Wednesday, January 13, 2010

Logical error

Chris conflates an argument with a state of affairs here:

In the labour market, many people favour big incentives and little risk-pooling. Unemployment insurance, they say, reduces people’s incentive to find work, whilst big wage inequality encourages them to work harder.

However, when it comes to the market for corporate ownership, things are different. The dominant form - measured in pounds if not the number of companies - is dispersed ownership. This generates good risk-spreading but weak incentives.

You can see my puzzle. For workers, risk and incentives must be sharp. But for capitalists they must be blunt. Strange, huh?
People do argue that unemployment benefits reduce the incentive to find work, and that's got to be true. However, it's a lesser evil than starving unemployed people. But that's an argument. The situation with dispersed share ownership is a state of affairs that has developed organically, a very different thing. And it's less true in the case of managed funds where the risk is spread between many owners but the management of funds is concentrated in people who really do focus the minds of managers.

The problem is, this focussing is corrupted by cronyism, by the fact that business managers and fund managers are drawn from the same small pond and tend to reinforce rather than challenge each other's behaviour.

But that's a combination of corruption and stupidity. It's not capitalism. Capitalism would also exist if risk (share ownership) were less dispersed.

UPDATE: Link to Chris's post added.


Mark Wadsworth said...

I have no idea what kind of point he was trying to make but this bit "big wage inequality encourages them to work harder" is clearly nonsense.

What makes you work harder is if you value the goods and services you can buy with another hour's net (after tax and costs) wages more than an hour's worth of free time. End of.

I also agree on your final point, but what you are trying to say is basically that true ownership (as in control) is in fact very closely concentrated, it's a little gang of unit trust managers, pension fund managers etc in the City of London, which, as you say, gives us the worst of all worlds.

This concentration could easily be fixed if we scrapped all the subsidies for pension savings and cut everybody's taxes instead (which increases net hourly wages, thus increasing work incentives).

chris said...

You're right - one is an argument, the other a state. But I don't think the distinction matters, simply because many people think the state of dispersed shareholding is defensible, so they do, in effect, argue for it.
Mark - many people do believe that inequality encourages people to work harder, because it implies that the pay-offs to getting promoted are greater. Or, they say, big bonuses call forth greater effort from bankers.
I'm sceptical of this as an empirical claim, but it's certainly not nonsense.

Wasp said...

Capitalism exists when capitalists own the means of production. If the ownership is dispersed among the workers through pension funds then maybe we have reached a marxist goal. Thus the recent so-called failures of capitalism are failures of dispersed ownership, as the owners do not exert control over the managers.