that presume a background of equal exchange, autonomy, and liberty.  But last I checked, equal exchange, autonomy, and liberty -- in so far as we actually have them -- only came about after hundreds of years of bloody revolution.  To assume them away seems an egregious error in thinking.

The overall point is very well summarized in John Weeks' new book, The Irreconcilable Inconsistencies of Neoclassical Macroeconomics: A False Paradigm:

In the European Middle Ages the dogmas of the Catholic Church enforced daunting barriers to scientific inquiry. The pernicious effect of neoclassical economics is worse. It is a virus of the mind. Once implanted in the mental processes, it systematically destroys the ability to conduct rational thought. Its intellectual method does not reveal underlying truths and relationships. Quite the contrary, it renders the complexities of life into ahistorical trivia obscured by cabalistic mathematics.

The Social nature of human existence is rejected by the neoclassicals in favor of the absurdity that each person is an isolated individual, stripped of the inter-personal responsibility that makes people human. ‘Individuals’ are driven by pure personal greed, defined as ‘rational’ behavior. This irresponsible greed allegedly results in the general welfare. It is difficult to imagine a doctrine more flagrantly in the interest of the rich. (pp. 2–3)

Or, perhaps, by the inestimable John Kenneth Galbraith:

In wielding power – in making economics a non-political subject – neoclassical theory destroys the relation of economics to the real world. In that world, power is decisive in what happens. And the problems of that world are increasing both in number and in the depth of their social affliction. In consequence, neoclassical and neo-Keynesian economics regulates its players to the social sidelines. They either call no plays or use the wrong ones. To change the metaphor, they manipulate levers to which no machinery is attached. (John Kenneth Galbraith, Annals of an Abiding Liberal, (New American Library, New York 1980)

(Thanks to Wesley Marshall for pulling these quotes)