News this morning that executive pay in big UK companies rose by 10% in the past year, about five times the rate of increase in average earnings. My question is rhetorical. This latest manifestation of economic opportunism by the executive classes (that is, seeing what they can get away with) is of course unseemly as well as immoral. But what of the economic drivers? My old favourite, Oliver Williamson’s [amazon_link id=”068486374X” target=”_blank” ]The Economic Institutions of Capitalism[/amazon_link], was published in 1985. It notes that earlier discussions of governance, at least since [amazon_link id=”0887388876″ target=”_blank” ]Berle and Means[/amazon_link], had paid little attention to the role of management, but the book’s own perspective on management does not discuss the reasons for the power of executives. After all, they were not yet flaunting it, and the book pre-dates the modern greed-fest.

I think the explanation requires a beefed-up principal-agent asymmetric information approach. Intangible value accounts for a massive proportion of the market cap of all large corporations, and it is impossible for any party other than the internal executives to monitor the contribution of those individuals to the value of the company. In fact, executive pay structures have also become a signalling device to indicate the individual’s contribution. (Are there any models of this kind around? I’m not up to date with this bit of the literature.) Shareholders, workers and customers alike have to trust the board. Looking at this morning’s reaction to the latest pay news, I rather think that trust has been torpedoed.

[amazon_image id=”068486374X” link=”true” target=”_blank” size=”medium” ]The Economic Institutions of Capitalism[/amazon_image]

I’ve just started reading Steve Keen’s [amazon_link id=”1848139926″ target=”_blank” ]Debunking Economics: The Naked Emperor Dethroned[/amazon_link], and it looks a very enjoyable rant. I’m sure I’ll agree with quite a bit of it. But a page in, and two issues of terminology are very apparent.

One is that by ‘economics’ he means ‘macroeconomics’. Of course, he’s not alone in this – most people think macro is the entirety of economics – but then, he’s an economist and could be more precise. We microeconomists are as shocked as any normal person that, as it turns out, pre-crisis macro models didn’t have a financial sector. We’re certainly going to have to get out much more and explain to people what it is that we, as opposed to the macro guys, actually do.

The second is revealed by footnote 1, page xv, in which Prof Keen describes his realisation early in his education that economics has no clothes (to continue the metaphor in the title) when he appreciates that getting rid of unions to let the labour market work freely is a bad idea when there are monopolies on the other side of the market. The footnote refers to reader to the classic Lancaster and Lipsey theory of second best, a familiar result in – economics. While it’s true that the language of market forces in public policy for the past generation has meant that their insight about second best has not been implemented, it isn’t entirely correct to say either that ‘economics’ is therefore useless.

Perhaps we need different typefaces. There is economics, as it is actually practiced by economists, much of it micro not macro, empirically-based and increasingly eclectic in its methodology. Then there is

economics

the not entirely unreal but equally not much observed in the wild version that critics object to. If anybody wants to read more in this vein, my recent Tanner Lectures go into it, and here again is the link to the excellent Stumbling and Mumbling post on the same kind of issue, and a follow-up post.

[amazon_image id=”1848139926″ link=”true” target=”_blank” size=”medium” ]Debunking Economics – Revised and Expanded Edition: The Naked Emperor Dethroned?[/amazon_image]

On my shelf is a collection of essays published in 1947 in memory of Keynes, who had died the previous year. The book, [amazon_link id=”B000UWHGDM” target=”_blank” ]The New Economics: Keynes’ Influence on Theory and Public Policy[/amazon_link], edited by Seymour Harris, is fascinating for many reasons. Among them, the reverence for Keynes, but also the kind of discussion that took place between economists to determine what ‘Keynesian’ thought was, exactly.

[amazon_image id=”B000UWHGDM” link=”true” target=”_blank” size=”medium” ]The New Economics : Keynes Influence on Theory and Public Policy / Edited, with Introductions by Seymour E. Harris[/amazon_image]

The affectionate and respectful chapter written by Joseph Schumpeter also makes some interesting sociological points about ‘Keynesianism’. He writes:

“Many of the men who entered the field of teaching or research in the 20s and 30s had renounced allegiance to the bourgeois scheme of life, the bourgeois scheme of values. Many of them sneered at the profit motive and at the element of personal performance in the capitalist process.”

But they did not want to pronounce themselves socialists, either. So Keynes gave them a ‘respectable’ alternative, a theory that made the personal accumulation of wealth bad for the economy and, as Schumpeter paraphrases [amazon_link id=”1467934925″ target=”_blank” ]The General Theory[/amazon_link], “the unequal distribution of income is the ultimate cause of unemployment.”

[amazon_image id=”1467934925″ link=”true” target=”_blank” size=”medium” ]The General Theory of Employment, Interest, and Money[/amazon_image]

This, Schumpeter concludes, “Is what the Keynesian revolution amounts to.”

It’s quite interesting to reflect in this vein on the sociology of the opposing camps of macroeconomists today, with the New Neo-Keynesians, like Schumpeter’s young economists of the 1930s, similarly crafting a non-socialist but anti-capitalist identity. Scary how many echoes of the 30s there seem to be….

Meanwhile, the opposing shouty camps in macroeconomics are giving the whole subject a wholly undeserved bad name, as Chris Dillow accurately but plaintively points out in an excellent Stumbling and Mumbling post.

Last night I attended the recording of the first of this year’s BBC Reith Lectures, historian Niall Ferguson giving the first of four on the subject of ‘The Rule of Law and its Enemies.’ Prof Ferguson tends to arouse strong feelings – I’m a fan – but whether you love or hate him, he’s certainly a lively and provocative lecturer. The big lecture theatre at the LSE was packed.

His theme in the first lecture was the breakdown in the social contract between the generations, citing, as one would expect from a conservative historian, Edmund Burke (from [amazon_link id=”0199539022″ target=”_blank” ]Reflections on the Revolution in France[/amazon_link]):

“Society is indeed a contract. It is a partnership in all science; a partnership in all art; a partnership in every virtue, and in all perfection. As the ends of such a partnership cannot be obtained in many generations, it becomes a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born.”

[amazon_image id=”0199539022″ link=”true” target=”_blank” size=”medium” ]Reflections on the Revolution in France (Oxford World’s Classics)[/amazon_image]

This took him into the current financial crisis and the question of debt, a subject on which Prof Ferguson has famously clashed with Paul Krugman over the latter’s insistence on fiscal stimulus to pep up growth now (an argument on which Prof Krugman’s got a new book out, [amazon_link id=”0393088774″ target=”_blank” ]End This Depression Now![/amazon_link] – I’ve not yet read it.)

[amazon_image id=”0393088774″ link=”true” target=”_blank” size=”medium” ]End This Depression Now![/amazon_image]

Prof Ferguson made the case for proper generational accounting and a national balance sheet – readers of [amazon_link id=”0691156298″ target=”_blank” ]The Economics of Enough[/amazon_link] will know I’m an ardent advocate of these measures. Anyway, the lecture will be broadcast on BBC Radio 4 and The World Service on 19 June, with a repeat and a podcast to follow, then the other three in the following weeks.They’re going to be a must-listen for me.

The point of this post was to highlight some of the many books cited in last night’s lecture. They included (as well as Burke) Daron Acemoglu and James Robinson’s [amazon_link id=”1846684293″ target=”_blank” ]Why Nation’s Fail [/amazon_link](reviewed here), Timur Kuran’s [amazon_link id=”0691147566″ target=”_blank” ]The Long Divergence[/amazon_link] (reviewed here), Carmen Reinhardt and Kenneth Rogoff’s [amazon_link id=”0691142165″ target=”_blank” ]This Time is Different[/amazon_link], along with Mandeville’s [amazon_link id=”0140445412″ target=”_blank” ]Fable of the Bees[/amazon_link] and Adam Smith’s [amazon_link id=”0140432086″ target=”_blank” ]The Wealth of Nations[/amazon_link].

[amazon_image id=”0691156298″ link=”true” target=”_blank” size=”medium” ]The Economics of Enough: How to Run the Economy as If the Future Matters[/amazon_image]