Saturday, February 11, 2012

What’s wrong with Capitalism?

Nothing. It’s still the best way of running an economy. The trouble is, it’s not what we have in the UK.

What we have is Executivism.

In Capitalism, the rewards of business flow to the providers of capital, the owners. In Executivism, this flow is intercepted by the executives that have been hired to run the businesses.

This process is nothing new – in the long centuries when power was land, many agents flourished at the expense of dilatory landlords. What is new is that ownership has become dispersed and powerless, and that owners have failed to fight back as they once did. Each of us is an owner, by virtue of pension and insurance funds if nothing else, but we have little power – that has been intercepted by fund managers, along with a large slice of the rewards of ownership.

The rewards of ownership are siphoned off principally through excessive remuneration (previous generations of executives did the same jobs for much less). By opposing this we are not undermining business – just some overpaid businessmen – the banks, as businesses, would be much better off if pay rates were lower. Ditto their customers.

Fund managers come next in the leach parade: 1.5% per annum for (on average) underperforming the market, plus a chunk of undisclosed remuneration from such dubious practices as stock lending (whereby the managers profit from assisting speculators to parasitise the returns that should have flowed to the investors). High Frequency Trading is another parasite, surfing on the waves created when large investors trade, and thereby reducing their returns.

Executives and fund managers have chosen, by and large, to remunerate themselves on the basis of short term performance, which has undermined the long term performance of businesses and the economy.

Investors have reacted rationally. Left with all the risk and half the return, they have decided not to save, or to pursue speculations such as houses and art.

So what is to be done?

To restore Capitalism, we must restore power to the owners of capital – us, the average man and woman.

My first proposal is for information. We must publish enough information for the public to get a real grip on what is happening, and to deplore it to the faces of the people who are doing it. I propose that we should require the publication of details of all remuneration packages in excess of twenty times the national average.

My second is to make it easier for owners to enforce their will – to require minimum ownership periods for voting, to require the consent of underlying owners in some cases, to increase the majority required in some cases – none easy to agree, and perhaps not easily effective, but an important signal of intent and objectives

My third is for government and its instruments, such as the FSA, to find ways of encouraging disintermediation – doing without the banks and fund managers, reconnecting owners directly with their investments. This is happening, slowly, on the fringes of banking with the likes of Zopa; it will happen soon on the fringes of venture capital, but we ought to make it possible to, for instance, replace pension fund managers with collective investment clubs.

My fourth is for measures to reduce conflicts of interest in the current system: to require that bonuses above say £50,000 must be tied to the share price or (in private businesses the profits per share) and may not be cashed in for at least ten years, on pain of a hefty tax penalty. To outlaw stock lending and other covert forms of remuneration by collective investment funds unless investors vote in favour each year. To require companies listed in London to register sales and purchases of shares instantaneously, and to pay to the exchequer a small fee per share when they do so – making high frequency trading in their shares unprofitable.

These measures are not anti-business: just pro-capital. A company based in Britain would be more profitable, with better informed and more loyal shareholders. The leeches would depart and suck the blood of others, and we would quickly see that their claims of special talents and value were an illusion.


Anonymous Jeremy said...

The point about fund managers underperforming the market is common knowledge, but I wonder whether it's really legitimate. When there are no fees then the average return of investments is the same as the performance of the market, by definition. The average return after fees is necessarily below this average, so it seems inevitable that fund managers will underperform the market on average.

There are plenty of passively managed funds that just track various indexes (although they still have fees, so they underperform the market by design!). I don't think you're arguing that people shouldn't be able to pay for active fund management if they want to. Is the real problem here that it's currently difficult for individuals to move their investments (e.g. pensions) between funds?

7:23 am  
Anonymous Jeremy said...

(Your post provoked a few thoughts, which I'm splitting into individual responses. Hope that's okay.)

On your first proposal: publishing details of all high pay (even private agreements) seems somewhat arbitrary. Why twenty times? Why not require everyone's pay to be published (as in some European countries, where tax returns are public)?

Also, would this proposal really address the issue at hand? I'd expect fund managers to extract fees through something more involved (and less tax-attracting) than PAYE -- dividends, options, forgivable loans, etc.

7:36 am  
Anonymous Jeremy said...

I like the point about disintermediation. Are you referring to something specific when you say "it will happen soon on the fringes of venture capital"? Something along the lines of Zopa, but for venture capital could be very interesting.

7:37 am  
Anonymous Jeremy said...

Slightly radical thought: perhaps stocks themselves have this mediating property, separating owners from managers, and discouraging active participation in the management of the business. It might be a good time to look at ways of encouraging/incentivising investment in local communities: rather than buying a tiny fraction of a multinational company (and then complaining impotently about the management) I could be helping a neighbour set up a business, perhaps ; rather than lending money to profligate governments I could be helping by children build a house.

   In his last years [J. P.] Morgan was asked by a congressional committee if money was not the basis of commercial credit. "No sir," he replied, "the first thing is character.... a man I do not trust could not get money from me on all the bonds in Christendom."

We lend money to men we don't trust then complain when they misappropriate it. Is increased regulation really the solution?

7:52 am  
Anonymous Relationship Banking said...

If a company is operating with little or no competition within a capitalist regime, it is able to reduce the supply of its product or service. Due to the economics of limited supply and a greater demand this will raise prices, in spite of there being a general ability to meet all demand.

12:53 pm  
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7:10 pm  

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