“The cost of a decision that makes things worse for shareholders is that the price of shares goes down, a cost for the shareholder not the firm.”
An excellent piece, well argued.
I disagree only with the line above.
First, because executives are usually shareholders via their compensation.
More importantly, because the livelihoods of the executives controlling the company are at risk when the price of shares goes down. I.e. the “public choice” arguments applied to public corporations rather than governments.
This issue cuts both ways, of course, but here surely the executives indeed do have incentives for the price of shares to go up.
And of course (sadly) related but separate is the reality in the modern era of ESG or merely leftist elitists running mutual fund companies and college miseducated leftist customers, many corporations use things like buying more expensive energy and similar cost-increasing measures as virtue-signaling marketing to their customers and shareholders, for the purposes of increasing sales and increasing P/Es and so share prices. These decisions do - or at least are intended to - increase the price of shares, but surely reduce economic efficiency.
The point being only that some of these same actions are not surreptitious ones for which the executives are fired, but explicit, trumpeted ones for which many are feted.
The shares going down hurts the executives only via the sort of mechanisms that I am arguing exist to give the executives an incentive to maintain the value of the shares.
Suppose we were talking about tanks. I explain that the armor exists to keep bullets from killing the crew. You reply that bullets can't injure the crew because they can't get through the armor — and think you are disagreeing with me.
Our point of contention seems to be what you mean by “not the firm”.
You cite “the firm” as not bearing the cost, while I’m suggesting that in practice the executive leadership is a stand-in for “the firm”, if an imperfect one.
What do you mean by “the firm” bears no cost for the share price going down?
Even aside from the issue of executive personal incentives, a lower stock price makes it more difficult to raise capital to expand, to acquire new companies with promising new technology, e.g. In this sense, almost however you define “the firm”, said firm is worse off with a lower share price than a higher one.
As noted, I agree with and am not at all arguing against your main thesis that shareholder primacy is the far superior system.
I think I learned something valuable here which I should have realized decades ago: most economic theory leaves me cold because it's all this "how do we rejigger society to do the right thing" kind of social engineering, and my heart is wedded to maximum individual liberty; let spontaneous self-organization handle the details.
Would your heart still be wedded to maximum liberty if you concluded that it didn't work? The economics is how you show that it does. Without that it's just wishful thinking.
I'm not opposed to economics in that sense. It's the economics which seek to optimize government policies which rankle.
I used to think government was just incomptent in some ways, such as Mercury-Gemini-Apollo turning into the Space Shuttle-Space Station-SLS fiasco and the blundering Vietnam War, now extended to every war since that I have lived through.
But the more I saw of government incompetence, the more I became convinced that was the norm, and I flipped the default: I began assuming government was incompetent until proven otherwise, and I haven't found one instance yet. I didn't, and I don't, think government is incapable of competence; but until I see some, my default remains that government is always the wrong answer.
The turning point may have been when I began wondering what the kerfuffle was about Audit The Fed, looked into its creation in 1913, traced it back to reactions to the Panic of 1907, traced that origin back to government reactions to previous panics, found the greenbacks corruption of the Civil War. ended up at the Panic of 1819 caused by the National Bank flubbing the aftermath of the War of 1812 and ill-advised state "investments", and gave up -- senseless useless government corruption going back 100 years, and then extending forward 100 more years, starting with the luck of Woodrow Wilson's stroke preventing too much meddling with the post WW I deflation, turning into causing and prolonging the Great Depression, on and on it went, endless examples of incompetent government meddling.
And I frankly don't care if economics shows why liberty is good or best. Using economics to devise good government policies is only useful if you start with the assumption that government should have policies to control the economy. Using economics to understand the economy or business dynamics is a different matter. I put it at the same level as physics: fine to understand how things work, pointless for a government to use to shape society. Physics is fine to develop better electronics or better metals or motors or house insulation. Economics is fine for businesses to fine tune their operations. But I don't want government using economics or anything else to control society.
"I'm not opposed to economics in that sense. It's the economics which seek to optimize government policies which rankle."
Even if the conclusion of the economics is that the optimal policy is for government not to do things?
Consider tariffs. There are obvious arguments for the pro-tariff position, arguments that are convincing if you don't understand the relevant economics, obviously mistaken if you do. And support for trade restrictions long predates modern economics, was one of the things Adam Smith argued against.
Yes, but ... I believe plain old liberty and individualism come to the right conclusion too, and much more simply.
Like I said, I used to think government incompetence from the Vietnam War and Apollo-Space shuttle-Space station days were just isolated cases, but the more I looked into government incompetence, the more I became convinced that was the norm.
Using economics to justify liberty strikes me as about as useful as using physics to justify parachutes for pilots.
Using economics to convince politicians, as opposed to justifying liberty in some theoretical sense, is entirely different, but still mostly useless, since politicians have already made up their minds. Look at JD Vance, who apparently used to understand tariffs, and now happily repeats Trump's nonsense. You could parade a thousand economists through his office and not change his mind. If he does win election as President in 2029 and change his mind on tariffs, it won't be because economists have convinced him, it will be because he no longer feels the need to ride Trump's coat tails.
ETA: If JD Vance does become President and change his tune regarding tariffs, he may well use economists as cover for his new stance. But that's all it will be.
The economic arguments are relevant to politicians in two ways:
Politicians want reelection for themselves, election for their allies. If they are persuaded that tariffs make the country poorer or that printing money causes inflation that is a reason not to do it, since if things are going badly incumbents and their allies are less likely to win.
Also, if the arguments persuade voters, potential donors, influencers, politicians who do things that economics implies are undesirable will get less support.
Do you really want to be in the position of surrendering the economic argument to your opponents, in effect saying "For all I know we would be better off with the policies you recommend, but I know that government is bad and liberty good so I am against them anyway"?
So far as current tariffs are concerned, the rhetoric is about unfair trade deficits but the reason voters support them is bad economics, the belief that they will make us better off, save jobs and industries.
No, economics has its uses. I did not mean to imply it is useless. I meant that economic arguments have never influenced me in ways that pure liberty arguments haven't already convinced me.
I mean that comparison of relying on physics to justify a parachute. If it convinces a bureaucrat, politician, or even pilot, great. But it isn't necessary to convince me. So it is with economics arguments about free trade and tariffs and a whole lot more. The arguments are interesting, but they do not convince me any more than pure liberty. If they do convince bureaucrats, politicians, or voters, great. But I am already convinced.
The discipline and profession of economics grew with and is closely associated with the administrative state.
Most of the economists are employed in government. They naturally have a bent towards thinking in national terms.
What is GDP and why was it invented? It has been maintained that Manhattan project would have been impossible before careful calculation of economists as to resource allocation.
The kerfuffle of tariffs would have been impossible without economists reckoning trade deficits of USA with each country
Correct. However 44 percent is large enough for the point I am making.
I suppose in 18c tariffs made up a good portion of govt revenues. Now they hardly do in any country. The present situation is entirely due to the perceived injustice of trade deficits.
"Correct. However 44 percent is large enough for the point I am making."
Perhaps. But it is not large enough to make your factual claim even close to true.
People in the 18th century believed that tariffs were good for a country because they resulted in an inflow of gold, a trade surplus judged good with different arguments and without modern economics.
It is my understanding that trade deficits between pairs of countries, in a world of 200 trading nations, are meaningless. If by "reckoning" you mean "presenting nonsense to gullible politicians", you may have a point, but that hardly seems like a recommendation foe the usefulness of economists, and I doubt it's what you meant.
“I gave them five pounds and told them no,” is from C. Northcote Parkinson’s book, specifically “Parkinson’s Law: The Pursuit of Progress” (1957). Parkinson recounts this anecdote as an example of corporate and bureaucratic attitudes toward charitable requests and decision-making. The passage is often cited to illustrate Parkinson’s Law of Triviality and his satirical observations of executive behavior and organizational dynamics. The story has become a classic example of his humorous, yet pointed, critiques about administration and leadership.
If I understand the following paper correctly, it shows that “stickiness of endowments” reduces market efficiency and leads to deadweight losses, a problem that is difficult to correct without intervention. Will you read, analyze, and critique the paper?
I know this wasn't the focus of your previous post, but your intro puts together two claims that seem to combine to make a wrong prediction: that pencil production involves a huge amount of coordination, and that centralized coordination is catastrophically bad at the scale of the Soviet Union. Prediction: the Soviet Union was not capable of producing pencils.
Optimally allocating resources to producing everything, including pencils, at that scale requires decentralized coordination. It doesn't follow that the centralized system produces nothing, just that it serves the interest of the population much less well.
By what metric did the Soviet system do such a poor job at production? By popular accounts, there was economic stagnation in the 70s and 80s, but there was also very high - by some accounts, almost unparalleled - growth in the productive economy for 50 years before that. I don't mean to hijack, but these are things that bother me about the discourse on central planning, and this seems like a good place to get answers.
People in the Soviet Union were very poor compared to people in other countries, such as Japan or South Korea, that started at comparable levels. I suggest the book _The Russians_ by Hedrick Smith, who covered the Soviet Union for the NYT, for a picture of how poor Russians were c. 1970. Outside of Moscow and Leningrad it was still a third world country.
The high rates of growth were largely based on Soviet statistics, now known to have been fraudulent. Samuelson believed them, with the result that his textbook contained predictions of when Soviet GNP would pass US GNP, predictions which kept moving ahead edition by edition. For details see https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1517983. You can find multiple other discussions by googling [Samuelson textbook Soviet economic growth].
They concentrated on heavy industry to the detriment of consumer products. Stories abound from those days of quotas for screws being measured by weight, so they made big screws that weren't used and not small screws which were wanted, because there was no feedback to show what was wanted. Home appliances were scarce, they had lots of terrible concrete block housing with multiple families crowded together. Cars had to be paid for years in advance of getting one. There's a famous joke about getting a plumber out to fix a drip and the proposed date in two years conflicts with the schedule of some other repair.
Their military gear was famous for its crude construction and primitive controls. Youtube is full of reviews of actually driving their tanks which mention needing a sledgehammer to change gears. I worked with a guy who had flown captured and bought Soviet fighters, and he said they had the aerodynamics pretty well sorted out, but the ergonomics were miserable, and he had to constantly keep a close eye on the instruments and adjust controls instead of looking outside. He could get on the tail of American fighters pretty easily in mock dogfights, but the disruption of always scanning the poorly laid-out instruments and having to reach for the poorly laid-out weapons controls under high G maneuvers made it hard to finish any attack.
Data may not be the plural of anecdote, but the sheer quantity of such reports is a quality of its own, as Stalin might have said. Or where there's smoke, there's fire.
> Prediction: the Soviet Union was not capable of producing pencils.
No, prediction: the pencils produced by the Soviet Union were much more expensive, or of much lower quality, or a combination of both, than pencils produced by countries with reasonably free markets. Which was true of pretty much everything the Soviet Union produced.
Don't take every thing so literally or to such extremes. Just because central planning is inefficient doesn't mean it can't do anything, and it's not like all the parts of the production chain have only the single purpose of making pencils.
Being very bad at something is not the same as being entirely incapable of it. Being a very bad cook does not mean one cannot make breakfast, just that it won't be good and you will probably waste a lot of ingredients.
Central planning tends to lead to shortages of goods, and the goods that get created being of very bad quality.
When observation shows theory is wrong, theory is wrong, and trying to force observations to fit is silly.
Being incompetent or inefficient is not an all or nothing matter. I will never win an Olympics foot race, but I can still run. I have no doubt that Soviet pencil production was inefficient, but they did indeed make pencils, or so I hear.
I asked Gemini regarding the quote and it gave me this (I have no idea if this is true, but I'd guess it's NOT true):
That quote is from C. Northcote Parkinson's 1962 book, "In-Laws and Outlaws."
The passage, found in Chapter 4 ("How to Succeed"), describes an exchange about handling a charitable request:
A subscription list came round for some charitable object.
'What are you doing about this, sir?' asked the junior partner.
'I am giving it my very careful consideration.'
'And what shall I do, sir?'
Pause
'I gave them five pounds,' said the Old Man, 'and told them "No".'
“The cost of a decision that makes things worse for shareholders is that the price of shares goes down, a cost for the shareholder not the firm.”
An excellent piece, well argued.
I disagree only with the line above.
First, because executives are usually shareholders via their compensation.
More importantly, because the livelihoods of the executives controlling the company are at risk when the price of shares goes down. I.e. the “public choice” arguments applied to public corporations rather than governments.
This issue cuts both ways, of course, but here surely the executives indeed do have incentives for the price of shares to go up.
And of course (sadly) related but separate is the reality in the modern era of ESG or merely leftist elitists running mutual fund companies and college miseducated leftist customers, many corporations use things like buying more expensive energy and similar cost-increasing measures as virtue-signaling marketing to their customers and shareholders, for the purposes of increasing sales and increasing P/Es and so share prices. These decisions do - or at least are intended to - increase the price of shares, but surely reduce economic efficiency.
The point being only that some of these same actions are not surreptitious ones for which the executives are fired, but explicit, trumpeted ones for which many are feted.
The shares going down hurts the executives only via the sort of mechanisms that I am arguing exist to give the executives an incentive to maintain the value of the shares.
Suppose we were talking about tanks. I explain that the armor exists to keep bullets from killing the crew. You reply that bullets can't injure the crew because they can't get through the armor — and think you are disagreeing with me.
Our point of contention seems to be what you mean by “not the firm”.
You cite “the firm” as not bearing the cost, while I’m suggesting that in practice the executive leadership is a stand-in for “the firm”, if an imperfect one.
What do you mean by “the firm” bears no cost for the share price going down?
Even aside from the issue of executive personal incentives, a lower stock price makes it more difficult to raise capital to expand, to acquire new companies with promising new technology, e.g. In this sense, almost however you define “the firm”, said firm is worse off with a lower share price than a higher one.
As noted, I agree with and am not at all arguing against your main thesis that shareholder primacy is the far superior system.
I think I learned something valuable here which I should have realized decades ago: most economic theory leaves me cold because it's all this "how do we rejigger society to do the right thing" kind of social engineering, and my heart is wedded to maximum individual liberty; let spontaneous self-organization handle the details.
:-) :-) :-) :-) :-)
Would your heart still be wedded to maximum liberty if you concluded that it didn't work? The economics is how you show that it does. Without that it's just wishful thinking.
I'm not opposed to economics in that sense. It's the economics which seek to optimize government policies which rankle.
I used to think government was just incomptent in some ways, such as Mercury-Gemini-Apollo turning into the Space Shuttle-Space Station-SLS fiasco and the blundering Vietnam War, now extended to every war since that I have lived through.
But the more I saw of government incompetence, the more I became convinced that was the norm, and I flipped the default: I began assuming government was incompetent until proven otherwise, and I haven't found one instance yet. I didn't, and I don't, think government is incapable of competence; but until I see some, my default remains that government is always the wrong answer.
The turning point may have been when I began wondering what the kerfuffle was about Audit The Fed, looked into its creation in 1913, traced it back to reactions to the Panic of 1907, traced that origin back to government reactions to previous panics, found the greenbacks corruption of the Civil War. ended up at the Panic of 1819 caused by the National Bank flubbing the aftermath of the War of 1812 and ill-advised state "investments", and gave up -- senseless useless government corruption going back 100 years, and then extending forward 100 more years, starting with the luck of Woodrow Wilson's stroke preventing too much meddling with the post WW I deflation, turning into causing and prolonging the Great Depression, on and on it went, endless examples of incompetent government meddling.
And I frankly don't care if economics shows why liberty is good or best. Using economics to devise good government policies is only useful if you start with the assumption that government should have policies to control the economy. Using economics to understand the economy or business dynamics is a different matter. I put it at the same level as physics: fine to understand how things work, pointless for a government to use to shape society. Physics is fine to develop better electronics or better metals or motors or house insulation. Economics is fine for businesses to fine tune their operations. But I don't want government using economics or anything else to control society.
"I'm not opposed to economics in that sense. It's the economics which seek to optimize government policies which rankle."
Even if the conclusion of the economics is that the optimal policy is for government not to do things?
Consider tariffs. There are obvious arguments for the pro-tariff position, arguments that are convincing if you don't understand the relevant economics, obviously mistaken if you do. And support for trade restrictions long predates modern economics, was one of the things Adam Smith argued against.
Yes, but ... I believe plain old liberty and individualism come to the right conclusion too, and much more simply.
Like I said, I used to think government incompetence from the Vietnam War and Apollo-Space shuttle-Space station days were just isolated cases, but the more I looked into government incompetence, the more I became convinced that was the norm.
Using economics to justify liberty strikes me as about as useful as using physics to justify parachutes for pilots.
Using economics to convince politicians, as opposed to justifying liberty in some theoretical sense, is entirely different, but still mostly useless, since politicians have already made up their minds. Look at JD Vance, who apparently used to understand tariffs, and now happily repeats Trump's nonsense. You could parade a thousand economists through his office and not change his mind. If he does win election as President in 2029 and change his mind on tariffs, it won't be because economists have convinced him, it will be because he no longer feels the need to ride Trump's coat tails.
ETA: If JD Vance does become President and change his tune regarding tariffs, he may well use economists as cover for his new stance. But that's all it will be.
The economic arguments are relevant to politicians in two ways:
Politicians want reelection for themselves, election for their allies. If they are persuaded that tariffs make the country poorer or that printing money causes inflation that is a reason not to do it, since if things are going badly incumbents and their allies are less likely to win.
Also, if the arguments persuade voters, potential donors, influencers, politicians who do things that economics implies are undesirable will get less support.
Do you really want to be in the position of surrendering the economic argument to your opponents, in effect saying "For all I know we would be better off with the policies you recommend, but I know that government is bad and liberty good so I am against them anyway"?
So far as current tariffs are concerned, the rhetoric is about unfair trade deficits but the reason voters support them is bad economics, the belief that they will make us better off, save jobs and industries.
No, economics has its uses. I did not mean to imply it is useless. I meant that economic arguments have never influenced me in ways that pure liberty arguments haven't already convinced me.
I mean that comparison of relying on physics to justify a parachute. If it convinces a bureaucrat, politician, or even pilot, great. But it isn't necessary to convince me. So it is with economics arguments about free trade and tariffs and a whole lot more. The arguments are interesting, but they do not convince me any more than pure liberty. If they do convince bureaucrats, politicians, or voters, great. But I am already convinced.
The discipline and profession of economics grew with and is closely associated with the administrative state.
Most of the economists are employed in government. They naturally have a bent towards thinking in national terms.
What is GDP and why was it invented? It has been maintained that Manhattan project would have been impossible before careful calculation of economists as to resource allocation.
The kerfuffle of tariffs would have been impossible without economists reckoning trade deficits of USA with each country
"Most of the economists are employed in government."
What is your evidence for that claim? The best figure I can find for the US is 44%, a minority although a large minority.
"The kerfuffle of tariffs would have been impossible without economists reckoning trade deficits of USA with each country"
Then how is it that they existed in the 18th century for Adam Smith to argue against?
Correct. However 44 percent is large enough for the point I am making.
I suppose in 18c tariffs made up a good portion of govt revenues. Now they hardly do in any country. The present situation is entirely due to the perceived injustice of trade deficits.
"Correct. However 44 percent is large enough for the point I am making."
Perhaps. But it is not large enough to make your factual claim even close to true.
People in the 18th century believed that tariffs were good for a country because they resulted in an inflow of gold, a trade surplus judged good with different arguments and without modern economics.
It is my understanding that trade deficits between pairs of countries, in a world of 200 trading nations, are meaningless. If by "reckoning" you mean "presenting nonsense to gullible politicians", you may have a point, but that hardly seems like a recommendation foe the usefulness of economists, and I doubt it's what you meant.
“Let’s give them five thousand,” said the Managing Director.
“Make it ten,” said the Chairman. “After all, it’s a good cause.”
It so happened, however, that another Director joined them at lunch and learned what they proposed.
“I wish,” he said, “that we could deal with this problem once for all. I dealt with it in my own office this morning.”
“How?” asked the Chairman.
“I gave them five pounds and told them to get out”.
“I gave them five pounds and told them no,” is from C. Northcote Parkinson’s book, specifically “Parkinson’s Law: The Pursuit of Progress” (1957). Parkinson recounts this anecdote as an example of corporate and bureaucratic attitudes toward charitable requests and decision-making. The passage is often cited to illustrate Parkinson’s Law of Triviality and his satirical observations of executive behavior and organizational dynamics. The story has become a classic example of his humorous, yet pointed, critiques about administration and leadership.
If I understand the following paper correctly, it shows that “stickiness of endowments” reduces market efficiency and leads to deadweight losses, a problem that is difficult to correct without intervention. Will you read, analyze, and critique the paper?
https://pure.hud.ac.uk/ws/portalfiles/portal/14132571/David_Ricardo_s_Comparative_Trade_Theory.pdf
I know this wasn't the focus of your previous post, but your intro puts together two claims that seem to combine to make a wrong prediction: that pencil production involves a huge amount of coordination, and that centralized coordination is catastrophically bad at the scale of the Soviet Union. Prediction: the Soviet Union was not capable of producing pencils.
Optimally allocating resources to producing everything, including pencils, at that scale requires decentralized coordination. It doesn't follow that the centralized system produces nothing, just that it serves the interest of the population much less well.
By what metric did the Soviet system do such a poor job at production? By popular accounts, there was economic stagnation in the 70s and 80s, but there was also very high - by some accounts, almost unparalleled - growth in the productive economy for 50 years before that. I don't mean to hijack, but these are things that bother me about the discourse on central planning, and this seems like a good place to get answers.
People in the Soviet Union were very poor compared to people in other countries, such as Japan or South Korea, that started at comparable levels. I suggest the book _The Russians_ by Hedrick Smith, who covered the Soviet Union for the NYT, for a picture of how poor Russians were c. 1970. Outside of Moscow and Leningrad it was still a third world country.
The high rates of growth were largely based on Soviet statistics, now known to have been fraudulent. Samuelson believed them, with the result that his textbook contained predictions of when Soviet GNP would pass US GNP, predictions which kept moving ahead edition by edition. For details see https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1517983. You can find multiple other discussions by googling [Samuelson textbook Soviet economic growth].
They concentrated on heavy industry to the detriment of consumer products. Stories abound from those days of quotas for screws being measured by weight, so they made big screws that weren't used and not small screws which were wanted, because there was no feedback to show what was wanted. Home appliances were scarce, they had lots of terrible concrete block housing with multiple families crowded together. Cars had to be paid for years in advance of getting one. There's a famous joke about getting a plumber out to fix a drip and the proposed date in two years conflicts with the schedule of some other repair.
Their military gear was famous for its crude construction and primitive controls. Youtube is full of reviews of actually driving their tanks which mention needing a sledgehammer to change gears. I worked with a guy who had flown captured and bought Soviet fighters, and he said they had the aerodynamics pretty well sorted out, but the ergonomics were miserable, and he had to constantly keep a close eye on the instruments and adjust controls instead of looking outside. He could get on the tail of American fighters pretty easily in mock dogfights, but the disruption of always scanning the poorly laid-out instruments and having to reach for the poorly laid-out weapons controls under high G maneuvers made it hard to finish any attack.
Data may not be the plural of anecdote, but the sheer quantity of such reports is a quality of its own, as Stalin might have said. Or where there's smoke, there's fire.
> Prediction: the Soviet Union was not capable of producing pencils.
No, prediction: the pencils produced by the Soviet Union were much more expensive, or of much lower quality, or a combination of both, than pencils produced by countries with reasonably free markets. Which was true of pretty much everything the Soviet Union produced.
Don't take every thing so literally or to such extremes. Just because central planning is inefficient doesn't mean it can't do anything, and it's not like all the parts of the production chain have only the single purpose of making pencils.
So… which of the positions is incorrect as stated and should not be taken literally?
Being very bad at something is not the same as being entirely incapable of it. Being a very bad cook does not mean one cannot make breakfast, just that it won't be good and you will probably waste a lot of ingredients.
Central planning tends to lead to shortages of goods, and the goods that get created being of very bad quality.
When observation shows theory is wrong, theory is wrong, and trying to force observations to fit is silly.
Being incompetent or inefficient is not an all or nothing matter. I will never win an Olympics foot race, but I can still run. I have no doubt that Soviet pencil production was inefficient, but they did indeed make pencils, or so I hear.