“The capitalist beach is made up of socialist grains of sand.”
Isn’t a more appropriate description that the decentralized beach is made up of central authoritarian grains of sand? I don’t follow how firms are socialist.
Well, except to the extent that some of them put the interests of “stakeholders” ahead of stockholders..
The firm is a miniature planned economy, like a socialist state. Your version is more accurate but less striking. I am using "socialist" to describe an economic system, not as a moral judgement.
“The firm is a miniature planned economy, like a socialist state.”
😕
But it’s not merely that your claim is inaccurate, it’s just not true.
The primary things that are true is that there is indeed some amount of centralized planning and some “authoritarian” top down decision making for some aspects, notably capital allocation, and that the top leaders have some incentives to benefit themselves directly that affect their decision making.
But the firm buys labor on the free market at market prices, buys many and in fact likely even most of its inputs on the free market at market prices, and cannot independently determine its own output for any length of time.
Firms have a profit motive; a socialist state does not.
At best your description would apply somewhat reasonably only to a highly vertically integrated firm in a not very competitive market.
Describing the firm as a hybrid that includes elements of socialism is fair enough. But there is *far* less than 50% truth in describing a firm’s internal economic system as “socialist”.
Whether describing a 3 person corner store, or most Fortune 500 companies.
I *suppose* it might be a reasonable enough description of a small to medium size widget factory, like those describe in introductory Econ classes. But with actual firms, the claimed model is not merely too simple, imo it’s neither reflective of reality nor a useful stylized description of it.
Quite apart from the fact that the word “socialist” has connotations that go far beyond merely “central planned economy”.
Real socialist states buy some inputs on the international market, sell some outputs. Real firms have some market elements internally, but so do real socialist states. I am dealing with simplified pictures of both, organized internally only by hierarchy.
Isn't private equity a reaction to the "Everyone’s business is nobody’s business" problem? The PE business model is to acquire underperforming privately-owned or public companies, improve their operations and then sell for a profit, right? PE replaces the large number of shareholder with diffuse interests in a public company with a "professional owner" who is incentivized to quickly increase the company's value so they can flip it for a big profit.
Some years back I saw an interesting case of central planning in Russia's Wild Wild East.
Boating on the Lena River in Yakutia, the Saka Republic, I noticed a rather large pile of coal on the river bank. I asked local friends why it was there. They told me it was the annual delivery of the winter heating supply to a village upstream but the fuel allotted to the vessel for that trip hauling it was inadequate to reach the village and return to port.
So they dumped it there on the bank and turned back downstream.
Someone might notice you can try to solve the problem by not having shareholders (ie. running the company as either a workers' or consumers' co-ops), but in practice these underperform.
I believe the answer to that one can be found in Holmström's theorem. It's not a perfect fit (it's about employees and output, it assume perfectly inobservable individual work), but it does make the case that you need an external beneficiary/funder to either absorb the surplus or make up for the deficit if you want to align all the employees' incentives.
It seems like the natural "solution" here is not workers' or consumers' co-ops (which face the same "democracy" problem), but family-owned businesses where the managers *are* the owners.
These don't seem to greatly outperform publicly traded companies --- something I actually find quite surprising (and perhaps damning to ideas that make a great deal out of principle-agent problems, like Hoppeanism)
There's one other issue involving stockholders that you didn't mention: a large fraction of stock (quite possibly a large majority, though I haven't tried to look up numbers) is owned not by individuals but by mutual funds. That makes enforcing stockholder primacy much harder, because mutual funds have much weaker incentives to do so than individual stockholders.
If a significant portion of my wealth is in shares of Company X, I have a strong incentive to make sure that Company X is acting in my interest as a stockholder.
But if my wealth, or at least that part of it that is in stocks and bonds, is in shares of mutual funds, I don't care what particular companies the fund owns shares in, and AFAIK I don't even have any way of asserting any rights in any of those companies as a stockholder. As long as the fund's overall rate of return meets my needs, I'm satisfied.
And the funds themselves, as stockholders in individual companies, generally don't own a significant portion of the stock of any one company, so they're facing the same problem as individual stockholders that you describe as the problem with democracy. Their way of dealing with the risk of one particular company being badly run is to be extremely diversified in the stocks they own.
Ownership is ideally a stable and public relation between the thing owned and the individual owning it. But decline in ownership, already foreseen by Belloc in 1922 in Servile State, is implicit in the mutual fund scenario you portray.
Instead of a stable and public relationship, we have individuals owning fluctuating units in a mutual funds that hold fluctuating amounts of stock.
Thus, now we do not have owners but simply investors. That modern corporations are essentially ownerless was known to Burnham in The Managerial Revolution. The control, whether in capitalist countries or in communist countries, is in hand of managers.
This also refutes a present opinion that sees the essence of ownership in control. But managers, while they do control the corporation, do not own it.
Is prediction a reasonable demand in social sciences?
Anyway, capitalism had more in it than Burnham and Belloc supposed. We still have owners on the largest scales.
However, the sociology of managerial capitalism is different from owner-dominated capitalism, this point is not vitiated even if the managers are perfectly aligned to stockholders.
I don't understand why you think mutual fund vs individual makes a difference in what they want from their investment. If anything, I'd think having a few dozen or hundred mutual fund owners concentrates the owners' focus better than thousands or millions of individual owners.
> I don't understand why you think mutual fund vs individual makes a difference in what they want from their investment.
I never said it did. What I said was that mutual fund owners have much less of an incentive to enforce shareholder primacy as described in the article.
> having a few dozen or hundred mutual fund owners
An individual company's stock won't; mutual funds don't generally buy large blocks of an individual company's stock, it's too risky. They're highly diversified. So a mutual fund wouldn't be expected to own a larger fraction of an individual company's stock than an individual investor who's buying the stock directly; in fact, a fund might well own a smaller fraction on average. Which means the number of shareholders of an individual company's stock with mutual funds will be no smaller, and might even be larger, than if all the shareholders were individual investors.
You didn't just say "difference". You said "difference in what they want from their investment". I never said there was such a difference. The difference in incentives I described is not the same thing.
Another requirement for needed items to be produced is a large enough market.
Pencil makers may not represent enough demand for wood, to motivate the creation of a chainsaw industry. There must be a huge additional market for wood, before chainsaws come into existence.
Semiconductors are (mostly) only affordable because they are manufactured at huge scales. The minimum investment required must be amortized over a huge volume or prices would be unaffordable. Without a population in the hundreds of millions (or billions?), there would probably be no semiconductors outside a few expensive applications (and the military).
So, in addition to the the items clearly needed to produce pencils, there must also be a huge market of people to create sufficient demand for all the necessary components/tools.
Early electronic components were nowhere near as expensive to manufacture and there were many, many more manufacturers. For many products the need and demand grows with the supply. In 1980 nobody needed, or could use, the top end chips we have now.
“The capitalist beach is made up of socialist grains of sand.”
Isn’t a more appropriate description that the decentralized beach is made up of central authoritarian grains of sand? I don’t follow how firms are socialist.
Well, except to the extent that some of them put the interests of “stakeholders” ahead of stockholders..
The firm is a miniature planned economy, like a socialist state. Your version is more accurate but less striking. I am using "socialist" to describe an economic system, not as a moral judgement.
“The firm is a miniature planned economy, like a socialist state.”
😕
But it’s not merely that your claim is inaccurate, it’s just not true.
The primary things that are true is that there is indeed some amount of centralized planning and some “authoritarian” top down decision making for some aspects, notably capital allocation, and that the top leaders have some incentives to benefit themselves directly that affect their decision making.
But the firm buys labor on the free market at market prices, buys many and in fact likely even most of its inputs on the free market at market prices, and cannot independently determine its own output for any length of time.
Firms have a profit motive; a socialist state does not.
At best your description would apply somewhat reasonably only to a highly vertically integrated firm in a not very competitive market.
Describing the firm as a hybrid that includes elements of socialism is fair enough. But there is *far* less than 50% truth in describing a firm’s internal economic system as “socialist”.
Whether describing a 3 person corner store, or most Fortune 500 companies.
I *suppose* it might be a reasonable enough description of a small to medium size widget factory, like those describe in introductory Econ classes. But with actual firms, the claimed model is not merely too simple, imo it’s neither reflective of reality nor a useful stylized description of it.
Quite apart from the fact that the word “socialist” has connotations that go far beyond merely “central planned economy”.
Real socialist states buy some inputs on the international market, sell some outputs. Real firms have some market elements internally, but so do real socialist states. I am dealing with simplified pictures of both, organized internally only by hierarchy.
Isn't private equity a reaction to the "Everyone’s business is nobody’s business" problem? The PE business model is to acquire underperforming privately-owned or public companies, improve their operations and then sell for a profit, right? PE replaces the large number of shareholder with diffuse interests in a public company with a "professional owner" who is incentivized to quickly increase the company's value so they can flip it for a big profit.
Some years back I saw an interesting case of central planning in Russia's Wild Wild East.
Boating on the Lena River in Yakutia, the Saka Republic, I noticed a rather large pile of coal on the river bank. I asked local friends why it was there. They told me it was the annual delivery of the winter heating supply to a village upstream but the fuel allotted to the vessel for that trip hauling it was inadequate to reach the village and return to port.
So they dumped it there on the bank and turned back downstream.
Someone might notice you can try to solve the problem by not having shareholders (ie. running the company as either a workers' or consumers' co-ops), but in practice these underperform.
I believe the answer to that one can be found in Holmström's theorem. It's not a perfect fit (it's about employees and output, it assume perfectly inobservable individual work), but it does make the case that you need an external beneficiary/funder to either absorb the surplus or make up for the deficit if you want to align all the employees' incentives.
It seems like the natural "solution" here is not workers' or consumers' co-ops (which face the same "democracy" problem), but family-owned businesses where the managers *are* the owners.
These don't seem to greatly outperform publicly traded companies --- something I actually find quite surprising (and perhaps damning to ideas that make a great deal out of principle-agent problems, like Hoppeanism)
There's one other issue involving stockholders that you didn't mention: a large fraction of stock (quite possibly a large majority, though I haven't tried to look up numbers) is owned not by individuals but by mutual funds. That makes enforcing stockholder primacy much harder, because mutual funds have much weaker incentives to do so than individual stockholders.
If a significant portion of my wealth is in shares of Company X, I have a strong incentive to make sure that Company X is acting in my interest as a stockholder.
But if my wealth, or at least that part of it that is in stocks and bonds, is in shares of mutual funds, I don't care what particular companies the fund owns shares in, and AFAIK I don't even have any way of asserting any rights in any of those companies as a stockholder. As long as the fund's overall rate of return meets my needs, I'm satisfied.
And the funds themselves, as stockholders in individual companies, generally don't own a significant portion of the stock of any one company, so they're facing the same problem as individual stockholders that you describe as the problem with democracy. Their way of dealing with the risk of one particular company being badly run is to be extremely diversified in the stocks they own.
Ownership is ideally a stable and public relation between the thing owned and the individual owning it. But decline in ownership, already foreseen by Belloc in 1922 in Servile State, is implicit in the mutual fund scenario you portray.
Instead of a stable and public relationship, we have individuals owning fluctuating units in a mutual funds that hold fluctuating amounts of stock.
Thus, now we do not have owners but simply investors. That modern corporations are essentially ownerless was known to Burnham in The Managerial Revolution. The control, whether in capitalist countries or in communist countries, is in hand of managers.
This also refutes a present opinion that sees the essence of ownership in control. But managers, while they do control the corporation, do not own it.
I am arguing that there are market mechanisms that, permitted to work, make it in the interest of managers to act in the interest of the stockholders.
Burnham was a while ago, Belloc still earlier. Did either offer predictions that we could use to judge how good their theories were?
Is prediction a reasonable demand in social sciences?
Anyway, capitalism had more in it than Burnham and Belloc supposed. We still have owners on the largest scales.
However, the sociology of managerial capitalism is different from owner-dominated capitalism, this point is not vitiated even if the managers are perfectly aligned to stockholders.
I don't understand why you think mutual fund vs individual makes a difference in what they want from their investment. If anything, I'd think having a few dozen or hundred mutual fund owners concentrates the owners' focus better than thousands or millions of individual owners.
> I don't understand why you think mutual fund vs individual makes a difference in what they want from their investment.
I never said it did. What I said was that mutual fund owners have much less of an incentive to enforce shareholder primacy as described in the article.
> having a few dozen or hundred mutual fund owners
An individual company's stock won't; mutual funds don't generally buy large blocks of an individual company's stock, it's too risky. They're highly diversified. So a mutual fund wouldn't be expected to own a larger fraction of an individual company's stock than an individual investor who's buying the stock directly; in fact, a fund might well own a smaller fraction on average. Which means the number of shareholders of an individual company's stock with mutual funds will be no smaller, and might even be larger, than if all the shareholders were individual investors.
Yes, that's what you said, and if that doesn't flat-out say there's a difference, I'm a monkey's uncle.
"have much less incentive" == "difference"
You didn't just say "difference". You said "difference in what they want from their investment". I never said there was such a difference. The difference in incentives I described is not the same thing.
I fail to see the distinction.
Another requirement for needed items to be produced is a large enough market.
Pencil makers may not represent enough demand for wood, to motivate the creation of a chainsaw industry. There must be a huge additional market for wood, before chainsaws come into existence.
Semiconductors are (mostly) only affordable because they are manufactured at huge scales. The minimum investment required must be amortized over a huge volume or prices would be unaffordable. Without a population in the hundreds of millions (or billions?), there would probably be no semiconductors outside a few expensive applications (and the military).
So, in addition to the the items clearly needed to produce pencils, there must also be a huge market of people to create sufficient demand for all the necessary components/tools.
Early electronic components were nowhere near as expensive to manufacture and there were many, many more manufacturers. For many products the need and demand grows with the supply. In 1980 nobody needed, or could use, the top end chips we have now.