Wednesday, October 15, 2008

Dispersed ownership

One of the main arguments levelled against the nationalisation of industries is that when everybody "owns" something, nobody owns it. I never felt any sense that I owned British Rail and I don't feel any proprietorial glow about the National Health Service. Sometimes such institutions provide adequate or even good service, other times they reduce users to frustrated, impotent rage. In neither case is there anything you can do about it. You ain't the guvnor.

This leads sometimes to arguments about the Tragedy of the Commons. Tim reckons that the Common Fisheries Policy is a case of such; the larger the organisation that "owns" a resource, the less the care that will be taken of it. (I think there's a bit more to it than that in the case of the CFP, but that's another story.)

Chris Dillow just wrote this about large companies:

When a firm is owned by hundreds of people, no-one has an incentive to look after it properly - because the hassle of organizing with other shareholders to control or change the management outweighs the benefits of having a better-run company, as these are spread across everyone, including the free-riders who just sat back and did nothing.
Good management is a public good. And public goods get under-supplied when many individuals pursue their own interest.
Banks’ failures are therefore ownership failures.
That's a very similar argument. And it rings true to me. Most people who own shares either directly or indirectly, through a pension plan, perhaps, have little or no sense of ownership of those businesses and the managements have little interest in the views of these shareholders. It's the institutional fund managers who wield power.

I don't share Chris's optimism that government shareholding might usher in an era of better shareholder accountability. If nationalised industries suffer from this problem then so do large publicly quoted corporations, and vice versa.

So perhaps capitalism - and for once this is actually about capitalism - and socialism share this central flaw. On a small scale they work well. This might be small or medium sized businesses on the one hand, businesses with owner/managers or small groups of informed shareholders, and on the other hand smaller voluntary cooperative structures. On a large scale, huge publicly quoted companies and compulsory collectivist structures are prone to the same problems, for the same reasons.

If there's anything in this idea, then it's noticeable that advocates of socialism draw attention to the problems of capitalism without realising that their own ideas are vulnerable to the same attacks, and supporters of large scale capitalism do the same thing in reverse.

They do this in another way too. I see people on the right argue that public employees should be personally liable for their failures, and I see people on the left trying to increase liabilities for company directors. Few argue both things. But certainly at the moment it's easy to feel a twitch of sympathy for the idea that limited liability might be a driver towards untenable risk and that the managers of banks might behave differently if they were entirely liable for their actions. If this meant that few would be willing to risk running very large businesses the above reasoning suggests this might be no bad thing.

But the point is this: in both these cases if the right is correct then so is the left. Yet they'll still manage to disagree.


AVI said...

An interesting post. I'd suggest that the same is true of countries (with the EU demonstrating the "large group" syndrome of the general EU-wide populace neither knowing nor caring about what goes on there, the waste, the unsigned-off accounts etc etc.)


Peter Risdon said...


cabalamat said...

I see people on the right argue that public employees should be personally liable for their failures, and I see people on the left trying to increase liabilities for company directors. Few argue both things.

I do. Admittedly, there is only one of me.

Anonymous said...

Well said Peter!

Watch Dragon's Den. Some guy pitched this idea of a directory of contractors on 0800 numbers. He was chucked out. Who do you want doing the plumbing or the sparks? Someone routed to you via a banglaore call-centre or someone local who you actually speak to and can get recommendations for from your neighbours?

Well, that's the philosphy which I have and it's why I can get away with charging more than the likes of PC World.

Moreover. I own (owned?) NR shares. I never felt I had a voice. Nobody told me they were wheeling and dealing in the US sub-prime market. I thought they were primarily involved in the steady buisness of mortgages for homes in the NE. The true future of capitalism is small businesses inter-connected through technology. Obviously somethings have to be run be BigCorp Inc but the number will decline.

Anonymous said...

It's because I expect big firms to be badly run, along the lines you suggest, that I oppose Socialism, which would face us with only one huge firm, the monopoly state. Under capitalism, there can also be small firms, co-ops, mutuals, partnerships and whatnot, and even the big firms have to compete a bit.

Anonymous said...

Joanna Lumley's email is obviously a standard reply generated for supporters of her campaign. Still, we think she should know about your 'history' as we wouldn't want her commendable campaign to be associated with a low-life like you. So we'll be emailing her to keep her up to date.

Robert de Niro, Lord Harris of High Cross, now Joanna Lumley! You're hilarious Freeborn John! A real entertainer. Keep it up!

See ya

Anonymous said...

the larger the organisation that "owns" a resource, the less the care that will be taken of it.

No, I don't agree fully with this assumption.
Yes, as an organisation grows individual responsibility will be diminished, but I would argue that the point you are making here is not size but ownership. As ownership widens so accountability and liability diminish. A multi billion dollar organisation with a small number of owners will suffer from the problems you outline much less than will one with many small owners.