Life beyond shareholder value

The peerless Izabella Kaminska (@izakaminska) of the FT linked this morning to this Andy Haldane speech, which I’d only skimmed when he made it. The speech discusses the consequences for corporate governance of the way the limited liability corporation has evolved, giving primacy to a narrow view of shareholder value. It cites en passant some terrific books both recent – Anat Admati and Martin Hellwig in The Bankers’ New Clothes, Colin Mayer’s Firm Commitment – and less recent – Berle and Means’ The Modern Corporation and Private Property and Schumpeter’s Capitalism, Socialism and Democracy.

The speech looks at the historical context of the emergence of limited liability, especially in banking. The need to which it responded was of course the increased capital requirements of the time, the Industrial Revolution getting well under way. With either partnerships of unlimited liability, banks in particular were unable to respond to crises by raising new capital. (Not that it proved straightforward in 2008-9 even with limited liability.) The speech ends with a discussion of potential corporate governance reforms, including clawing back bonuses, and modifying company law to reflect wider stakeholder interests, in addition to shareholders’ interests.

The history made me ponder, however, whether the limited liability public company largely ought to go the way of the megalosaurus? Already the growth of private equity suggests there are other financing channels chipping away at the monoculture. Perhaps when legislators ever get around to doing something, one of the corporate governance reforms needed is to reduce the role of limited liability public companies in the economy.

Meanwhile, I’m reading John Kay’s latest, Other People’s Money, an excellent read which follows up on his short-termism review, to which the Andy Haldane speech refers. A review to follow.

EmailLinkedInShare/Save

On not skipping over facts

I read recently Sarah Bakewell’s delightful book, How to Live: A Life of Montaigne in one question and twenty attempts at an answer. Then by chance today (possibly via @Storythings?) came across this quotation from his Complete Essays:

“I realize that if you ask people to account for “facts”, they usually  spend more time finding reasons for them than finding out whether they  are true. … They skip over the facts but carefully deduce inferences.  They normally begin thus: “How does this come about?” But does it do so?  That is what they ought to be asking.”

Quite so. The more time I spend thinking about it – and it’s quite a lot already – the more puzzling economic facts seem to be.

 

History and imagination

The last of my holiday reads, albeit finished this week, was Sapiens: A Brief History of Humankind by Yuval Noah Harari. I was a bit disappointed, as it had absolutely glowing reviews. After reading Ian Morris’s Why The West Rules For Now and his more recent Farmers, Foragers and Fossil Fuels, and Jared Diamond’s Guns, Germs and Steel, and his later Collapse, not to mention Joseph Tainter and Walter Russell Mead, I suppose it’s hard to describe anything completely new looking through the long lens on the history of civilisation. It’s quite a crowded terrain.

That isn’t to say I didn’t enjoy reading Sapiens. It’s eloquently written. I liked the emphasis on human social agency, and absence of technological or ecological determinism: “The ability to create an imagined reality out of words enabled large numbers of strangers to co-operate effectively.”

He writes of ‘imagined order’ (echose of Benedict Anderson): “We believe in a particular order not because it is objectively true but because believing in it enables us to coperate effectively and forge a better society.” He has a nice example using Peugeot, the car company. It doesn’t consist in the cars it makes, or its assets, or the people working for it – it has an existence beyind any of them, and a longevity too, kept in existence by the imagined order of the French legal system, the French state, the idea of nation states, and so on. The ‘rules of the game’ as an institutional economist might put it, are a set of Russian dolls.

It drove home for me the point that for individuals the agricultural revolution was an adverse development, although it was great for spreading Homo Sapiens genes. I liked the discussion of natural and unnatural – a distinction that pre-supposes the existence of a higher purpose, and since evolution has no purpose it is a distinction that comes from religion.

I very much enjoyed the contrasting portraits of Louis XIV of France and Barack Obama: “Dominant men have never looked so dreary as they do today. What happened to the wig, stockings, high heels?”

The book tails off a bit towards the end – the economics chapters seemed weak to me, although perhaps they wouldn’t to a non-economist. They cram the whole history of world economics with an emphasis on credit (Graeber-style) into three chapters.

Anyway, that’s it for summer paperbacks. Back to the serious reading now. Next up is John Kay’s Other People’s Money. Four pages in, and I think it’s fabulous.

Accounts and holding to account

This is the last of my posts drafted on holiday last week, and is particularly timely despite being retrospective because my review of Jane Gleeson-White’s Six Capitals, or Can Accountants Save the Planet is published in the new issue of Foreign Affairs today.

I *loved* Jacob Soll’s The Reckoning: Financial Accountability and the Making and Breaking of Nations. It gives a long historical perspective on accountancy – no, wait – and particularly its importance in literally holding leaders and politicians to account. It is also extremely well written and lively. I got much joy from learning of the 1604 book Accounting for Princes, and that there was a real Musketeer called Captain D’Artagnan, he isn’t just a creature of fiction. That Jacques Necker’s Compte Rendu sold more than 100,000 copies in one year, 1781, alone. And this description of Josiah Wedgwood’s legacy: “Sound industrial management and tableware for the middling sort.”

The book’s message is that there is a constant tension between the increasing sophistication of methods of accounting to hold to account, literally, kings or powerful companies or political leaders and the scope that sophistication creates for new ways of defrauding the people or the shareholders. So the methods of accountancy need to be embedded in a culture of honest dealing. Soll concludes that we lack that now: “Accountants have become separated from everyday culture. … All countries, rich and poor, hide the true costs of their pension benefits and health care as well as of infrastructure, off their balance sheets.” But there is no public outcry about bad public accounting, while deceitful bankers and financiers have not been held to account for the crisis. (One of my arguments in The Economics of Enough was that this situation is seriously unsustainable.)

Soll cites the proposal by Timothy Irwin of the IMF that governments should publish 50 year ahead balance sheets, but queries whether it is possible. “By separating finance into its own sphere, we have lowered our financial and political aspirations.” The numbers should be an integral part of society but are not: “If there is any historical lesson to be learned here, it is that those societies that managed to harness accounting as part of their general cultures flourished.” These have been rare – Renaissance Italian city states, the early American republic, Britain of the Glorious Revolution or for a time in the Industrial Revolution. They have been brief: Charles Davenant, one of the earliest national income accountants, tried to calculate the public finances after 1689 but by the time his Discourses on the Publick Revenues was published complained that information was being withheld.

My sole regret (as the author of GDP) about Soll’s book is that he does not cover economic statistics more generally, but rather public finances. They too matter for political accountability and are no longer doing that job (as I argue in my recent working paper). Still, it’s good to want more of a book rather than less. I highly commend The Reckoning.

Final couple of days of holiday now. I have Sarah Bakewell’s How To Live: A Life of Montaigne in one question and twenty attempts at an answer; and Sapiens: A brief history of humankind left to read.

Robots for the people

In between Lionel Davidson’s cracking 1994 thriller – recently reissued – Kolymsky Heights and Colum McCann’s moving novel Let the Great World Spin, I read (at last) Martin Ford’s Rise of the Robots: Technology and the Threat of a Jobless Future. It’s good to see it made the FT Business Book Prize long list, amid terrific company.

As one of the economists Ford has a go at in the book, I don’t believe the challenge is one of the total number of jobs jobs. These periodic waves of concern about where all the jobs are going to come from tend to prefigure a wave of job creation. It happened in the 1960s, following publication in 1964 of the ‘Triple Revolution’ report in the US, and it happened again in the 1990s after the ‘Downsizing of America’ report in 1992. This time might be different, as Ford and so many others argue, but repeatedly over 250 years capitalist economies have shown their capacity for creating new forms of work when old forms become redundant for technological or other reasons.

Indeed, at present in the US and UK there is little sign of any direct impact of automation at all. Employment rates are high, and low labour and total factor productivity signal the absence of a significant technological impact on growth and jobs. We have too few robots, not too many. There are some significant data issues here, but that includes the question of measuring jobs in the digital economy – as often noted, Google has far fewer employees than GM, but Mike Mandel has pointed out that the statistics are not counting the extent of job creation in smaller businesses.

That’s not to say there are no challenges from robotisation. Almost as often as they have adapted, capitalist economies have proven themselves bad at the process of transition. The huge wave of automation in manufacturing in the 1980s and 1990s, the deindustrialisation and globalisation, destroyed communities and left successive generations out of work, in poverty, and scarred by the nexus of social problems experienced by so many former mill or mining towns. There is also the question of income distribution. As Ford points out, Thomas Piketty’s tome on inequality hardly mentioned technology amid its quotations from Balzac and Austen, but it did plant this issue firmly at the centre of policy debates. Tony Atkinson’s impressive book Inequality had a detailed list of policy responses. The winners from technology will need to share the benefits if our societies are to thrive.

So I certainly don’t dismiss techno-fears, but I do think “we’re all going to be unemployed” is the wrong way to frame the problems. Having said that, Rise of the Robots is a thorough review of the impact of digital technologies on a number of areas. It covers the likely breakthroughs such as AI and driverless vehicles, going over the exponential pattern as Brynjolfsson and McAfee do in their book The Second Machine Age. Ford has chapters on industries such as health and higher education, where the impact of digital disruption has yet to be experienced.

He raises some interesting questions. For example: “Should the population at large have some sort of claim on [the] accumulated technological balance?” Meaning the vast social and public investment in research and innovation, on which the new digital fortunes are piggybacking. The answer to that is surely yes. There is also the implication of the machines’ greater ability to know what we know: no human an be aware of all research, past or present, but something like IBM Watson can be.

There is a great example in the book of two almost simultaneous cases of patients presenting themselves at different hospitals with mysterious diseases. One almost died during a heart operation, the doctors puzzled as to the diagnosis. Another was correctly diagnosed and treated because the doctor happened to have seen the same mystery symptoms on the TV series House. A smart enough computer would have known without having to have serendipitously watched the right TV programme. Ford seems to see this as a threat, but surely there is only benefit in this ability to pool past human knowledge? And I’m not persuaded that computers are yet anywhere near creating new knowledge however magical they are at collating and making sense of past knowledge. They are standing on the shoulders of human giants, absorbing humanity’s existing intellectual assets.

Well, maybe I’m delusionally optimistic. Ford ends the book with figures from the BLS. Between 1998 and 2013, there was a 42% real increase in US GDP, but no increase in the total hours worked. He thinks that’s a bad thing. I think it’s a good one – with the huge proviso that the benefits of growth must be widely shared. They haven’t been. We don’t have the people’s robots. That’s the real problem.