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.


Simon said...

I find the idea of the multinational corporation as a “network of relationships” interesting, but I agree with your conclusion. For an update of Marris, I expect Lazonik’s views on shareholder value and short termism might provide a useful integration.

D. Mario Nuti said...

Yes, William Lazonick already in the 1980s became an early and forceful critic of the view that companies should maximise shareholder value, especially in view of overgenerous managerial pay packages based on short-term performance, easy to boost through measures such as shares buybacks, to the detriment of longer run shareholder value. See Business and Economic History, 1988; Industrial and Corporate Change, 1992. Lazonick is also a major critic of the financialisation of United States corporations, and of the market economy at large.

Rudi said...

Yours observations strike me as eminently sensible. After all, not all enterprises are like Facebook, Google, Apple and Amazon.

D. Mario Nuti said...

Precisely, thanks.

Tim said...

By growing faster a company might actually boost its profitability, what then?

D. Mario Nuti said...

It might at first. Indeed Marris assumed that this was the case initially, but that sooner or later diminishing returns to growth would set in. At a higher growth rate the share of employees moved from production activities to training the newly employed in the ways of the company would grow; the product mix would have to include less profitable goods in more distant markets; and advertising and promotion expenditures would have to increase to generate demand.

For these reasons the valuation ratio v, defined as the stock exchange capitalisation V divided by the underlying replacement value of the capital stock K, would reach a maximum and then begin to decline. Managers would necessarily choose a trade-off between v and growth g on the declining part of the v=v(g) function, instead of taking the maximum v obtainable in the interests of shareholders. However, fear of takeover and its adverse consequences would force managers to get closer to the maximum v.

Jan said...

Greetings from China. You will be interested/sad to learn that your blogspot is blocked here.

D. Mario Nuti said...

I am flattered and honoured, Jan, at being regarded as that dangerous!

Vlad said...

Yes, I asked someone in China to access it and they could not.

But recently the Utopia site (to the left of the CPP, uniting the new left and maoists) was unblocked, surprisingly.

Dora said...

Yes, you should be proud of having had your Blog blocked in China, it is a recognition of its unorthodox nature and effectiveness.