Thursday, March 22, 2018

“Beyond Capitalism?” No, Back To The Future

“I wish we would stop using the word Capitalism”, writes John Kay of Oxford University, in a recent post entitled Moving Beyond “Capitalism”

Kay reminds us that, in nineteenth century 
British capitalism, enterprises and large companies were in the hands of owners-entrepreneurs; in the twentieth century in England and the United States the role of entrepreneurs was delegated to professional managers, already in family enterprises and especially on behalf of a multitude of shareholders. More recently the role of shareholders was taken over mostly by pension funds, by insurance companies and mutual funds, whose investments are handled by professionals specialized in managing their portfolios.
After the last War firms become international and multinational, manage many plants in different countries and operate in a global economy that frees them of many domestic constraints, giving it access to mobility of capital and labour, of goods and services. The enterprise is "empty" (generating the hollow company), in the sense of transforming itself into a network of relationships, with a fragmented division of labour worldwide governed by intermediaries organized by markets, rather than by hierarchies as in the enterprise model developed by Ronald Coase in 1937. (Coase had asked why production was organised in firms instead of being conducted by self-employed individuals entering market relations, and why was production not organised in a single giant firm. He found the answer in the transaction costs of market relations versus those of centralised direction by an entrepreneur).
The capitalization of a large company depends on the value of these relationships, which is particularly illiquid: the relationships as such or the brand that represents them cannot be transferred to others without losing much if not all of their value. For this reason the shares of these companies tend to end up in the hands of their managers, as well as of their employees. These companies need a stock exchange listing initially to allow the founders to realize the value they added to their capital, and to reassure shareholders on the value and above all the liquidity of their shares, but otherwise are not financed by the capital market but mostly through reinvesting their profits.
A certain fragility derives from this set up, but also a certain resilience, i.e. the ability' to survive a bad management even if their own capital is used inefficiently.  According to Kay the enterprise of the twenty-first century - and therefore today's new capitalism - would no longer involve a confrontational relationship between capital and labor, but rather a partnership, an inclusive relationship that merges the interests of managers and employees, of suppliers and customers, while the position of investors is secondary and precarious. A stakeholders’ paradise, we might call it. Kay expects that such inclusive character of enterprises should discourage selfish rent-seeking behavior and maintain cohesion, without endangering the company’s external legitimacy through the misuse of the political process, reaffirming their character as social organizations embedded in communities.
The theory that shareholders are not the owners of their company is an old hobby horse of John Kay, oblivious to considerations that shareholders who disagree with managerial decisions can always vote for the liquidation of the company, sell the shares to anyone with an alternative vision of how make it more profitable, or simply sell the shares in the stock exchange depressing their price thus making it easier for potential bidders to take over the company. 

Robin Marris (1964) tried to build a theory of "Managerial" Capitalism, in which professional managers sacrifice part of the shareholders’ value (the maximisation of profit and of capital valuation relatively to capital employed), in favour of higher growth of company turnover, capital and employment, which benefits managers directly and indirectly through their remuneration, social prestige and promotion opportunities. However this profitability reduction is constrained, in Marris’ theory, by the danger that the failure to maximise the stock exchange valuation of the company might induce an investor or an alternative managerial team to attempt a takeover bid, which if successful would bring about the dismissal of managers and the rise of profitability also in the interest of all other shareholders. Paradoxically therefore Marris’ attempt to theorise the alleged specific difference of Managerial Capitalism led him to confirm its traditional textbook behaviour.
As for the model of the modern enterprise as a network of relationships mediated by markets instead of a centralised command hierarchy, it is easy to understand its greater fragility but not its alleged more inclusive and less confrontational character. On the contrary, the fragmentation of the productive process and the fierce competition among global workers can only intensify conflicts between capital and labour, as confirmed by the continuous decrease of the labour share in national income worldwide. 

The capitalist evolution outlined by Kay does not alter at all the system’s tendencies towards labour unemployment and unused capacity, economic fluctuations and crises, rising inequality of income and wealth.
“Moving Beyond Capitalism?” No, Back To The Future. 

On the evolution of corporations in modern capitalism see also John Kenneth Galbraith’s The New Industrial State (1967) and especially the excellent Foreword by James Galbraith to the 2007 reprint of the book (Princeton University Press,
Ronald Coase (1937), “The Nature of the Firm”Economica, 4(16), 386-405

Robin Marris (1964), The Economic Theory of ‘Managerial’ Capitalism, London, Macmillan.

Sunday, March 4, 2018

Be Careful What You Wish For

Note: An Italian translation of this post (not revised by the author) has been published by , I am grateful to them and to the many readers who twitted and ri-twitted this post, as well as those who expressed their support on Facebook (where I have an account that I do not manage well). All this gave this post an extraordinary diffusion. Thanks also to all those who offered comments: I would rather readers commented directly on the Blog rather than to me via e-mail, in which case I might post their comments under initials or a made-up pseudonym or ask for their permission to enter their name (DMN) .

Indro Montanelli (1909-2001), the prestigious Italian journalist and writer, on many occasions expressed great contempt for Silvio Berlusconi, his character and politics. Yet in 2001 Montanelli declared in an interview: “I want him to win, I make vows and give pledges to the Madonna for him to win, so that Italians will see who this man is. Berlusconi is a disease that is cured only by vaccination, with a good injection of Berlusconi in government [a Palazzo Chigi]; Berlusconi as President of Italy [al Quirinale], Berlusconi wherever he wants to be, Berlusconi at the Vatican. Only afterwards will we be immune. The immunity that is obtained through vaccination” (La Repubblica, 26 March 2001[1]).
In the 13 May 2001 elections the first part of Montanelli’s wishes came true: Berlusconi and his allies obtained an absolute majority in both Houses of Parliament. 
Montanelli should have been more careful what he wished for. His verdict on the man was correct: the lower and the appeal courts in Milan in 2012 and 2013 convicted Berlusconi of fiscal fraud. The four year sentence was later reduced to one year and three months, which he never served by virtue of being over 70, but deprived him of political rights for two years until 2019. 
"He is the most sincere liar I know, for he is the first to believe in his own lies”, Montanelli had said;  he got away with a gigantic conflict of interest (with the complicity of the Left); Marco Travaglio, B. come Basta, Paperfirst2018, recounts how he run the country.
But otherwise Montanelli had been utterly and tragically wrong: the Italian electorate, who had already a short exposure to Berlusconi in 1994-95 and repeated large doses of vaccine with his governments in 2001-05 and 2008-11, still seems inclined to make his coalition the favourite to win the elections of 4 March 2018.
Despite Montanelli's mistaken prognosis and cure, I venture a similar wish, though in different circumstances, with respect to other parties and for different reasons.
At present there is a false, self-styled social-democratic Left, justifying itself by pretending to defend the interests of working people while destroying their life chances with their hyper-liberal, austerian and globalist policies, promoting no-border movements of capital and labour, de-regulation, privatisation, the destruction of the welfare state and unprecedented inequality of income and wealth. 
Inevitably a two steps (at least) process is required to get rid of this false Left and open the Left again to being the representative of working people, of fairness, of the admittance of workers' organisations into governance, of preventing falling wages and mass unemployment, of strengthening the welfare state in all its manifestations, from education to decent health and pensions as well as its current, defective, merely safety-net functions.

If this analysis is correct, Italian socialists and socialdemocrats should vote for the centre-Right, from Noi con Italia-UDC, to Lega, to Forza Italia. They are going to win anyway this time. It is better that they should win well, preventing any attempt by the state to put the country through the repellent mess Napolitano concocted in 2011 and 2013, that has led to five years of illicit and incompetent governance and to the collapse of a proper Left position and Party.

If the Centre-Right governs well then the Left will have breathing space to construct a proper programme, a democratic Party structure, and consolidate its electorate.  They must at least step back from the caricature of the Left of Grasso, Boldrini, and old men like Bersani.  And get rid of all the contemptible collusion in corruption from Rignano sull’Arno and Laterina.  
The Centre-Right might govern well, for many of the programme elements proposed by the current Centre-Right coalition should be in a programme of the Left: lower taxes on earned income; controls on economic immigration into Italy; new relations with the  EU; a revision of Eurozone regulation and management; easing of regulation destructive of providing housing; security at home; defence of Italian interests at international level, etc., etc.  Indeed it is a shame that these issues are not part of the Left manifesto, or indeed of the so-called Lefts' many manifestos. 
A reshuffling of voters characterised by these values should be pursued and implemented, which is very different from an unholy Grosse Koalition of opposite approaches and interests held together exclusively by the pursuit of and for the maintenance of political power against democratic processes.
And if the Centre-Right fails to deliver then we return to vote again (which I believe we will) but this time, with the second step, the second consultation of the people, we can hope to have a real Left to vote for.  The 'Progressive' class and national traitors can stand on their own platform, and not as the pretend Left that is all that is on offer this time.

Dixi et salvavi animam meam.