Stumbling and Mumbling: Ownership and productivity


In last night’s leaders’ debate, the audience laughed when Jeremy Corbyn said that productivity gains could pay for a four-day week. This is an example of what I said recently – that we cannot have nice things because voters have resigned themselves to the inadequacy of British capitalism.
And inadequate it is. The ONS estimates that UK productivity is one-fifth lower than that of the US, Germany or France and one-tenth lower than Italy’s. Closing some of this gap would allow for a cut in the working week with no loss of pay.
In this context, Labour’s plans (pdf) to reform corporate governance, including putting workers on boards, are crucial. John McDonnell is bang right to say that giving workers a stake in companies raises productivity: there is a ton (pdf) of evidence for this. (Which of course is wholly consistent with the likelihood that there are many other possible ways in which a government might increase productivity.)
But how can this be? One answer lies in a classic article written 30 years ago by Michael Jensen. Stock market-listed firms, he said, contain “widespread waste and inefficiency” because an of “absence of effective monitoring” of bosses by shareholders. Giving workers greater say can reduce this agency failure. This is partly because workers know the ground truth of how the company is performing better than do external shareholders. But it’s also because many workers have more skin in the game than do fund managers; whereas workers lose their jobs if the firm does badly, fund managers face less severe penalties.
At this stage, righties like to claim that the market can solve this problem.
There’s a grain of truth in this: since Jensen’s classic article, the number of stock market-quoted firms has fallen and private ownership has risen. The market cannot, however, so easily transfer companies into worker ownership in part because workers are credit-constrained.
What’s more, we know for sure that product market competition does not eliminate the inefficiencies caused by agency failures. Nick Bloom and John Van Reenen show (pdf) that there is “a long tail of extremely badly managed firms.” And Andy Haldane has said (pdf) that “there is a striking and widening divergence” between the most productive firms and the rest. This would not be the case if market forces quickly drove inefficient firms out of the market.
As for what explains such differences, Haldane echoes Jensen:

(A lack of) management quality is a plausible candidate explanation for the UK’s long tail of companies…It is possible that current UK corporate governance practices may act as a brake on innovative companies.

Fans of David Graeber’s book Bullshit Jobs (of whom I am one) know one way in which bad management manifests itself. “Managerial feudalism” means that intermediate bosses prefer to create hierarchies of flunkeys rather than maximize profits. And inadequate oversight and imperfect competition allow them to get away with this. Graeber’s is a colourful way of expressing what economists and equity investors have known for a long time – that companies often grow at the expense of profits.
Now, in saying all this I’m not entirely endorsing Labour’s position. My point is that companies have not been effectively pursuing shareholder value, perhaps because, as John Kay has said, such value can only be achieved obliquely. (I’m also unsure whether short-termism is a problem.)
What I am saying, though, is that the notion that changing ownership might increase productivity is far from risible. There’s tons of evidence that it can do so, and mainstream economists agree that there are failures of management and ownership: Jensen, Haldane and Bloom are not Marxists.
The fact that an audience can laugh at Corbyn’s claim to raise productivity, therefore, tells us nothing about Labour policy. But it speaks volumes – and damning volumes at that – about a political discourse that has become so debased as to put discussions about productivity outside of mainstream politics.


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